**FORM 10-QSECURITIES AND EXCHANGE COMMISSION**Washington,D.C. 20549
| **(Mark One)**                                    | ** **                                                                                     |
|---------------------------------------------------|------------------------------------------------------------------------------------------------|
| **x**                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                        | ** **                                                                                     |
| **For the  quarterly period ended June 30, 2006** |
| ** **                                        |
| **OR**                                            |
| ** **                                        | ** **                                                                                     |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

**Forthe transition period from                       to                      **

**RegistrationNumber: 333-114032**

**BLUE RIDGE PAPER PRODUCTS INC.**(Exact name of registrant as specified in charter)

| **Delaware**                             | ** ** | **56-2136509**                   |
|------------------------------------------|------------|----------------------------------|
| (State of  incorporation)                |       | (I.R.S. Employer  Identification |
|                                     |       | Number)                          |
| ** **                               |
| **41 MAIN  STREET**                      |
| **CANTON,  NORTH CAROLINA 28716**        |
| (Address of  principal executive office) |

Registrant’s telephonenumber, including area code: **828-454-0676**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90  days.

Yes   x      No   o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or a non-acceleratedfiler. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.(Check one):

| Large Accelerated Filer  o |   | Accelerated  Filer  o |   | Non-Accelerated  Filer  x |
|--------------------------------------|--------|---------------------------------|--------|-------------------------------------|

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

Yes   o     No   x

Thenumber of common shares outstanding at June 30, 2006 was 1,000.

 

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**BLUE RIDGE PAPER PRODUCTS INC. AND SUBSIDIARIES**

**INDEX**
| PART 1.  |   |     |   | FINANCIAL INFORMATION                                                                                                                                         |   |   |   |
|----------|--------|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   | Item 1.  |   | Financial Statements                                                                                                                                          |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   |     |   | Condensed  Consolidated Balance Sheets, June 30, 2006 (unaudited) and December 31, 2005  (derived from audited financial statements)                          |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   |     |   | Condensed  Consolidated Statements of Operations, Three Months Ended June 30, 2006 and  2005 (unaudited), Six Months Ended June 30, 2006 and 2005 (unaudited) |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   |     |   | Condensed Consolidated  Statements of Cash Flows, Six Months Ended June 30, 2006 and 2005 (unaudited)                                                         |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   |     |   | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                                                             |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   | Item 2.  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                   |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   | Item 3.  |   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                   |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   | Item 4.  |   | Controls and  Procedures                                                                                                                                      |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
| PART II. |   |     |   | OTHER INFORMATION                                                                                                                                             |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   | Item 1A. |   | Risk Factors                                                                                                                                                  |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   | Item 5.  |   | Other Information                                                                                                                                             |   |   |   |
|     |   |     |   |                                                                                                                                                          |   |   |   |
|     |   | Item 6.  |   | Exhibits                                                                                                                                                      |   |   |   |

 

2

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**PART 1. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**BLUE RIDGE PAPERPRODUCTS INC.**

**CondensedConsolidated Balance SheetsJune 30, 2006 and December 31, 2005 (Dollars in thousands)**(unaudited)
| ** **                                                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **Assets**                                                                                                                      |       |              |       |                  |       |
| Current assets:                                                                                                                 |       |              |       |                  |       |
| Cash                                                                                                                            |       | $                 | 748        |                  | $          | 2,110 |   |
| Accounts  receivable, net of allowance for doubtful accounts and discounts of $1,324  and $2,298 in 2006 and 2005, respectively |       | 60,795            |       | 56,002                |       |
| Inventories                                                                                                                     |       | 50,147            |       | 53,988                |       |
| Prepaid expenses                                                                                                                |       | 1,530             |       | 1,029                 |       |
| Insurance  proceeds receivable                                                                                                  |       | —            |       | 291                   |       |
| Income tax  receivable                                                                                                          |       | —            |       | 50                    |       |
| Deferred tax  asset                                                                                                             |       | 4,163             |       | 4,448                 |       |
| Total current  assets                                                                                                           |       | 117,383           |       | 117,918               |       |
| Property, plant,  and equipment, net of accumulated depreciation of $112,555 and $105,253 in  2006 and 2005, respectively       |       | 188,392           |       | 190,463               |       |
| Deferred  financing costs, net                                                                                                  |       | 4,357             |       | 5,108                 |       |
| Other assets                                                                                                                    |       | 1,208             |       | 193                   |       |
| Total assets                                                                                                                    |       | $                 | 311,340    |                  | $          | 313,682 |   |
|                                                                                                                            |       |              |       |                  |       |
| **Liabilities  and Stockholder’s Equity (Deficit)**                                                                        |       |              |       |                  |       |
| Current liabilities:                                                                                                            |       |              |       |                  |       |
| Current portion  of senior debt                                                                                                 |       | $                 | 43         |                  | $          | 41 |   |
| Current portion  of capital lease obligation                                                                                    |       | 505               |       | 595                   |       |
| Accounts payable                                                                                                                |       | 42,874            |       | 48,917                |       |
| Accrued expenses  and other current liabilities                                                                                 |       | 29,624            |       | 33,987                |       |
| Interest payable                                                                                                                |       | 1,874             |       | 1,875                 |       |
| Total current  liabilities                                                                                                      |       | 74,920            |       | 85,415                |       |
| Senior debt, net of  current portion                                                                                            |       | 164,150           |       | 159,749               |       |
| Parent Pay-In-Kind  (PIK) Senior Subordinated Note                                                                              |       | 46,424            |       | 44,425                |       |
| Capital lease  obligations                                                                                                      |       | 745               |       | 979                   |       |
| Pension and  postretirement benefits                                                                                            |       | 23,814            |       | 22,678                |       |
| Deferred tax liability                                                                                                          |       | 4,163             |       | 4,448                 |       |
| Other liabilities                                                                                                               |       | 1,119             |       | 730                   |       |
| Total  liabilities                                                                                                              |       | 315,335           |       | 318,424               |       |
| Obligation to redeem  ESOP shares                                                                                               |       | 29,340            |       | 27,716                |       |
| Obligation to redeem  restricted stock units of Parent                                                                          |       | 1,655             |       | 1,631                 |       |
| Commitments and  contingencies (See notes)                                                                                      |       |              |       |                  |       |
| Stockholder’s equity:                                                                                                      |       |              |       |                  |       |
| Common stock  (par value $0.01, 1000 shares authorized and outstanding in 2006 and 2005,  respectively)                         |       | —            |       | —                |       |
| Additional  paid-in capital                                                                                                     |       | 64,099            |       | 64,121                |       |
| Accumulated  deficit                                                                                                            |       | (86,955           | )          | (86,054               | )          |
| Unearned  compensation                                                                                                          |       | —            |       | (25                   | )          |
| Accumulated  other comprehensive loss                                                                                           |       | (4,183            | )          | (4,183                | )          |
|                                                                                                                            |       | (27,039)          |       | (26,141               | )          |
| Receivable from Parent                                                                                                          |       | (7,951            | )          | (7,948                | )          |
| Total  stockholder’s equity (deficit)                                                                                      |       | (34,990           | )          | (34,089               | )          |
| Total liabilities and  stockholder’s equity (deficit)                                                                      |       | $                 | 311,340    |                  | $          | 313,682 |   |

 

See accompanying notes to consolidated financial statements.

3

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**BLUE RIDGE PAPERPRODUCTS INC.**

**CondensedConsolidated Statements of OperationsThree- and Six-Month Periods Ended June 30, 2006 and 2005 (Dollars in thousands)(unaudited)**

