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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended October 31, 2005



OR



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



For the transition period from
             to



Commission File Number: 333-118844



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THE NEWARK GROUP, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|New Jersey                                                     |  | 22-2884844                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|20 Jackson Drive Cranford, New Jersey                          |  | 07016                                  
|(Address of principal executive office)                        |  | (Zip Code)                             



Registrants
telephone number, including area code: (908) 276-4000





(Former name, former address and former fiscal year, if changed since last report)



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



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



The number of common shares outstanding at October 31, 2005 was 3,654,242.



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##### Table of Contents

INDEX



|                               |  |                                                                                                    |  |     
|------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                    |  | Page
|PART I 
FINANCIAL INFORMATION |  |                                                                                                   
|                               |  |                                                                                                   
|Item 1.                        |  | Unaudited Consolidated Financial Statements:                                                       |  |     
|                               |  |                                                                                                   
|                               |  | Consolidated Balance Sheets as of October 31, 2005 and April 30, 2005                              |  | 1   
|                               |  |                                                                                                   
|                               |  | Consolidated Statements of Operations for the three and six months ended October 31, 2005 and 2004 |  | 2   
|                               |  |                                                                                                   
|                               |  | Consolidated Statements of Cash flows for the six months ended October 31, 2005 and 2004           |  | 3   
|                               |  |                                                                                                   
|                               |  | Consolidated Statement of Permanent Stockholders Equity for the six months ended October 31, 2005 |  | 4   
|                               |  |                                                                                                   
|                               |  | Notes to Consolidated Financial Statements                                                         |  | 5   
|                               |  |                                                                                                   
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 13  
|                               |  |                                                                                                   
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 24  
|                               |  |                                                                                                   
|Item 4.                        |  | Controls and Procedures                                                                            |  | 24  
|                               | 
|Part II 
OTHER INFORMATION    |  |                                                                                                   
|                               |  |                                                                                                   
|Item 1.                        |  | Legal Proceedings                                                                                  |  | 25  
|Item 2.                        |  | Unregistered Sale of Equity Securities and Use of Proceeds                                         |  | 25  
|Item 3.                        |  | Defaults Upon Senior Securities                                                                    |  | 25  
|Item 4.                        |  | Submission of Matters to a Vote of Security-Holders                                                |  | 25  
|Item 5.                        |  | Other Information                                                                                  |  | 25  
|Item 6.                        |  | Exhibits                                                                                           |  | 25  
|                               |  |                                                                                                   
|                               |  | SIGNATURES                                                                                         |  | 26  



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



PART
I FINANCIAL INFORMATION



Item 1. Financial Statements.



CONSOLIDATED BALANCE SHEETS - UNAUDITED

AS OF October 31, 2005 AND APRIL 30, 2005

(Dollars in Thousands, Except Share Data)



|                                                                                                                 |  |                 |         |   |               |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                 |  | October 31,2005 |         |   | April 30,2005 |  
|ASSETS                                                                                                           |  |                 |         |   |               |   |         |  
|CURRENT ASSETS:                                                                                                  |  |                 |         |   |               |   |         |  
|Cash and cash equivalents                                                                                        |  | $               | 3,490   |   |               | $ | 2,991   |  
|Accounts receivable (less allowance for doubtful accounts of $5,990 and $6,356, respectively)                    |  |                 | 106,898 |   |               |   | 119,815 |  
|Inventories                                                                                                      |  |                 | 65,375  |   |               |   | 61,760  |  
|Other current assets                                                                                             |  |                 | 16,192  |   |               |   | 3,840   |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total current assets                                                                                             |  |                 | 191,955 |   |               |   | 188,406 |  
|                                                                                                                 |  |                
|RESTRICTED CASH                                                                                                  |  |                 | 256     |   |               |   | 131     |  
|PROPERTY, PLANT AND EQUIPMENT  Net                                                                              |  |                 | 310,357 |   |               |   | 320,947 |  
|GOODWILL                                                                                                         |  |                 | 45,525  |   |               |   | 47,256  |  
|LONG-TERM INVESTMENTS                                                                                            |  |                 | 16,734  |   |               |   | 16,776  |  
|OTHER ASSETS                                                                                                     |  |                 | 26,223  |   |               |   | 26,568  |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|TOTAL ASSETS                                                                                                     |  | $               | 591,050 |   |               | $ | 600,084 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS EQUITY                                                 |  |                 |         |   |               |   |         |  
|CURRENT LIABILITIES:                                                                                             |  |                 |         |   |               |   |         |  
|Accounts payable                                                                                                 |  | $               | 82,023  |   |               | $ | 85,068  |  
|Current maturities of debt                                                                                       |  |                 | 4,541   |   |               |   | 2,621   |  
|Income taxes and other taxes payable                                                                             |  |                 | 4,969   |   |               |   | 2,979   |  
|Accrued salaries and wages                                                                                       |  |                 | 15,334  |   |               |   | 14,183  |  
|Other accrued expenses                                                                                           |  |                 | 11,906  |   |               |   | 13,981  |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total current liabilities                                                                                        |  |                 | 118,773 |   |               |   | 118,832 |  
|                                                                                                                 |  |                
|SENIOR DEBT                                                                                                      |  |                 | 76,390  |   |               |   | 79,097  |  
|SUBORDINATED DEBT                                                                                                |  |                 | 181,561 |   |               |   | 175,599 |  
|DEFERRED INCOME TAXES                                                                                            |  |                 | 7,736   |   |               |   | 5,073   |  
|PENSION OBLIGATION                                                                                               |  |                 | 28,013  |   |               |   | 27,980  |  
|SWAP OBLIGATION                                                                                                  |  |                 | 14,686  |   |               |   | 22,399  |  
|OTHER LIABILITIES                                                                                                |  |                 | 6,222   |   |               |   | 6,435   |  
|MINORITY INTEREST                                                                                                |  |                 | 87      |   |               |   | 92      |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total liabilities                                                                                                |  |                 | 433,468 |   |               |   | 435,507 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|COMMITMENTS AND CONTINGENCIES (Note 7)                                                                           |  |                 |         |   |               |   |         |  
|                                                                                                                 |  |                
|TEMPORARY EQUITY - COMMON STOCK, SUBJECT TO PUT RIGHTS, (668,442 and 866,442 shares, respectively)               |  |                 | 30,708  |   |               |   | 38,418  |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|PERMANENT STOCKHOLDERS EQUITY:                                                                                  |  |                 |         |   |               |   |         |  
|Common stock, $.01 per share stated value; authorized 10,000,000 shares, issued and outstanding 6,005,000 shares |  |                 | 60      |   |               |   | 60      |  
|Additional paid-in capital                                                                                       |  |                 | 374     |   |               |   | 374     |  
|Retained earnings                                                                                                |  |                 | 195,612 |   |               |   | 190,330 |  
|Accumulated other comprehensive loss                                                                             |  |                 | (9,046  | ) |               |   | (12,354 | )
|Treasury stock, 2,350,758 and 2,152,758 shares, respectively at cost                                             |  |                 | (60,126 | ) |               |   | (52,251 | )
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total permanent stockholders equity                                                                             |  |                 | 126,874 |   |               |   | 126,159 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|TOTAL LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS EQUITY                                           |  | $               | 591,050 |   |               | $ | 600,084 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  



See
notes to consolidated financial statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2005 AND 2004

(Dollars in Thousands)



|                                                                |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|--------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---------------- |  | - | ---------------- | - |  | - | ------- | -
|                                                                |  | For the Three Months Ended |         |   | For the Six Months Ended |  
|                                                                |  | October 31, 2005           |         |   | October 31, 2004         |   |         | October 31, 2005 |  |   | October 31, 2004 |  
|                                                                |  |                            |         |   | (As Restated)            |   |         |                  |  |   | (As Restated)    |  
|NET SALES                                                       |  | $                          | 217,898 |   |                          | $ | 217,065 |                  |  | $ | 442,341          |   |  | $ | 433,124 |  
|COST OF SALES                                                   |  |                            | 193,881 |   |                          |   | 189,034 |                  |  |   | 393,012          |   |  |   | 376,478 |  
|                                                                |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Gross profit                                                    |  |                            | 24,017  |   |                          |   | 28,031  |                  |  |   | 49,329           |   |  |   | 56,646  |  
|                                                                |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|OPERATING EXPENSES:                                             |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Selling, general and administrative                             |  |                            | 19,864  |   |                          |   | 20,636  |                  |  |   | 40,003           |   |  |   | 41,455  |  
|Restructuring and impairments                                   |  |                            | 417     |   |                          |   | 128     |                  |  |   | 1,249            |   |  |   | 1,078   |  
|                                                                |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total operating expenses                                        |  |                            | 20,281  |   |                          |   | 20,764  |                  |  |   | 41,252           |   |  |   | 42,533  |  
|                                                                |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|OPERATING INCOME                                                |  |                            | 3,736   |   |                          |   | 7,267   |                  |  |   | 8,077            |   |  |   | 14,113  |  
|                                                                |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|OTHER (EXPENSE) INCOME:                                         |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Interest expense                                                |  |                            | (6,613  | ) |                          |   | (6,243  | )                |  |   | (12,870          | ) |  |   | (12,403 | )
|Interest income                                                 |  |                            | 52      |   |                          |   | 20      |                  |  |   | 53               |   |  |   | 41      |  
|Equity in income of affiliates                                  |  |                            | 434     |   |                          |   | 494     |                  |  |   | 1,012            |   |  |   | 1,022   |  
|Other (expense) income  net                                    |  |                            | (124    | ) |                          |   | 15      |                  |  |   | (426             | ) |  |   | 290     |  
|                                                                |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total other expense                                             |  |                            | (6,251  | ) |                          |   | (5,714  | )                |  |   | (12,231          | ) |  |   | (11,050 | )
|                                                                |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|(LOSS) EARNINGS FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES |  |                            | (2,515  | ) |                          |   | 1,553   |                  |  |   | (4,154           | ) |  |   | 3,063   |  
|                                                                |  |                            |         |  
|INCOME TAX (BENEFIT) EXPENSE                                    |  |                            | (1,276  | ) |                          |   | 356     |                  |  |   | (1,561           | ) |  |   | 1,096   |  
|                                                                |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|NET (LOSS) EARNINGS                                             |  | $                          | (1,239  | ) |                          | $ | 1,197   |                  |  | $ | (2,593           | ) |  | $ | 1,967   |  
|                                                                |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  



See
notes to consolidated financial statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

