UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q






(Mark
One)




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


For
      the quarterly period ended March 31,
2009




or





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


For
      the transition period from __________ to
  __________








Commission
file number:  333-142283





Verso
Paper Holdings LLC


(Exact name of
registrant as specified in its charter)





Delaware
                
                56-2597634(State
      or other jurisdiction of incorporation or organization)
                
                (I.R.S.
      Employer Identification Number)6775 Lenox Center Court, Suite
      400Memphis,
      Tennessee 38115-4436
                
                (901)
      369-4100(Address of principal
      executive offices) (Zip Code)
                
                (Registrant’s
      telephone number, including area
code)


Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


Yes __ü__  
No _____





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





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).


Yes
______   No __ü__





As of
April 30, 2009, the registrant had one outstanding limited liability company
interest.







TABLE
OF CONTENTS





Part I.
                                                                                            FINANCIAL INFORMATION
                                                                                            
                                                                                            PageItem 1.
                                                                                            Financial StatementsUnaudited Condensed Consolidated Balance
      Sheets
                                                                                            
                                                                                            
                                                                                            3Unaudited Condensed Consolidated Statements of
      Operations
                                                                                            
                                                                                            
                                                                                            4Unaudited Condensed Consolidated Statements of Changes in
      Member’s Equity
                                                                                            
                                                                                            
                                                                                            5Unaudited Condensed Consolidated Statements of Cash
      Flows
                                                                                            
                                                                                            
                                                                                            6Notes to Unaudited Condensed Consolidated Financial
      Statements
                                                                                            
                                                                                            
                                                                                            7Item 2.
                                                                                            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                                                                                            
                                                                                            
                                                                                            25Item 3.
                                                                                            Quantitative and Qualitative Disclosures About Market
      Risk
                                                                                            
                                                                                            
                                                                                            33Item 4T.
                                                                                            Controls and Procedures
                                                                                            
                                                                                            
                                                                                            35Part II.
                                                                                            OTHER INFORMATIONItem 1.
                                                                                            Legal Proceedings
                                                                                            
                                                                                            
                                                                                            36Item 1A.
                                                                                            Risk Factors
                                                                                            
                                                                                            
                                                                                            36Item 2.
                                                                                            Unregistered Sales of Equity Securities and Use of
      Proceeds
                                                                                            
                                                                                            
                                                                                            36Item 3.
                                                                                            Defaults Upon Senior Securities
                                                                                            
                                                                                            
                                                                                            36Item 4.
                                                                                            Submission of Matters to a Vote of Security
      Holders
                                                                                            
                                                                                            
                                                                                            37Item 5.
                                                                                            Other Information
                                                                                            
                                                                                            
                                                                                            37Item 6.
                                                                                            Exhibits
                                                                                            
                                                                                            
                                                                                            37SIGNATURES
                                                                                            
                                                                                            
                                                                                            38EXHIBIT INDEX
                                                                                            
                                                                                            
                                                                                            39
 
 2


PART I.  FINANCIAL INFORMATION





ITEM 1.  FINANCIAL STATEMENTS




VERSO
      PAPER HOLDINGS LLCUNAUDITED CONDENSED CONSOLIDATED BALANCE
      SHEETSMarch
      31,
                                    
                                    
                                    December
      31,(In
      thousands of U.S. dollars)
                                    
                                    2009
                                    
                                    
                                    2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                    
                                    $
                                    16,971
                                    
                                    
                                    $
                                    119,520Accounts
      receivable - net
                                    
                                    
                                    147,501
                                    
                                    
                                    
                                    74,733Accounts
      receivable from related parties
                                    
                                    
                                    7,553
                                    
                                    
                                    
                                    8,312Inventories
                                    
                                    
                                    224,411
                                    
                                    
                                    
                                    195,934Prepaid
      expenses and other assets
                                    
                                    
                                    5,761
                                    
                                    
                                    
                                    2,512Total
      Current Assets
                                    
                                    
                                    402,197
                                    
                                    
                                    
                                    401,011Property,
      plant, and equipment - net
                                    
                                    
                                    1,095,807
                                    
                                    
                                    
                                    1,115,657Reforestation
                                    
                                    
                                    12,657
                                    
                                    
                                    
                                    770Intangibles
      and other assets - net
                                    
                                    
                                    81,788
                                    
                                    
                                    
                                    86,083Goodwill
                                    
                                    
                                    10,551
                                    
                                    
                                    
                                    10,551Total
      Assets
                                    
                                    $
                                    1,603,000
                                    
                                    
                                    $
                                    1,614,072LIABILITIES
      AND MEMBER'S EQUITYCurrent
      Liabilities:Accounts
      payable
                                    
                                    $
                                    84,578
                                    
                                    
                                    $
                                    117,906Accounts
      payable to related parties
                                    
                                    
                                    3,830
                                    
                                    
                                    
                                    4,135Accrued
      liabilities
                                    
                                    
                                    88,439
                                    
                                    
                                    
                                    122,649Current
      maturities of long-term debt
                                    
                                    
                                    2,850
                                    
                                    
                                    
                                    2,850Total
      Current Liabilities
                                    
                                    
                                    179,697
                                    
                                    
                                    
                                    247,540Long-term
      debt
                                    
                                    
                                    1,230,108
                                    
                                    
                                    
                                    1,242,821Other
      liabilities
                                    
                                    
                                    33,723
                                    
                                    
                                    
                                    32,007Total
      Liabilities
                                    
                                    
                                    1,443,528
                                    
                                    
                                    
                                    1,522,368Commitments
      and contingencies (Note 12)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Member's
      EquityPaid-in-capital
                                    
                                    
                                    316,477
                                    
                                    
                                    
                                    301,110Retained
      deficit
                                    
                                    
                                    (113,866
                                    )
                                    
                                    
                                    (167,135
                                    )Accumulated
      other comprehensive loss
                                    
                                    
                                    (43,139
                                    )
                                    
                                    
                                    (42,271
                                    )Total
      Member's Equity
                                    
                                    
                                    159,472
                                    
                                    
                                    
                                    91,704Total
      Liabilities and Member's Equity
                                    
                                    $
                                    1,603,000
                                    
                                    
                                    $
                                    1,614,072See
      notes to unaudited condensed consolidated financial
      statements.




3




VERSO
      PAPER HOLDINGS LLCUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
      OPERATIONSThree
      Months
                                  
                                  
                                  Three
      MonthsEnded
                                  
                                  
                                  EndedMarch
      31,
                                  
                                  
                                  March
      31,(In
      thousands of U.S. dollars)
                                  
                                  2009
                                  
                                  
                                  2008Net
      sales
                                  
                                  $
                                  287,074
                                  
                                  
                                  $
                                  453,907Costs
      and expenses:Cost
      of products sold - (exclusive ofdepreciation,
      amortization, and depletion)
                                  
                                  
                                  268,940
                                  
                                  
                                  
                                  375,378Depreciation,
      amortization, and depletion
                                  
                                  
                                  34,323
                                  
                                  
                                  
                                  32,137Selling, general, and administrative expenses
                                  
                                  
                                  15,222
                                  
                                  
                                  
                                  14,103Restructuring
      and other charges
                                  
                                  
                                  171
                                  
                                  
                                  
                                  1,718Operating
      income (loss)
                                  
                                  
                                  (31,582
                                  )
                                  
                                  
                                  30,571Interest
      income
                                  
                                  
                                  (58
                                  )
                                  
                                  
                                  (191
                                  )Interest
      expense
                                  
                                  
                                  24,716
                                  
                                  
                                  
                                  26,720Other
      income, net
                                  
                                  
                                  (113,317
                                  )
                                  
                                  
                                  -Net
      income
                                  
                                  $
                                  57,077
                                  
                                  
                                  $
                                  4,042Included
      in the financial statement line itemsabove
      are related-party transactions as follows(Notes
      10 and 11):Net
      sales
                                  
                                  $
                                  26,780
                                  
                                  
                                  $
                                  36,189Purchases
      included in cost of products sold
                                  
                                  
                                  1,120
                                  
                                  
                                  
                                  1,039Restructuring
      and other charges
                                  
                                  
                                  -
                                  
                                  
                                  
                                  847See
      notes to unaudited condensed consolidated financial
      statements.




4




VERSO
      PAPER HOLDINGS LLCUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
      MEMBER'S EQUITYFOR
      THE PERIODS ENDED MARCH 31, 2009 AND 2008AccumulatedOtherComprehensive
                                                  
                                                  
                                                  TotalPaid-in-
                                                  
                                                  
                                                  Retained
                                                  
                                                  
                                                  Income
                                                  
                                                  
                                                  Member's(In
      thousands of U.S. dollars)
                                                  
                                                  Capital
                                                  
                                                  
                                                  Deficit
                                                  
                                                  
                                                  (Loss)
                                                  
                                                  
                                                  EquityBeginning
      balance - January 1, 2008
                                                  
                                                  $
                                                  289,911
                                                  
                                                  
                                                  $
                                                  (105,188
                                                  )
                                                  
                                                  $
                                                  (9,870
                                                  )
                                                  
                                                  $
                                                  174,853Cash
      distributions
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (7,131
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (7,131
                                                  )Net
      income
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  4,042
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  4,042Other
      comprehensive income:Net
      unrealized gains on derivativefinancial instruments
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  3,011
                                                  
                                                  
                                                  
                                                  3,011Defined
      benefit pension planprior service cost amortization
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  218
                                                  
                                                  
                                                  
                                                  218Total
      other comprehensive income
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  3,229
                                                  
                                                  
                                                  
                                                  3,229Comprehensive
      income
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  4,042
                                                  
                                                  
                                                  
                                                  3,229
                                                  
                                                  
                                                  
                                                  7,271Equity
      award expense
                                                  
                                                  
                                                  77
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  77Ending
      Balance - March 31, 2008
                                                  
                                                  $
                                                  289,988
                                                  
                                                  
                                                  $
                                                  (108,277
                                                  )
                                                  
                                                  $
                                                  (6,641
                                                  )
                                                  
                                                  $
                                                  175,070Beginning
      Balance - January 1, 2009
                                                  
                                                  $
                                                  301,110
                                                  
                                                  
                                                  $
                                                  (167,135
                                                  )
                                                  
                                                  $
                                                  (42,271
                                                  )
                                                  
                                                  $
                                                  91,704Parent
      company contributions
                                                  
                                                  
                                                  15,281
                                                  
                                                  
                                                  
                                                  (3,569
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  11,712Cash
      distributions
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (239
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (239
                                                  )Net
      income
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  57,077
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  57,077Other
      comprehensive income (loss):Net
      unrealized losses on derivativefinancial
      instruments
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (1,165
                                                  )
                                                  
                                                  
                                                  (1,165
                                                  )Defined
      benefit pension plan:Net
      actuarial loss
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  79
                                                  
                                                  
                                                  
                                                  79Prior
      service cost amortization
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  218
                                                  
                                                  
                                                  
                                                  218Total
      other comprehensive loss
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (868
                                                  )
                                                  
                                                  
                                                  (868
                                                  )Comprehensive
      income (loss)
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  57,077
                                                  
                                                  
                                                  
                                                  (868
                                                  )
                                                  
                                                  
                                                  56,209Equity
      award expense
                                                  
                                                  
                                                  86
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  86Ending
      Balance - March 31, 2009
                                                  
                                                  $
                                                  316,477
                                                  
                                                  
                                                  $
                                                  (113,866
                                                  )
                                                  
                                                  $
                                                  (43,139
                                                  )
                                                  
                                                  $
                                                  159,472See
      notes to unaudited condensed consolidated financial
      statements.




