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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 July 31, 2007

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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  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
July 31, 2007 was 3,600,652.



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##### Table of Contents

INDEX

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|                               |  |                                                                                                             |  |   
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------- |  | --
|                               |  | Page                                                                                                       
|PART I  FINANCIAL INFORMATION |  |                                                                                                            
|                               |  |                                                                                                            
|Item 1.                        |  | Unaudited Condensed Consolidated Financial Statements:                                                      |  |   
|                               |  |                                                                                                            
|                               |  | Condensed Consolidated Balance Sheets as of July 31, 2007 and April 30, 2007                                |  | 1 
|                               |  |                                                                                                            
|                               |  | Condensed Consolidated Statements of Operations for the three months ended July 31, 2007 and 2006           |  | 2 
|                               |  |                                                                                                            
|                               |  | Condensed Consolidated Statements of Cash Flows for the three months ended July 31, 2007 and 2006           |  | 3 
|                               |  |                                                                                                            
|                               |  | Condensed Consolidated Statement of Permanent Stockholders Equity for the three months ended July 31, 2007 |  | 4 
|                               |  |                                                                                                            
|                               |  | Notes to Condensed Consolidated Financial Statements                                                        |  | 5 
|                               |  |                                                                                                            
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 15
|                               |  |                                                                                                            
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 24
|                               |  |                                                                                                            
|Item 4.                        |  | Controls and Procedures                                                                                     |  | 25
|                               | 
|Part II  OTHER INFORMATION    |  |                                                                                                            
|                               |  |                                                                                                            
|Item 1.                        |  | Legal Proceedings                                                                                           |  | 25
|                               |  |                                                                                                            
|Item 1A.                       |  | Risk Factors                                                                                                |  | 26
|                               |  |                                                                                                            
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                 |  | 26
|                               |  |                                                                                                            
|Item 3.                        |  | Defaults Upon Senior Securities                                                                             |  | 26
|                               |  |                                                                                                            
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                         |  | 26
|                               |  |                                                                                                            
|Item 5.                        |  | Other Information                                                                                           |  | 26
|                               |  |                                                                                                            
|Item 6.                        |  | Exhibits                                                                                                    |  | 26
|                               |  |                                                                                                            
|                               |  | SIGNATURES                                                                                                  |  | 27



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



PART I    FINANCIAL INFORMATION



|Item 1. | Unaudited Condensed Consolidated Financial Statements.
|------- | ------------------------------------------------------

CONDENSED CONSOLIDATED BALANCE SHEETSUNAUDITED

AS OF JULY 31, 2007 AND APRIL 30, 2007

(Dollars in Thousands, Except Share Data)