FOR THE SIX MONTHS ENDED OCTOBER 31, 2005 AND 2004

(Dollars in Thousands)



|                                                                                           |  |      |        |   |               |   |         |  
|------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ------------- | - | ------- | -
|                                                                                           |  | 2005 |        |   | 2004          |  
|                                                                                           |  |      |        |   | (As Restated) |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |  |      |        |   |               |   |         |  
|Net (loss) earnings                                                                        |  | $    | (2,593 | ) |               | $ | 1,967   |  
|Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: |  |      |        |   |               |   |         |  
|Depreciation and amortization                                                              |  |      | 17,278 |   |               |   | 16,051  |  
|Impairment of assets                                                                       |  |      | 393    |   |               |   | 82      |  
|Loss on sale of property, plant and equipment                                              |  |      | 225    |   |               |   | 168     |  
|Equity in income of affiliates                                                             |  |      | (1,012 | ) |               |   | (1,022  | )
|Stock-based compensation expense                                                           |  |      | 165    |   |               |   |        |  
|(Gain) loss due to hedge ineffectiveness                                                   |  |      | (210   | ) |               |   | 520     |  
|Proceeds from dividends paid by equity investments in affiliates                           |  |      |       |   |               |   | 424     |  
|Deferred income tax benefit                                                                |  |      | (3,261 | ) |               |   | (1,826  | )
|                                                                                           |  |     
|Changes in assets and liabilities:                                                         |  |      |        |   |               |   |         |  
|Decrease in accounts receivable                                                            |  |      | 10,408 |   |               |   | 1,085   |  
|Increase in inventories                                                                    |  |      | (4,661 | ) |               |   | (3,401  | )
|(Increase) decrease in other current assets                                                |  |      | (1,732 | ) |               |   | 2,410   |  
|(Increase) decrease in other assets                                                        |  |      | (792   | ) |               |   | 373     |  
|Increase (decrease) in accounts payable and accrued expenses                               |  |      | (1,162 | ) |               |   | (1,438  | )
|Decrease in other liabilities                                                              |  |      | (1,984 | ) |               |   | (4,889  | )
|                                                                                           |  |      |        |   |               |   |         |  
|Net cash provided by operating activities                                                  |  |      | 11,062 |   |               |   | 10,504  |  
|                                                                                           |  |      |        |   |               |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |  |      |        |   |               |   |         |  
|Proceeds from sale of marketable securities                                                |  |      |       |   |               |   | 44      |  
|Capital expenditures                                                                       |  |      | (8,870 | ) |               |   | (9,245  | )
|Proceeds from sale of property, plant and equipment                                        |  |      | 1,084  |   |               |   | 67      |  
|Increase in restricted cash                                                                |  |      | (125   | ) |               |   | (125    | )
|                                                                                           |  |      |        |   |               |   |         |  
|Net cash used in investing activities                                                      |  |      | (7,911 | ) |               |   | (9,259  | )
|                                                                                           |  |      |        |   |               |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |  |      |        |   |               |   |         |  
|Repayment of long-term debt                                                                |  |      | (2,174 | ) |               |   | (6,380  | )
|Proceeds from long-term debt                                                               |  |      |       |   |               |   | 19,025  |  
|Changes in cash overdraft                                                                  |  |      | 519    |   |               |   | (10,550 | )
|Purchase of treasury stock                                                                 |  |      |       |   |               |   | (1,092  | )
|                                                                                           |  |      |        |   |               |   |         |  
|Net cash (used in) provided by financing activities                                        |  |      | (1,655 | ) |               |   | 1,003   |  
|                                                                                           |  |      |        |   |               |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                    |  |      | (997   | ) |               |   | (478    | )
|                                                                                           |  |      |        |   |               |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                  |  |      | 499    |   |               |   | 1,770   |  
|                                                                                           |  |     
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                             |  |      | 2,991  |   |               |   | 2,003   |  
|                                                                                           |  |      |        |   |               |   |         |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                   |  | $    | 3,490  |   |               | $ | 3,773   |  
|                                                                                           |  |      |        |   |               |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                         |  |      |        |   |               |   |         |  
|Cash paid during the period for:                                                           |  |      |        |   |               |   |         |  
|Interest                                                                                   |  | $    | 12,865 |   |               | $ | 12,876  |  
|                                                                                           |  |      |        |   |               |   |         |  
|Income Taxes                                                                               |  | $    | 1,054  |   |               | $ | 738     |  
|                                                                                           |  |      |        |   |               |   |         |  
|SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:                                    |  |      |        |   |               |   |         |  
|Note issued in connection with stock repurchase                                            |  | $    | 7,875  |   |               | $ |        |  
|                                                                                           |  |      |        |   |               |   |         |  



See
notes to consolidated financial statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENT OF PERMANENT STOCKHOLDERS EQUITY - UNAUDITED

FOR THE SIX MONTHS ENDED OCTOBER 31, 2005

(Dollars in Thousands)



|                                                                  |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |        |  
|----------------------------------------------------------------- |  | ----- | ------- | - | ------------------------------------------ | - | ------- | ------------- |  | - | ---------------- | - |  | ------------------------ | ------- | ----------- |  | ------------------------ | --- |  | - | -- |  | - | ------ | -
|                                                                  |  | Total |         |   | AccumulatedOtherComprehensiveIncome (Loss) |   |         | TreasuryStock |  |   | RetainedEarnings |   |  | AdditionalPaid InCapital |         | CommonStock |  | TotalComprehensiveIncome |    
|BALANCE APRIL 30, 2005                                            |  | $     | 126,159 |   |                                            | $ | (12,354 | )             |  | $ | (52,251          | ) |  | $                        | 190,330 |             |  | $                        | 374 |  | $ | 60 |  |   |        |  
|                                                                  |  |       |         |   |                                            |   |        
|Net loss                                                          |  |       | (2,593  | ) |                                            |   |        |               |  |   |                 |   |  |                          | (2,593  | )           |  |                          |    |  |   |   |  | $ | (2,593 | )
|Other comprehensive income (loss), net of tax:                    |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |        |  
|Foreign currency translation adjustments (net of taxes of $727)   |  |       | (1,091  | ) |                                            |   | (1,091  | )             |  |   |                 |   |  |                          |        |             |  |                          |    |  |   |   |  |   | (1,091 | )
|Change in fair value of cash flow hedges (net of taxes of $2,933) |  |       | 4,399   |   |                                            |   | 4,399   |               |  |   |                 |   |  |                          |        |             |  |                          |    |  |   |   |  |   | 4,399  |  
|Acquisition of treasury stock, at cost                            |  |       |        |   |                                            |   |        |               |  |   | (7,875           | ) |  |                          | 7,875   |             |  |                          |    |  |   |   |  |   |       |  
|                                                                  |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |        |  
|BALANCE OCTOBER 31, 2005                                          |  | $     | 126,874 |   |                                            | $ | (9,046  | )             |  | $ | (60,126          | ) |  | $                        | 195,612 |             |  | $                        | 374 |  | $ | 60 |  | $ | 715    |  
|                                                                  |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |        |  



See
notes to consolidated financial statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(Dollars in Thousands, Except Share and Per Share Amounts)



|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



Business and Principles of Consolidation The Newark Group, Inc. and its wholly owned subsidiaries (the Company) is an integrated
global producer of recycled paperboard and converted paperboard products, with significant manufacturing and converting operations in North America and Europe. The Companys customers are global manufacturers and converters of paperboard.



The accompanying unaudited condensed consolidated financial
statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments and accruals, as well as accounting changes
considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements. Additionally, the preparation of these financial statements requires management to make estimates and assumptions that affect: a)
the reported amounts of assets and liabilities, b) the disclosure of contingent assets and liabilities at the date of the financial statements; and, c) the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Operating results for the three and six-month periods ended October 31, 2005 are not necessarily indicative of the results that may be expected for the year ending April 30, 2006 due to seasonal and other
factors. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended April 30, 2005 included in our annual report
on Form 10-K.



The equity method is used to account for the
Companys investment in the common stock of other companies where the Company maintains ownership between 20 and 50 percent, and has the ability to exercise significant influence over the investees operating and financial policies. These
investments are included in long-term investments. In the event that management identifies an other than temporary decline in the estimated fair value of an equity method investment to an amount below its carrying value, such investment is written
down to its estimated fair value. All significant intercompany profits, transactions and balances have been eliminated.



Revenue Recognition Revenue is recognized when the earning process is complete and the title and risks and rewards of ownership have
transferred to the customer, which is determined based on shipping terms. Net Sales includes provisions for discounts, returns, allowances, customer rebates and other adjustments that are based upon managements best estimates and historical
experience and are provided for in the same period as the related revenues are recorded. The Company accounts for shipping and handling costs as a component of cost of goods sold; amounts for shipping and handling costs invoiced to customers are
included in determining net sales.



Stock-based
Compensation  In accordance with SFAS No. 123 Accounting for Stock Based Compensation, the Company accounts for employee stock options and stock appreciation rights based upon the fair value method of accounting for equity
instruments which results in the recording of compensation expense in the Companys financial statements.



Cash and Cash Equivalents Cash and cash equivalents include cash on hand, cash in banks and short-term investments with maturity of three
months or less from date of purchase. Cash overdrafts are included in accounts payable and are $5,108 and $4,589 as of October 31, 2005 and April 30, 2005, respectively.



Reclassification Certain amounts in the prior year financial statements have been reclassified to conform to
current year presentation.



|2. | INVENTORIES
|-- | -----------



Prior to November 1, 2004, the Company used the last-in, first-out (LIFO) method of costing inventory for most of its North American
Operations, with the cost of the remaining inventories determined using the first-in, first-out (FIFO) method. Effective, November 1, 2004, the Company changed its method of accounting for its LIFO inventory to the FIFO method.
Management believes the FIFO method is preferable because it provides a better matching of costs to revenues, provides a more meaningful presentation of the Companys financial position by reflecting recent costs in the balance sheet, and
provides a uniform costing method across the Companys business segments. In accordance with accounting principles generally accepted in the United States of America, the prior



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



period consolidated financial statements presented in this Form 10-Q have been restated to retroactively apply the FIFO
method of accounting as depicted in the following table:



|                                    |  |                                     |         |                                   |   |       |             |  |             |         |            |   |         |             |   |       |   |  |   |        
|----------------------------------- |  | ----------------------------------- | ------- | --------------------------------- | - | ----- | ----------- |  | ----------- | ------- | ---------- | - | ------- | ----------- | - | ----- | - |  | - | -------
|                                    |  | Three Months Ended October 31, 2004 |         | Six Months Ended October 31, 2004
|                                    |  | As Reported                         |         | Adjustment                        |   |       | As Restated |  | As Reported |         | Adjustment |   |         | As Restated
|Cost of Sales                       |  | $                                   | 189,219 |                                   | $ | (185  | )           |  | $           | 189,034 |            | $ | 377,057 |             | $ | (579  | ) |  | $ | 376,478
|Earnings from Continuing Operations |  | $                                   | 1,368   |                                   | $ | 185   |             |  | $           | 1,553   |            | $ | 2,484   |             | $ | 579   |   |  | $ | 3,063  
|Net Income                          |  | $                                   | 1,086   |                                   | $ | 111   |             |  | $           | 1,197   |            | $ | 1,619   |             | $ | 348   |   |  | $ | 1,967  
|                                    |  |                                     |         |                                   |   |      
|Inventories                         |  | $                                   | 57,315  |                                   | $ | 7,759 |             |  | $           | 65,074  |            | $ | 57,315  |             | $ | 7,759 |   |  | $ | 65,074 



Inventories consist of
the following:



|                             |  |                 |        |               |   |       
|---------------------------- |  | --------------- | ------ | ------------- | - | ------
|                             |  | October 31,2005 |        | April 30,2005
|Raw Materials                |  | $               | 23,013 |               | $ | 22,629
|Finished Goods               |  |                 | 39,533 |               |   | 35,963
|Other Manufacturing Supplies |  |                 | 2,829  |               |   | 3,168 
|                             |  |                 |        |               |   |       
|                             |  | $               | 65,375 |               | $ | 61,760
|                             |  |                 |        |               |   |       



|3. | LONG-TERM DEBT
|-- | --------------



|                                    |  |                 |         |   |               |   |         |  
|----------------------------------- |  | --------------- | ------- | - | ------------- | - | ------- | -
|                                    |  | October 31,2005 |         |   | April 30,2005 |  
|Senior Subordinated Notes 9.75% (1) |  | $               | 175,000 |   |               | $ | 175,000 |  
|Three-Year Bank Credit Facility (2) |  |                 | 7,841   |   |               |   | 9,009   |  
|Industrial Revenue Bonds (3)        |  |                 | 69,310  |   |               |   | 70,780  |  
|Subordinated Notes (4)              |  |                 | 7,748   |   |               |   | 1,077   |  
|All other                           |  |                 | 2,593   |   |               |   | 1,451   |  
|                                    |  |                 |         |   |               |   |         |  
|Total Debt                          |  |                 | 262,492 |   |               |   | 257,317 |  
|Less Current Portion                |  |                 | (4,541  | ) |               |   | (2,621  | )
|                                    |  |                 |         |   |               |   |         |  
|Long-Term Debt                      |  | $               | 257,951 |   |               | $ | 254,696 |  
|                                    |  |                 |         |   |               |   |         |  