** **
| ** **                                                                                                             | ** ** | **Three-Month Period Ended** | ** ** | **Six-Month Period Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                             | ** ** | **June 30,**                      | ** ** | **June 30,**                    | ** ** |
| ** **                                                                                                             | ** ** | **2006**                               | ** ** | **2005**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                                                                                              |       | $                                      | 144,856    |                                 | $          | 125,206 |   | $ | 284,963 |   | $ | 253,753 |   |
| Cost of goods sold:                                                                                                    |       |                                   |       |                                 |       |   |   |   |   |
| Cost of goods  sold, excluding depreciation and amortization, flood-related loss and repairs  and insurance recoveries |       | 128,700                                |       | 113,895                              |       | 256,501 |   | 227,090 |   |
| Depreciation and  amortization                                                                                         |       | 3,634                                  |       | 3,833                                |       | 7,238 |   | 7,737 |   |
| Flood-related loss and  repairs                                                                                        |       | —                                 |       | 478                                  |       | — |   | 1,326 |   |
| Insurance recoveries                                                                                                   |       | —                                 |       | —                               |       | — |   | (100 | ) |
| Gross profit                                                                                                           |       | 12,522                                 |       | 7,000                                |       | 21,224 |   | 17,700 |   |
| Selling, general and  administrative expenses                                                                          |       | 6,107                                  |       | 5,042                                |       | 11,896 |   | 10,189 |   |
| Depreciation and  amortization                                                                                         |       | 28                                     |       | 426                                  |       | 86 |   | 862 |   |
| Insurance recoveries                                                                                                   |       | —                                 |       | —                               |       | — |   | (23 | ) |
| ESOP expense                                                                                                           |       | 511                                    |       | 1,631                                |       | 1,627 |   | 3,262 |   |
| Profit-sharing expense                                                                                                 |       | —                                 |       | —                               |       | — |   | 80 |   |
| Operating profit  (loss)                                                                                               |       | 5,876                                  |       | (99                                  | )          | 7,615 |   | 3,330 |   |
| Other income (expense):                                                                                                |       |                                   |       |                                 |       |   |   |   |   |
| Interest  expense, excluding amortization of deferred financing costs                                                  |       | (4,481                                 | )          | (4,397                               | )          | (8,956 | ) | (8,655 | ) |
| Amortization of  deferred financing costs                                                                              |       | (381                                   | )          | (341                                 | )          | (751 | ) | (673 | ) |
| Government grant  income                                                                                               |       | 979                                    |       | 428                                  |       | 1,185 |   | 2,306 |   |
| Gain on equity  method investment                                                                                      |       | —                                 |       | —                               |       | 4 |   | — |   |
|                                                                                                                   |       | (3,883)                                |       | (4,310                               | )          | (8,518 | ) | (7,022 | ) |
| Profit (loss)  before income taxes                                                                                     |       | 1,993                                  |       | (4,409                               | )          | (903 | ) | (3,692 | ) |
| Income tax                                                                                                             |       | —                                 |       | —                               |       | — |   | — |   |
| Net income (loss)                                                                                                      |       | $                                      | 1,993      |                                 | $          | (4,409 | ) | $ | (903 | ) | $ | (3,692 | ) |

 

See accompanying notes to consolidated financial statements.

4

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**BLUE RIDGE PAPER PRODUCTS INC.**

**Condensed Consolidated Statements of Cash FlowsSix Months Ended June 30, 2006 and 2005(Dollars in thousands)(unaudited)**
| ** **                                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                                   |       |     |       |     |       |
| Net loss                                                                                                 |       | $        | (903       | )        | $          | (3,692 | ) |
| Adjustment to  reconcile net loss to net cash provided by (used in) operating activities:                |       |     |       |     |       |
| Depreciation and  amortization                                                                           |       | 7,324    |       | 8,599    |       |
| Compensation  expense for Parent restricted stock                                                        |       | 25       |       | 148      |       |
| Amortization of  deferred financing costs                                                                |       | 751      |       | 673      |       |
| ESOP expense                                                                                             |       | 1,627    |       | 3,262    |       |
| Gain on sale of  assets                                                                                  |       | (17      | )          | —   |       |
| Parent PIK  Senior Subordinated Note for interest                                                        |       | 2,044    |       | 1,872    |       |
| Changes in  operating assets and liabilities:                                                            |       |     |       |     |       |
| Accounts  receivable, net                                                                                |       | (4,793   | )          | (7,431   | )          |
| Inventories                                                                                              |       | 3,841    |       | (2,114   | )          |
| Prepaid expenses                                                                                         |       | (501     | )          | 919      |       |
| Insurance  proceeds receivable                                                                           |       | 291      |       | 4,539    |       |
| Income tax  receivable                                                                                   |       | 50       |       | 21       |       |
| Accounts payable                                                                                         |       | (5,288   | )          | (9,319   | )          |
| Accrued expenses  and other current liabilities                                                          |       | (4,363   | )          | (3,693   | )          |
| Interest payable                                                                                         |       | (46      | )          | (29      | )          |
| Pension and  postretirement benefits                                                                     |       | 1,136    |       | 472      |       |
| Other assets and  liabilities                                                                            |       | (625     | )          | (625     | )          |
| Net cash  provided by (used in) operating activities                                                     |       | 553      |       | (6,398   | )          |
| Cash flows used in  investing activities:                                                                |       |     |       |     |       |
| Additions to  property, plant, and equipment                                                             |       | (5,253   | )          | (4,608   | )          |
| Proceeds from  sale of property, plant, and equipment                                                    |       | 17       |       | —   |       |
| Net cash used in  investing activities                                                                   |       | (5,236   | )          | (4,608   | )          |
| Cash flows from  financing activities:                                                                   |       |     |       |     |       |
| Repurchase of  Parent common and preferred stock                                                         |       | (3       | )          | (3       | )          |
| Proceeds from  borrowings under line of credit                                                           |       | 75,610   |       | 84,090   |       |
| Repayment of  borrowings under line of credit                                                            |       | (71,187  | )          | (72,705  | )          |
| Repayments of  long-term debt and capital lease obligations                                              |       | (344     | )          | (311     | )          |
| Other financing  activities                                                                              |       | (755     | )          | —   |       |
| Net cash  provided by financing activities                                                               |       | 3,321    |       | 11,071   |       |
| Net increase  (decrease) in cash                                                                         |       | (1,362   | )          | 65       |       |
| Cash, beginning of  period                                                                               |       | 2,110    |       | 2,466    |       |
| Cash, end of period                                                                                      |       | $        | 748        |     | $          | 2,531 |   |
| Supplemental  disclosures of cash flow information:                                                      |       |     |       |     |       |
| Cash paid for  interest, including capitalized interest of $461 and $146 in 2006 and 2005,  respectively |       | $        | 7,420      |     | $          | 6,839 |   |
| Noncash investing and  financing activities:                                                             |       |     |       |     |       |
| Conversion of  accrued interest to note payable                                                          |       | 1,999    |       | 1,831    |       |
| Issuance of restricted  stock units                                                                      |       | —   |       | 333      |       |

See accompanying notes tocondensed consolidated financial statements.

5

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**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands)**

**(1) Basis ofPresentation**

The accompanyingunaudited condensed consolidated interim financial statements have beenprepared in accordance with Regulation S-X related to interim period financialstatements and, in the opinion of management, include all adjustments(consisting only of normal recurring accruals) that are necessary for the fairpresentation of results for the interim periods. Results for the six monthsended June 30, 2006 may not necessarily be indicative of full-year results. Itis suggested that these condensed consolidated interim financial statements beread in conjunction with the audited consolidated financial statements of BlueRidge Paper Products Inc. (the Company”) included in the Company’s annualreport on Form 10-K for the year ended December 31, 2005.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make a numberof estimates and assumptions relating to the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements. These estimates and assumptions also affect thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

**(2) Liquidity**

The Company’s workingcapital needs are satisfied through its $50,000 revolving credit facility,which expires December 15, 2008. The credit agreement requires that the Company meet certainfinancial covenants, including a minimum borrowing availability threshold and afixed charge coverage ratio. At various times during 2004 and 2005, the creditagreement was amended to reduce the minimum borrowing availability thresholdfrom $15,000 to $5,000 for specified periods of time. On March 15, 2006, therevolving credit agreement was amended on a permanent basis to change theminimum borrowing availability threshold from $7,500 to $5,000. For furtherdiscussion, see the Company’s annual report on Form 10-K for the year endedDecember 31, 2005. In addition, the Company must meet certain affirmative andnegative operating covenants. In the event of default or if the outstandingbalance of the revolving credit facility is greater than $25,000, the borrowingavailability falls below $5,000 and the fixed charge coverage ratio is lessthan 1.1 to 1.0, the credit agreement provides for activation of controlledbank accounts to apply daily cash collections toward the outstanding revolvingloan balance. On June 9, 2006, the revolving credit facility was amended toreduce the interest and applicable margins by 50 to 75 basis points dependingon the level of borrowing. Management believes the existing credit facility isadequate for the Company’s current cash flow needs. Continued compliance withdebt covenants and sufficient liquidity is dependent upon business operationsconsistent with management’s plan for 2006. However, uncertainties exist withinthe Company’s markets that include, but are not limited to, availability andpricing of raw materials and energy, unforeseen disruption in plant operations,labor disputes, significant competition, relationships with large customers,product demand, environmental compliance, litigation, loss of key managers andexposures to interest rate changes.

6

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The borrowing availability atJune 30, 2006 and December 31, 2005 is as follows:

|                                 | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Borrowing base                  |       | $                       | 58,207     |                        | $          | 53,629 |   |
| Credit agreement  restriction   |       | (5,000                  | )          | (7,500                      | )          |
| Suppressed  availability (1)    |       | (3,207                  | )          | —                      |       |
| Credit line  availability       |       | 50,000                  |       | 46,129                      |       |
| Revolver balance                |       | (38,488                 | )          | (34,065                     | )          |
| Letters of  credit              |       | (5,201                  | )          | (6,519                      | )          |
| Maximum borrowing  availability |       | $                       | 6,311      |                        | $          | 5,545 |   |

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(1)             Theexcess of the value of the assets collateralized over the maximum line ofcredit after subtracting the credit agreementrestriction.