5




VERSO
      PAPER HOLDINGS LLCUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH
      FLOWSThree
      Months
                                
                                
                                Three
      MonthsEnded
                                
                                
                                EndedMarch
      31,
                                
                                
                                March
      31,(In
      thousands of U.S. dollars)
                                
                                2009
                                
                                
                                2008Cash
      Flows From Operating Activities:Net
      income
                                
                                $
                                57,077
                                
                                
                                $
                                4,042Adjustments
      to reconcile net income tonet cash used in operating activities:Depreciation,
      amortization, and depletion
                                
                                
                                34,323
                                
                                
                                
                                32,137Amortization
      of debt issuance costs
                                
                                
                                1,353
                                
                                
                                
                                1,357Gain
      on retirement of debt
                                
                                
                                (8,903
                                )
                                
                                
                                -Loss
      on disposal of fixed assets
                                
                                
                                56
                                
                                
                                
                                117Equity
      award expense
                                
                                
                                86
                                
                                
                                
                                -Increase
      in derivatives, net
                                
                                
                                (1,165
                                )
                                
                                
                                -Other
      - net
                                
                                
                                104
                                
                                
                                
                                2,841Changes
      in assets and liabilities:Accounts
      receivable
                                
                                
                                (72,569
                                )
                                
                                
                                (14,101
                                )Inventories
                                
                                
                                (33,143
                                )
                                
                                
                                (16,986
                                )Prepaid
      expenses and other assets
                                
                                
                                (2,676
                                )
                                
                                
                                (5,136
                                )Accounts
      payable
                                
                                
                                (28,932
                                )
                                
                                
                                (2,016
                                )Accrued
      liabilities
                                
                                
                                (32,449
                                )
                                
                                
                                (20,661
                                )Net
      cash used in operating activities
                                
                                
                                (86,838
                                )
                                
                                
                                (18,406
                                )Cash
      Flows From Investing Activities:Proceeds
      from sale of fixed assets
                                
                                
                                14
                                
                                
                                
                                -Capital
      expenditures
                                
                                
                                (11,918
                                )
                                
                                
                                (12,594
                                )Net
      cash used in investing activities
                                
                                
                                (11,904
                                )
                                
                                
                                (12,594
                                )Cash
      Flows From Financing Activities:Repayments
      of long-term debt
                                
                                
                                (3,568
                                )
                                
                                
                                (713
                                )Equity
      distributions
                                
                                
                                (239
                                )
                                
                                
                                (7,131
                                )Net
      cash used in financing activities
                                
                                
                                (3,807
                                )
                                
                                
                                (7,844
                                )Change
      in cash and cash equivalents
                                
                                
                                (102,549
                                )
                                
                                
                                (38,844
                                )Cash
      and cash equivalents at beginning of period
                                
                                
                                119,520
                                
                                
                                
                                58,499Cash
      and cash equivalents at end of period
                                
                                $
                                16,971
                                
                                
                                $
                                19,655See
      notes to unaudited condensed consolidated financial
      statements.




6


VERSO
PAPER HOLDINGS LLC





NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2009,
AND DECEMBER 31, 2008, AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2009 AND
2008


1.  BACKGROUND
AND BASIS OF PRESENTATION





The
accompanying consolidated financial statements include the accounts of Verso
Paper Holdings LLC, a Delaware limited liability company, and its
subsidiaries.  Unless otherwise noted, the terms “Verso,” “Verso
Paper,” “Company,”  “we,” “us,’” and “our” refer collectively to Verso
Paper Holdings LLC and its subsidiaries.





The
Company began operations on August 1, 2006, when it acquired the assets and
certain liabilities comprising the business of the Coated and Supercalendered
Papers Division of International Paper Company, or “International
Paper.”  The Company was formed by affiliates of Apollo Management,
L.P., or “Apollo,” for the purpose of consummating the acquisition from
International Paper, or the “Acquisition.”  Verso Paper Corp., of
which we are an indirect, wholly-owned subsidiary, went public on May 14, 2008,
with an initial public offering, or “IPO," of 14 million shares of common
stock at a price of $12 per share which generated $152.2 million in net
proceeds.




The
Company operates, through its subsidiaries, in the following three segments:
coated and supercalendered 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.





Included
in this report are the unaudited condensed consolidated financial statements of
Verso Paper Holdings LLC as of March 31, 2009 and December 31, 2008, and for the
three months ended March 31, 2009 and 2008.  In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements include all adjustments that are necessary for the fair presentation
of the Company’s financial position, results of operations, and cash flows for
the interim periods presented.  Except as disclosed in the notes to
the unaudited condensed consolidated financial statements, such adjustments are
of a normal, recurring nature. All material intercompany balances and
transactions are eliminated. Results for the three-month periods ended March 31,
2009 and 2008, may not necessarily be indicative of full-year
results.  It is suggested that these financial statements be read in
conjunction with the Company’s consolidated and combined audited financial
statements and notes thereto as of December 31, 2008, and for the year then
ended.





2.  RECENT
ACCOUNTING DEVELOPMENTS





Fair Value of
Financial Instruments—In April 2009, the Financial Accounting Standards
Board, or “FASB,” issued FASB Staff Position on SFAS No. 107 and APB No. 28, or
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, which increases the frequency of fair value
disclosures to a quarterly basis instead of an annual basis.  The
guidance relates to fair value disclosures for any financial instruments that
are not currently reflected on the balance sheet at fair value.  FSP
FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after
June 15, 2009. Since FSP FAS 107-1 and APB 28-1 only addresses new disclosure
requirements, the adoption of FSP FAS 107-1 and APB 28-1 will have no impact on
our financial condition, results of operations, or cash flows.





Postretirement
Benefit Plan Assets—In December 2008, the FASB issued FSP FAS 132(R)-1,
Employers’ Disclosure about
Postretirement Benefit Plan Assets, which amends SFAS No. 132(R) to
require more detailed disclosures about employers’ pension plan
assets.  New disclosures will include more information on investment
strategies, major categories of plan assets, concentrations of risk within plan
assets and valuation techniques used to measure the fair value of plan
assets.  FSP FAS 132(R)-1 is effective for fiscal years ending after
December 15, 2009.  Since FSP FAS 132(R)-1 only addresses new
disclosure requirements, the adoption of FSP FAS 132(R)-1 will have no impact on
our financial condition, results of operations, or cash flows.





7


Intangible
Assets—In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which provides guidance on the renewal or extension
assumptions used in the determination of the useful life of a recognized
intangible asset.  The intent of FSP FAS 142-3 is to better match the
useful life of the recognized intangible asset to the period of the expected
cash flows used to measure its fair value.  FSP FAS 142-3 is effective
for fiscal years and interim periods beginning after December 15,
2008.  The adoption of FSP FAS 142-3 did not have a material impact on
our financial condition, results of operations, or cash flows.





Derivatives and
Hedging Activities— In March 2008, the FASB, issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  SFAS No. 161 changes the
disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. SFAS No. 161 is
effective for fiscal years and interim periods beginning after November 15,
2008.  Since SFAS No. 161 only addresses disclosure requirements, the
adoption of SFAS No. 161 had no impact on our financial condition, results of
operations, or cash flows.





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





Noncontrolling
Interests—In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No.
51.  SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  This standard is effective, on a
prospective basis, for fiscal years and interim periods beginning on or after
December 15, 2008.  The presentation and disclosure requirements for
existing minority interests should be applied retrospectively for all periods
presented.  The adoption of SFAS No. 160 did not have a material
impact on our financial condition, results of operations, or cash
flows.





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





8


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





Other new
accounting pronouncements issued but not effective until after March 31, 2009,
are not expected to have a significant effect on our financial condition,
results of operations, or cash flows.




3.  SUPPLEMENTAL
FINANCIAL STATEMENT INFORMATION





Inventories and
Replacement Parts and Other Supplies—Inventory values include all costs
directly associated with manufacturing products: materials, labor, and
manufacturing overhead.  These values are presented at the lower of
cost or market.  Costs of raw materials, work-in-progress, and
finished goods are determined using the first-in, first-out
method.  Replacement parts and other supplies are stated using the
average cost method and are reflected in Intangibles and other assets on the
balance sheet (see Note 4).





Inventories
by major category include the following:





March
      31,
                      
                      
                      December
      31,(In
      thousands of U.S. dollars)
                      
                      2009
                      
                      
                      2008Raw
      materials
                      
                      $
                      34,855
                      
                      
                      $
                      29,858Woodyard
      logs
                      
                      
                      11,712
                      
                      
                      
                      7,970Work-in-process
                      
                      
                      25,080
                      
                      
                      
                      19,001Finished
      goods
                      
                      
                      126,397
                      
                      
                      
                      113,050Replacement
      parts and other supplies
                      
                      
                      26,367
                      
                      
                      
                      26,055Inventories
                      
                      $
                      224,411
                      
                      
                      $
                      195,934




Asset Retirement
Obligations—In accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement
Obligations, a liability and an asset are recorded equal to the present
value of the estimated costs associated with the retirement of long-lived assets
where a legal or contractual obligation exists.  The liability is
accreted over time, and the asset is depreciated over its useful
life.  The Company’s asset retirement obligations under this standard
relate to closure and post-closure costs for landfills.  Revisions to
the liability could occur due to changes in the estimated costs or timing of
closure or possible new federal or state regulations affecting the
closure.