---

|(1) | The Company has $175,000 of 9.75% unsecured senior subordinated notes. Interest is payable semi-annually (March 15 and September 15) and principal is due, in total, on
March 15, 2014. This debt is classified in Subordinated Debt in the consolidated balance sheets.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Company has a $150,000 senior secured credit facility with ten banks. Borrowing availability is subject to borrowing base requirements established by leverage ratios. In
addition, the Company has the ability to issue up to $95,000 for letters of credit, usage of which reduces borrowing availability under the facility. Letters of credit can be issued to enhance industrial revenue bonds, guarantee unpaid claim
reserves under insurance policies and/or to provide performance bonds and trade letters of credit. As of October 31, 2005 the Company has $82,761 in letters of credit obligations outstanding ($70,469 of which has been used to enhance security
for the industrial revenue bonds), $7,841 in loans outstanding and $59,398 of availability under the facility. The borrowings bear variable interest that is reset quarterly at a rate equal to, at the Companys discretion, one of the following
(1) Prime plus a spread of 1% to 2%, (2) London Interbank Offered Rate (LIBOR) plus a spread of 2% to 3% or (3) Euro Interbank Offered Rate (EURIBOR) plus a spread of 2% to 3%. The credit spread on both LIBOR and EURIBOR borrowings is
subject to applicable credit spread requirements established by leverage ratios. The rate of interest as of October 31, 2005 is 4.88%. Outstanding letters of credit are subject to a fee equal to the applicable credit spread for LIBOR based
loans. The undrawn portion of the facility is subject to a facility fee at an annual rate of 0.50%. This debt is classified in Senior Debt in the consolidated balance sheets.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The industrial revenue bonds are comprised of: Mercer IRB of $1,750, Mobile IRB of $4,975, Natick IRB of $40, Ohio IRB of $15,500, and Massachusetts IRBs of $47,045 as of
October 31, 2005. These bonds are variable rate demand bonds with maturity dates ranging from July 2006 through July 2031 and where the interest rates range from 2.70% to 6.75% and are reset every seven days. This debt is classified in Senior
Debt in the consolidated balance sheets with a portion in Current Maturities of Debt.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



|(4) | Pursuant to the July 5, 2005 put of Company common stock to the Company by its former Chairman and current Director (see Note 9), the Company issued a Subordinated
note on August 10, 2005 for $7,875 to the former Chairman in exchange for the 198,000 shares of Company common stock owned by him. The note bears interest at the prime rate in effect from time to time, requires quarterly principal and interest
payments and is due in July 2015. As of October 31, 2005, the remaining balance on the note is $6,910.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our senior secured revolving credit facility requires that we satisfy certain financial covenants, as defined in the credit facility agreement. These
covenants consist of an interest coverage test, a $30 million maximum level of annual capital expenditures and certain leverage ratios. At October 31, 2005, the Company is in compliance with all financial covenants.



Assets pledged as collateral under the credit facility include substantially
all domestic machinery, equipment and receivables, as well as certain real estate.



The Company has cross-currency interest rate swap agreements with two banks. These agreements have been designated as cash flow hedges against the existing intercompany loan to the Companys European subsidiary.
At October 31, 2005 and April 30, 2005, the fair value of the swaps represented a liability of $14,686 and $22,399, respectively, the decrease resulting from a scheduled principal payment and the affects of the change in foreign currency
exchange rates. The Company has recognized income of $210 and a charge of $266 within Other (expense) income  net on the consolidated statements of operations, related to hedge ineffectiveness, during the six months ended October 31, 2005
and 2004, respectively.



The Company is involved in the use of
derivative financial instruments, in the form of cross-currency interest rate swaps and various hedging transactions, to manage interest rate risk, foreign currency exchange risk, certain energy price risks and other raw material price risks. The
Company is exposed to credit losses in the event of non-performance by the counterparties to its derivative financial instruments. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the
contracts.



|4. | RETIREMENT PLANS
|-- | ----------------



The following table presents the net periodic pension cost for the Companys domestic Pension Plans:



|                                              |  |                                  |        |   |                                |   |        |                 |  |   |                 |   |  |   |        |  
|--------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------ | - | ------ | --------------- |  | - | --------------- | - |  | - | ------ | -
|                                              |  | Pension Costs Three Months ended |        |   | Pension Costs Six Months ended |  
|                                              |  | October 31,2005                  |        |   | October 31,2004                |   |        | October 31,2005 |  |   | October 31,2004 |  
|Service Cost                                  |  | $                                | 998    |   |                                | $ | 1,156  |                 |  | $ | 2,160           |   |  | $ | 2,099  |  
|Interest Cost on Projected Benefit Obligation |  |                                  | 1,984  |   |                                |   | 1,642  |                 |  |   | 3,538           |   |  |   | 3,108  |  
|Expected Return on Assets (Gain) Loss         |  |                                  | (2,481 | ) |                                |   | (1,791 | )               |  |   | (4,000          | ) |  |   | (3,038 | )
|Net Amortization                              |  |                                  | 575    |   |                                |   | 297    |                 |  |   | 917             |   |  |   | 684    |  
|                                              |  |                                  |        |   |                                |   |        |                 |  |   |                 |   |  |   |        |  
|Net Pension Expense                           |  | $                                | 1,076  |   |                                | $ | 1,304  |                 |  | $ | 2,615           |   |  | $ | 2,853  |  
|                                              |  |                                  |        |   |                                |   |        |                 |  |   |                 |   |  |   |        |  



The Company estimates
a minimum cash contribution to its domestic pension plans of approximately $7,000 during fiscal year ending April 30, 2006, and has made a contribution of $1,600 towards that total during the six months ended October 31, 2005. As of
October 31, 2005, 77% of the plans assets were in equity investments, 14% in fixed-income securities and 9% in commercial paper, cash and other.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



The following table presents the net periodic pension cost for the Companys foreign Pension Plans:



|                                              |  |                                  |     |   |                                |   |     |                 |  |   |                 |   |  |   |     |  
|--------------------------------------------- |  | -------------------------------- | --- | - | ------------------------------ | - | --- | --------------- |  | - | --------------- | - |  | - | --- | -
|                                              |  | Pension Costs Three Months ended |     |   | Pension Costs Six Months ended |  
|                                              |  | October 31,2005                  |     |   | October 31,2004                |   |     | October 31,2005 |  |   | October 31,2004 |  
|Service Cost                                  |  | $                                | 47  |   |                                | $ | 32  |                 |  | $ | 95              |   |  | $ | 63  |  
|Interest Cost on Projected Benefit Obligation |  |                                  | 59  |   |                                |   | 22  |                 |  |   | 117             |   |  |   | 71  |  
|Expected Return on Assets (Gain) Loss         |  |                                  | (54 | ) |                                |   | (51 | )               |  |   | (107            | ) |  |   | (85 | )
|Net Amortization                              |  |                                  |    |   |                                |   | 12  |                 |  |   |                |   |  |   | 12  |  
|                                              |  |                                  |     |   |                                |   |     |                 |  |   |                 |   |  |   |     |  
|Net Pension Expense                           |  | $                                | 52  |   |                                | $ | 15  |                 |  | $ | 105             |   |  | $ | 61  |  
|                                              |  |                                  |     |   |                                |   |     |                 |  |   |                 |   |  |   |     |  



|5. | RESTRUCTURING AND IMPAIRMENTS
|-- | -----------------------------



For the Three Months Ended October 31, 2005 and 2004:



2006 Restructuring



Dismantling costs in the Paperboard segment relate to continued costs to exit two facilities closed in prior periods. The severance costs and asset
impairment charges for the quarter relate to our mill in Natick, MA, the closing of which was announced in September 2005. Upon closure, there will be 58 severed employees, primarily representing the hourly workforce. The decision to close the mill
was made based on the need for rationalization of capacity and the near-term requirement of significant capital investment at the facility which offered little or no return. The Converted Products segment incurred additional exit costs at two
facilities closed in prior periods.



2005 Restructuring



The Paperboard segment showed net restructuring credits
of $60. Actual expenses incurred of $350 were offset by $410 which was received from the sale of certain water/sewage discharge rights from a facility that was closed in prior years. Severance costs of $62 relate to the facility in Sunrise, FL which
closed on July 15, 2004. Asset impairment charges of $32 and the majority of the $256 of actual dismantling charges were incurred at the facility in Stockton, CA.



The Converted Products segment incurred $188 of restructuring charges on three locations  Vancouver, WA, Stockton, CA,
and Kountze, TX. Three other restructured locations in this segment incurred no charges for the period and are not expected to incur future charges.



The components of the Companys plant restructuring and impairments incurred for the three months ended:



|                                 |  |            |      |   |                   |   |       |  |   |    
|-------------------------------- |  | ---------- | ---- | - | ----------------- | - | ----- |  | - | ---
|                                 |  | Paperboard |      |   | ConvertedProducts |   | Total
|October 31, 2005                 |  |            |      |   |                   |   |       |  |   |    
|Severance                        |  | $          | 146  |   |                   | $ |      |  | $ | 146
|Dismantling, Mothballing & Other |  |            | 101  |   |                   |   | 37    |  |   | 138
|Asset Impairment                 |  |            | 115  |   |                   |   | 18    |  |   | 133
|                                 |  |            |      |   |                   |   |       |  |   |    
|Total Charges                    |  | $          | 362  |   |                   | $ | 55    |  | $ | 417
|                                 |  |            |      |   |                   |   |       |  |   |    
|October 31, 2004                 |  |            |      |   |                   |   |       |  |   |    
|Severance                        |  | $          | 62   |   |                   | $ | 13    |  | $ | 75 
|Dismantling, Mothballing & Other |  |            | (154 | ) |                   |   | 166   |  |   | 12 
|Asset Impairment                 |  |            | 32   |   |                   |   | 9     |  |   | 41 
|                                 |  |            |      |   |                   |   |       |  |   |    
|Total Charges                    |  | $          | (60  | ) |                   | $ | 188   |  | $ | 128
|                                 |  |            |      |   |                   |   |       |  |   |    



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



For the Six Months Ended October 31, 2005 and 2004:



2006 Restructuring



The Paperboard segment incurred $236 of expenses related to the maintenance of three facilities closed in prior years. The remaining $261 in this segment
are comprised of severance costs and asset impairment charges related to the announced closing of our Natick, MA facility. Within the Converted Products segment, the majority of both dismantling and impairment charges relate to a certain leased
facility which ceased production operations in April 2004 but continued to be used for warehousing purposes. The $166 within corporate represents the loss on the sale of a previously restructured facility in Greenville, SC. Gross proceeds on the
sale were $1,078.



2005 Restructuring



The Paperboard segment incurred severance costs of $76 from a facility in
Sunrise, FL which closed on July 15, 2004 due to the fact that it had been operating at a loss for many months. This location also incurred $55 of costs to exit the property. The remaining restructuring charges of $452 were offset by $410 due
to the sale of certain water/sewer discharge rights at a facility that was closed in prior years.



The Converted Products segment incurred restructuring charges on six locations  Vancouver, WA, Stockton, CA, Mira Loma, CA, Kountze, TX, Oshkosh, WI
and Neenah, WI; restructuring charges are $905. With the exception of the Kountze, TX facility which was closed as a result of poor financial performance, the remaining locations in this segment were closed as a result of consolidation of
operations.