**(3) Inventories**

**Componentsof inventory at June 30, 2006 and December 31, 2005 are as follows:**

|                      | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials        |       | $                       | 16,849     |                        | $          | 17,411 |   |
| Work in progress     |       | 16,303                  |       | 20,113                      |       |
| Finished goods:      |       |                    |       |                        |       |
| Paper and paperboard |       | 12,892                  |       | 12,407                      |       |
| Cartons              |       | 4,103                   |       | 4,057                       |       |
| Total                |       | $                       | 50,147     |                        | $          | 53,988 |   |

 

**(4) Debt**

*9.5% SeniorSecured Notes*

On December 17, 2003, theCompany sold $125,000 of the 9.5% senior secured notes (the “Notes”) through aprivate placement offering under Rule 144A. The Notes have a term of fiveyears, are due on December 15, 2008 and bear interest at a stated rate of 9.5%,which is payable semiannually in arrears on June 15 and December 15. The Notesare collateralized by a senior secured interest in substantially all of theCompany’s tangible and intangible assets and have a subordinated securedinterest in the outstanding trade accounts receivable and inventories. TheCompany has the right to redeem the Notes at 104.75% and 100.00%, plus accruedinterest on or after December 15, 2006 and December 15, 2007, respectively.Terms of the indenture under which the Notes have been issued contain certaincovenants, including limitations on certain restricted payments and theincurrence of additional indebtedness.

7

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*Revolving CreditFacility*

On December 17, 2003, theCompany entered into a revolving credit facility with a financial institution,which provided for maximum borrowings of $45,000, subject to a borrowing basecalculated using eligible accounts receivable and inventories. On September 15,2004, the credit agreement was amended to increase the maximum borrowings to$50,000 on a permanent basis. On August 5, 2005, the credit agreement wasamended to include specified foreign account debtors as eligible accounts indetermining borrowing base availability. On June 9, 2006, the credit agreementwas further amended to reduce the interest and applicable margins by 50 to 75basis points depending on level of borrowing. The revolving credit facility iscollateralized by a senior secured interest in the Company’s outstanding tradeaccounts receivable and inventories and by a subordinated secured interest insubstantially all of the Company’s tangible and intangible assets. Therevolving credit facility matures on December 15, 2008, and requires theCompany to pay an annual fee of 0.375% on the unused facility amount. TheCompany had an outstanding balance of $38,488 and $34,065 at June 30, 2006 andDecember 31, 2005, respectively, and letters of credit outstanding as of June30, 2006 and December 31, 2005 were $5,201 and $6,519, respectively. Themaximum borrowing availability at June 30, 2006 was $6,311, adjusting for theavailability restriction described in Note 2. The interest rate on therevolving credit facility at June 30, 2006 and December 31, 2005 was 7.34% and7.71%, respectively. This is a blended rate of LIBOR contracts plus margin.

*Parent PIK SeniorSubordinated Note*

Blue Ridge Holding Corp.(the “Parent”) partially financed the acquisition of the Canton System fromInternational Paper Company (formerly Champion International Corporation) witha PIK Senior Subordinated Note payable to International Paper in the principalamount of $30,000, wherein interest would accrue on the unpaid principalbalance at a rate of 9% per annum until May 14, 2007. On November 14,2003, the Company entered into an agreement with International Paper to extendthe maturation date of the Parent PIK Senior Subordinated Note to May 14, 2009in return for a principal payment of $7,000. This payment was made on December17, 2003 with proceeds from the sale of the Notes. On each semi-annual interestpayment date (March 31 and September 30), the Parent records interest on thisnote by issuing “Secondary Notes,” which bear substantially the same terms asthe original Parent PIK Senior Subordinated Notes. Payments of principal andinterest under the Parent PIK Senior Subordinated Note are legal obligations ofthe Parent and have not been guaranteed in any way by the Company. However, theParent will be dependent upon the Company to settle these obligations in theirentirety. In addition, under certain circumstances, primarily future Parentequity transactions transferring at least 50% of the common stock to a thirdparty, payment by the Parent of the Parent PIK Senior Subordinated Note wouldbe triggered prior to its maturity. The entire amount is due on May 14, 2009.

8

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**(5) Retirement Plans**

 

*Pension Plan*

 

The components of net periodic benefit costsrelating to the Company’s pension plan are as follows for the three-monthperiods and six-month periods ended June 30, 2006 and 2005:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
|                                |       | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** |   |
| Service cost                        |       | $                                | 408        |                           | $          | 370 |   | $ | 817 |   | $ | 740 |   |
| Interest cost                       |       | 251                              |       | 224                            |       | 502 |   | 448 |   |
| Expected return on  assets          |       | (264                             | )          | (225                           | )          | (528 | ) | (450 | ) |
| Amortization of prior  service cost |       | (16                              | )          | (13                            | )          | (32 | ) | (26 | ) |
| Amortization of  actuarial loss     |       | 118                              |       | 132                            |       | 236 |   | 264 |   |
| Total net periodic benefits costs   |       | $                                | 497        |                           | $          | 488 |   | $ | 995 |   | $ | 976 |   |

 

Management is primarily responsible fordetermining the cost of pension benefits for this plan. Management considered anumber of factors, including consulting with an actuarial firm, whendetermining this cost. The Company estimates its benefits payments in fiscalyear 2006 will be approximately $326. Benefits payments in fiscal year 2005were $355.

 

*Postretirement Medical Plan*

 

The components of net periodic benefit costsrelating to the Company’s postretirement medical plan are as follows for thethree-month periods and six-month periods ended June 30, 2006 and 2005:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                          | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                        |       | $                                | 118        |                           | $          | 163 |   | $ | 236 |   | $ | 325 |   |
| Interest cost                       |       | 227                              |       | 277                            |       | 454 |   | 554 |   |
| Amortization of prior  service cost |       | (100                             | )          | 45                             |       | (200 | ) | 91 |   |
| Total net periodic benefits costs   |       | $                                | 245        |                           | $          | 485 |   | $ | 490 |   | $ | 970 |   |

 

Management is primarily responsible for determiningthe cost of postretirement medical benefits for this plan. Managementconsidered a number of factors, including consulting with an actuarial firm,when determining this cost. The Company estimates its benefits payments for thefiscal year ending December 31, 2006 will be approximately $388. Benefitspayments for the fiscal year ended December 31, 2005 were $154.

 

 

9

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**(6) Recent AccountingDevelopments**

In December 2004, the FASBissued Statement of Financial Accounting Standards (“SFAS”) 123R, “Share-BasedPayment,” which requires the measurement of all employee share-based paymentsto employees, including grants of employee stock options, using afair-value-based method and the recording of such expense in the Company’sconsolidated statement of income. The Company adopted the provisions of SFAS123R using the prospective method effective January 1, 2006. As such, there wasno accounting effect on any outstanding awards. Upon adoption of SFAS 123R, theCompany has only one share-based payment arrangement as described in thefollowing paragraph.

Certainmanagement employees have received restricted stock awards entitling them toreceive the Parent’s restricted common stock units. These units vest overvarying periods from one to five years unless the Parent’s majority stockholdersells or otherwise disposes of 80% of its shares or there is a change incontrol, at which time the restricted stock units vest immediately. Restrictedstock units issued under these arrangements typically contain provisions grantingthe holder the right, upon the occurrence of certain events or conditions orfor the 90-day period commencing at least six months after becoming fullyvested and share certificates being issued, to require the Parent to repurchasesuch fully vested shares of the Parent’s stock underlying the respectiverestricted stock awards at the then-determined fair value, which is based on anappraisal of the Parent’s common stock performed by an independent valuationspecialist. As of June 30, 2006, the Parent had issued a total of 266,838 restrictedstock units, net of units canceled, of which all were fully vested. Duringfiscal year 2005, the Company issued 36,538 units, net of units canceled, whichbecame fully vested on June 30, 2006. The obligation to redeem restricted stockunits of the Parent was $1,655 at June 30, 2006, which is recorded in temporaryequity on the condensed consolidated balance sheet. The Company records thefair value of the units issued as unearned compensation as a separate componentof stockholder’s equity and amortizes them to expense over the vesting periodsof the respective units. Amortization of unearned compensation expense wascompleted in the period ended June 30, 2006. The total expense recorded in thesix months ended June 30, 2006 is $25. On June 30, 2006, restricted stock unitstotaling 230,300 became due to the employees. These units have a put optionduring a 90-day period beginning January 1, 2007 if the employee has held theirrespective share certificate for at least six months. The Company repurchased75,903 of the fully vested shares in July 2006 to cover the tax withholding ofthe employees as allowed by the agreements. This had a cash flow effect of$471.

InNovember 2004, the FASB issued SFAS 151, “Inventory Costs, an Amendment of ARBNo. 43, Chapter 4,” which clarifies the types of costs that should be expensedrather than capitalized as inventory. This statement also clarifies thecircumstances under which fixed overhead costs associated with operatingfacilities involved in inventory production should be capitalized. The Companyadopted this standard effective January 1, 2006. The adoption of SFAS 151 didnot have a material effect on the Company’s financial position or results ofoperations.