---



|                                                                                                                               |  |               |         |   |                |   |         |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | -------------- | - | ------- | -
|                                                                                                                               |  | July 31, 2007 |         |   | April 30, 2007 |  
|ASSETS                                                                                                                         |  |               |         |   |                |   |         |  
|CURRENT ASSETS:                                                                                                                |  |               |         |   |                |   |         |  
|Cash and cash equivalents                                                                                                      |  | $             | 23,044  |   |                | $ | 11,806  |  
|Accounts receivable (less allowance for doubtful accounts and sales returns and allowances of $5,436 and $5,241, respectively) |  |               | 121,656 |   |                |   | 128,125 |  
|Inventories                                                                                                                    |  |               | 74,923  |   |                |   | 75,266  |  
|Other current assets                                                                                                           |  |               | 19,514  |   |                |   | 18,685  |  
|Assets held for sale                                                                                                           |  |               | 800     |   |                |   | 755     |  
|                                                                                                                               |  |               |         |   |                |   |         |  
|Total current assets                                                                                                           |  |               | 239,937 |   |                |   | 234,637 |  
|                                                                                                                               |  |              
|RESTRICTED CASH                                                                                                                |  |               | 200     |   |                |   | 12      |  
|PROPERTY, PLANT AND EQUIPMENT  Net                                                                                            |  |               | 292,936 |   |                |   | 295,534 |  
|GOODWILL                                                                                                                       |  |               | 48,943  |   |                |   | 48,945  |  
|LONG-TERM INVESTMENTS                                                                                                          |  |               | 18,943  |   |                |   | 18,481  |  
|OTHER ASSETS                                                                                                                   |  |               | 17,453  |   |                |   | 18,493  |  
|                                                                                                                               |  |               |         |   |                |   |         |  
|TOTAL ASSETS                                                                                                                   |  | $             | 618,412 |   |                | $ | 616,102 |  
|                                                                                                                               |  |               |         |   |                |   |         |  
|LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS EQUITY                                                               |  |               |         |   |                |   |         |  
|CURRENT LIABILITIES:                                                                                                           |  |               |         |   |                |   |         |  
|Accounts payable                                                                                                               |  | $             | 96,675  |   |                | $ | 104,788 |  
|Current maturities of debt                                                                                                     |  |               | 13,250  |   |                |   | 10,878  |  
|Income taxes and other taxes payable                                                                                           |  |               | 3,801   |   |                |   | 2,983   |  
|Accrued salaries and wages                                                                                                     |  |               | 13,492  |   |                |   | 14,319  |  
|Other accrued expenses                                                                                                         |  |               | 17,430  |   |                |   | 10,609  |  
|                                                                                                                               |  |               |         |   |                |   |         |  
|Total current liabilities                                                                                                      |  |               | 144,648 |   |                |   | 143,577 |  
|                                                                                                                               |  |              
|SENIOR DEBT                                                                                                                    |  |               | 95,210  |   |                |   | 99,118  |  
|SUBORDINATED DEBT                                                                                                              |  |               | 180,670 |   |                |   | 180,138 |  
|DEFERRED INCOME TAXES                                                                                                          |  |               | 8,997   |   |                |   | 8,040   |  
|PENSION OBLIGATION                                                                                                             |  |               | 18,789  |   |                |   | 18,766  |  
|SWAP OBLIGATION                                                                                                                |  |               | 15,013  |   |                |   | 14,775  |  
|OTHER LIABILITIES                                                                                                              |  |               | 5,680   |   |                |   | 5,841   |  
|                                                                                                                               |  |               |         |   |                |   |         |  
|Total liabilities                                                                                                              |  |               | 469,007 |   |                |   | 470,255 |  
|                                                                                                                               |  |               |         |   |                |   |         |  
|COMMITMENTS AND CONTINGENCIES (Note 9)                                                                                         |  |               |         |   |                |   |         |  
|                                                                                                                               |  |              
|TEMPORARY EQUITY - COMMON STOCK, SUBJECT TO PUT RIGHTS, (614,851)                                                              |  |               | 26,617  |   |                |   | 26,617  |  
|                                                                                                                               |  |               |         |   |                |   |         |  
|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                                                                                                              |  |               | 186,755 |   |                |   | 181,822 |  
|Accumulated other comprehensive loss                                                                                           |  |               | (1,909  | ) |                |   | (534    | )
|Treasury stock, 2,404,348 at cost                                                                                              |  |               | (62,492 | ) |                |   | (62,492 | )
|                                                                                                                               |  |               |         |   |                |   |         |  
|Total permanent stockholders equity                                                                                           |  |               | 122,788 |   |                |   | 119,230 |  
|                                                                                                                               |  |               |         |   |                |   |         |  
|TOTAL LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS EQUITY                                                         |  | $             | 618,412 |   |                | $ | 616,102 |  
|                                                                                                                               |  |               |         |   |                |   |         |  

See notes to condensed consolidated financial statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSUNAUDITED

FOR THE THREE MONTHS ENDED JULY 31, 2007 AND 2006

(Dollars in Thousands)

---



|                                                         |  |      |         |   |      |   |         |  
|-------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                         |  | 2007 |         |   | 2006 |  
|NET SALES                                                |  | $    | 255,675 |   |      | $ | 227,108 |  
|COST OF SALES                                            |  |      | 223,354 |   |      |   | 196,564 |  
|                                                         |  |      |         |   |      |   |         |  
|Gross profit                                             |  |      | 32,321  |   |      |   | 30,544  |  
|                                                         |  |      |         |   |      |   |         |  
|OPERATING EXPENSES:                                      |  |      |         |   |      |   |         |  
|Selling, general and administrative                      |  |      | 20,978  |   |      |   | 20,101  |  
|Restructuring and impairments                            |  |      | 111     |   |      |   | 154     |  
|                                                         |  |      |         |   |      |   |         |  
|Total operating expenses                                 |  |      | 21,089  |   |      |   | 20,255  |  
|                                                         |  |      |         |   |      |   |         |  
|OPERATING INCOME                                         |  |      | 11,232  |   |      |   | 10,289  |  
|                                                         |  |      |         |   |      |   |         |  
|OTHER (EXPENSE) INCOME:                                  |  |      |         |   |      |   |         |  
|Interest expense                                         |  |      | (6,937  | ) |      |   | (6,943  | )
|Interest income                                          |  |      | 867     |   |      |   | 61      |  
|Equity in income of affiliates                           |  |      | 731     |   |      |   | 682     |  
|Other income (expense)  net                             |  |      | 16      |   |      |   | (52     | )
|                                                         |  |      |         |   |      |   |         |  
|Total other expense                                      |  |      | (5,323  | ) |      |   | (6,252  | )
|                                                         |  |      |         |   |      |   |         |  
|EARNINGS FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES |  |      | 5,909   |   |      |   | 4,037   |  
|INCOME TAX EXPENSE                                       |  |      | 976     |   |      |   | 1,136   |  
|                                                         |  |      |         |   |      |   |         |  
|NET EARNINGS                                             |  | $    | 4,933   |   |      | $ | 2,901   |  
|                                                         |  |      |         |   |      |   |         |  