The components of the Companys plant
restructuring and impairments incurred for the six months ended:



|                                 |  |            |     |                   |   |           |  |       |     |  |   |      
|-------------------------------- |  | ---------- | --- | ----------------- | - | --------- |  | ----- | --- |  | - | -----
|                                 |  | Paperboard |     | ConvertedProducts |   | Corporate |  | Total
|October 31, 2005                 |  |            |     |                   |   |           |  |       |     |  |   |      
|Severance                        |  | $          | 146 |                   | $ |          |  | $     |    |  | $ | 146  
|Dismantling, Mothballing & Other |  |            | 236 |                   |   | 308       |  |       | 166 |  |   | 710  
|Asset Impairment                 |  |            | 115 |                   |   | 278       |  |       |    |  |   | 393  
|                                 |  |            |     |                   |   |           |  |       |     |  |   |      
|Total Charges                    |  | $          | 497 |                   | $ | 586       |  | $     | 166 |  | $ | 1,249
|                                 |  |            |     |                   |   |           |  |       |     |  |   |      
|October 31, 2004                 |  |            |     |                   |   |           |  |       |     |  |   |      
|Severance                        |  | $          | 76  |                   | $ | 137       |  | $     |    |  | $ | 213  
|Dismantling, Mothballing & Other |  |            | 65  |                   |   | 724       |  |       |    |  |   | 789  
|Asset Impairment                 |  |            | 32  |                   |   | 44        |  |       |    |  |   | 76   
|                                 |  |            |     |                   |   |           |  |       |     |  |   |      
|Total Charges                    |  | $          | 173 |                   | $ | 905       |  | $     |    |  | $ | 1,078
|                                 |  |            |     |                   |   |           |  |       |     |  |   |      



The following table
summarizes the Companys accruals for plant restructuring costs:



|                                                                |  |                                      |      |   |                                   |   |                |  |   |      |  
|--------------------------------------------------------------- |  | ------------------------------------ | ---- | - | --------------------------------- | - | -------------- |  | - | ---- | -
|                                                                |  | Dismantling,Mothballing & OtherCosts |      |   | Severance andPayroll RelatedCosts |   | TotalProvision | 
|April 30, 2005 Accrual Balance                                  |  | $                                    | 46   |   |                                   | $ |               |  | $ | 46   |  
|Restructuring Charges for the Six Months Ended October 31, 2005 |  |                                      | 710  |   |                                   |   | 146            |  |   | 856  |  
|Amounts Paid Against 2005 Accruals                              |  |                                      | (46  | ) |                                   |   |               |  |   | (46  | )
|Amounts Paid Against 2006 Accruals                              |  |                                      | (670 | ) |                                   |   |               |  |   | (670 | )
|                                                                |  |                                      |      |   |                                   |   |                |  |   |      |  
|October 31, 2005 Accrual Balance                                |  | $                                    | 40   |   |                                   | $ | 146            |  | $ | 186  |  
|                                                                |  |                                      |      |   |                                   |   |                |  |   |      |  



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##### Table of Contents

The following table summarizes restructuring and impairment costs by segment for those plans initiated
since January 1, 2003 and accounted for under Statements of Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities:



|                   |  |                                         |        |                                                   |   |                                                             |  |                                                         |       |  |   |       
|------------------ |  | --------------------------------------- | ------ | ------------------------------------------------- | - | ----------------------------------------------------------- |  | ------------------------------------------------------- | ----- |  | - | ------
|                   |  | CumulativeCosts as of April 30,2005 (1) |        | Costs for the SixMonths EndedOctober 31, 2005 (2) |   | Estimated Costs toCompleteInitiatives as ofOctober 31, 2005 |  | Total EstimatedCosts ofInitiatives as ofOctober 31,2005
|Paperboard         |  | $                                       | 13,891 |                                                   | $ | 483                                                         |  | $                                                       | 1,313 |  | $ | 15,687
|Converted Products |  |                                         | 1,531  |                                                   |   | 586                                                         |  |                                                         | 525   |  |   | 2,642 
|                   |  |                                         |        |                                                   |   |                                                             |  |                                                         |       |  |   |       
|                   |  | $                                       | 15,422 |                                                   | $ | 1,069                                                       |  | $                                                       | 1,838 |  | $ | 18,329
|                   |  |                                         |        |                                                   |   |                                                             |  |                                                         |       |  |   |       

---

|(1) | Of the $15,422 in cumulative restructuring costs, $7,089 were non-cash charges related to asset impairment.
|--- | -----------------------------------------------------------------------------------------------------------

|(2) | The total costs incurred in the six months ended October 31, 2005, $1,069, does not agree with the six month total charges of $1,249 from a prior table above since some of the
costs are related to plans initiated prior to January 1, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|6. | INCOME TAXES
|-- | ------------



In determining the Companys consolidated tax rate, an annual effective rate is computed for each taxable jurisdiction.



During the six months ended October 31, 2005, the Company recorded a
net increase to its valuation allowance of $292. An increase of $582, related to the expected non-realization of certain net operating losses in the State of Ohio, was recorded along with an additional increase of $743 for net operating losses which
are expected to expire unused. These increases were offset by non-expiring state tax credits of $1,033 which, based on initial tax planning strategies, are expected to be realized. However, the Company continually evaluates and modifies strategies
and the ultimate form of utilization of these tax credits may change.



Also during this period, the Company repatriated approximately $612 in dividends from its European subsidiary. Taxes for this repatriation were provided for at April 30, 2005 and this transaction reduced the Companys deferred tax
asset for the net operating loss by approximately $216.



|7. | COMMITMENT AND CONTINGENCIES
|-- | ----------------------------



The Company and its subsidiaries are party to various claims, legal actions, complaints and administrative proceedings, including workers
compensation and environmental claims, arising in the ordinary course of business. In managements opinion, the ultimate disposition of these matters will not have a material effect on the Companys financial condition, results of
operations or cash flows.



|8. | SEGMENT INFORMATION
|-- | -------------------



The Company operates in principally three business segments.



The Paperboard segment consists of facilities that manufacture recycled paperboard and facilities that collect, sort and process recovered paper for
internal consumption and sales to other paper manufacturers. Inter-segment sales are recorded at prices which approximate market prices.



The Converted Products segment is principally made up of facilities that laminate, cut and form paperboard into fiber components for tubes and cores,
protective packaging, books, games and office products. Inter-segment sales are recorded at prices which approximate market prices.



The International segment consists of facilities throughout Europe that are managed separately from North American operations. The vertical integration of
this segment offers both paperboard manufacturing and converting. To date there are minimal business transactions between the North American segments (Paperboard and Converted Products) and the International segment.



The Company evaluates performance and allocates resources based on operating
profits and losses of each business segment. Operating results include all costs and expenses directly related to the segment involved. Corporate includes corporate, general, administrative and unallocated expenses.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Identifiable assets are accumulated by facility within each business segment.



The following table presents certain business segment information for the
periods indicated.



|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|-------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---------------- |  | - | ---------------- | - |  | - | ------- | -
|                                                               |  | For the Three Months Ended |         |   | For the Six Months Ended |  
|                                                               |  | October 31, 2005           |         |   | October 31, 2004         |   |         | October 31, 2005 |  |   | October 31, 2004 |  
|                                                               |  |                            |         |   | (As Restated)            |   |         |                  |  |   | (As Restated)    |  
|Sales (aggregate):                                             |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | 148,442 |   |                          | $ | 150,306 |                  |  | $ | 302,564          |   |  | $ | 300,521 |  
|Converted Products                                             |  |                            | 70,893  |   |                          |   | 69,167  |                  |  |   | 142,033          |   |  |   | 139,221 |  
|International                                                  |  |                            | 36,915  |   |                          |   | 36,090  |                  |  |   | 76,097           |   |  |   | 72,671  |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total:                                                         |  | $                          | 256,250 |   |                          | $ | 255,563 |                  |  | $ | 520,694          |   |  | $ | 512,413 |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Less sales (inter-segment):                                    |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | (36,487 | ) |                          | $ | (36,743 | )                |  | $ | (74,483          | ) |  | $ | (75,734 | )
|Converted Products                                             |  |                            | (1,891  | ) |                          |   | (1,779  | )                |  |   | (3,898           | ) |  |   | (3,624  | )
|International                                                  |  |                            | 26      |   |                          |   | 24      |                  |  |   | 28               |   |  |   | 69      |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total:                                                         |  | $                          | (38,352 | ) |                          | $ | (38,498 | )                |  | $ | (78,353          | ) |  | $ | (79,289 | )
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Sales (external customers):                                    |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | 111,955 |   |                          | $ | 113,563 |                  |  | $ | 228,081          |   |  | $ | 224,787 |  
|Converted Products                                             |  |                            | 69,002  |   |                          |   | 67,388  |                  |  |   | 138,135          |   |  |   | 135,597 |  
|International                                                  |  |                            | 36,941  |   |                          |   | 36,114  |                  |  |   | 76,125           |   |  |   | 72,740  |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total:                                                         |  | $                          | 217,898 |   |                          | $ | 217,065 |                  |  | $ | 442,341          |   |  | $ | 433,124 |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Operating Income:                                              |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | 4,668   |   |                          | $ | 8,745   |                  |  | $ | 10,820           |   |  | $ | 16,588  |  
|Converted Products                                             |  |                            | (657    | ) |                          |   | (2,276  | )                |  |   | (2,281           | ) |  |   | (3,906  | )
|International                                                  |  |                            | 3,773   |   |                          |   | 4,782   |                  |  |   | 7,624            |   |  |   | 8,724   |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total Segment Operating Income:                                |  |                            | 7,784   |   |                          |   | 11,251  |                  |  |   | 16,163           |   |  |   | 21,406  |  
|                                                               |  |                            |         |  
|Corporate Expense                                              |  |                            | 4,048   |   |                          |   | 3,984   |                  |  |   | 8,086            |   |  |   | 7,293   |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total Operating Income:                                        |  |                            | 3,736   |   |                          |   | 7,267   |                  |  |   | 8,077            |   |  |   | 14,113  |  
|                                                               |  |                            |         |  
|Interest Expense                                               |  |                            | (6,613  | ) |                          |   | (6,243  | )                |  |   | (12,870          | ) |  |   | (12,403 | )
|Interest Income                                                |  |                            | 52      |   |                          |   | 20      |                  |  |   | 53               |   |  |   | 41      |  
|Equity in Income of Affiliates                                 |  |                            | 434     |   |                          |   | 494     |                  |  |   | 1,012            |   |  |   | 1,022   |  
|Other (Expense) Income, Net                                    |  |                            | (124    | ) |                          |   | 15      |                  |  |   | (426             | ) |  |   | 290     |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|(Loss) Earnings from Continuing Operations Before Income Taxes |  |                            | (2,515  | ) |                          |   | 1,553   |                  |  |   | (4,154           | ) |  |   | 3,063   |  
|Income Tax (Benefit) Expense                                   |  |                            | (1,276  | ) |                          |   | 356     |                  |  |   | (1,561           | ) |  |   | 1,096   |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|(Loss) Earnings from Continuing Operations                     |  | $                          | (1,239  | ) |                          | $ | 1,197   |                  |  | $ | (2,593           | ) |  | $ | 1,967   |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Depreciation and Amortization:                                 |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | 5,720   |   |                          | $ | 5,375   |                  |  | $ | 11,437           |   |  | $ | 10,660  |  
|Converted Products                                             |  |                            | 1,319   |   |                          |   | 1,135   |                  |  |   | 2,624            |   |  |   | 2,206   |  
|International                                                  |  |                            | 1,062   |   |                          |   | 1,121   |                  |  |   | 2,125            |   |  |   | 2,072   |  
|Corporate                                                      |  |                            | 545     |   |                          |   | 573     |                  |  |   | 1,092            |   |  |   | 1,113   |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total:                                                         |  | $                          | 8,646   |   |                          | $ | 8,204   |                  |  | $ | 17,278           |   |  | $ | 16,051  |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Purchases of Property, Plant and Equipment:                    |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | 3,940   |   |                          | $ | 2,593   |                  |  | $ | 7,071            |   |  | $ | 6,003   |  
|Converted Products                                             |  |                            | 710     |   |                          |   | 1,254   |                  |  |   | 1,030            |   |  |   | 3,009   |  
|International                                                  |  |                            | 185     |   |                          |   | 76      |                  |  |   | 629              |   |  |   | 186     |  
|Corporate                                                      |  |                            | 129     |   |                          |   | 32      |                  |  |   | 140              |   |  |   | 47      |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total:                                                         |  | $                          | 4,964   |   |                          | $ | 3,955   |                  |  | $ | 8,870            |   |  | $ | 9,245   |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|                                                               |  |                            |         |  
|                                                               |  |                            |         |   |                          |   |         | October 31, 2005 |  |   | April 30, 2005   |  
|Identifiable Assets:                                           |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  |                            |         |   |                          |   |         |                  |  | $ | 331,776          |   |  | $ | 332,259 |  
|Converted Products                                             |  |                            |         |   |                          |   |         |                  |  |   | 97,206           |   |  |   | 97,479  |  
|International                                                  |  |                            |         |   |                          |   |         |                  |  |   | 127,364          |   |  |   | 137,606 |  
|Corporate                                                      |  |                            |         |   |                          |   |         |                  |  |   | 34,704           |   |  |   | 32,740  |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total:                                                         |  |                            |         |   |                          |   |         |                  |  | $ | 591,050          |   |  | $ | 600,084 |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Geographic Regions



Sales to unaffiliated customers (based on country of origin) and long-lived assets by geographic region are as follows:



|                                                            |  |                  |         |                 |   |        
|----------------------------------------------------------- |  | ---------------- | ------- | --------------- | - | -------
|                                                            |  | October 31,2005  |         | October 31,2004
|Sales to Unaffiliated Customers                             |  |                  |         |                 |   |        
|United States                                               |  | $                | 361,024 |                 | $ | 355,874
|Europe                                                      |  |                  | 76,125  |                 |   | 72,740 
|Canada                                                      |  |                  | 5,192   |                 |   | 4,510  
|                                                            |  |                  |         |                 |   |        
|Total                                                       |  | $                | 442,341 |                 | $ | 433,124
|                                                            |  |                  |         |                 |   |        
|                                                            |  |                 
|                                                            |  | October 31, 2005 |         | April 30,2005  
|Net Property, Plant and Equipment, Goodwill and Intangibles |  |                  |         |                 |   |        
|United States                                               |  | $                | 294,468 |                 | $ | 301,979
|Europe                                                      |  |                  | 54,229  |                 |   | 59,452 
|Canada                                                      |  |                  | 7,204   |                 |   | 6,793  
|                                                            |  |                  |         |                 |   |        
|Total                                                       |  | $                | 355,901 |                 | $ | 368,224
|                                                            |  |                  |         |                 |   |        



|9. | RELATED PARTY TRANSACTIONS
|-- | --------------------------



The Company leases its corporate headquarters located at 20 Jackson Drive, Cranford, New Jersey from Jackson Drive Corp., a corporation owned by two
Directors of the Company. For each of the six-month periods ended October 31, 2005 and 2004, the amount paid to that company under the lease was $174.