9


On March
31, 2009, the Company had $0.8 million of restricted cash included in Other
assets in the accompanying condensed consolidated balancesheet
related to an asset retirement obligation in the state of
Michigan.  This cash deposit is required by the state and may only be
used for the future closure of a landfill.  The following table
presents an analysis related to the company’s asset retirement obligations
included in Other liabilities in the accompanying balance sheets:


Three
      Months
                  
                  
                  Three
      MonthsEnded
                  
                  
                  EndedMarch
      31,
                  
                  
                  March
      31,(In
      thousands of U.S. dollars)
                  
                  2009
                  
                  
                  2008Asset
      retirement obligations, January 1
                  
                  $
                  14,028
                  
                  
                  $
                  11,614New
      liabilities
                  
                  
                  -
                  
                  
                  
                  1,091Accretion
      expense
                  
                  
                  202
                  
                  
                  
                  156Settlement
      of existing liabilities
                  
                  
                  (61
                  )
                  
                  
                  (159
                  )Adjustment
      to existing liabilities
                  
                  
                  611
                  
                  
                  
                  2,273Asset
      retirement obligations, March 31
                  
                  $
                  14,780
                  
                  
                  $
                  14,975
 In
addition to the above obligations, the Company may be required to remove certain
materials from its facilities, or to remediate in accordance with current
regulations that govern the handling of certain hazardous or potentially
hazardous materials.  At this time, any such obligations have an
indeterminate settlement date, and the Company believes that adequate
information does not exist to estimate any such potential
obligations.  Accordingly, the Company will record a liability for
such remediation when sufficient information becomes available to estimate the
obligation.




Property, Plant,
and Equipment—Property, plant, and equipment is stated at cost, net of
accumulated depreciation. Interest is capitalized on projects meeting certain
criteria and is included in the cost of the assets.  The capitalized
interest is depreciated over the same useful lives as the related
assets.  Expenditures for major repairs and improvements are
capitalized, whereas normal repairs and maintenance are expensed as
incurred.  For the three months ended March 31, 2009 and 2008,
interest costs of $0.2 million and $0.5 million, respectively were
capitalized.





Depreciation
is computed using the straight-line method over the assets’ estimated useful
lives.  Depreciation expense was $31.5 million and $30.5 million for
the three-month periods ended March 31, 2009 and 2008,
respectively.





10
 
 4.  INTANGIBLES
AND OTHER ASSETS





Intangibles
and other assets consist of the following:




March
      31,
                                    
                                    
                                    December
      31,(In
      thousands of U.S. dollars)
                                    
                                    2009
                                    
                                    
                                    2008Amortizable
      intangible assets:Customer
      relationships - net of accumulated amortization of $3.6 million
      and$3.3
      million, respectively
                                    
                                    $
                                    9,695
                                    
                                    
                                    $
                                    10,020Patents
      - net of accumulated amortization of $0.31 million and $0.28
      million,respectively
                                    
                                    
                                    842
                                    
                                    
                                    
                                    870Total
      amortizable intangible assets
                                    
                                    
                                    10,537
                                    
                                    
                                    
                                    10,890Unamortizable
      intangible assets:Trademarks
                                    
                                    
                                    21,473
                                    
                                    
                                    
                                    21,473Other
      assets:Financing
      costs-net of accumulated amortization of $14.3 million and$13.1
      million, respectively
                                    
                                    
                                    29,380
                                    
                                    
                                    
                                    31,040Deferred
      major repair
                                    
                                    
                                    6,896
                                    
                                    
                                    
                                    9,543Deferred
      software cost-net of accumulated amortization of $3.5
    millionand
      $3.0 million, respectively
                                    
                                    
                                    2,372
                                    
                                    
                                    
                                    2,746Replacement
      parts-net
                                    
                                    
                                    4,561
                                    
                                    
                                    
                                    5,625Other
                                    
                                    
                                    6,569
                                    
                                    
                                    
                                    4,766Total
      other assets
                                    
                                    
                                    49,778
                                    
                                    
                                    
                                    53,720Intangibles
      and other assets
                                    
                                    $
                                    81,788
                                    
                                    
                                    $
                                    86,083


Approximately
$0.4 million of intangible amortization are reflected in depreciation,
amortization, and depletion expense for each of the three-month periods ended
March 31, 2009 and 2008.





Estimated
amortization expense of intangibles for the remainder of 2009 is expected to be
$1.1 million and is expected to be approximately $1.3 million, $1.1 million,
$0.9 million and $0.8 million for the twelve-month periods of 2010, 2011, 2012,
and 2013, respectively.





Software
cost incurred as part of a major systems project was capitalized in 2007 and is
being amortized over its anticipated useful life of approximately three
years.  Approximately $0.3 million and $0.4 million of software
amortization are reflected in depreciation, amortization, and depletion expense
for the three-month periods ended March 31, 2009 and 2008,
respectively.




11


5.  LONG-TERM
DEBT





A summary
of long-term debt is as follows:




March
      31,
                                    
                                    
                                    December
      31,(In
      thousands of U.S. dollars)
                                    Maturity
                                    
                                    Rate
                                    
                                    
                                    2009
                                    
                                    
                                    2008First
      Priority Revolving Credit Facility
                                    8/1/2012
                                    
                                    LIBOR
      + 1.50%and/
                                      orPrime
      + 0.05%
                                    
                                    $
                                    92,083
                                    
                                    
                                    $
                                    92,083First
      Priority Term Loan B
                                    8/1/2013
                                    
                                    LIBOR
      + 1.75%
                                    
                                    
                                    252,875
                                    
                                    
                                    
                                    253,588Second
      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%
                                    
                                    
                                    238,000
                                    
                                    
                                    
                                    250,000Senior
      Subordinated Notes
                                    8/1/2016
                                    
                                    
                                    11.38%
                                    
                                    
                                    
                                    300,000
                                    
                                    
                                    
                                    300,0001,232,958
                                    
                                    
                                    
                                    1,245,671Less
      current maturities
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (2,850
                                    )
                                    
                                    
                                    (2,850
                                    )Long-term
      debt
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    1,230,108
                                    
                                    
                                    $
                                    1,242,821


Interest
expense was $23.6 million while $39.1 million of interest was paid during the
three months ended March 31, 2009.  Interest expense was $25.8 million
while $43.7 million of interest was paid during the three months ended March 31,
2008.





Amortization
of debt issuance costs, included in interest expense in the condensed
consolidated statements of operations, was $1.4 million for each of the
three-month periods ended March 31, 2009 and 2008.





In March
2009, we repurchased and retired $12.0 million of our second priority senior
secured floating rate notes due on August 1, 2014, and recognized a gain of $8.9
million in Other income on the condensed consolidated statement of
operations.





6.  RETIREMENT
PLANS





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





The
Company makes contributions that are sufficient to fully fund its actuarially
determined costs, generally equal to the minimum amounts required by the
Employee Retirement Income Security Act (ERISA).  In the first quarter
of 2009, the Company made contributions of $0.2 million attributable to the 2008
plan year.  In the first quarter of 2008, the Company made
contributions of $1.6 million, with $1.5 million attributable to the 2007 plan
year and $0.1 million attributable to the 2008 plan year.  The Company
expects to make additional contributions of $6.8 million in 2009, with $1.0
million being related to the 2008 plan year and $5.8 million related to the 2009
plan year.





12


The
following table summarizes the components of net periodic expense:


Three
      Months
                          
                          
                          Three
      MonthsEnded
                          
                          
                          Year
      EndedMarch
      31,
                          
                          
                          March
      31,(In
      thousands of U.S. dollars)
                          
                          2009
                          
                          
                          2008Components
      of net periodic benefit cost:Service
      cost
                          
                          $
                          1,592
                          
                          
                          $
                          1,494Interest
      cost
                          
                          
                          381
                          
                          
                          
                          250Expected
      return on plan assets
                          
                          
                          (309
                          )
                          
                          
                          (191
                          )Amortization
      of prior service cost
                          
                          
                          218
                          
                          
                          
                          218Recognized
      losses
                          
                          
                          79
                          
                          
                          
                          -Net
      periodic benefit cost
                          
                          $
                          1,961
                          
                          
                          $
                          1,771


The
expected return on plan assets assumption for 2009 will be 7.50%.





7.  EQUITY
AWARDS





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





In
connection with the IPO and the amendment of the limited partnership agreement
of the Partnership, the Legacy Class C Units of the Partnership previously
granted to certain members of our management were vested as of May 20,
2008.  Prior to the amendment, the Legacy Class C Units were to vest
only if certain performance targets were met.





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





The fair
value of Legacy Class D Units granted to directors in the three months ended
March 31, 2008, was approximately $0.1 million.  The Company estimates
the fair value of management equity awards using the Black-Scholes valuation
model.  Key input assumptions applied under the Black-Scholes option
pricing model for this grant were as follows:  expected term of five
years, volatility rate of 36.65% based on industry historical volatility rate,
no expected dividends and an average risk free rate of 3.0%.




Equity
award expense was $0.1 million for each of the three-month periods ended March
31, 2009 and 2008.  As of March 31, 2009, there was $0.7 million of
unrecognized compensation cost related to unvested Legacy Class B Units. This
cost is expected to be recognized over a weighted-average period of
approximately 2.3 years.




13


The 2008
Stock Incentive Award Plan, which authorized the issuance of awards covering up
to 4,250,000 shares of common stock of Verso Paper Corp., allows stock awards to
be granted to non-employee directors upon approval by the board of
directors.  During the first quarter of 2009, the Company granted a
director, upon his election to the board, 15,200 options which were immediately
vested with a contractual life of 10 years and an exercise price of
$0.71.  The Company used the Black-Scholes valuation model to estimate
a grant date fair value per option of $0.22 for this stock option
award.  Key input assumptions applied under the Black-Scholes option
pricing model were as follows:  expected term of five years,
volatility rate of 31.82% based on industry historical volatility rate, no
expected dividends and an average risk free rate of 1.97%.





Additionally,
the 2008 Stock Incentive Award Plan allows awards to be granted to employees
upon approval by the board of directors.  During the first quarter of
2009, the Company granted 121,833 options to employees with an exercise price of
$1.09, of which 40,613 vest on January 5, 2012, subject to continuous employment
by the participant through the vesting date.  The remaining 81,220
options granted vest over a three-year period based on achievement of
performance criteria which is tied to Verso’s calculation of Adjusted
EBITDA.  However, the performance period has not begun and performance
criteria have not been communicated to the participants for 50% of these
options.  Accordingly, a fair value has not been determined and no
expense has been recognized related to these 40,609 options.  The
remaining 40,611 options awarded under performance-based grants for which the
performance period has begun and the 40,613 time-vested options were valued
using the Black-Scholes option pricing model to estimate a grant date fair value
per option of $0.16.  Key input assumptions applied under the
Black-Scholes option pricing model were as follows:  market price of
$0.70 on date of grant, expected term ranging from four to five years,
volatility rate of 31.82% based on industry historical volatility rate, no
expected dividends and an average risk free rate of 2.19%.





8.  DERIVATIVE
INSTRUMENTS AND HEDGES





Effective
January 1, 2009, the Company adopted SFAS No. 161, which expands the quarterly
and annual disclosure requirements for derivative instruments and hedging
activities.