InJune 2006, the FASB issued FAS Interpretation No. 48 (FIN 48) “Accounting forUncertainty in Income Taxes,” which clarifies the accounting for uncertainty inincome taxes recognized in an entity’s financial statements in accordance withSFAS 109, “Accounting for Income Taxes.” The accounting provisions of FIN 48prescribe a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This interpretation establishes a consistent thresholdfor recognizing current and deferred taxes. The Company adopted the provisionsof FIN 48 in June 2006. The adoption of FIN 48 will not have a material effecton the Company’s financial statements or results of operations.

 

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**(7) Commitments and Contingencies**

(a) *PurchaseCommitments*

TheCompany has an agreement with International Paper for supply of wood chipsthrough May 2009. The agreement requires minimum volume purchases anddeliveries of 815,000 tons of wood chips during each contract year. These chipsare supplied by two International Paper facilities in South Carolina andTennessee and account for approximately 44% of the total mill requirements. Asof June 30, 2006, the Company had commitments to purchase wood chips of approximately$79,395 over the remaining term of the agreement. In May 2006, the agreementwas amended to discontinue the invoicing of in-transit chips. The agreementstates that title will transfer upon delivery at the Canton mill but risk ofloss in the event of casualty while in-transit will be the responsibility ofthe Company.

(b)*Labor Agreements*

OnJuly 7, 2006, a new labor agreement was ratified between the UnitedSteelworkers International Union (USW) and the Company. The new contractprovides for annual increases of 4%, 3% and 3% over the next three years,retroactive to May 14, 2006. In addition, the Company will increase itscontribution to the bargaining unit pension plan to maintain benefits atcurrent levels. The estimated increase in costs is approximately $230 annuallyover the duration of the contract. Modifications to the employees’ healthcareplan were also made, which included eliminating the highest cost and lessutilized healthcare plan, and increasing employee contributions towardhealthcare to 20% of the cost of such benefit where the contributions were lessthan 20%.

(c)*Litigation, Claims and Assessments*

OnApril 15, 2003, a class action lawsuit was filed against the Company for thetime period June 1, 1999 until the date of the verdict on behalf of certainowners of property along the Pigeon River in Cocke County, Tennessee. Thedemand for damages by the class participants totaled approximately $22,500. OnAugust 17, 2005, a jury in the Circuit Court of Cocke County, Tennessee ruledin favor of the Plaintiffs awarding $2,000 for nuisance damages with nopunitive damages being awarded. A liability of $2,000 was recorded in 2005. TheCompany has appealed the decision to the Tennessee Court of Appeals EasternSection in Knoxville, Tennessee.

OnOctober 11, 2005, the Company was sued by the same plaintiff group for the samecause of action for the time period August 17, 2005 until the trial date in alawsuit filed in the Circuit Court for Cocke County, Tennessee. The plaintiffshave limited the claim for damages to $4,900. Although the complaint wasdesigned to maintain state jurisdiction, on January 12, 2006, the Companyremoved the case to Federal court. On February 13, 2006, the plaintiffs filed amotion to remand the case back to Tennessee state court and this motion ispending.

OnJune 6, 2006, the Parent received notices of tax assessment for corporate andfranchise tax for tax years 1999 through 2004. The aggregate amount assessed is$806, consisting of $443 in taxes, $97 in interest and $266 in penalties forthe full six-year period. The Parent formally protested the tax assessment onJuly 5, 2006. The Company had not recorded a liability for any amountrelated to this assessment as of June 30, 2006 because the ultimate loss,if any, associated with the assessment is not probable or estimable.

TheCompany is subject to litigation that may arise in the normal course ofbusiness. In the opinion of management, the Company’s liability, if any, underany pending litigation will not materially impact its financial condition oroperations.

 

11

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(d) *EnvironmentalLiabilities*

Aspart of its environmental management program, the Company recognizesobligations for closure of landfills in accordance with SFAS No. 143, “Accountingfor Asset Retirement Obligations.” The Company had accrued $1,119 and $730 forthe closure of landfills at June 30, 2006 and December 31, 2005, respectively.An engineering study received in March 2006 revealed that the estimated cost toclose the landfill had increased by $317. Additionally, the estimated remainingmonths to fill decreased by 27 months because of increased usage in thelandfill due to increased production rates at the Canton mill. The Company hasrecorded expenses of $72 and $99 in the three-month period and six-month periodended June 30, 2006, respectively, related to the closure of this landfill.

**(8) Other Matters**

 

*Flood Losses and GovernmentGrants*

 

In2004, the Company experienced significant losses related to floods caused byHurricanes Frances and Ivan. Property damage losses and related repairs andmaintenance from these two floods through December 31, 2005 were $25,124. Noadditional expenses were recorded during the six-month period ended June 30,2006. For the period ended June 30, 2006, all recorded insurance recoveries hadbeen paid in full.

Inthe wake of these events, the Company was awarded three grants for repairs andmaintenance of the wastewater treatment facility located within the Canton millthat is also used by the Town of Canton. The first grant was awarded by FEMAfor repairs incurred from the two floods. This grant was in the amount of$1,479, all of which was received in the first two quarters of 2005. The secondgrant was awarded by the State of North Carolina in the amount of $4,500 to bepaid on a reimbursement basis. This grant provides for flood control repairsand improvements to the wastewater treatment facilities. The third grant for$485 was awarded under the U.S. Environmental Protection Agency that alsoprovided for flood control repairs and improvements to the wastewater treatmentfacilities to be paid on a reimbursement basis. The Company has recognizedthese grants to the extent they have incurred costs from repairs andimprovements resulting in the recognition of government grant income of $206and $1,185 in the three-month period and six-month period ended June 30, 2006,respectively. The Company recorded $4,910 as government grant income in theyear ended December 31, 2005. The remaining $369 is expected to be recognizedas income over the next three months as costs are incurred.

*OtherAssets*

TheCompany has incurred certain due diligence costs and legal fees associated witha potential transaction. These costs have been recorded in other assets at June30, 2006 on the accompanying consolidated balance sheets included elsewhere inthis report in the amount of $1,142. If the transaction is not consummated,these costs and fees will be expensed.

**(9)Segment Information**

TheCompany’s management makes financial decisions and allocates resources based onsales and operating income of the paper and packaging segments. Although rawmaterials, the production processes, distribution methods and the regulatoryenvironment are similar, management believes it is appropriate to separatelydisclose these segments. The Company does not allocate selling, research andadministration expenses to each segment, but management uses operating incometo measure the performance of the segments. The financial informationattributed to these segments is included in the following tables:

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**Blue Ridge Paper Products Inc.Three Months Ended June 30, 2006 and 2005(Dollars in Thousands)**
| ** **                     | ** ** | ** ** | ** ** | **Paper** | ** ** | **Packaging** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|--------------------------------|------------|------------|------------|-----------|------------|---------------|------------|---------------|------------|-----------|------------|
| Net sales                      |       | 2006       |       | $         | 59,559     |          | $          | 85,297        |       | —    |       | $ | 144,856 |   |
|                           |       | 2005       |       | 49,878    |       | 75,328        |       | —        |       | 125,206   |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Operating profit  (loss)       |       | 2006       |       | 6,600     |       | 5,921         |       | (6,645        | )          | 5,876     |       |
|                           |       | 2005       |       | 2,895     |       | 4,105         |       | (7,099        | )          | (99       | )          |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Depreciation and  amortization |       | 2006       |       | 2,776     |       | 858           |       | 28            |       | 3,662     |       |
|                           |       | 2005       |       | 3,006     |       | 827           |       | 426           |       | 4,259     |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Total assets                   |       | 2006       |       | 204,144   |       | 93,277        |       | 13,919        |       | 311,340   |       |
|                           |       | 2005       |       | 199,181   |       | 90,459        |       | 15,302        |       | 304,942   |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Capital  expenditures          |       | 2006       |       | 2,204     |       | 915           |       | —        |       | 3,119     |       |
|                           |       | 2005       |       | 1,696     |       | 892           |       | —        |       | 2,588     |       |
|                                |            |            |            |           |            |               |            |               |            |           |            |  |  |  |

 

**Blue Ridge Paper Products Inc.Six Months Ended June 30, 2006 and 2005(Dollars in Thousands)**
| ** **                     | ** ** | ** ** | ** ** | **Paper** | ** ** | **Packaging** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|--------------------------------|------------|------------|------------|-----------|------------|---------------|------------|---------------|------------|-----------|------------|
| Net sales                      |       | 2006       |       | $         | 116,734    |          | $          | 168,229       |       | —    |       | $ | 284,963 |   |
|                           |       | 2005       |       | 103,792   |       | 149,961       |       | —        |       | 253,753   |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Operating profit  (loss)       |       | 2006       |       | 10,859    |       | 10,364        |       | (13,608       | )          | 7,615     |       |
|                           |       | 2005       |       | 9,446     |       | 8,254         |       | (14,370       | )          | 3,330     |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Depreciation and  amortization |       | 2006       |       | 5,529     |       | 1,709         |       | 86            |       | 7,324     |       |
|                           |       | 2005       |       | 6,091     |       | 1,646         |       | 862           |       | 8,599     |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Total assets                   |       | 2006       |       | 204,144   |       | 93,277        |       | 13,919        |       | 311,340   |       |
|                           |       | 2005       |       | 199,181   |       | 90,459        |       | 15,302        |       | 304,942   |       |
|                           |       |       |       |      |       |          |       |          |       |      |       |
| Capital  expenditures          |       | 2006       |       | 4,048     |       | 1,165         |       | 40            |       | 5,253     |       |
|                           |       | 2005       |       | 3,283     |       | 1,325         |       | —        |       | 4,608     |       |
|                                |            |            |            |           |            |               |            |               |            |           |            |  |  |  |

 

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**ITEM 2.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

**FORWARD-LOOKING STATEMENTS**

This filing includes “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are those that do not relate solely to historicalfact. They include, but are not limited to, any statement that may predict,forecast, indicate or imply future results, performance, achievements orevents. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,”“intend,” “project,” “plan,” “will” or words or phrases of similar meaning.