On August 10, 2005, the Company completed the purchase from its former Chairman and current Director of the 198,000 shares of the Companys
common stock owned by him. On July 5, 2005, this director had exercised his right to put the subject stock to the Company pursuant to a May 1, 1980 agreement, as amended. The aggregate purchase price for the stock was $7,875,
which amount is to be paid pursuant to a Subordinated Installment Promissory Note (the Note), with $788 plus accrued interest paid on August 18, 2005 and the balance being due in 40 equal and consecutive quarterly installments, with
interest, commencing on October 1, 2005, and continuing thereafter on the first day of the months of January, April, July and October. Interest will accrue on the outstanding principal balance of the Note at the prime rate of interest as in
effect from time to time. The obligation under the Note is classified as Subordinated Debt on the consolidated balance sheets.



The paperboard mills in our International segment purchased approximately $4,379 and $4,934 of raw material from affiliated entities accounted for as
equity method investments during the six-month periods ended October 31, 2005 and 2004, respectively.



The International segment also recorded sales of approximately $1,064 and $830 to two affiliated entities accounted for as equity method investments
during the six-month periods ended October 31, 2005 and 2004, respectively.



The Company paid approximately $2,533 and $2,506 to Integrated Paper Recyclers, LLC, an affiliated entity accounted for as an equity method investment, primarily for hauling services of recyclable material during the
six-month periods ended October 31, 2005 and 2004, respectively.



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Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations



The following discussion of operations and financial condition of The Newark Group should be read in conjunction with the financial statements and notes thereto included
in this Quarterly Report on Form 10-Q and on the Annual Report on Form 10-K dated April 30, 2005.



This report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by use of terms
such as may, will, should, plan, expect, anticipate, estimate, and similar words, although some forward-looking statements are expressed differently. Forward-looking
statements represent our managements judgment regarding future events. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be
correct. All statements other than statements of historical fact included in this report regarding our financial position, business strategy, products, plans, or objectives for future operations are forward-looking statements. We cannot guarantee
the accuracy of the forward-looking statements, and you should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including the statements under Risk
Factors and Critical Accounting Policies detailed in our Annual Report on Form 10-K for the year ended April 30, 2005. We undertake no obligation to publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.



Overview



The Newark Group is an integrated producer of 100% recycled paperboard and paperboard products with leading market positions in North America and Europe. We primarily manufacture folding carton (predominately
uncoated), core board and industrial converting grades of paperboard, and are among the largest producers of these grades in North America. We are also a leading producer of laminated products and graphicboard in North America and Europe as well as
a major producer of tubes, cores and allied products in North America. We supply our products to the paper, packaging, stationery, book printing, construction, plastic film, furniture and game industries. In addition, we are engaged in the
collection, trading and processing of recovered paper in North America and believe that we are among the five largest participants in this industry. No single customer accounted for more than 2.8% of our sales in our fiscal year ended April 30,
2005.



We operate in three segmentsPaperboard, Converted Products and
Internationaland our products can be categorized into five product lines: (i) recovered paper; (ii) 100% recycled paperboard; (iii) laminated products and graphicboard; (iv) tube, core and allied products; and
(v) solidboard packaging products. In our Paperboard segment we handle recovered paper and manufacture grades of recycled paperboard used in the production of folding cartons, rigid boxes, tubes, cores and other products. In our Converted
Products segment we manufacture tubes, cores and allied products, solidboard packaging and products used for book covers, game boards, jigsaw puzzles and loose-leaf binders. In our International segment, which consists of a vertically integrated
network of facilities in Europe, we manufacture 100% recycled paperboard, laminated products and graphicboard and solidboard packaging, primarily for the European market.



For the fiscal year ended April 30, 2005, the Paperboard segment represented 52% of our total sales, the Converted Products segment
represented 30% of our total sales and the International segment represented 18% of our total sales.



Our fiscal year ends April 30. All references to years, quarters or other periods in this section refer to fiscal years, quarters or periods whether or not specifically indicated. Most percentages and dollar
amounts have been rounded to aid presentation. As a result, all such figures are approximations.



Our operating results are primarily influenced by sales price and volume, mill capacity utilization, recovered paper cost, energy cost and freight costs. Our sales volumes are generally driven by overall economic
conditions and more specifically by consumer non-durable goods consumption.



Sales volumes are also impacted by the highly competitive environment in which we operate. This competition, combined with the business slowdown that began during fiscal year 2000, resulted in decreased industry capacity utilization rates,
which for us hit a low of 89% in fiscal 2002. As a result, we initiated a mill capacity rationalization program which led to the closures of five paperboard mills between October 2001 and July 2003. Combined, these five closures resulted in a
capacity reduction of approximately 300,000 tons per year, which led to approximately $30 million per year of overhead savings and loss avoidance. As a result of these closures, and a shift of business to other mills, our paperboard mills
capacity utilization rates were 95% for the six-month period ended October 31, 2005, despite our loss of approximately four machine days of production in our southeastern US mill during a two-day shutdown in the quarter ended July 31, 2005
due to Hurricane Dennis and the loss of another sixteen machine days at the same mill during the quarter ended October 31, 2005 due to Hurricane Katrina. Additionally, in September 2005, we announced the closure of our Natick,



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



MA mill. This will reduce overall production capacity by 48,000 tons per annum, though we expect to transfer nearly all tons currently
produced at Natick to our other mills. This closure is expected to result in approximately $3.0 million per year in fixed-cost savings.



Recovered paper is our most significant raw material. Historically, the cost of recovered paper has fluctuated significantly due to market and industry conditions. For
example, our average North American recovered paper cost per ton of paperboard produced declined from $101 per ton in fiscal 2001 to $75 per ton in fiscal 2002, a decrease of 26%, before increasing by 35% to $102 per ton in fiscal 2003. Fiscal 2004
saw a slight reduction of 3% to $99 per ton though recovered paper prices increased by $17 per ton, or 17%, to $116 per ton in fiscal 2005. For the six-month period ended October 31, 2005, recovered paper prices decreased $3 per ton from the
average fiscal 2005 prices, to $113 per ton, and $3 per ton when compared to the second quarter of fiscal 2005.



Energy, which consists of electricity and fuel used to generate steam for use in the paper making process, is also a significant manufacturing cost for us. The average
energy cost in our North American mill system has increased substantially in recent years, averaging approximately $73, $68 and $58 per ton of paperboard produced in fiscal years 2005, 2004 and 2003, respectively, as compared to $43 per ton in 2000.
This increase primarily is due to overall increases in natural gas, fuel oil and electricity prices. We expect that prices may continue to rise in response to conditions in the Middle East, natural gas shortages in the United States and other
economic conditions and the related uncertainties regarding the outcome and implications of such events. Our operating margins are adversely affected when energy costs increase, notwithstanding that we attempt to manage fluctuations in our energy
costs by utilizing financial hedges and purchasing forward contracts for a portion of our energy needs. Despite our hedging efforts, our average energy cost per ton for the current fiscal quarter ended October 31, 2005 was $83, an increase of
31% when compared to the same fiscal quarter of 2005. During the second quarter ended October 31, 2005, in an effort to offset the increased fuel costs, we announced a fuel surcharge on our finished products across our North American segments
that will be in place until a certain natural gas indexed price hits a predetermined level. The benefits of this surcharge only began to be realized during the last month of the quarter, and as a result, the full impact on our results of operations
has not yet been realized.



We attempt to raise our selling prices in response
to increases in raw material and energy costs. However, we are not always able to pass the full amount of these costs through to our customers on a timely basis, if at all, and as a result, cannot maintain our operating margins in the face of
meaningful cost increases. We experience a reduction in margin during periods of recovered paper cost increases due to customary time lags in implementing our price increases to our customers. Even if we are able to recover future cost increases,
our operating margins and results of operations still will be materially and adversely affected by time delays in the implementation of price increases. Price increases for sales from our Paperboard and Converted Products segments were announced
commencing in April 2004, with a second price increase announced in September 2004.



Our Results of Operations



The following table sets out our
segmented financial and operating information for the periods indicated. All prior periods have been restated to reflect the Companys change in inventory valuation (see Note 2 to the accompanying consolidated financial statements).



|                   |  |                                |         |                              |   |         |  |               |         |  |   |        
|------------------ |  | ------------------------------ | ------- | ---------------------------- | - | ------- |  | ------------- | ------- |  | - | -------
|                   |  | Three Months Ended October 31, |         | Six Months Ended October 31,
|(in thousands)     |  | 2005                           |         | 2004                         |   | 2005    |  | 2004         
|                   |  |                                |         | (As Restated)                |   |         |  | (As Restated)
|Net Sales          |  |                                |         |                              |   |         |  |               |         |  |   |        
|Paperboard         |  | $                              | 111,955 |                              | $ | 113,563 |  | $             | 228,081 |  | $ | 224,787
|Converted Products |  |                                | 69,002  |                              |   | 67,388  |  |               | 138,135 |  |   | 135,597
|International      |  |                                | 36,941  |                              |   | 36,114  |  |               | 76,125  |  |   | 72,740 
|                   |  |                                |         |                              |   |         |  |               |         |  |   |        
|Total              |  | $                              | 217,898 |                              | $ | 217,065 |  | $             | 442,341 |  | $ | 433,124
|                   |  |                                |         |                              |   |         |  |               |         |  |   |        
|Cost of Sales      |  |                                |         |                              |   |         |  |               |         |  |   |        
|Paperboard         |  | $                              | 98,678  |                              | $ | 96,368  |  | $             | 200,533 |  | $ | 191,202
|Converted Products |  |                                | 64,571  |                              |   | 64,106  |  |               | 129,739 |  |   | 128,006
|International      |  |                                | 30,632  |                              |   | 28,089  |  |               | 62,740  |  |   | 57,031 
|Corporate          |  |                                |        |                              |   | 471     |  |               |        |  |   | 239    
|                   |  |                                |         |                              |   |         |  |               |         |  |   |        
|Total              |  | $                              | 193,881 |                              | $ | 189,034 |  | $             | 393,012 |  | $ | 376,478
|                   |  |                                |         |                              |   |         |  |               |         |  |   |        