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





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





14


The
Company enters into short-term, fixed-price energy swaps as hedges designed to
mitigate the risk of changes in commodity prices for future purchase
commitments.  These fixed-price swaps involve the exchange of net cash
settlements, based on changes in the price of the underlying commodity index
compared to the fixed price offering, at specified intervals without the
exchange of any underlying principal.  The Company has designated its
energy hedging relationships as cash flow hedges under SFAS No. 133 with net
gains or losses attributable to effective hedging recorded in Accumulated other
comprehensive income and any ineffectiveness recognized in Cost of products
sold.  Amounts recorded in Accumulated other comprehensive income are
expected to be reclassified into cost of products sold in the period in which
the hedged cash flows affect earnings.





In
February 2008, the Company entered into a two-year, $250 million notional value
receive-variable, pay-fixed interest rate swap in connection with the Company’s
outstanding floating rate notes that mature in 2014.  The notes pay
interest quarterly based on a three-month LIBOR.  The Company is
hedging the cash flow exposure on its quarterly variable-rate interest payments
due to changes in the benchmark interest rate (three-month LIBOR) and has
designated the interest rate swap as a cash flow hedge under SFAS No.
133.  During the first quarter of 2009, the Company repurchased $12
million of the hedged notes and de-designated the portion of the swap hedging
the interest payments on this portion of the debt.  Amounts recorded
in Accumulated other comprehensive income are expected to be reclassified into
Interest expense in the period in which the hedged cash flows affect
earnings.




The
following table presents information about the volume and fair value amounts of
the Company’s derivative instruments.




Fair
      Value MeasurementsAt
      March 31, 2009
                                            
                                            
                                            At
      December 31, 2008
                                            
                                            BalanceNominal
                                            
                                            
                                            Derivative
                                            
                                            
                                            Derivative
                                            
                                            
                                            Derivative
                                            
                                            
                                            Derivative
                                            
                                            Sheet(dollars
      in thousands)
                                            
                                            Volume
                                            
                                            
                                            Asset
                                            
                                            
                                            Liability
                                            
                                            
                                            Asset
                                            
                                            
                                            Liability
                                            
                                            LocationDerivatives
      designated as hedginginstruments
      under SFAS No. 133Short-term,
      fixed price energy swaps
                                            
                                            5,672,922
                                              MMBtu's
                                            
                                            $
                                            22
                                            
                                            
                                            $
                                            27,721
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            26,878
                                            
                                            Other
      assets/
                                              Accrued
      liabiltiesInterest
      rate swaps, receive-variable, pay-fixed
                                            
                                            $
                                            238,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,877
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,677
                                            
                                            Other
      liabilitiesDerivatives
      not designated as hedginginstruments
      under SFAS No. 133Interest
      rate swaps, receive-variable, pay-fixed
                                            
                                            $
                                            12,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            195
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            Other
      liabilities


15


The
following tables present information about the effect of the Company’s
derivative instruments on Accumulated other comprehensive income and the
condensed consolidated statements of operations.




Gain
      (Loss) Recognized
                        
                        Gain
      (Loss) Reclassifiedin
      OCI
                        
                        from
      Accumulated OCI
                        
                        Location
      ofAt
                        
                        
                        At
                        
                        
                        Three
      Months Ended
                        
                        Gain
      (Loss)March
      31,
                        
                        
                        December
      31,
                        
                        March
      31,
                        
                        on
      Statements(dollars
      in thousands)
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008
                        
                        of
      OperationsDerivatives
      designated as hedginginstruments
      under SFAS No. 133Short-term,
      fixed price energy swaps (1)
                        
                        $
                        (27,657
                        )
                        
                        $
                        (25,852
                        )
                        
                        $
                        (8,448
                        )
                        
                        $
                        (1,082
                        )
                        Cost
      of products soldInterest
      rate swaps, receive-variable, pay-fixed (1)
                        
                        
                        (3,221
                        )
                        
                        
                        (3,859
                        )
                        
                        
                        (570
                        )
                        
                        
                        169
                        
                        Interest
      expense
 (1)
                  Net
      losses at March 31, 2009, are expected to be reclassified from Accumulated
      other comprehensive income into earnings within the next
      12 months.
 Gain
      (Loss) RecognizedGain
      (Loss) Recognized
                              
                              
                              on
      Derivative
                              
                              Location
      ofon
      Derivative
                              
                              
                              (Ineffective
      Portion)
                              
                              Gain
      (Loss)Three
      Months Ended March 31,
                              
                              on
      Statements(dollars
      in thousands)
                              
                              2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008
                              
                              of
      OperationsDerivatives
      designated as hedginginstruments
      under SFAS No. 133Short-term,
      fixed price energy swaps
                              
                              $
                              (2,109
                              )
                              
                              $
                              479
                              
                              
                              $
                              (20
                              )
                              
                              $
                              (3
                              )
                              Cost
      of products soldInterest
      rate swaps, receive-variable, pay-fixed
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              Interest
      expenseDerivatives
      not designated as hedginginstruments
      under SFAS No. 133Interest
      rate swaps, receive-variable, pay-fixed
                              
                              
                              (195
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              Other
      income




9.  FAIR
VALUE OF FINANCIAL INSTRUMENTS





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.  On January 1,
2008, the Company adopted SFAS No. 157 as it relates to financial assets and
liabilities and nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a recurring basis, and
adopted SFAS No. 157 as it relates to nonfinancial assets and liabilities that
are not remeasured at fair value on a recurring basis as of January 1,
2009.  The adoption of SFAS No. 157 did not have a material impact on
the Company’s financial condition, results of operations, or cash
flows.





16


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





▪  Level
1: Unadjusted quoted prices in active markets for identical assets or
liabilities at the measurement date.


▪  Level
2: Observable inputs other than those included in Level 1.  For
example, quoted prices for similar assets or
liabilities in active markets or quoted prices for identical assets or
liabilities in inactive markets.


▪  Level
3: Unobservable inputs reflecting management’s own assumption about the inputs
used in pricing the asset
or liability at the measurement date.





As of
March 31, 2009, the fair values of the Company’s assets and liabilities measured
at fair value on a recurring basis are categorized as follows:




(In
      thousands of U.S. dollars)
                                
                                Total
                                
                                
                                Level
      1
                                
                                
                                Level
      2
                                
                                
                                Level
      3ASSETSDeferred
      compensation assets (a)
                                
                                $
                                211
                                
                                
                                $
                                211
                                
                                
                                $
                                -
                                
                                
                                $
                                -Regional
      Greenhouse Gas Initiative carbon credits (a)
                                
                                
                                231
                                
                                
                                
                                -
                                
                                
                                
                                231
                                
                                
                                
                                -Commodity
      swaps (a)
                                
                                
                                22
                                
                                
                                
                                -
                                
                                
                                
                                22
                                
                                
                                
                                -Total
      assets at fair value on March 31, 2009
                                
                                $
                                464
                                
                                
                                $
                                211
                                
                                
                                $
                                253
                                
                                
                                $
                                -LIABILITIESCommodity
      swaps (a)
                                
                                $
                                27,721
                                
                                
                                $
                                -
                                
                                
                                $
                                27,721
                                
                                
                                $
                                -Interest
      rate swaps (b)
                                
                                
                                4,072
                                
                                
                                
                                -
                                
                                
                                
                                4,072
                                
                                
                                
                                -Deferred
      compensation liabilities (a)
                                
                                
                                211
                                
                                
                                
                                211
                                
                                
                                
                                -
                                
                                
                                
                                -Total
      liabilities at fair value on March 31, 2009
                                
                                $
                                32,004
                                
                                
                                $
                                211
                                
                                
                                $
                                31,793
                                
                                
                                $
                                -(a)
      Based on observable market data.(b)
      Based on observable inputs for the liability (interest rates and yield
      curves observable at specific intervals).




The
Company did not record any impairment charges on long-lived assets and no
significant events requiring non-financial assets and liabilities to be measured
at fair value occurred (subsequent to initial recognition) during the first
quarter of 2009.




10.  RELATED
PARTY TRANSACTIONS




The
Company had net sales to International Paper of $26.8 million for the
three-month period ended March 31, 2009, compared to $36.2 million for the three
months ended March 31, 2008.  The Company had purchases from
International Paper, included in cost of products sold, of $1.1 million for the
three months ended March 31, 2009, compared to $1.0 million for the three months
ended March 31, 2008.





Subsequent
to the Acquisition, the Company entered into a management agreement with Apollo
relating to the provision of certain financial and strategic advisory services
and consulting services.  Management fees to Apollo for these services
were $0.6 million for the three months ended March 31, 2008.  Upon
consummation of the IPO, Apollo terminated the annual fee arrangement under the
management agreement for its consulting and advisory
services.  Although the annual fee arrangement was terminated in
connection with the IPO, the management agreement remains in effect and will
expire on August 1, 2018.





17


Verso
Paper Finance Holdings LLC, or “Verso Finance;” of which the Company is an
indirect, wholly-owned subsidiary, has a senior unsecured term loan which
matures on February 1, 2013.  In May 2008, a portion of the net
proceeds from the IPO were used to repay $138 million of the outstanding
principal of the term loan and to pay a related $1.4 million prepayment
penalty.  As of December 31, 2008, $112 million was outstanding on the
term loan.  The term loan allows Verso Finance to pay interest either
in cash or in-kind through the accumulation of the outstanding principal
amount.  Verso Finance elected to exercise the PIK option for the
interest payment pertaining to the 90-day interest period ending January 2,
2009, resulting in a $2.9 million increase in the outstanding balance to $114.9
million as of March 31, 2009.  Verso Finance has no independent
operations; consequently, all cash flows used to service the remaining debt
obligation will need to be received via a distribution from the
Company.  The Company paid distributions to Verso Finance of $0.2
million in the first quarter of 2009 and $7.1 million in the first quarter of
2008.  The Company has no obligation to make distributions to Verso
Finance.




During the
quarter, Verso Paper Corp. pushed down the assets, liabilities, and equity of
Verso Fiber Farm LLC to the Company using carryover basis.





11.
RESTRUCTURING AND OTHER CHARGES





Restructuring
and other charges are comprised of transition and other non-recurring costs
associated with the acquisition and carve out of our operations from those of
International Paper; including costs of a transition service agreement with
International Paper, technology migration costs, consulting and legal fees, and
other one-time costs related to us operating as a stand-alone business. The
charges for the three months ended March 31, 2009 and 2008, were $0.2 million
and $1.7 million, respectively.





12.
COMMITMENTS AND CONTINGENCIES





The
Company is involved in legal proceedings incidental to the conduct of its
business.  The Company does not believe that any liability that may
result from these proceedings will have a material adverse effect on our
financial statements.