These forward-looking statements are not guaranteesof future performance. Forward-looking statements are based on management’sexpectations that involve risks and uncertainties, including, but not limitedto, economic, competitive, governmental and technological factors outside ofour control, that may cause actual results to differ materially from trends,plans or expectations set forth in the forward-looking statements. Given theserisks and uncertainties, actual future results may be materially different fromwhat we plan or expect. We will not update these forward-looking statementseven if our situation changes in the future.

**QUARTERLY OVERVIEW; COMPARISON TO IMMEDIATELY PRECEDING QUARTER**

We reported a net income of $2.0 million for thesecond quarter ended June 30, 2006. This compared to a net loss of $2.9 millionfor the first quarter ended March 31, 2006 and a net loss of $4.4 million forthe second quarter ended June 30, 2005. Total net sales for the second quarterended June 30, 2006 were $144.9 million, an increase of 3.4 % and 15.7 %,respectively, when compared to net sales for the first quarter ended March 31,2006 of $140.1 million and net sales of $125.2 million for the second quarterended June 30, 2005.

Despite high energy and transportation costs, wereturned to profitability in the second quarter due to increased productivity,improved pricing for our products and gains from our Six Sigma and LeanManufacturing initiatives. The ratification of our new three-year laboragreement provides our employees with increased annual compensation of 4%, 3%and 3% over the next three years, retroactive to May 14, 2006. Included in thepackage were additional cost-sharing measures in the Company’s health andwelfare programs.

The uncoated paper market continued to strengthen inthe second quarter ended June 30, 2006. Average pricing in the second quarterended June 30, 2006 increased 8.6% compared to the first quarter ended March31, 2006 and 12.1% compared to the second quarter ended June 30, 2005.Increased pricing reflects the implementation of the March 27, 2006 priceincrease for white wove envelope, offset, reply card, multipurpose, envelopekraft and tablet grades.

Shipments in our packaging segment for the quarterended June 30, 2006 increased 5.2% or 3,541 tons when compared to the firstquarter ended March 31, 2006 and 8.5% when compared to the second quarter endedJune 30, 2005. The increase in packaging segment shipment volume was primarilydue to increased shipments of coated board rolls. Pricing for the packagingsegment for the second quarter ended June 30, 2006 decreased when compared tothe first quarter ended March 31, 2006 due to a higher mix of coated rollssales, which have a lower revenue realization than cartons.

The Canton mill conducted a planned pine pulp milloutage in the second quarter ended June 30, 2006. The planned outage had anegative impact on second quarter earnings of approximately $2.6 million. Therewas not a corresponding outage in the first quarter ended March 31, 2006. TheCanton mill is scheduled to have a hardwood pulp mill outage in the thirdquarter ending September 30, 2006. Due to additional planned maintenance work,the costs of the third quarter outage are expected to exceed the costs of thesecond quarter outage.

Raw material costs improved in the second quarterended June 30, 2006 compared to the first quarter ended March 31, 2006 by approximately$1.9 million. This reduction in costs was primarily due to net decreases in

 

14

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the costs of low-density polyethylene ofapproximately 10% in the second quarter ended June 30, 2006 compared to thefirst quarter ended March 31, 2006. Price increases for low-densitypolyethylene of 4.9% and 4.7% were implemented June 1, 2006 and July 1, 2006,respectively. Both chemical and wood chip costs experienced slight decreases incosts in the second quarter ended June 30, 2006 compared to the first quarterended March 31, 2006. Notwithstanding the net quarter-to-quarter decreases inraw material costs, raw material costs for the second quarter ended June 30,2006 increased compared to the second quarter ended June 30, 2005, as discussedbelow. June 30, 2006 year-to-date costs have increased when compared to June30, 2005 year-to-date costs.

On July 7, 2006, the United SteelworkersInternational Union (USW) ratified a new three-year labor agreement with us.The new contract provides for annual increases of 4%, 3% and 3% over the nextthree years, retroactive to May 14, 2006. Included in the package wereadditional cost-sharing measures in our health and welfare programs. The newcontract follows a seven-year agreement in which there were no general wageincreases for the collective bargaining unit.

The ESOP Plan reflects that 40% of the common stockauthorized is to be allocated to the ESOP participants from May 14, 1999through May 13, 2006. As of May 14, 2006, the value of all shares have beenaccrued, except for any valuation changes that may occur on December 31, 2006.

If sales prices hold, productivity remains at currentlevels and energy and input costs remain stable, we expect our earnings in thesix months ending December 31, 2006 to be comparable to the six months endedJune 30, 2006.

**Results of Operations**

The following table sets forth certain sales andoperating data for our business segments for the periods indicated:

 

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**(Dollars in millions, except perton amounts)**
| ** **                                                           | ** ** | **Three-Month Period**  | ** ** | **Six-Month Period**    | ** ** |
|----------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                                                           | ** ** | **2006**                     | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales:                                                           |       |                         |       |                         |       |   |   |   |   |
| Packaging                                                            |       | $                            | 85.3       |                         | $          | 75.3 |   | $ | 168.2 |   | $ | 150.0 |   |
| Paper                                                                |       | 59.6                         |       | 49.9                         |       | 116.7 |   | 103.8 |   |
| Total                                                                |       | $                            | 144.9      |                         | $          | 125.2 |   | $ | 284.9 |   | $ | 253.8 |   |
|                                                                 |       |                         |       |                         |       |   |   |   |   |
| Segments’  operating profit:                                    |       |                         |       |                         |       |   |   |   |   |
| Packaging                                                            |       | $                            | 6.0        |                         | $          | 4.1 |   | $ | 10.4 |   | $ | 8.3 |   |
| Paper                                                                |       | 6.5                          |       | 2.9                          |       | 10.8 |   | 9.4 |   |
| Total segments’ operating profit, excluding  corporate expenses |       | $                            | 12.5       |                         | $          | 7.0 |   | $ | 21.2 |   | $ | 17.7 |   |
|                                                                 |       |                         |       |                         |       |   |   |   |   |
| Corporate  expenses:                                                 |       | 6.6                          |       | 7.1                          |       | 13.6 |   | 14.4 |   |
| Total operating profit (loss)                                        |       | $                            | 5.9        |                         | $          | (0.1 | ) | $ | 7.6 |   | $ | 3.3 |   |
|                                                                 |       |                         |       |                         |       |   |   |   |   |
| Percentage of  net sales:                                            |       |                         |       |                         |       |   |   |   |   |
| Packaging                                                            |       | 58.9                         | %          | 60.1                         | %          | 59.0 | % | 59.1 | % |
| Paper                                                                |       | 41.1                         | %          | 39.9                         | %          | 41.0 | % | 40.9 | % |
| Total                                                                |       | 100.0                        | %          | 100.0                        | %          | 100.0 | % | 100.0 | % |
|                                                                 |       |                         |       |                         |       |   |   |   |   |
| Segments’  operating margin:                                    |       |                         |       |                         |       |   |   |   |   |
| Packaging segment                                                    |       | 7.0                          | %          | 5.4                          | %          | 6.2 | % | 5.5 | % |
| Paper segment                                                        |       | 10.9                         | %          | 5.8                          | %          | 9.3 | % | 9.1 | % |
| Average margin                                                       |       | 8.6                          | %          | 5.6                          | %          | 7.4 | % | 7.0 | % |
|                                                                 |       |                         |       |                         |       |   |   |   |   |
| Shipments  (tons):                                                   |       |                         |       |                         |       |   |   |   |   |
| Packaging segment                                                    |       | 72,137                       |       | 66,473                       |       | 140,733 |   | 130,134 |   |
| Paper segment                                                        |       | 74,837                       |       | 70,108                       |       | 152,734 |   | 146,181 |   |
| Total                                                                |       | 146,974                      |       | 136,581                      |       | 293,467 |   | 276,315 |   |
|                                                                 |       |                         |       |                         |       |   |   |   |   |
| Average price  ($per ton):                                           |       |                         |       |                         |       |   |   |   |   |
| Packaging segment                                                    |       | $                            | 1,182      |                         | $          | 1,133 |   | $ | 1,195 |   | $ | 1,153 |   |
| Paper segment                                                        |       | 796                          |       | 712                          |       | 764 |   | 710 |   |
| Average price                                                        |       | $                            | 986        |                         | $          | 917 |   | $ | 971 |   | $ | 919 |   |

 

**THREE MONTHS ENDED JUNE 30, 2006COMPARED TO THREE MONTHS ENDED JUNE 30, 2005**

*Net Sales*.   Net sales for the three-month periodended June 30, 2006, or the 2006 three-month period, increased $19.7 million or15.7% to $144.9 million compared to $125.2 million for the three-month periodended June 30, 2005, or the 2005 three-month period.