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|                        |  |                               |        |   |                             |   |        |      |  |   |               |   |  |   |        |  
|----------------------- |  | ----------------------------- | ------ | - | --------------------------- | - | ------ | ---- |  | - | ------------- | - |  | - | ------ | -
|                        |  | Three Months Ended October 31 |        |   | Six Months Ended October 31 |  
|                        |  | 2005                          |        |   | 2004                        |   |        | 2005 |  |   | 2004          |  
|                        |  |                               |        |   | (As Restated)               |   |        |      |  |   | (As Restated) |  
|SG&A                    |  |                               |        |   |                             |   |        |      |  |   |               |   |  |   |        |  
|Paperboard              |  | $                             | 8,246  |   |                             | $ | 8,511  |      |  | $ | 16,231        |   |  | $ | 16,824 |  
|Converted Products      |  |                               | 5,033  |   |                             |   | 5,370  |      |  |   | 10,091        |   |  |   | 10,592 |  
|International           |  |                               | 2,536  |   |                             |   | 3,243  |      |  |   | 5,761         |   |  |   | 6,985  |  
|Corporate               |  |                               | 4,049  |   |                             |   | 3,512  |      |  |   | 7,920         |   |  |   | 7,054  |  
|                        |  |                               |        |   |                             |   |        |      |  |   |               |   |  |   |        |  
|Total                   |  | $                             | 19,864 |   |                             | $ | 20,636 |      |  | $ | 40,003        |   |  | $ | 41,455 |  
|                        |  |                               |        |   |                             |   |        |      |  |   |               |   |  |   |        |  
|Restructuring           |  |                               |        |   |                             |   |        |      |  |   |               |   |  |   |        |  
|Paperboard              |  | $                             | 362    |   |                             | $ | (60    | )    |  | $ | 497           |   |  | $ | 173    |  
|Converted Products      |  |                               | 55     |   |                             |   | 188    |      |  |   | 586           |   |  |   | 905    |  
|Corporate               |  |                               |       |   |                             |   |       |      |  |   | 166           |   |  |   |       |  
|                        |  |                               |        |   |                             |   |        |      |  |   |               |   |  |   |        |  
|Total                   |  | $                             | 417    |   |                             | $ | 128    |      |  | $ | 1,249         |   |  | $ | 1,078  |  
|                        |  |                               |        |   |                             |   |        |      |  |   |               |   |  |   |        |  
|Operating Income (Loss) |  |                               |        |   |                             |   |        |      |  |   |               |   |  |   |        |  
|Paperboard              |  | $                             | 4,668  |   |                             | $ | 8,745  |      |  | $ | 10,820        |   |  | $ | 16,588 |  
|Converted Products      |  |                               | (657   | ) |                             |   | (2,276 | )    |  |   | (2,281        | ) |  |   | (3,906 | )
|International           |  |                               | 3,773  |   |                             |   | 4,782  |      |  |   | 7,624         |   |  |   | 8,724  |  
|Corporate               |  |                               | (4,048 | ) |                             |   | (3,984 | )    |  |   | (8,086        | ) |  |   | (7,293 | )
|                        |  |                               |        |   |                             |   |        |      |  |   |               |   |  |   |        |  
|Total                   |  | $                             | 3,736  |   |                             | $ | 7,267  |      |  | $ | 8,077         |   |  | $ | 14,113 |  
|                        |  |                               |        |   |                             |   |        |      |  |   |               |   |  |   |        |  



The following table sets forth certain
items related to our consolidated statements of operations as a percentage of net sales for the periods indicated. A detailed discussion of the material changes in our operating results is set forth below.



|                                             |  |                                |   |  |                              |   |  |       |   |  |       |  
|-------------------------------------------- |  | ------------------------------ | - |  | ---------------------------- | - |  | ----- | - |  | ----- | -
|                                             |  | Three Months ended October 31, |   |  | Six Months ended October 31, |  
|                                             |  | 2005                           |   |  | 2004                         |   |  | 2005  |   |  | 2004  |  
|Net sales                                    |  | 100.0                          | % |  | 100.0                        | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                                |  | 89.0                           |   |  | 87.1                         |   |  | 88.8  |   |  | 86.9  |  
|Selling, general and administration expenses |  | 9.1                            |   |  | 9.5                          |   |  | 9.0   |   |  | 9.6   |  
|Restructuring and impairments                |  | 0.2                            |   |  | 0.1                          |   |  | 0.3   |   |  | 0.2   |  
|Operating income                             |  | 1.7                            |   |  | 3.3                          |   |  | 1.8   |   |  | 3.3   |  
|Interest expense                             |  | 3.0                            |   |  | 2.9                          |   |  | 2.9   |   |  | 2.9   |  
|Income tax expense                           |  | (0.6                           | ) |  | 0.2                          |   |  | (0.4  | ) |  | 0.3   |  
|Net earnings                                 |  | (0.6                           | ) |  | 0.6                          |   |  | (0.6  | ) |  | 0.5   |  



Results of Operations



Six Months Ended October 31, 2005 Compared to Six Months Ended
October 31, 2004



Overview



Net Sales. Net sales for the six months ended October 31, 2005 were $442.3
million, 2% greater than $433.1 million in the same six-month period of the prior year. This increase is predominantly the result of the realization of previously announced price increases in our North American segments, a 17% increase in foreign
converting sales volume and a 1% increase in foreign converting sales price.



Cost of Sales. Cost of sales for the six months ended October 31, 2005 increased 4% to $393.0 from $376.5 million during the six months ended October 31, 2004. This increase was driven by increases in both energy and
freight costs, which increased 21% and 11%, respectively, or approximately $8.2 million and $5.0 million, respectively.



SG&A.SG&A decreased 4% in the six months ended October 31, 2005 to $40.0 million as compared to $41.5 million in the six months ended
October 31, 2004. This improvement resulted from the recovery of debts that had been written off in prior periods in our International segment and a lower provision for bad debts in our North American segments, as well as our continued focus on
cost reduction initiatives.



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Restructuring and Impairments. We recorded restructuring charges of $1.2 million during the six-month period ended October 31,
2005 as compared to $1.1 million during the six-month period ended October 31, 2004. Current year expenses include on-going costs related to previously shut down operations in our Converted Products and Paperboard segments, costs for the
pending shut-down of our Natick, MA mill, and a loss on the sale of a previously restructured facility sold in June 2005. Included in the charges for the six months ended October 31, 2005 are non-cash impairment charges of $0.1 million related
to our Natick, MA mill and $0.3 million for the impairment of a facility in our Converted Products segment.



Operating Income. Operating income was 43% lower during the six-month period ended October 31, 2005 when compared to the six-month period ended October 31, 2004, or $8.1 million compared to $14.1
million, respectively. This decrease is mainly the result of the increased energy costs and freight costs.



Paperboard



Net sales in the
Paperboard segment increased by $3.3 million, or 2%, to $228.1 million for the six months ended October 31, 2005 compared to $224.8 million in the six months ended October 31, 2004. This increase resulted primarily from the realization of
previously announced price increases on our paperboard products, as well as a 1% increase in the volume of recovered paper we sell to third parties offset by a 6% decrease in the per ton price of such recovered paper.



Overall cost of sales increased $9.3 million, or 5%, from $191.2 million in the six months
ended October 31, 2004 to $200.5 million in the current six-month period. Energy and freight cost increases are primarily responsible for the growth in cost of sales, increasing 22%, or $7.7 million, and 12%, or $4.2 million, respectively, when
comparing the six months ended October 31, 2005 and 2004, respectively. These increases were offset by a 1% decline in the overall cost of recovered paper purchased.



Restructuring costs increased $0.3 million to $0.5 million in the six-month period ended October 31, 2005 from $0.2 million during the
same period of 2004. The charges incurred during the current fiscal year represent continued costs to exit previously shut down locations as well as new charges for the announced upcoming closure of the Natick, MA plant, and include $0.1 million of
non-cash impairment of fixed assets.



Our mill utilization rates decreased to
95% during the six months ended October 31, 2005 as compared to 96% in the six months ended October 31, 2004, as result of our Mobile, AL mill losing 20 machine days as a result of Hurricanes Dennis and Katrina.



SG&A decreased 4% from $16.8 million in the six-month period ended October 31, 2004
to $16.2 million in the same period of 2005, primarily the result of a lower provision for bad debts and overall cost reduction initiatives.



Operating Income for the Paperboard segment decreased 35%, from $16.6 million in the period ended October 31, 2004 to $10.8 million in the period ended
October 31, 2005, primarily due to the increased energy and freight costs.



Converted Products



Net sales in the Converted Products
segment increased $2.5 million, or 2%, to $138.1 million for the six-month period ended October 31, 2005 compared to $135.6 million for the six-month period ended October 31, 2004. This increase is mainly due to a 5% increase in sales
price resulting from previously announced price increases on our converted products offset by a 4% decrease in volume.



Cost of sales increased $1.7 million, or 1%, in the six-month period ended October 31, 2005 when compared to the six-month period ended October 31, 2004. This
increase is the result of higher costs of chemicals and packaging supplies, as well as five additional months of operation at our NSP start-up facility which began production in October 2004.



Restructuring costs were $0.6 million in the six months ended October 31, 2005, a $0.3
million decrease from $0.9 million in the six months ended October 31, 2004. Current year charges reflect continued costs to exit restructured facilities. Prior year costs included charges for the closing of two plants which were closed in the
six months ended October 31, 2004. Included in total restructuring costs in the six months ended October 31, 2005 and 2004 are non-cash impairment charges of $0.4 million and $0.1 million, respectively.



SG&A decreased 5% from $10.6 million in the six months ended October 31, 2004 to
$10.1 million in the six months ended October 31, 2005 due primarily to the continuation of cost reduction initiatives.



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Operating loss improved $1.6 million from a loss of $3.9 million in the six months ended October 31, 2004 to a loss of $2.3 million in
the six months ended October 31, 2005. This improvement is the result of the increased sales price realization and cost reduction initiatives.



International



Net sales in the International segment increased by $3.4 million, or 5%, to $76.1 million in the six months ended October 31, 2005 compared to $72.7 million in the six months ended October 31, 2004 due to a
17% increase in converting volumes and a 1% increase in converting sales price (excluding the effects of foreign currency exchange rates), which more than offset a 1% mill volume decrease.



Cost of sales in the International segment was $62.7 million the six months ended
October 31, 2005 as compared to $57.0 million for the six months ended October 31, 2004, an increase of $5.7 million, or 10%. Excluding the effects of foreign currency exchange rates, this increase is the result of an 8% overall increase
in freight costs and an 18% increase in energy costs. Approximately 50% of the energy cost increase is attributable to a malfunction of the turbine at San Andrés and is in the process of being repaired.



SG&A in the International segment decreased 18%, or $1.2 million, in the six months ended
October 31, 2005 when compared to the six months ended October 31, 2004. This improvement is primarily the result of the recovery of bad debts that had been written off in prior periods.



Operating income for the International segment was $7.6 million in the six months ended
October 31, 2005, 13% lower than the $8.7 million for the six months ended October 31, 2004. This decrease in operating income is primarily the result of the increased energy and freight costs offset by converting volume and overall sales
price increases.



Corporate



Unallocated corporate expense increased by $0.8 million to $8.1 million in the first six
months of fiscal 2006. This increase is primarily the result of increased professional fees.



Other (Expense)/Income



Interest
expense increased from $12.4 million in the six months ended October 31, 2004 to $12.9 million in the six months ended October 31, 2005, primarily due to higher interest rates on our variable rate debt. Average outstanding borrowings
decreased from $262.7 million during the period ended October 31, 2004 to $259.9 million during the period ended October 31, 2005.



Excluding Interest expense, Other income - net decreased from income of $1.4 million in the six months ended October 31, 2005 to income of $0.6 million in the six
months ended October 31, 2005. This decrease in Other Income is primarily due to unfavorable swings in foreign currency exchange rates.



Income Tax (Benefit) Expense



In determining our consolidated tax rate, we compute an annual effective rate for each taxable jurisdiction.



During the six months ended October 31, 2005, we recorded a net increase to our
valuation allowance of $292. An increase of $582, related to the expected non-realization of certain net operating losses in the State of Ohio, was recorded along with an additional increase of $743 for net operating losses which are expected to
expire unused. These increases were offset by non-expiring state tax credits of $1,033 which, based on initial tax planning strategies, are expected to be realized. However, we continually evaluate and modify strategies and the ultimate form of
utilization of these tax credits may change.



Also during this period, we
repatriated approximately $612 in dividends from our European subsidiary. Taxes for this repatriation were provided for at April 30, 2005 and this transaction reduced our deferred tax asset for the net operating loss by approximately $216.