On August
6, 2008, the Company filed a declaratory judgment suit in the United States
District Court for the Eastern District of Wisconsin against NewPage Corporation
and NewPage Wisconsin System Inc., in response to a patent infringement claim
asserted by NewPage regarding certain of the Company’s coated paper
products.  The action sought a declaration that the Company’s coated
paper products do not infringe the NewPage patent and that the NewPage patent is
invalid.  On January 29, 2009, the action was voluntarily dismissed
with prejudice pursuant to a settlement agreement between the
parties.  As part of the settlement, NewPage granted the
Company an irrevocable, perpetual, non-exclusive, worldwide, royalty-free,
and fully paid-up right and license for any and all purposes under the NewPage
patent and any continuation, division, reissue or non-U.S. counterpart of the
patent.





The U.S.
government provides an excise tax credit for companies that use alternative fuel
mixtures in their businesses equal to $0.50 per gallon of alternative fuel
contained in the mixture.  In January and February 2009, the Internal
Revenue Service certified that the Company’s operations at its Androscoggin and
Quinnesec mills qualified for the alternative fuel mixture tax
credit.  Although there is some uncertainty as to the continued
existence and availability of the alternative fuel mixture tax credit, the
Company is reasonably assured that the tax credit for the alternative fuel
mixture used by the Company through March 31, 2009, has been earned and will be
collected from the U.S. government.  Accordingly, during the first
quarter of 2009, the Company accrued $105.5 million of alternative fuel mixture
tax credits for the period from September 2008 through March 2009, including
$18.7 million for claims to be filed subsequent to March 31,
2009.  This accrual is reflected on the Company’s condensed
consolidated statement of operations in Other income, net of $0.9 million of
associated expenses.  As of March 31, 2009, the Company had received
$29.7 million of alternative fuel mixture cash payments, and it received an
additional $51.2 million in payments in April 2009.




18


In
connection with the Acquisition, the Company assumed a twelve-year supply
agreement with Thilmany LLC, or “Thilmany,” for the specialty paper products
manufactured on paper machine No. 5 at the Androscoggin mill.  The
agreement requires Thilmany to pay the Company a variable charge for the paper
purchased and a fixed charge for the availability of the No. 5 paper
machine.  The Company is responsible for the No. 5 machine’s routine
maintenance and Thilmany is responsible for any capital expenditures specific to
the machine.  Thilmany has the right to terminate the agreement if
certain events occur.




The
Company has a joint ownership interest with Bucksport Energy LLC, an unrelated
third party, in a cogeneration power plant producing steam and
electricity.  The plant was built in 2000 by the two parties and is
located in Bucksport, Maine.  Each owner, Verso Bucksport LLC and
Bucksport Energy LLC, owns its proportional share of the assets.  The
plant supports the Bucksport mill.  The mill owns 28% of the steam and
electricity produced by the plant.  The mill may purchase its
remaining electrical needs from the plant at market rates.  The mill
is obligated to purchase the remaining 72% of the steam output at fuel cost plus
a contractually fixed fee per unit of steam.  Power generation and
operating expenses are divided on the same basis as ownership.  The
Bucksport mill has cash which is restricted in its use and may be used only to
fund the ongoing energy operations of this investment.  On March 31,
2009, the Company had $0.2 million of restricted cash included in Other assets
in the accompanying condensed consolidated balancesheet.




19


13.  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 supercalendered papers. These products serve customers in the
catalog, magazine, inserts, and commercial print markets.





The
following table summarizes the industry segment data for the three-months ended
March 31, 2009 and 2008:




Three
      Months
                            
                            
                            Three
      MonthsEnded
                            
                            
                            EndedMarch
      31,
                            
                            
                            March
      31,(In
      thousands of U.S. dollars)
                            
                            2009
                            
                            
                            2008Net
      Sales:Coated
      and supercalendered
                            
                            $
                            255,977
                            
                            
                            $
                            404,931Hardwood
      market pulp
                            
                            
                            17,674
                            
                            
                            
                            39,107Other
                            
                            
                            13,423
                            
                            
                            
                            9,869Total
                            
                            $
                            287,074
                            
                            
                            $
                            453,907Operating
      Income (Loss):Coated
      and supercalendered
                            
                            $
                            (20,387
                            )
                            
                            $
                            21,374Hardwood
      market pulp
                            
                            
                            (8,887
                            )
                            
                            
                            10,498Other
                            
                            
                            (2,308
                            )
                            
                            
                            (1,301
                            )Total
                            
                            $
                            (31,582
                            )
                            
                            $
                            30,571Depreciation
      and Amortization:Coated
      and supercalendered
                            
                            $
                            28,902
                            
                            
                            $
                            26,770Hardwood
      market pulp
                            
                            
                            4,314
                            
                            
                            
                            4,647Other
                            
                            
                            1,107
                            
                            
                            
                            720Total
                            
                            $
                            34,323
                            
                            
                            $
                            32,137Capital
      Spending:Coated
      and supercalendered
                            
                            $
                            10,308
                            
                            
                            $
                            9,408Hardwood
      market pulp
                            
                            
                            1,341
                            
                            
                            
                            2,873Other
                            
                            
                            269
                            
                            
                            
                            313Total
                            
                            $
                            11,918
                            
                            
                            $
                            12,594


20


14.  UNAUDITED
CONDENSED CONSOLIDATING FINANCIAL INFORMATION





Presented
below are the Company’s consolidating balance sheets, statements of operations,
and statements of cash flows, as required by Rule 3-10 of
Regulation S-X of the Securities Exchange Act of 1934, as
amended.  The 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 Verso Paper Holdings LLC’s subsidiaries that guaranteed
the obligations under the debt securities described below are reflected in the
Intercompany Eliminations column.





Verso
Paper Holdings LLC (“Parent Issuer”) and Verso Paper Inc., are the issuers of
91⁄8% second-priority senior secured fixed rate notes due 2014, second-priority
senior secured floating rate notes due 2014, and 113⁄8% senior subordinated notes
due 2014 (the “notes”).  The notes are jointly and severally
guaranteed on a full and unconditional basis by the Company’s 100% owned
subsidiaries, except Verso Paper Inc. (“Guarantor Subsidiaries”).  All
subsidiaries other than the Guarantor Subsidiaries are minor.





Unaudited
      Condensed Consolidating Balance Sheetas
      of March 31, 2009Parent
                              
                              
                              Subsidiary
                              
                              
                              Guarantor
                              
                              
                              Intercompany(In
      thousands of U.S. dollars)
                              
                              Issuer
                              
                              
                              Issuer
                              
                              
                              Subsidiaries
                              
                              
                              Eliminations
                              
                              
                              ConsolidatedASSETSCurrent
      assets
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              402,197
                              
                              
                              $
                              -
                              
                              
                              $
                              402,197Property,
      plant, and equipment, net
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,095,807
                              
                              
                              
                              -
                              
                              
                              
                              1,095,807Intercompany
      receivable
                              
                              
                              1,277,636
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,277,636
                              )
                              
                              
                              -Investment
      in subsidiaries
                              
                              
                              130,092
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (130,092
                              )
                              
                              
                              -Non-current
      assets
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              104,996
                              
                              
                              
                              -
                              
                              
                              
                              104,996Total
      assets
                              
                              $
                              1,407,728
                              
                              
                              $
                              -
                              
                              
                              $
                              1,603,000
                              
                              
                              $
                              (1,407,728
                              )
                              
                              $
                              1,603,000LIABILITIES
      AND MEMBER'S EQUITYCurrent
      liabilities
                              
                              $
                              18,148
                              
                              
                              $
                              -
                              
                              
                              $
                              161,549
                              
                              
                              $
                              -
                              
                              
                              $
                              179,697Intercompany
      payable
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,277,636
                              
                              
                              
                              (1,277,636
                              )
                              
                              
                              -Long-term
      debt
                              
                              
                              1,230,108
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,230,108Other
      long-term liabilities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              33,723
                              
                              
                              
                              -
                              
                              
                              
                              33,723Member's
      equity
                              
                              
                              159,472
                              
                              
                              
                              -
                              
                              
                              
                              130,092
                              
                              
                              
                              (130,092
                              )
                              
                              
                              159,472Total
      liabilities and member's equity
                              
                              $
                              1,407,728
                              
                              
                              $
                              -
                              
                              
                              $
                              1,603,000
                              
                              
                              $
                              (1,407,728
                              )
                              
                              $
                              1,603,000


21




Unaudited
      Condensed Consolidating Balance Sheetas
      of December 31, 2008Parent
                                
                                
                                Subsidiary
                                
                                
                                Guarantor
                                
                                
                                Intercompany(In
      thousands of U.S. dollars)
                                
                                Issuer
                                
                                
                                Issuer
                                
                                
                                Subsidiaries
                                
                                
                                Eliminations
                                
                                
                                ConsolidatedASSETSCurrent
      assets
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                401,011
                                
                                
                                $
                                -
                                
                                
                                $
                                401,011Property,
      plant, and equipment, net
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,115,657
                                
                                
                                
                                -
                                
                                
                                
                                1,115,657Intercompany
      receivable
                                
                                
                                1,307,503
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (1,307,503
                                )
                                
                                
                                -Investment
      in subsidiaries
                                
                                
                                60,663
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (60,663
                                )
                                
                                
                                -Non-current
      assets
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                97,404
                                
                                
                                
                                -
                                
                                
                                
                                97,404Total
      assets
                                
                                $
                                1,368,166
                                
                                
                                $
                                -
                                
                                
                                $
                                1,614,072
                                
                                
                                $
                                (1,368,166
                                )
                                
                                $
                                1,614,072LIABILITIES
      AND MEMBER'S EQUITYCurrent
      liabilities
                                
                                $
                                33,641
                                
                                
                                $
                                -
                                
                                
                                $
                                213,899
                                
                                
                                $
                                -
                                
                                
                                $
                                247,540Intercompany
      payable
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,307,503
                                
                                
                                
                                (1,307,503
                                )
                                
                                
                                -Long-term
      debt
                                
                                
                                1,242,821
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,242,821Other
      long-term liabilities
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                32,007
                                
                                
                                
                                -
                                
                                
                                
                                32,007Member's
      equity
                                
                                
                                91,704
                                
                                
                                
                                -
                                
                                
                                
                                60,663
                                
                                
                                
                                (60,663
                                )
                                
                                
                                91,704Total
      liabilities and member's equity
                                
                                $
                                1,368,166
                                
                                
                                $
                                -
                                
                                
                                $
                                1,614,072
                                
                                
                                $
                                (1,368,166
                                )
                                
                                $
                                1,614,072


Unaudited
      Condensed Consolidating Statements of OperationsThree
      Months Ended March 31, 2009Parent
                                
                                
                                Subsidiary
                                
                                
                                Guarantor
                                
                                
                                Intercompany(In
      thousands of U.S. dollars)
                                
                                Issuer
                                
                                
                                Issuer
                                
                                
                                Subsidiaries
                                
                                
                                Eliminations
                                
                                
                                ConsolidatedNet
      sales
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                287,074
                                