Net sales for our packagingsegment for the 2006 three-month period increased $10.0 million or 13.3% to$85.3 million compared to $75.3 million for the 2005 three-month period. Forthe 2006 three-month period, our packaging segment sold 72,137 tons of coatedand converted paperboard products at an average price of $1,182 per ton,compared to 66,473 tons sold for the 2005 three-month period at an averageprice of $1,133 per ton. The increase in packaging segment sales is attributableto an 8.5% increase in volume shipped and a 4.3% increase in average revenueper ton shipped.

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Net sales for our papersegment for the 2006 three-month period increased $9.7 million or 19.4% to$59.6 million compared to $49.9 million in the 2005 three-month period. Netsales volume in our paper segment increased 4,729 tons to 74,837 tons shipped inthe 2006 three-month period as compared to 70,108 tons shipped in the 2005three-month period. Approximately 63.9% or $6.2 million of the net salesincrease in the 2006 three-month period reflects improved pricing for ourproducts. The remaining increase in net sales reflects the additional volumeshipped in the 2006 three-month period that was partially brought about throughimproved operating rates at our Canton, North Carolina manufacturing facility.Average pricing in our paper segment improved to $796 per ton shipped in the2006 three-month period as compared to $712 per ton shipped in the 2005three-month period.

*Operating Profit*.   Total segments’ operating profitincreased $5.5 million to $12.5 million in the 2006 three-month period comparedto an operating profit of $7.0 million for the 2005 three-month period. As apercentage of sales, total segments’ operating profit increased to 8.6% in the2006 three-month period from 5.6% in the 2005 three-month period.

The following table setsforth significant items that increased (decreased) total segments’ operatingprofit:
| ** **                                                | ** ** | **Three-Month  Period Ended** | ** ** | **Three-Month  Period Ended** | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| **Segments’ Operating Profit**             | ** ** | ** **                         | ** ** | **June 30, 2006**        | ** ** | **June 30, 2005** | ** ** | **Change** | ** ** |
|                                                      |       | $                                  | 12.5       |                               | $          | 7.0                         |       | $ | 5.5 |   |
| Product pricing  improvement                              |       |                               |       |                               |       | $                           | 12.4       |   |
| Productivity and sales  improvements                      |       |                               |       |                               |       | 2.7                         |       |
| Outbound transportation  costs                            |       |                               |       |                               |       | (0.5                        | )          |
| Sales of excess NOx  credits in 2005                      |       |                               |       |                               |       | (0.9                        | )          |
| Increased energy costs                                    |       |                               |       |                               |       | (1.5                        | )          |
| Plastic resin costs  used at Waynesville coating facility |       |                               |       |                               |       | (1.2                        | )          |
| Increased chemical and  other raw material costs          |       |                               |       |                               |       | (2.2                        | )          |
| Increases wage and  benefit costs                         |       |                               |       |                               |       | (1.3                        | )          |
| Change in inventory  valuation                            |       |                               |       |                               |       | (1.4                        | )          |
| Other miscellaneous and  offsetting items                 |       |                               |       |                               |       | (0.6                        | )          |
| Total                                                     |       |                               |       |                               |       | $                           | 5.5        |   |
|                                                           |            |                                    |            |                                    |            |                             |            |  |  |  |  |  |

Operating profit for ourpackaging segment increased $1.9 million or 46.3% in the 2006 three-monthperiod to $6.0 million or 7.0% of packaging segment sales, compared to $4.1million or 5.4% of packaging segment sales for the 2005 three-month period. Theincrease in operating profit for our packaging segment was due primarily to:(i) increased pricing on coated board sales of $2.1 million and on convertedcarton sales of $4.1 million; and (ii) improved productivity and sales volumeof approximately $0.2 million. The increase in packaging segment

 

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operating profit in the 2006three-month period was partially offset by: (i) $1.2 million increase inpurchase costs of plastic/resin, our primary raw material used at ourWaynesville converting facility; (ii) a $1.3 million increase in costs ofinternally produced board received from the Canton mill and passed on to thepackaging division through interdivisional transfer costs; (iii) an increase of$0.1 million in energy costs; (iv) an increase of $0.5 million in costsincurred for wages and benefits; (v) impact of change in inventory valuation inthe 2005 three-month period of $0.9 million; and (vi) other miscellaneous andoffsetting variances totaling $0.5 million.

Operating profit for our paper segment increased $3.6million in the 2006 three-month period to $6.5 million or 10.9% of papersegment sales, compared to an operating profit of $2.9 million or 5.8% of papersegment sales for the 2005 three-month period. The increase in operating profitfor our paper segment was due primarily to: (i) increased pricing on uncoatedpaper sales of $6.1 million and on uncoated board sales of $0.1 million; (ii)improved productivity and sales volume of approximately $2.5 million; (iii)increased transfer revenue for the rawstock sent to our Waynesville facility of$1.2 million; and (iv) other miscellaneous and offsetting variances totaling$0.1 million. The increase in paper segment operating profit in the 2006three-month period was partially offset by: (i) a $1.4 million increase inpurchase costs of fuels and electricity consumed at our Canton, North Carolinamill; (ii) a $2.2 million increase in the cost of wood chips and chemicals usedas primary raw material at our Canton, North Carolina mill; (iii) the sale ofexcess NOx credits of approximately $0.9 million in the 2005 three-monthperiod; (iv) a $0.8 million increase in costs incurred for wages and benefits;(v) impact of change in inventory valuation in the 2005 three-month period of$0.5 million; and (vi) a $0.6 million increase in outbound transportation costsdue primarily to higher fuel costs.

*Selling, General and Administrative Expenses*.   Total selling, general andadministrative expenses increased $1.1 million or 22.0% to $6.1 million in the2006 three-month period compared to $5.0 million for the 2005 three-monthperiod. The increase in selling, general and administrative expenses for the2006 three-month period was primarily attributable to: (i) reduction of a $0.5million environmental reserve in the 2005 three-month period; (ii) increasedsalary payroll costs of approximately $0.2 million primarily related to meritincreases; (iii) a $0.1 million reversal of severance related costs in the 2005period; and (iv) other miscellaneous offsetting variances totaling $0.3million.

*Depreciation and Amortization Expense (non-operations)*.   Depreciation and amortization expensesunrelated to manufacturing decreased $0.4 million to $0.0 million in the 2006three-month compared to $0.4 million in the 2005 three-month period. The dropin depreciation expense relates primarily to the completion of depreciation onsystem-related assets purchased in prior years.

*ESOP Expense*.   ESOPexpense decreased $1.1 million or 68.8% to $0.5 million in the 2006 three-monthperiod compared to $1.6 million in the 2005 three-month period. The ESOPexpense is a non-cash expense, which results from the annual transfer of sharesinto the ESOP. The amount of the ESOP expense varies with the value of theshares of our parent’s common stock, which is determined by an independentvaluation specialist at the end of each year. The decrease in the 2006three-month period reflects the decline in annual valuation of the shares ofour parent’s common stock to $6.20 per share in fiscal 2006 compared to $9.06in fiscal 2005 as well as the completion of the seven-year share distributioninto the ESOP, which began in May 1999 and ended in May 2006. Going forward,any additional costs for ESOP expense should substantially relate to thevaluation of the shares held within the ESOP.

*Interest and Amortization**Expenses*.   Interestand amortization expenses increased $0.2 million to $4.9 million for the 2006three-month period compared to $4.7 million for 2005 three-month period. Thisincrease is due primarily to an increased borrowing level and increasedinterest rate on our revolving line of credit as well as increased amountsoutstanding on our Parent PIK Senior Subordinated Note.

 

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*Government Grant Income*.   Flood prevention activities continue at our Canton, NorthCarolina mill following the flood damage incurred at the mill in 2004. In the2006 three-month period, we recognized government grant income of $1.0 millionas compared to $0.4 million in the 2005 period. The grant is being used torepair and more permanently protect our wastewater facility, which also servesthe Town of Canton, North Carolina.

*Income Tax Expense*.   There was no income tax expenserecorded in either the 2006 three-month period or the 2005 three-month period.This was due to our year-to-date net losses as of June 30, 2006 and 2005.

**SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30,2005**

*Net Sales.*   Netsales for the six months ended June 30, 2006, or the 2006 six-month period,increased to $284.9 million or 12.3% compared to $253.8 million for the sixmonths ended June 30, 2005, or the 2005 six-month period. This increase intotal revenue is attributable to an increase in the average weighted revenueper ton shipped to $971 per ton in the 2006 six-month period from $919 per tonin the 2005 six-month period. This increase in average revenue per ton soldresulted primarily from improved pricing in all four of our major grade lines:paper, uncoated board, coated board and cartons. The increase in averageweighted revenue per unit sold resulted in an approximate $15.3 millionincrease in total revenue in the 2006 six-month period as compared to the 2005six-month period. Total sales volume increased by 17,152 tons or 6.2% to293,467 tons in the 2006 six-month period compared to 276,315 tons for the 2005six-month period.

Net sales for our packaging segment for the 2006six-month period increased $18.2 million or 12.1% to $168.2 million compared to$150.0 million for the 2005 six-month period. The increase in net sales isattributable to: (i) an average net sales price per ton increase of 8.6% forcartons and 6.2% for non-converted coated paperboard in the 2006 six-monthperiod compared to the 2005 six-month period; and (ii) a 24.1% increase involume of our non-converted coated paperboard shipments in the 2006 six-monthperiod as compared to the 2005 six-month period. The increase in net sales waspartially offset by a decrease in shipment volume for our converted cartons of6.2% in the 2006 six-month period as compared to the 2005 six-month period.

Sales for our paper segmentfor the 2006 six-month period have increased by $12.9 million or 12.4% to$116.7 million compared to $103.8 million for the 2005 six-month period. Thisincrease was attributable to an improvement in our average net sales price perton for our products sold as well as increased shipment volume. Our average netsales price per ton increased 8.0% for our paper grades and 5.8% for uncoatedpaperboard in the 2006 six-month period as compared to the 2005 six-monthperiod. Total segment outside shipment volume increased 6,553 tons or 4.5% to152,734 tons in the 2006 six-month period as compared to 146,181 tons in the2005 six-month period. The increase in the paper segment shipment volumereflects improved productivity at our Canton, North Carolina manufacturingfacility. This improved productivity also enabled us to increase transfers ofuncoated board to our packaging division for further value-added converting.

*Operating Profit*.   Totalsegments’ operating profit increased $3.5 million to $21.2 million in the 2006six-month period compared to an operating profit of $17.7 million for the 2005six-month period. As a percentage of sales, total segments’ operating profitincreased to 7.4% in the 2006 six-month period from 7.0% in the 2005 six-monthperiod.

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The following table setsforth significant items that increased (decreased) total segments’ operatingprofit:
| ** **                                                                  | ** ** | **Six-Month**         | ** ** | **Six-Month**               | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                  | ** ** | **Period Ended** | ** ** | **Period Ended**       | ** ** | ** **                  | ** ** |
| **Segments’ Operating Profit**                               | ** ** | ** **            | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** | **Change** | ** ** |
|                                                                        |       | $                     | 21.2       |                        | $          | 17.7                        |       | $ | 3.5 |   |
| Product pricing  improvement                                                |       |                  |       |                        |       | $                           | 20.4       |   |
| Net flood impact in  2005                                                   |       |                  |       |                        |       | 1.2                         |       |
| Productivity and sales  improvements                                        |       |                  |       |                        |       | 2.6                         |       |
| Increased wage and  benefit costs                                           |       |                  |       |                        |       | (1.8                        | )          |
| Outbound transportation  costs                                              |       |                  |       |                        |       | (1.0                        | )          |
| Increased wood fiber  costs                                                 |       |                  |       |                        |       | (3.4                        | )          |
| Major raw material  costs (plastic resin, chemicals, and packing materials) |       |                  |       |                        |       | (7.4                        | )          |
| Change in inventory  valuation                                              |       |                  |       |                        |       | (1.5                        | )          |
| Increased energy costs                                                      |       |                  |       |                        |       | (3.3                        | )          |
| Sales of excess NOx  credits in 2005                                        |       |                  |       |                        |       | (0.9                        | )          |
| Other miscellaneous and  offsetting items                                   |       |                  |       |                        |       | (1.4                        | )          |
| Total                                                                       |       |                  |       |                        |       | $                           | 3.5        |   |
|                                                                             |            |                       |            |                             |            |                             |            |  |  |  |  |  |

Operating profitfor our packaging segment in the 2006 six-month period increased $2.1 millionto $10.4 million compared to $8.3 million for the 2005 six-month period. Theincrease was primarily due to increases in the average net selling prices forcoated paperboard and carton products of 6.2% and 8.6%, respectively, comparedto the 2005 six-month period, adding $11.9 million to revenues and operatingprofit for the 2006 six-month period as compared to the 2005 six-month period.In addition, improved transportation management resulted in a decline of $0.1million in outbound freight expense and a corresponding increase in operatingprofit for the 2006 six-month period. The increase in packaging segment operatingprofit in the 2006 six-month period was partially offset by: (i) a $3.4 millionincrease in purchase costs of plastic/resin, our primary raw material used atour Waynesville converting facility; (ii) an approximate $0.3 million fromreduced carton productivity and sales volume, reflecting lower converted cartondemand; (iii) a $0.7 million increase in our wage and benefits costs; (iv)increased transfer cost of rawstock paperboard of $2.7 million; (v) increasedenergy costs of $0.5 million; (vi) impact of change in inventory valuation inthe 2005 six-month period of $1.0 million; and (vii) other miscellaneous andoffsetting items totaling $1.3 million.

Operating profit for our paper segment increased $1.4million in the 2006 six-month period to $10.8 million as compared to $9.4million for the 2005 six-month period. The increase in operating profit for ourpaper segment was due primarily to: (i) increased pricing on paper sales of$8.1 million and on uncoated board sales of $0.4 million; (ii) an approximate$2.9 million from improved productivity and sales volume; (iii) increasedtransfer

 

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cost for the rawstock sent toour Waynesville facility of $2.7 million; and (iv) flood losses, net ofinsurance proceeds, of $1.2 million incurred in the 2005 six-month period. Theincrease in paper segment operating profit in the 2006 six-month period waspartially offset by: (i) a $2.8 million increase in purchase costs of fuels andelectricity consumed at our Canton, North Carolina mill; (ii) a $1.1 millionincrease in outbound transportation costs due primarily to higher fuel costs;(iii) a $3.4 million increase in the cost of wood chips, our primary rawmaterial at our Canton, North Carolina mill; (iv) an approximate $4.0 millionincrease in cost of chemicals and packing materials utilized in ourmanufacturing process; (v) increased wage and benefits costs of $1.1 million;(vi) the sale of excess NOx credits of approximately $0.9 million in the 2005three-month period; (vii) impact of change in inventory valuation in the 2005six-month period of $0.5 million; and (viii) other miscellaneous and offsettingvariances totaling $0.1 million.

*Selling,General and Administrative Expenses.  *Totalselling, general and administrative expenses increased $1.7 million or 16.7% to$11.9 million in the 2006 six-month period compared to $10.2 million for the2005 six-month period. The increase in selling, general and administrativeexpenses for the 2006 six-month period was primarily attributable to: (i)reduction of a $0.5 million environmental reserve in the 2005 six-month period;(ii) increased salary payroll costs of approximately $0.3 million primarilyrelated to merit adjustments; (iii) a $0.7 million reversal in the 2005six-month period of severance reserves related to the completed closure of ourFort Worth, Texas DairyPak facility and other miscellaneous severancetransactions; and (iv) increases to workers compensation costs booked atheadquarters of $0.2 million.

*Depreciationand Amortization Expense (non-operations).*  Depreciationand amortization expenses unrelated to manufacturing decreased $0.8 million to$0.1 million in the 2006 six-month compared to $0.9 million in the 2005six-month period. The drop in depreciation expense relates primarily to thecompletion of depreciation on system-related assets purchased in prior years.

*ESOPExpense*.  ESOP expense decreased $1.7 million or51.5% to $1.6 million in the 2006 six-month period compared to $3.3 million inthe 2005 six-month period. The ESOP expense is a non-cash expense, whichresults from the annual transfer of shares into the ESOP. The amount of theESOP expense varies with the value of the shares of our parent’s common stock,which is determined by an independent valuation specialist at the end of eachyear. The decrease in the 2006 three-month period reflects the decline inannual valuation of the shares of our parent’s common stock to $6.20 per sharein fiscal 2006 compared to $9.06 in fiscal 2005 as well as the completion ofthe seven-year share distribution into the ESOP, which began in May 1999 andended in May 2006. Going forward, any additional costs for ESOP expense shouldsubstantially relate to the valuation of the shares held within the ESOP.

*Interestand Amortization Expenses.*  Interest andamortization expenses increased $0.4 million to $9.7 million for the 2006six-month period compared to $9.3 million for the 2005 six-month period. Thisincrease is due primarily to an increased borrowing level and increasedinterest rate on our revolving line of credit as well as increased amountsoutstanding on our Parent PIK Senior Subordinated Note.