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Net Income



In summary, our net income, which decreased from income of $2.0 million in the six months ended October 31, 2004 to a net loss of $2.6 million in the six months
ended October 31, 2005, was adversely affected by the continued increase in worldwide energy and freight costs which more than offset the realization of previously announced price increases.



Three Months Ended October 31, 2005 Compared to Three Months Ended October 31,
2004



Overview



Net Sales. Net sales for the quarter ended October 31, 2005 were $217.9 million,
$0.8 million greater than $217.1 million in the quarter ended October 31, 2004. This increase is predominantly the result of the realization of prior announced price increases in our North American segments and an 18% increase in foreign
converting sales volume.



Cost of Sales. Cost of sales for the quarter
ended October 31, 2005 increased 3% to $193.9 million from $189.0 million during the quarter ended October 31, 2004. This increase was driven by increases in both energy and freight costs, which increased 32% and 10%, or $5.9 million and
$2.4 million, respectively, which more than offset a 9% decline in overall recovered paper costs.



SG&A.SG&A decreased 4% in the quarter ended October 31, 2005 to $19.9 million as compared to $20.6 million in the quarter ended October 31, 2004. This improvement resulted from the collection
of certain debts that had been deemed uncollectible in our International segment and a lower provision for bad debts in our North American segments, as well as our continued focus on cost containment.



Restructuring and Impairments. We recorded restructuring charges of $0.4 million
during the quarter ended October 31, 2005 as compared to $0.1 million during the quarter ended October 31, 2004. Current quarter expenses include on-going costs related to previously shut down operations in our Converted Products and
Paperboard segments as well as new charges for the announced upcoming closure of the Natick, MA plant. Current restructuring costs include non-cash impairment on the assets of the Natick, MA mill of $0.1 million.



Operating Income. Operating income was 49% lower during the quarter ended
October 31, 2005 as compared to the quarter ended October 31, 2004. Current quarter Operating income was $3.7 million compared to $7.3 in the same quarter last year. This decrease is mainly the result of the increased energy and freight
costs which more than offset the realization of previously announced price increases and the reduction in the cost of recovered paper.



Paperboard



Net sales in the Paperboard segment decreased 1%, or $1.6 million, in the quarter ended October 31, 2005 when compared to the quarter ended October 31, 2004, the result of a 1% decrease in volume.



Overall cost of sales increased $2.3 million, or 2%, from $96.4 million in the
quarter ended October 31, 2004 to $98.7 million in the quarter ended October 31, 2005. Energy and freight cost escalation are primarily responsible for the growth in cost of sales, 30% or $5.2 million, and 11% or $1.9 million,
respectively, when compared to the quarter ended October 31, 2004. These increases were offset by a 9% decline in the overall cost of recovered paper costs.



Restructuring costs were $0.4 million in the quarter ended October 31, 2005 compared to ($0.1) million during the quarter ended
October 31, 2004. The charges incurred during the current quarter represent continued costs to exit previously shut down locations as well as new charges for the announced upcoming closure of the Natick, MA plant, and include $0.1 million of
non-cash impairment on fixed assets.



Our mill utilization rates declined to
94% during the quarter ended October 31, 2005 as compared to 95% in the quarter ended October 31, 2004. This decrease is the result of the hurricanes that plagued the Gulf Coast this three-month period causing a loss of 16 machine days at
our Mobile, AL mill.



SG&A decreased 3% from $8.5 million in the quarter
ended October 31, 2004 to $8.2 million in the quarter ended October 31, 2005 primarily due to a decrease in the provision for bad debts.



Operating income for the Paperboard segment decreased 47%, from $8.7 million to $4.7 million, in the quarters ended October 31, 2004 and 2005, respectively,
primarily due to the increased energy and freight costs referred to above which was partially offset by the decrease in overall recovered paper costs.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Converted Products



Net sales in the Converted Products segment were 2%, or $1.6 million, higher when comparing the quarter ended October 31, 2005 to the quarter ended October 31,
2004. This improvement is mainly due to a 6% increase in sales price for our converted products, realized from previously announced price increases, offset by a 5% decrease in volume.



Cost of sales increased 1%, or $0.5 million, to $64.6 million, when comparing the quarters ended October 31, 2005 and 2004. This
increase is partly the result of two additional months of operation at our NSP start-up facility which began production in October 2004, as well as increased costs of chemicals and packaging supplies.



Restructuring costs were $0.1 million in the quarter ended October 31, 2005, a $0.1
million decrease from $0.2 million in the quarter ended October 31, 2004. Expenses in each of these quarters represent on-going charges relating to prior closures.



SG&A decreased 6% from $5.4 million in the quarter ended October 31, 2004 to $5.0 million in the quarter ended October 31,
2005 due primarily to cost reduction initiatives.



Operating loss for the
Converted Products segment improved $1.6 million when comparing the quarters ended October 31, 2005 and 2004, respectively, from $2.3 million to $0.7 million. This improvement is the result of the realization of previously announced price
increases as well as continued cost reduction initiatives.



International



Net sales in the International segment improved 2%, or $0.8 million,
to $36.9 million in the quarter ended October 31, 2005 compared to $36.1 million in the same quarter last year primarily due to an 18% increase in converting volumes. The converting volume increase was offset by a 3% decrease in converting
sales price, primarily due to product mix.



Cost of sales in the International
segment was $30.6 million the quarter ended October 31, 2005 as compared to $28.1 million in the quarter ended October 31, 2004, an increase of $2.5 million, or 9%. This increase is the result of a 22% increase in energy costs, 60% of
which is attributable to the turbine malfunction at San Andrés, as well as 21% and 14% increases in board and freight costs, respectively.



SG&A in the International segment showed a $0.7 million, or 22%, improvement in the quarter ended October 31, 2005 when compared to the quarter ended
October 31, 2004, or $2.5 million compared to $3.2 million, respectively. This improvement is primarily the result of the recovery of bad debts that had been written off in prior periods.



Operating income for the International segment was $3.8 million in the quarter ended
October 31, 2005, 21% lower than the $4.8 million reported in the quarter ended October 31, 2004. This decrease in operating income is the result of the increased energy, freight and board costs discussed above.



Corporate



Unallocated corporate expense remained constant at $4.0 million for each of the quarters ended October 31, 2005 and 2004.



Other (Expense)/Income



Interest expense increased from $6.2 million in the quarter ended October 31, 2004 to
$6.6 million in the quarter ended October 31, 2005, primarily due to higher interest rates on our variable rate debt. Average outstanding borrowings decreased $3.2 million, from $265.9 million to $262.7 million.



Excluding Interest expense, Other income - net decreased from income of $0.5 million in the
quarter ended October 31, 2004 to income of $0.4 million in the quarter ended October 31, 2005. This decrease in Other Income is primarily due to unfavorable swings in foreign currency exchange rates.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Income Tax (Benefit) Expense



In determining our consolidated tax rate, we compute an annual effective rate for each taxable jurisdiction.



During the quarter ended October 31, 2005, we recorded a $0.3 million net reduction to
our valuation allowance. An increase in the allowance of $0.7 million, for net operating losses expected to expire unused, was offset by non-expiring state tax credits of $1.0 million which, based on initial tax planning strategies, are expected to
be realized. However, we continually evaluate and modify strategies and the ultimate form of utilization of these tax credits may change.



Additionally during this quarter, we repatriated approximately $0.6 million as dividends from our European subsidiary. Taxes for this repatriation were provided for at
April 30, 2005 and this transaction reduced our deferred tax asset for the net operating loss by approximately $0.2 million.



Net Income



In summary, our net income decreased from income of $1.2 million in the quarter ended October 31, 2004 to a net loss of $1.2 million in the quarter ended October 31, 2005. Net income was adversely affected
by the continued increase in energy and freight costs.



Liquidity
Requirements



Operations. Our current cash requirements
for operations consist primarily of expenditures to maintain our mills and plants, meet operating lease obligations, meet obligations to our lenders, and finance working capital requirements and other operating activities. We fund our current cash
requirements with cash provided by operations and borrowings under our senior credit facility. We believe that these sources are sufficient to meet the current and anticipated cash requirements of our operations.



As discussed in our Annual Report on Form 10-K for the year ended April 30, 2005, we
have provided income taxes of $2.3 million for the repatriation of $6.4 million of foreign earnings in the form of dividends. During the six months ended October 31, 2005, we repatriated a total of $7.3 million, only $0.6 million of which was
in the form of a dividend and therefore taxable in the United States. This transaction reduced our deferred tax asset for the net operating loss by approximately $0.2 million.



Capital Expenditures. Our total capital expenditures were $8.9 million and $9.2 million in the first six months of fiscal 2006
and 2005, respectively of which $0.4 million and $0.9 million, respectively, were spent on the Fitchburg mill. Through October 31, 2005, we have made capital expenditures of approximately $177.2 million on the Fitchburg mill. We expect our
total fiscal 2006 capital expenditures to be under $25.0 million.



Borrowings



At October 31, 2005, total debt
(consisting of current maturities of debt, our senior credit facility, and other long-term debt, as reported on our consolidated balance sheets) was as follows (in millions):



|                                         |  |                  |      
|---------------------------------------- |  | ---------------- | -----
|                                         |  | October 31, 2005
|Senior revolving credit facility(1)      |  | $                | 7.8  
|93/4%
Senior Subordinated Notes due 2014 |  |                  | 175.0
|Industrial Revenue Bonds                 |  |                  | 69.3 
|Other(2)                                 |  |                  | 10.4 
|                                         |  |                  |      
|Total debt                               |  | $                | 262.5
|                                         |  |                  |      

---

|(1) | Excludes letters of credit issued to enhance security for the IRBs and workers compensation claims.
|--- | ----------------------------------------------------------------------------------------------------

|(2) | Pursuant to the July 5, 2005 put of Company common stock to the Company by its former Chairman and current Director (see Note 9 to the accompanying consolidated
financial statements), the Company issued a subordinated note on August 10, 2005 for $7.9 million to the former Chairman in exchange for the 198,000 shares of Company common stock owned by him. The note bears interest at the prime rate in
effect from time to time, requires quarterly principal and interest payments and is due in July 2015. As of October 31, 2005, the remaining balance on the note is $6.9 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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In March 2004, we entered into a three-year, senior secured revolving credit facility with Wachovia Bank, National Association, as Agent.
The facility is in the aggregate principal amount of $150.0 million, with up to $95.0 million available for the issuance of letters of credit. Letters of credit are issued, in part, as security for our industrial revenue bonds. As of
October 31, 2005, we had approximately $82.8 million of letters of credit outstanding to secure our industrial revenue bonds and liability insurance claims and $7.8 million of other borrowings outstanding under the facility, leaving us with
availability of approximately $59.4 million under the revolver.



Our senior
secured revolving credit facility requires that we satisfy certain financial covenants, as defined in the credit facility agreement. These covenants consist of an interest coverage test, a $30.0 million maximum level of annual capital expenditures
and certain leverage ratios. As of October 31, 2005, we were in compliance with all financial covenants.



Effective May 1, 2006, pursuant to the senior secured revolving credit facility, our current interest coverage test will increase from the ratio of 2.0:1 to a ratio of 2.25:1. This will require, on each
measurement date, that our Adjusted EBITDA, as defined in the credit facility agreement, be greater than 2.25 times our cash interest expense. At October 31, 2005, our actual interest coverage ratio was 2.1:1.



In March 2004, we completed an offering of $175.0 million of 9.75% senior subordinated notes
with a maturity date of March 12, 2014. We pay interest semi-annually on March 15 and September 15 of each year. We cannot redeem the Notes before March 15, 2009, except as described below. On or after that date, we may redeem
them at specified prices. However, on or before March 15, 2007, we may redeem up to 35% of the original principal amount of the Notes at 109.75% of their face amount, plus accrued interest, with money we raise from certain public equity
offerings. The Notes rank junior in right of payment to all of our existing and future senior debt and equal in right of payment with all of our existing and future senior subordinated debt. The Notes are not guaranteed by any of our subsidiaries,
and therefore, are effectively subordinated to all liabilities of our subsidiaries. If we experience certain changes of control, we must offer to purchase the Notes at 101% of their face amount, plus accrued interest.