                                
                                $
                                -
                                
                                
                                $
                                287,074Cost
      of products sold (exclusive ofdepreciation,
      amortization, and depletion)
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                268,940
                                
                                
                                
                                -
                                
                                
                                
                                268,940Depreciation,
      amortization, and depletion
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                34,323
                                
                                
                                
                                -
                                
                                
                                
                                34,323Selling,
      general, and administrative expenses
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                15,222
                                
                                
                                
                                -
                                
                                
                                
                                15,222Restructuring
      and other charges
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                171
                                
                                
                                
                                -
                                
                                
                                
                                171Interest
      and dividend income
                                
                                
                                (24,318
                                )
                                
                                
                                -
                                
                                
                                
                                (58
                                )
                                
                                
                                24,318
                                
                                
                                
                                (58
                                )Interest
      expense
                                
                                
                                24,318
                                
                                
                                
                                -
                                
                                
                                
                                24,716
                                
                                
                                
                                (24,318
                                )
                                
                                
                                24,716Other
      income, net
                                
                                
                                (8,903
                                )
                                
                                
                                -
                                
                                
                                
                                (113,317
                                )
                                
                                
                                8,903
                                
                                
                                
                                (113,317
                                )Equity
      in net income of subsidiaries
                                
                                
                                57,077
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (57,077
                                )
                                
                                
                                -Net
      income
                                
                                $
                                65,980
                                
                                
                                $
                                -
                                
                                
                                $
                                57,077
                                
                                
                                $
                                (65,980
                                )
                                
                                $
                                57,077





22




Unaudited
      Condensed Consolidating Statements of OperationsThree
      Months Ended March 31, 2008Parent
                              
                              
                              Subsidiary
                              
                              
                              Guarantor
                              
                              
                              Intercompany(In
      thousands of U.S. dollars)
                              
                              Issuer
                              
                              
                              Issuer
                              
                              
                              Subsidiaries
                              
                              
                              Eliminations
                              
                              
                              ConsolidatedNet
      sales
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              453,907
                              
                              
                              $
                              -
                              
                              
                              $
                              453,907Cost
      of products sold (exclusive ofdepreciation,
      amortization, and depletion)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              375,378
                              
                              
                              
                              -
                              
                              
                              
                              375,378Depreciation,
      amortization, and depletion
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              32,137
                              
                              
                              
                              -
                              
                              
                              
                              32,137Selling,
      general, and administrative expenses
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              14,103
                              
                              
                              
                              -
                              
                              
                              
                              14,103Restructuring
      and other charges
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,718
                              
                              
                              
                              -
                              
                              
                              
                              1,718Interest
      and dividend income
                              
                              
                              (34,284
                              )
                              
                              
                              -
                              
                              
                              
                              (191
                              )
                              
                              
                              34,284
                              
                              
                              
                              (191
                              )Interest
      expense
                              
                              
                              27,153
                              
                              
                              
                              -
                              
                              
                              
                              26,720
                              
                              
                              
                              (27,153
                              )
                              
                              
                              26,720Equity
      in net income of subsidiaries
                              
                              
                              4,042
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (4,042
                              )
                              
                              
                              -Net
      income
                              
                              $
                              11,173
                              
                              
                              $
                              -
                              
                              
                              $
                              4,042
                              
                              
                              $
                              (11,173
                              )
                              
                              $
                              4,042




Unaudited
      Condensed Consolidating Statements of Cash FlowsThree
      Months Ended March 31, 2009Parent
                                  
                                  
                                  Subsidiary
                                  
                                  
                                  Guarantor
                                  
                                  
                                  Intercompany(In
      thousands of U.S. dollars)
                                  
                                  Issuer
                                  
                                  
                                  Issuer
                                  
                                  
                                  Subsidiaries
                                  
                                  
                                  Eliminations
                                  
                                  
                                  ConsolidatedNet
      cash used in operating activities
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (86,838
                                  )
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (86,838
                                  )Cash
      flows from investing activities:Proceeds
      from sale of fixed assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  14
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  14Capital
      expenditures
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (11,918
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (11,918
                                  )Investment
      in subsidiaries
                                  
                                  
                                  (9,145
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  9,145
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Return
      of investment in subsidiaries
                                  
                                  
                                  239
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (239
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Net
      cash used in investing activities
                                  
                                  
                                  (8,906
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,998
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (11,904
                                  )Cash
      flows from financing activities:Equity
      distributions
                                  
                                  
                                  (239
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (239
                                  )Repayment
      of advances to subsidiaries
                                  
                                  
                                  12,713
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (12,713
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Payments
      on long-term debt
                                  
                                  
                                  (3,568
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,568
                                  )Net
      cash provided by (used in) financingactivities
                                  
                                  
                                  8,906
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (12,713
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,807
                                  )Change
      in cash and cash equivalents
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (102,549
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (102,549
                                  )Cash
      and cash equivalents at beginning ofperiod
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  119,520
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  119,520Cash
      and cash equivalents at end of period
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  16,971
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  16,971







23


Unaudited
      Condensed Consolidating Statements of Cash FlowsThree
      Months Ended March 31, 2008Parent
                                        
                                        
                                        Subsidiary
                                        
                                        
                                        Guarantor
                                        
                                        
                                        Intercompany(In
      thousands of U.S. dollars)
                                        
                                        Issuer
                                        
                                        
                                        Issuer
                                        
                                        
                                        Subsidiaries
                                        
                                        
                                        Eliminations
                                        
                                        
                                        ConsolidatedNet
      cash provided by (used in) operatingactivities
                                        
                                        $
                                        7,131
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (25,537
                                        )
                                        
                                        
                                        
                                        
                                        $
                                        (18,406
                                        )Cash
      flows from investing activities:Capital
      expenditures
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (12,594
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (12,594
                                        )Net
      cash used in investing activities
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (12,594
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (12,594
                                        )Cash
      flows from financing activities:Equity
      distributions
                                        
                                        
                                        (7,131
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (7,131
                                        )Repayment
      of advances tosubsidiaries
                                        
                                        
                                        713
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (713
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Payments
      on long-term debtunder
      credit agreement
                                        
                                        
                                        (713
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (713
                                        )Net
      cash used in financing activities
                                        
                                        
                                        (7,131
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (713
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (7,844
                                        )Change
      in cash and cash equivalents
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (38,844
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (38,844
                                        )Cash
      and cash equivalents at beginning ofperiod
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        58,499
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        58,499Cash
      and cash equivalents at end of period
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        19,655
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        19,655






24


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





Overview





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




Financial
Summary





Our
results for the first quarter of 2009 reflect a 36.8% decrease in net sales as
volume fell 37.2% compared to the first quarter of 2008.  Our average
sales price per ton for all of our products was up slightly to $875 in the first
quarter of 2009 from $869 for the same period last year, primarily driven by a
3.3% increase in average coated paper prices.  Our gross margin
dropped to 6.3% from 17.3% for the same period last year, reflecting $31.3
million of unabsorbed costs resulting from almost 140,000 tons of downtime taken
in the first quarter of 2009 as we continue to curtail our production in
response to continued weak demand for coated papers.





In
response to the ongoing, challenging operating environment, we continue to
assess and implement, as appropriate, various earnings and expense reduction
initiatives.  Management has developed a company-wide cost reduction
program, which we expect to yield $65 million in cost reductions.  As
of the end of the first quarter of 2009, approximately $10 million of savings
have been realized from this program.  Management expects to achieve
most of these savings in 2009 and will continue to search for and develop
additional savings measures.  Included in this program are material
usage reductions, energy usage reductions, labor cost savings, chemical
substitution, salary freezes, selling, general, and administrative expense
reductions, workforce planning improvements, and new product
opportunities.





New
product initiatives have contributed to a 36.0% increase in net sales for our
other segment, reflecting the development of new specialty paper product
offerings for our customers.





Results
of Operations – First Quarter of 2009 Compared to First Quarter of
2008




Net Sales.  Net
sales for the first quarter of 2009 decreased 36.8% to $287.1 million from
$453.9 million as total sales volume decreased 37.2% compared to last year,
reflecting lower demand for coated papers and market pulp in a difficult
economic environment.  The average sales price per ton for all of our
products was higher, increasing 0.7% from the first quarter of
2008.





Net sales
for our coated and supercalendered papers segment decreased 36.8% to $256.0
million in the first quarter of 2009 from $404.9 million in the first quarter of
2008.  The decrease reflects a 38.8% decrease in paper sales volume
and a 3.3% increase in average paper sales price per ton for the first quarter
of 2009 compared to the same period last year.





25


Net sales
for our market pulp segment decreased 54.8% to $17.7 million in the first
quarter of 2009 from $39.1 million for the same period in 2008.  This
decline was due to a 37.6% decrease in sales volume combined with a 27.6%
decrease in average sales price per ton compared to the first quarter of
2008.


Three
      Months
                        
                        
                        Three
      MonthsEnded
                        
                        
                        EndedMarch
      31,
                        
                        
                        March
      31,(In
      thousands of U.S. dollars)
                        
                        2009
                        
                        
                        2008Net
      sales
                        
                        $
                        287,074
                        
                        
                        $
                        453,907Costs
      and expenses:Cost
      of products sold - exclusive ofdepreciation,
      amortization, and depletion
                        
                        
                        268,940
                        
                        
                        
                        375,378Depreciation,
      amortization, and depletion
                        
                        
                        34,323
                        
                        
                        
                        32,137Selling,
      general, and administrative expenses
                        
                        
                        15,222
                        
                        
                        
                        14,103Restructuring
      and other charges
                        
                        
                        171
                        
                        
                        
                        1,718Operating
      income (loss)
                        
                        
                        (31,582
                        )
                        
                        
                        30,571Interest
      income
                        
                        
                        (58
                        )
                        
                        
                        (191
                        )Interest
      expense
                        
                        
                        24,716
                        
                        
                        
                        26,720Other
      income, net
                        
                        
                        (113,317
                        )
                        
                        
                        -Net
      income
                        
                        $
                        57,077
                        
                        
                        $
                        4,042




Net sales
for our other segment increased 36.0% to $13.4 million in the first quarter of
2009 from $9.9 million in the first quarter of 2008.  The improvement
in 2009 is due to a 25.7% increase in sales volume and an 8.2% increase in
average sales price per ton compared to the first quarter of 2008, reflecting
the development of new specialty paper product offerings for our
customers.





Cost of
sales.  Cost of sales, including depreciation, amortization,
and depletion, decreased 25.6% to $303.3 million from $407.6 million in the
first quarter of 2008, primarily reflecting the decline in sales
volume.  Our gross margin, excluding depreciation, amortization, and
depletion, was 6.3% for the first quarter of 2009 compared to 17.3% for the
first quarter of 2008, reflecting $31.3 million of unabsorbed costs resulting
from almost 140,000 tons of downtime taken in the first quarter of 2009 as we
continue to curtail our production in response to continued weak demand for
coated papers.  Depreciation, amortization, and depletion expense was
$34.4 million in the first quarter of 2009 compared to $32.2 million in the
first quarter of 2008.