*GovernmentGrant Income*.  Flood prevention activities continueat our Canton, North Carolina mill following the flood damage incurred at themill in the 2004. In the 2006 six-month period, we recognized government grantincome totaling approximately $1.2 million compared to $2.3 million in the 2005six-month period. The grants are being used to repair and more permanentlyprotect our wastewater treatment facility, which also serves the Town ofCanton, North Carolina.

*IncomeTax Expense.*  There was no income tax expenserecorded in either the 2006 six-month period or 2005 six-month period since wehad a year-to-date net loss in both of the periods.

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** **

**LIQUIDITY ANDCAPITAL RESOURCES**

Our principal liquidityrequirements are to service our debt and fund our operations and capitalexpenditure needs. Our total senior debt, defined as total debt less the ParentPIK Senior Subordinated Note, at June 30, 2006 was $165.4 million. Subject toour performance, which if adversely affected could affect the availability offunds, we expect to be able to meet our liquidity requirements for theremainder of fiscal 2006 through cash provided by operations and throughborrowings available under our working capital facility. We cannot assure you,however, that this will be the case. In December 2003, we issued $125.0 millionof the Notes in a private offering. Proceeds from issuance of the Notes wereused to repay our Term Loans A and B and our then existing revolving creditfacility under the 1999 credit agreement. In addition, we paid $7.0 million onthe Parent PIK Subordinated Note. We entered into a $45.0 million revolvingcredit facility in December 2003. On September 15, 2004, the credit agreement wasamended to increase the facility from $45.0 million to $50.0 million on apermanent basis. On August 5, 2005, the credit agreement was amended to includespecified foreign account debtors as eligible accounts in determining borrowingbase availability. On March 15, 2006, the revolving credit agreement wasamended on a permanent basis to change the minimum borrowing availabilitythreshold from $7.5 million to $5.0 million. On June 9, 2006, the creditagreement was further amended to reduce the interest and applicable margins by50 to 75 basis points depending on level of borrowing. The maximum borrowingavailability at June 30, 2006 and December 31, 2005 was $6.3 million and $5.5million, respectively. Adding the maximum borrowing availability to the cash onhand makes our total liquidity $7.1 million and $7.7 million at June 30, 2006and December 31, 2005, respectively. The revolving credit facility containscovenant restrictions, which require covenant availability to exceed $5.0million (as amended March 15, 2006). If the covenant availability does not meetthe required minimum availability, a fixed charge coverage ratio covenant of1.1 to 1.0 will be triggered. As of June 30, 2006, we had a covenantavailability of $14.5 million, which is $9.5 million in excess of the requiredminimum of $5.0 million. This availability includes $3.2 million of suppressedavailability. Covenant availability is defined as borrowing base lessoutstanding revolver and letters of credit.

Summaryof Cash Flow ($ in millions):

|                                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Net cash  provided by (used in) operating activities |       | $                                                 | 0.6        |   | $ | (6.4 | ) |
| Net cash used in  investing activities               |       | (5.2                                              | )          | (4.6 | ) |
| Net cash  provided by financing activities           |       | 3.3                                               |       | 11.1 |   |
| Net increase  (decrease) in cash                     |       | $                                                 | (1.3       | ) | $ | 0.1 |   |
| Cash balance                                         |       | $                                                 | 0.7        |   | $ | 2.5 |   |

 

The cash provided byoperations was $0.6 million for the 2006 six-month period. The improvement incash provided by operations from the 2005 six-month period was attributable tochanges in working capital as reflected in the condensed consolidatedstatements of cash flows included elsewhere in this quarterly report on Form10-Q, as well as the decreased loss discussed in the Management’s Discussionand Analysis of Financial Condition and Results of Operations.

The cash used ininvesting activities for the 2006 six-month period was $5.2 million. Capitalspending for the 2006 six-month period was $5.2 million of which $1.2 millionwas reimbursed by government grants. For the fiscal year ending December 31,2006, we currently estimate that our capital spending will be approximately$8.7 million.

 

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Net cash provided byfinancing activities was $3.3 million for the 2006 six-month period, which isprimarily attributable to net borrowings on our revolving line of credit.

**ITEM 3.   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We are exposed to certain market risks, includinginterest rate risk. Risk exposure relating to this market risk is summarizedbelow. This information should be read in connection with the condensedconsolidated financial statements and the related notes thereto includedelsewhere in this quarterly report on Form 10-Q.

We manage interest cost using a combination of fixedand variable rate debt. As of June 30, 2006, we have $125.0 million of Notesoutstanding at a 9.5% fixed rate of interest and a $50.0 million workingcapital credit facility at variable rates of interest. As of June 30, 2006,approximately $38.5 million was outstanding under our working capital creditfacility consisting of short-term interest rates of 0.25% over ApplicableRevolver Index Margin and 2.00% over Applicable Revolver Libor Margin, asdefined. Our working capital facility offers two options for interest rates:Applicable Revolver Libor margin ranging from 2.25% - 2.75% or ApplicableRevolver Index Margin ranging from 0.50% - 1.00%. These rates were amended June9, 2006 to reduce interest of Applicable Revolver Libor margin to 1.50% - 2.00%and Applicable Revolver Index Margin to 0.00% - 0.25%. The rate is based onrevolver availability. At the end of June 2006, we were approximately at thehigh point of the interest rate grid for Libor and Index Margins. In addition,as of June 30, 2006, we have a $0.7 million mortgage note with a maximuminterest rate of 5.5% and a remaining duration of four years.

**ITEM 4.   CONTROLSAND PROCEDURES**

(A) Evaluation of Disclosure Controls andProcedures

Our Chief Executive Officer and Chief FinancialOfficer have evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and 15d-15(e)) under the SecuritiesExchange Act of 1934. Based on their evaluation, our Chief Executive Officerand Chief Financial Officer have concluded that, as of June 30, 2006, ourdisclosure controls and procedures were effective in ensuring that materialinformation was properly disclosed in our filings with the Securities andExchange Commission.

(B) Changes in Internal Controls Over FinancialReporting

There have been no significant changes in our internalcontrols over financial reporting during the three months ended June 30, 2006that have materially affected or are reasonably likely to materially affect ourinternal control over financial reporting.

**PART II.   OTHERINFORMATION**

**ITEM 1A.   RISKFACTORS**

The risk factors included in our Annual Report on Form10-K for the fiscal year ended December 31, 2005 have not materially changedother than as set forth below.

***Labor union matters could potentially adversely affectour operating results.***

Approximately 75.5% of our active employees as of June30, 2006 are represented by USW. A lengthy strike or other work stoppage orlabor disputes could have an adverse effect on our business, financialcondition and results of operations. On July 7, 2006, a new labor agreement wasratified between USW and us. The new

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contract provides for annual increases of 4%, 3% and3% over the next three years, retroactive to May 14, 2006. In addition, we willincrease our contribution to the bargaining unit pension plan to maintainbenefits at current levels. The estimated increase in costs is approximately$0.2 million annually over the duration of the contract. Modifications to theemployees’ healthcare plan were also made, which included eliminating thehighest cost and less utilized healthcare plan, and increasing employeecontributions toward healthcare to 20% of the cost of such benefit where thecontributions were less than 20%.

**ITEM 5.   OTHERINFORMATION**

We and International Paper Company are parties to anagreement whereby International Paper supplies wood chips to us. On May 23,2006, the agreement was amended to extend the term of the agreement and toaddress residual chips volume, storage, shipping and other provisions.

**ITEM 6.   EXHIBITS**

(a)             Exhibits required byItem 601 of Regulation S-K
| 10.1   |   | Amendment to  Contract for Sale (and Delivery) of Forest Products between Blue Ridge Paper  Products Inc. and International Paper  Company |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                       |
| 31.1   |   | Certification of  CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                |
|   |   |                                                                                                                                       |
| 31.2   |   | Certification of  CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                |

 

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                       | **BLUE RIDGE PAPER PRODUCTS INC.**                                |
|-----------------------|-------------------------------------------------------------------|
|                  |                                                              |
| Date: August 11, 2006 | **/s/ JOHN B. WADSWORTH**                                         |
|                  | John B. Wadsworth                                                 |
|                  | Chief Financial Officer                                           |
|                  |                                                              |
|                  | (On behalf of the Registrant and as Principal  Financial Officer) |

 

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**EXHIBIT INDEX TOFORM 10-Q OFBLUE RIDGE PAPER PRODUCTS INC.FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006Pursuant to Section 102(d) of RegulationS-T(17 C.F.R. Section 232.102(d))**

The following exhibits are filed as part of thisreport:
| 10.1 |   | Amendment to Contract for Sale (and Delivery) of  Forest Products between Blue Ridge Paper Products  Inc. and International Paper Company |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certification of CEO  pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                               |
| 31.2 |   | Certification of CFO  pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                               |

 

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