We are also parties to a series of cross-currency rate swap transactions with members of our
existing bank group (the 2001 Swaps). The 2001 Swaps have been designated as hedges against the existing inter-company loan to our European subsidiary. At October 31, 2005 the fair value of the 2001 Swaps represented a liability of
$14.7 million.



Additionally, in our effort to manage costs, we have entered
into several energy price hedges. At October 31, 2005 the fair value of these hedges was an asset of $6.3 million.



Aggregate annual principal payments applicable to debt for the next five years and thereafter will be as follows (in millions):



|                      |  |       |      
|--------------------- |  | ----- | -----
|Year Ending April 30, |  | Total
|2006(1)               |  | $     | 1.0  
|2007(2)               |  |       | 12.4 
|2008                  |  |       | 2.9  
|2009                  |  |       | 2.9  
|2010                  |  |       | 3.0  
|Thereafter            |  |       | 240.3

---

|(1) | Represents remaining obligations for the fiscal year ended April 30, 2006.
|--- | --------------------------------------------------------------------------

|(2) | Includes $7.8 million due under revolving credit facility.
|--- | ----------------------------------------------------------



Cash Flow



Net cash provided by operating activities



In the six months ended October 31, 2005 and 2004, we generated cash from operating activities of $11.1 million and $10.5 million, respectively. This $0.6 million increase in cash generated from operations is mainly the result of lower
accounts receivable, which was offset by higher prepaid expense and other receivable balances, as well as decreased earnings resulting from the higher energy and freight costs.



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Net cash used in investing activities



In the six months ended October 31, 2005 and 2004, we used $7.9 million and $9.3 million of cash, respectively, in investing activities. The overall reduction
compared to last year was due primarily to $1.0 million more in proceeds from the sale of property, plant and equipment as well as $0.4 million less of capital expenditures.



Net cash used in financing activities



In the six-month period ended October 31, 2005 we used cash in financing activities of $1.7 million while in the six-month period ended October 31, 2004,
financing activities provided cash of $1.0 million. This increased use of cash is primarily due to the fact that in the current six-month period, we had net repayments of long-term debt of $2.2 million as compared to net borrowings of long-term debt
of $12.6 million in the same period last year. This $14.8 million negative effect on financing cash flows was offset by an $11.0 million decrease in cash overdrafts. Additionally, there were no cash purchases of treasury stock in the six-month
period ended October 31, 2005 as compared to $1.1 million of purchases in the six-month period ended October 31, 2004.



Seasonality



Certain of our products are used by customers in the packaging of food products, primarily fruits and vegetables. Due principally to the seasonal nature of certain of these products, sales of our products to these
customers have varied from quarter to quarter. In addition, poor weather conditions that reduce crop yields of packaged food products and adversely affect customer demand for food containers can adversely affect our revenues and our operating
results. Our overall level of sales and operating profit have historically been lower in our third quarter, ended January 31, due in part to the cyclicality of the demand for our products as well as closures by us and our customers for the
Thanksgiving, Christmas and New Years holidays.



Inflation



Changes in raw material and energy prices have had and continue to
have a material effect on our operations. We do not believe that general economic inflation is a significant determinant of our raw material price increases or that it has a material effect on our operations.



Critical Accounting Policies



Our accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The
following are critical accounting matters which are both very important to the portrayal of our financial condition and results and which require some of managements most difficult, subjective and complex judgments. The accounting for these
matters involves the making of estimates based on current facts, circumstances and assumptions which, in managements judgment, could change in a manner that would materially affect managements future estimates with respect to such
matters and, accordingly, could cause future reported financial condition and results to differ materially from the financial condition and results reported based on managements current estimates. Changes in these estimates are recorded when
better information is known. There have been no material changes in our critical accounting policies during the six-month period ended October 31, 2005.



Pension



Our defined benefit pension plans are accounted for in accordance with SFAS No. 87, Employers Accounting for Pensions. The determination of pension obligations and expense is dependent upon our
selection of certain assumptions, the most significant of which are the expected long-term rate of return on plan assets and the discount rates used to discount plan liabilities. Our assumptions are described in Note 12 to our Annual Report on Form
10-K for the year ended April 30, 2005. The assumption for the long-term rate of return on plan assets is determined based on historical results of the portfolio and managements expectation of the current economic environment. Effective
May 1, 2003, this rate of return was 8.75%. At April 30, 2004, the discount rate was reduced from 6.50% to 6.25% and subsequently reduced to 5.70% on April 30, 2005. A 1.0% change in this discount rate would create an impact to the
statement of operations of approximately $1.0 million. This discount rate is based upon the demographics of the plan participants as well as benchmarking certain indices, e.g. Citigroup High Grade Credit Index as well as Aa- and Aaa-Rated Corporate
Bonds. Pension expense was $6.2 million in 2004, $5.3 million in 2005 and is expected to be $4.8 million in 2006.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Goodwill



Effective May 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. This pronouncement requires us to perform a goodwill
impairment test at least annually. See Note 1 to our Annual Report on Form 10-K for the year ended April 30, 2005 for additional information regarding our goodwill accounting. Our judgments regarding the existence of impairment indicators are
based on a number of factors including market conditions and operational performance of our businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our businesses is impaired.
Evaluating the impairment of goodwill also requires us to estimate future operating results and cash flows, which also require judgment by management. Any resulting impairment loss could have a material adverse effect on our financial condition and
results of operations.



Accounts Receivable



Our policy with respect to trade and notes receivables is to maintain an adequate allowance
or reserve for doubtful accounts for estimated losses from the inability of our customers to make required payments. For specific accounts for which we have information that the customer may be unable to meet its financial obligation, whether or not
a bankruptcy is involved, a provision is recorded at time of occurrence. For all other accounts, percentages are applied to all receivables based up the age of the specific invoices. The older invoices (e.g., all amounts greater than 90 days)
receive a larger percentage of allowance, based upon managements best estimate. Another percentage, based upon managements best estimate, is applied to the remaining receivable balance. A total reserve is calculated in this manner and is
compared to historical experience. If collections were to slow by seven days, there would be an increase in this reserve of $0.2 million. If the financial condition of our customers were to deteriorate and result in an inability for them to make
their payments, additional allowances may be required.



Income Taxes



Pursuant to FAS 109 Accounting for Income Taxes
(FAS 109), the Company provides for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to reverse.



In establishing reserves against net deferred tax assets, the Company assesses recoverability based upon a computation of normalized
earnings and the resultant expected utilization of those net deferred tax assets. Under FAS 109, a valuation allowance is required when it is more likely than not that some portion of the net deferred tax assets will not be realized. Realization is
dependant upon, among other things, the generation of future taxable income and tax management strategies.



Impairment of Long-Lived Assets



Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically evaluate long-lived assets, including property, plant and equipment and definite lived intangible assets whenever
events or changes in conditions may indicate that the carrying value may not be recoverable. Factors that management considers important that could initiate an impairment review include the following:



| |  |  | Significant operating losses;
| | - |  | -----------------------------



| |  |  | Significant declines in demand for a product where an asset is only able to produce that product;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Assets that are idled; and
| | - |  | --------------------------



| |  |  | Assets that are likely to be divested.
| | - |  | --------------------------------------



The impairment review requires management to estimate future undiscounted cash flows associated with an asset or asset group expected to result from the use and eventual
disposition of the asset or asset group. Estimating future cash flows requires management to make judgments regarding future economic conditions, product demand and pricing. Although we believe our estimates are appropriate, significant differences
in the actual performance of the asset or asset group may materially affect our asset values and results of operations. An impairment loss shall be recognized if the carrying amount of the long-lived asset or asset group exceeds fair value as
determined by the sum of the undiscounted cash flows. For additional information, see Note 8 to our Annual Report on Form 10-K for the year ended April 30, 2005.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Item 3. Qualitative And Quantitative Disclosure About Market Risk



We are exposed to market risk from changes in foreign exchange rates, interest rates and the costs of raw materials used in our production processes. To reduce such risks, we selectively use financial instruments.



The following risk management discussion and the estimated amounts generated from the
sensitivity analyses are forward-looking statements of market risks, assuming that certain adverse market conditions occur. Actual results in the future may differ materially from those projected results due to actual developments in the global
financial markets. The analysis used to assess and mitigate risks discussed below should not be considered projections of future events or losses.



Commodity Prices: The markets for our recovered paper products, particularly Old Corrugated Containers (OCC), are highly cyclical and affected by
such factors as global economic conditions, demand for paper, municipal recycling programs, changes in industry production capacity and inventory levels. These factors all have a significant impact on costs and our profitability. We estimate that a
10% increase in the purchase price of recovered paper consumed, with no corresponding increase in the prices of finished products, would have approximately a ($11.5) million effect on our operating income in fiscal 2006, although this would be
slightly mitigated by our sale of recovered paper to third party customers.



Energy prices are also highly cyclical. We estimate that a 10% increase in our energy costs with no corresponding increase in the prices of finished products would have approximately a ($9.5) million effect on our operating income in fiscal
2006. We utilize derivative financial instruments in an attempt to partially hedge our energy price risk on some of our future energy requirements.



Interest Rates/Cross-Currency Interest Rate Swaps: We have cross-currency interest rate swap agreements with two banks as described above. The 2001 Swaps have
been designated as hedges against the existing intercompany loan to our European subsidiary. At October 31, 2005, the fair value of the 2001 Swaps represented a liability of $14.7 million and the results of hedge ineffectiveness related to
these swap agreements during the six months ended October 31, 2005 and 2004 were a gain of $0.2 and $0.3 million, respectively. We do not expect a material amount to be reclassified from other comprehensive income to earnings to offset
recognition of gains and losses on the intercompany loan in the next twelve months.



We could be exposed to future changes in interest rates. Our senior secured revolving credit facility bears interest at a variable rate, as do our industrial revenue bonds. Interest rate changes impact the amount of our interest payments
and, therefore, our future earnings and cash flows, assuming other factors are held constant. We estimate that if interest rates were to increase by 10%, it would have approximately a ($0.3) million effect on net earnings.



We do not otherwise have any involvement with derivative
financial instruments and do not use them for trading purposes.



Item 4. Controls and Procedures.



(a)
Disclosure controls and procedures.



During the first six months of fiscal
2006, our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the
recording, processing, summarization and reporting of information in our reports that we file with the SEC. These disclosure controls and procedures have been designed to ensure that material information relating to us, including our subsidiaries,
is made known to our management, including these officers, by other of our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SECs rules and
forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error
or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Our controls and procedures can only provide reasonable, not absolute,
assurance that the above objectives have been met.



Based on their evaluation
as of October 31, 2005, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are
effective to reasonably ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
SEC rules and forms.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



(b) Changes in internal controls over financial reporting.



The Company continually seeks ways to improve the effectiveness and efficiency of its internal controls over financial reporting, resulting
in frequent process refinement. However, there have been no changes in our internal control over financial reporting that occurred during our last fiscal period to which this Quarterly Report on Form 10-Q relates that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.



PART II OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None



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



Not applicable



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



(a) None



(b) None



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



None



ITEM 5. OTHER INFORMATION



None



ITEM 6. EXHIBITS AND REPORTS



(a) Exhibits:



|     |  |                                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES



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



|                        |  |                        |  |                                             
|----------------------- |  | ---------------------- |  | --------------------------------------------
|                        |  | THE NEWARK GROUP, INC.
|                        |  |                       
|Date: December 14, 2005 |  |                        |  |                                             
|                        |  |                       
|                        |  | By:                    |  | /s/ Robert H. Mullen                        
|                        |  |                        |  | Robert H. Mullen                            
|                        |  |                        |  | Chief Executive Officer, President and      
|                        |  |                        |  | Chairman of the Board                       
|                        |  |                        |  | (Principal Executive Officer)               
|                        |  |                       
|Date: December 14, 2005 |  |                        |  |                                             
|                        |  |                       
|                        |  | By:                    |  | /s/ Joseph E. Byrne                         
|                        |  |                        |  | Joseph E. Byrne                             
|                        |  |                        |  | Chief Financial Officer                     
|                        |  |                        |  | (Principal Financial and Accounting Officer)



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