Selling, general, and
administrative.  Selling, general, and administrative expenses
were $15.2 million in the first quarter of 2009 compared to $14.1 million for
the same period in 2008, reflecting the effect of transitioning our
infrastructure to a stand-alone organization.





Interest expense.Interest
expense for the first quarter of 2009 was $24.7 million compared to $26.7
million for the same period in 2008.  The decrease in interest expense
was due to lower interest rates on floating rate debt in 2009.





Other
income.  Other income was $113.3 million for the first quarter
of 2009, which includes $104.6 million in net benefits from alternative fuel
mixture tax credits provided by the U.S. government for our use of black liquor
in alternative fuel mixtures during the period of September 2008 through March
2009 and $8.7 million in net gains related to the repurchase and retirement of
$12.0 million of our second priority senior secured floating rate
notes.




26


Restructuring and other
charges.  Restructuring and other charges for the first quarter
of 2009 were $0.2 million compared to $1.7 million for the first quarter of
2008.  Restructuring and other charges are comprised of transition and
other costs associated with the Acquisition; including technology migration
costs, consulting and legal fees, and other one-time costs related to becoming a
stand-alone business.  Subsequent to the Acquisition, we entered into
a management agreement with Apollo relating to the provision of certain
financial and strategic advisory services and consulting
services.  Management fees to Apollo for these services were $0.6
million for the three months ended March 31, 2008.  Upon consummation
of the IPO, Apollo terminated the annual fee arrangement under the management
agreement.




Seasonality





We are
exposed to fluctuations in quarterly net sales volumes and expenses due to
seasonal factors.  These seasonal factors are common in the coated
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 and
accounts receivable generally peak 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 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.  Net cash used in operating activities was $86.8
million for the three months ended March 31, 2009, compared to $18.4 million for
the three months ended March 31, 2008.  The increase in net cash used
in operating activities was primarily due to changes in working capital, which
included a decline in accounts payable and accrued liabilities while inventories
increased reflecting the current economic conditions.  An increase in
accounts receivable was primarily due to accruals for alternative fuel mixture
tax credits and was offset by the resulting improvement in net
income.





Net cash flows from investing
activities.For the three months ended March 31, 2009 and
2008, we used $11.9 million and $12.6 million, respectively, of net cash in
investing activities due to investments in capital expenditures.




Net cash flows from financing
activities.For the three months ended March 31, 2009,
financing activities used net cash of $3.8 million due primarily to principal
payments on long-term debt.  This compares to $7.8 million of net cash
used in 2008 which reflected principal payments on debt and $7.1 million in
distributions to Verso Paper Finance Holdings LLC, or “Verso Finance,” to
service interest obligations.




27


Indebtedness.As
of March 31, 2009, our aggregate indebtedness was $1,233.0 million.





On March
31, 2009, we had senior secured credit facilities consisting of:




·
            $285
      million term loan maturing in 2013, of which $252.9 million was
      outstanding on March 31, 2009; and




·
            $200
      million revolving credit facility maturing in 2012, under which
      $92.1 million was outstanding, $31.2 million in letters of credit
      were issued, and $60.9 million was available for future borrowing on March
      31, 2009.




The term
loan bears interest at a rate equal to LIBOR plus 1.75%, with the interest rate
being 3.0% at March 31, 2009.  The revolving credit facility bears
interest at a rate equal to LIBOR plus 1.50% and/or Prime plus 0.50%, and the
weighted average interest rate at March 31, 2009, was 3.0%.  We are
required to pay a commitment fee to the lenders under the revolving credit
facility in respect of unutilized commitments at a rate equal to 0.375% per
annum (subject to reduction in certain circumstances) and customary letter of
credit and agency fees.  The senior secured credit facilities are
secured by first priority security interests in, and mortgages on, substantially
all of our tangible and intangible assets and those of each of our direct and
indirect subsidiaries.  The senior secured credit facilities also are
secured by first priority pledges of all the equity interests owned by us in our
subsidiaries.  The obligations under the senior secured credit
facilities are unconditionally guaranteed by Verso Finance and, subject to
certain exceptions, each of its direct and indirect subsidiaries.  The
credit agreement for our senior secured credit facilities contains various
covenants which, among other things, prohibit our subsidiaries from prepaying
other indebtedness, require us to maintain a maximum consolidated first lien
leverage ratio, and restrict our ability to incur indebtedness or liens, make
investments or declare or pay any dividends.  As of March 31, 2009, we
were in compliance with all such covenants.





On March
31, 2009, we also had outstanding debt securities consisting of:





·
            $350
      million aggregate principal amount of 91⁄8% second priority senior secured
      fixed rate notes due 2014;




·
            $300
      million aggregate principal amount of 113⁄8% senior subordinated notes due
      2016; and




·
            $238
      million aggregate principal amount of second priority senior secured
      floating rate notes due 2014.




The
original principal amount of each of the fixed-rate notes was outstanding at
March 31, 2009.  In March 2009, we repurchased and retired $12.0
million of our floating rate notes and recognized a gain of $8.9
million.  The fixed rate notes pay interest semi-annually, and the
floating rate notes pay interest quarterly.  The floating rate notes
bear interest at a rate equal to LIBOR plus 3.75% with the interest rate being
4.9% at March 31, 2009.  The fixed rate and floating rate second
priority senior secured notes have the benefit of a second priority security
interest in the collateral securing our senior secured credit facilities, while
the subordinated notes are unsecured.





The
indentures governing our notes contain various covenants which  limit
our ability to, among other things, incur additional indebtedness; pay dividends
or make other distributions or repurchase or redeem our stock; make investments;
sell assets, including capital stock of restricted subsidiaries; enter into
agreements restricting our subsidiaries’ ability to pay dividends; consolidate,
merge, sell or otherwise dispose of all or substantially all of our assets;
enter into transactions with our affiliates; and incur liens.  As of
March 31, 2009, we were in compliance with all such covenants.




28


The
Company may elect to retire its outstanding debt in open market purchases,
privately negotiated transactions, or otherwise.  These repurchases
may be funded through available cash from operations and borrowings from our
credit facilities.  Such repurchases are dependent on prevailing
market conditions, the Company’s liquidity requirements, contractual
restrictions and other factors.  In March 2009, we repurchased and
retired $12.0 million of the floating rate notes and recognized a gain of $8.9
million.





Critical
Accounting Policies





Our
accounting policies are fundamental to understanding management’s discussion and
analysis of results of operations and financial condition.  Our
consolidated condensed financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America and
follow general practices within the industry in which we operate.  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 our financial condition,
changes in financial condition or results of operations.





Management
believes the following critical accounting policies are both important to the
portrayal of our financial condition and results of operations and require
subjective or complex judgments.  These judgments about critical
accounting estimates are based on information available to us 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 the following: Statement of
Financial Accounting Standards, or “SFAS,” No. 5, Accounting for Contingencies;
SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets; SFAS No. 142,
Goodwill and Other Intangible
Assets; SFAS No. 87, Employers’ Accounting for
Pensions; and SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.





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





Goodwill
and other intangible assets are accounted for in accordance with SFAS 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 these assets exceed their implied fair value.  An
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.  The Company has identified the following trademarks as
intangible assets with an indefinite life: Influence®, Liberty® and
Advocate®.  Goodwill is evaluated at the reporting unit level and has
been allocated to the “Coated” segment.  The valuation as of October
1, 2008, indicated no impairment of goodwill or trademarks assigned indefinite
lives.





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.




29


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




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





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





Recent
Accounting Developments





Fair Value of Financial
Instruments—In April 2009, the FASB issued FASB Staff Position on SFAS
No. 107 and APB No. 28, or FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, which increases the frequency of fair value
disclosures to a quarterly basis instead of an annual basis.  The
guidance relates to fair value disclosures for any financial instruments that
are not currently reflected on the balance sheet at fair value.  FSP
FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after
June 15, 2009. Since FSP FAS 107-1 and APB 28-1 only addresses new disclosure
requirements, the adoption of FSP FAS 107-1 and APB 28-1 will have no impact on
our financial condition or results of operations.





Postretirement Benefit Plan
Assets.In December 2008, the FASB issued FASB Staff Position
on Statement 132(R)-1, or FSP FAS 132(R)-1, Employers’ Disclosure about
Postretirement Benefit Plan Assets, which amends SFAS No. 132(R) to
require more detailed disclosures about employers’ pension plan
assets.  New disclosures will include more information on investment
strategies, major categories of plan assets, concentrations of risk within plan
assets and valuation techniques used to measure the fair value of plan
assets.  FSP FAS 132(R)-1 is effective for fiscal years ending after
December 15, 2009.  Since FSP FAS 132(R)-1 only addresses disclosure
requirements, the adoption of FSP FAS 132(R)-1 will have no impact on our
financial condition or results of operations.





30


Forward-Looking
Statements





In this
quarterly report, all statements that are not purely historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934.  Forward-looking statements may be identified by the words
“believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “intend” and
similar expressions.  Forward-looking statements are based on
currently available business, economic, financial and other information and
reflect management’s current beliefs, expectations and views with respect to
future developments and their potential effects on Verso.  Actual
results could vary materially depending on risks and uncertainties that may
affect Verso and its business.  For a discussion of such risks and
uncertainties, please refer to “Risk Factors,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and other sections of
this quarterly report and to Verso’s other filings with the Securities and
Exchange Commission.  Verso assumes no obligation to update any
forward-looking statement made in this quarterly report to reflect subsequent
events or circumstances or actual outcomes.





Covenant
Compliance





The credit
agreement governing our senior secured credit facilities requires the
maintenance of a total net first lien secured debt to Adjusted EBITDA (as
defined below) ratio that does not exceed 3.25 to 1.00 measured on a trailing
four-quarter basis.  In addition, the credit agreement and the
indentures governing our outstanding notes contain financial and other
restrictive covenants that limit our ability to take certain actions, such as
incurring additional debt or making acquisitions.  Although we do not
expect to violate any of the provisions in the agreements governing our
outstanding indebtedness, these covenants can result in limiting our long-term
growth prospects by hindering our ability to incur future indebtedness or grow
through acquisitions.





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 EBITDA further adjusted to exclude unusual items and other pro forma
adjustments permitted in calculating covenant compliance in the indentures
governing our notes to test the permissibility of certain types of
transactions.  Adjusted EBITDA is modified to reflect the amount of
net cost savings projected to be realized as a result of specified activities
taken during the preceding 12-month period.  We believe that the
inclusion of the supplemental adjustments applied in calculating Adjusted EBITDA
are reasonable and appropriate in providing additional information to investors
to demonstrate our compliance with our financial covenants.  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.





31


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




Three
      Months
                          
                          
                          Year
                          
                          
                          Three
      Months
                          
                          
                          Twelve
      MonthsEnded
                          
                          
                          Ended
                          
                          
                          Ended
                          
                          
                          EndedMarch
      31,
                          
                          
                          December
      31,
                          
                          
                          March
      31,
                          
                          
                          March
      31,(in
      millions of U.S. dollars)
                          
                          2008
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2009Cash
      flow from operating activities
                          
                          $
                          (18.4
                          )
                          
                          $
                          74.9
                          
                          
                          $
                          (86.8
                          )
                          
                          $
                          6.5Amortization
      of debt issuance costs
                          
                          
                          (1.4
                          )
                          
                          
                          (5.4
                          )
                          
                          
                          (1.4
                          )
                          
                          
                          (5.4
                          )Interest
      income
                          
                          
                          (0.2
                          )
                          
                          
                          (0.8
                          )
                          
                          
                          (0.1
                          )
                          
                          
                          (0.7
                          )Interest
      expense
                          
                          
                          26.7
                          
                          
                          
                          103.2
                          
                          
                          
                          24.7
                          
                          
                          
                          101.2Gain
      on early extinguishment of debt
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          8.9
                          
                          
                          
                          8.9Loss
      on disposal of fixed assets
                          
                          
                          (0.1
                          )
                          
                          
                          (0.7
                          )
                          
                          
                          (0.1
                          )
                          
                          
                          (0.7
                          )Other,
      net
                          
                          
                          (2.8
                          )
                          
                          
                          22.6
                          
                          
                          
                          1.0
                          
                          
                          
                          26.4Changes
      in assets and liabilities, net
                          
                          
                          58.9
                          
                          
                          
                          3.9
                          
                          
                          
                          169.8
                          
                          
                          
                          114.8EBITDA
                          
                          
                          62.7
                          
                          
                          
                          197.7
                          
                          
                          
                          116.0
                          
                          
                          
                          251.0Restructuring,
      severance, and other (1)
                          
                          
                          1.7
                          
                          
                          
                          27.4
                          
                          
                          
                          0.2
                          
                          
                          
                          25.9Non-cash
      compensation/benefits (2)
                          
                          
                          0.1
                          
                          
                          
                          11.2
                          
                          
                          
                          0.1
                          
                          
                          
                          11.2Alternative
      fuel tax credit (3)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (104.6
                          )
                          
                          
                          (104.6
                          )Gain
      on early extinguishment of debt, net (4)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (8.7
                          )
                          
                          
                          (8.7
                          )Other
      items, net (5)
                          
                          
                          0.1
                          
                          
                          
                          3.1
                          
                          
                          
                          0.7
                          
                          
                          
                          3.7Proforma
      effects of profitability program (6)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          6.5
                          
                          
                          
                          54.9Adjusted
      EBITDA
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          10.2
                          
                          
                          $
                          233.4Net
      first-lien secured debt to Adjusted EBITDA
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1.4




(1)
                      Restructuring
      includes transition and other non-recurring costs associated with the
      Acquisition as per our financial statements.(2)
                      Represents
      amortization of non-cash incentive compensation.(3)
                      Represents
      earnings from the federal government's program which provides incentives
      for the use of alternative fuels.(4)
                      Represents
      the net gain recognized from the early extinguishment of a portion of our
      senior secured notes, net of hedge results.(5)
                      Represents
      earnings adjustments for legal and consulting fees, and other
      miscellaneous non-recurring items.(6)
                      Represents
      cost savings expected to be realized as part of the Company's cost savings
      program.NOTE:
                      To
      construct financials for the twelve months ended March 31, 2009, amounts
      have been calculated by subtracting the data for the three months ended
      March 31, 2008, from the data for the year ended December 31, 2008, and
      then adding the three months ended March 31,
  2009.





32


ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK





We are exposed to market risk from fluctuations in our paper prices,
interest rates, energy prices, 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 influence
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: catalogs and
magazines.  Coated paper demand is primarily driven by advertising and
print media usage.  Advertising spending and magazine and catalog
circulation tend to correlate with GDP in the United States - they rise with a
strong economy and contract with a weak economy.





The majority of our products are sold under contracts 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.  Most of our contracts are negotiated on an annual basis, with
only a few having terms extending beyond one year.  Typically, our
contracts provide for quarterly price adjustments based on market price
movements.  The large portion of contracted sales allows us to plan
our production runs well in advance, optimizing production over our integrated
mill system and thereby reducing costs and increasing overall
efficiency.





We reach our end-users through several channels, including printers,
brokers, paper merchants, and direct sales to end-users.  We sell and
market our products to approximately 100 customers.  In 2009, no
single customer accounted for more than 10% of our total net
sales.





Interest Rates





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 March
31, 2009, under our senior secured credit facilities and our floating-rate notes
would increase our annual interest expense by $5.8 million.  While we may
enter into agreements limiting our exposure to higher interest rates, any such
agreements may not offer complete protection from this risk.





Derivatives





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





33


We do not hedge the entire exposure of our operations from commodity
price volatility for a variety of reasons.  To the extent that we do
not hedge against commodity price volatility, our results of operations may be
affected either favorably or unfavorably by a shift in the future price
curve.  As of March 31, 2009, we had net unrealized losses of $27.7
million on open commodity contracts with maturities of one to nine months.
 These derivative instruments involve the exchange of net cash settlements,
based on changes in the price of the underlying commodity index compared to the
fixed price offering, at specified intervals without the exchange of any
underlying principal.  A 10% decrease in commodity prices would have a
negative impact of approximately $2.4 million on the fair value of such
instruments.  This quantification of exposure to market risk does not
take into account the offsetting impact of changes in prices on anticipated
future energy purchases.





In February 2008, we entered into a two-year $250 million notional
value receive-variable, pay-fixed interest rate swap in connection with our
outstanding floating rate notes that mature in 2014.  We are hedging
the cash flow exposure on our quarterly variable-rate interest payments due to
changes in the benchmark interest rate (three-month LIBOR). During the first
quarter of 2009, the Company repurchased $12 million of the hedged notes and
de-designated the portion of the swap hedging the interest payments on this
portion of the debt, recognizing an unfavorable fair value adjustment of $0.2
million.  On March 31, 2009, the fair value of the designated portion
of this swap was an unrealized loss of $3.9 million.   A 10%
decrease in interest rates would have a negative impact of approximately $0.3
million on the fair value of this instrument.





Commodity Prices





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,
amortization, and depletion.  Costs for commodities, including
chemicals, wood, and energy, are the most variable component of our cost of
sales because their prices can fluctuate substantially, sometimes within a
relatively short period of time.  In addition, our aggregate commodity
purchases fluctuate based on the volume of paper that we
produce.





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





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





34


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




Off-Balance Sheet Arrangements




None.





ITEM 4T.  CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures




We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in reports that we file and
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.




There are inherent limitations to the effectiveness of any disclosure
controls and procedures, including the possibility of human error or the
circumvention or overriding of the controls and
procedures.  Accordingly, even effective disclosure controls and
procedures can provide only reasonable assurance of achieving their
objectives.




Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of Marc 31,
2009.  Based upon the evaluation, and subject to the foregoing, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective to accomplish their objectives
as of March 31, 2009.




Changes in Internal Control Over Financial Reporting




There was no change in our internal control over financial reporting
during the fiscal quarter ended March 31, 2009 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.




35


PART II.  OTHER INFORMATION





ITEM 1.   LEGAL PROCEEDINGS





We are involved in legal proceedings incidental to the conduct of our
business.  We do not believe that any liability that may result from
these proceedings will have a material adverse effect on our financial condition
or results of operations.





On August 6, 2008, we filed a declaratory judgment suit in the United
States District Court for the Eastern District of Wisconsin against NewPage
Corporation and NewPage Wisconsin System Inc., in response to a patent
infringement claim asserted by NewPage regarding certain of our coated paper
products.  The action sought a declaration that our coated paper
products do not infringe the NewPage patent and that the NewPage patent is
invalid.  On January 29, 2009, the action was voluntarily dismissed
with prejudice pursuant to a settlement agreement between the
parties.  As part of the settlement, NewPage granted us an
irrevocable, perpetual, non-exclusive, worldwide, royalty-free, and fully
paid-up right and license for any and all purposes under the NewPage patent and
any continuation, division, reissue or non-U.S. counterpart of the
patent.





ITEM 1A.   RISK FACTORS





Our business is subject to various risks.  Set forth below is
an important risk that we face and that could cause our actual results to differ
materially from our historical results.  Additional risk factors are
discussed in our annual report on Form 10-K for the year ended December 31,
2008, and our other SEC filings.





The alternative fuel mixture tax credit provided by the U.S. government
is being challenged in Congress and may be amended in a manner that eliminates
or reduces the benefits of the tax credit for pulp and paper
companies.





The U.S. government provides an excise tax credit to taxpayers for the
use of alternative fuel mixtures.  The alternative fuel mixture tax
credit, as it relates to liquid fuel derived from biomass, is scheduled to
expire on December 31, 2009.  In recent weeks, certain members of
Congress and others have indicated their opposition to pulp and paper companies
receiving the tax credit.  They have called for the amendment of the
tax credit in a manner that would eliminate or reduce its benefits for pulp and
paper companies.  In response, other members of Congress and
interested parties have voiced their support for maintaining the tax credit and
its availability to all taxpayers, including pulp and paper
companies.  We do not know whether the U.S. government will amend the
tax credit to eliminate or reduce its benefits for pulp and paper companies, but
there is the possibility that such action may be taken.  Any such
amendment of the tax credit could have a material adverse effect on our
financial condition and results of operations.





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





Not applicable.





ITEM 3.   DEFAULTS UPON SENIOR
SECURITIES





Not applicable.





36


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS





Not applicable.





ITEM 5.   OTHER INFORMATION





Not applicable.





ITEM 6.   EXHIBITS





The following exhibits are included with this report:





Exhibit


Number                                                                           Description





31.1
            Certification of Principal Executive Officer pursuant to Rule
      15d-14(a) under Securities Exchange Act of
  1934.


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


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


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





37


SIGNATURES





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




Date:  May
      14, 2009VERSO
      PAPER HOLDINGS LLCBy:
                  
                  /s/
      Michael A. JacksonMichael
      A. Jackson
                    President
      and Chief Executive
Officer




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








38


EXHIBIT INDEX





The
following exhibits are included with this report:





Exhibit


Number                                                                           Description





31.1
            Certification
      of Principal Executive Officer pursuant to Rule 15d-14(a) under Securities
      Exchange Act of 1934.





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





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





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









39