See notes to condensed consolidated financial statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED

FOR THE THREE MONTHS ENDED JULY 31, 2007 AND 2006

(Dollars in Thousands)

---



|                                                                                    |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                    |  | 2007 |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                               |  |      |         |   |      |   |         |  
|Net earnings                                                                        |  | $    | 4,933   |   |      | $ | 2,901   |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                       |  |      | 8,629   |   |      |   | 8,515   |  
|Loss on sale of property, plant and equipment                                       |  |      | 113     |   |      |   | 359     |  
|Equity in income of affiliates                                                      |  |      | (731    | ) |      |   | (682    | )
|(Gain) loss on derivative activities                                                |  |      | (87     | ) |      |   | 42      |  
|Proceeds from dividends paid by equity investments in affiliates                    |  |      | 272     |   |      |   | 1,656   |  
|Deferred income tax (benefit) expense                                               |  |      | (2,131  | ) |      |   | 726     |  
|                                                                                    |  |     
|Changes in assets and liabilities:                                                  |  |      |         |   |      |   |         |  
|Decrease (increase) in accounts receivable                                          |  |      | 6,515   |   |      |   | (1,096  | )
|Decrease in inventories                                                             |  |      | 368     |   |      |   | 246     |  
|Decrease (increase) in other current assets                                         |  |      | 1,936   |   |      |   | (3,267  | )
|Decrease in other assets                                                            |  |      | 1,809   |   |      |   | 395     |  
|Increase in accounts payable and accrued expenses                                   |  |      | 6,512   |   |      |   | 10,680  |  
|Increase in other liabilities                                                       |  |      | 184     |   |      |   | 84      |  
|                                                                                    |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                           |  |      | 28,322  |   |      |   | 20,559  |  
|                                                                                    |  |      |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                               |  |      |         |   |      |   |         |  
|Capital expenditures                                                                |  |      | (5,133  | ) |      |   | (3,814  | )
|Acquisition costs                                                                   |  |      | (744    | ) |      |   |        |  
|Proceeds from sale of property, plant and equipment                                 |  |      | 2       |   |      |   | 347     |  
|Increase in restricted cash                                                         |  |      | (188    | ) |      |   | (63     | )
|                                                                                    |  |      |         |   |      |   |         |  
|Net cash used in investing activities                                               |  |      | (6,063  | ) |      |   | (3,530  | )
|                                                                                    |  |      |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                               |  |      |         |   |      |   |         |  
|Proceeds from long-term debt                                                        |  |      | 7,889   |   |      |   |        |  
|Repayments of long-term debt                                                        |  |      | (8,996  | ) |      |   | (8,129  | )
|Changes in cash overdraft                                                           |  |      | (10,295 | ) |      |   | (4,035  | )
|                                                                                    |  |      |         |   |      |   |         |  
|Net cash used in financing activities                                               |  |      | (11,402 | ) |      |   | (12,164 | )
|                                                                                    |  |      |         |   |      |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                             |  |      | 381     |   |      |   | (114    | )
|                                                                                    |  |      |         |   |      |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                           |  |      | 11,238  |   |      |   | 4,751   |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                      |  |      | 11,806  |   |      |   | 6,688   |  
|                                                                                    |  |      |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                            |  | $    | 23,044  |   |      | $ | 11,439  |  
|                                                                                    |  |      |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                  |  |      |         |   |      |   |         |  
|Cash paid during the period for:                                                    |  |      |         |   |      |   |         |  
|Interest                                                                            |  | $    | 2,071   |   |      | $ | 1,722   |  
|                                                                                    |  |      |         |   |      |   |         |  
|Income Taxes:                                                                       |  |      |         |   |      |   |         |  
|Paid                                                                                |  | $    | 47      |   |      | $ | 586     |  
|                                                                                    |  |      |         |   |      |   |         |  
|(Refunded)                                                                          |  | $    |        |   |      | $ | (5      | )
|                                                                                    |  |      |         |   |      |   |         |  
|Purchases of property, plant and equipment included in accounts payable             |  | $    | 1,626   |   |      | $ | 2,156   |  
|                                                                                    |  |      |         |   |      |   |         |  

See notes to condensed consolidated financial statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENT OF PERMANENT STOCKHOLDERS EQUITYUNAUDITED

FOR THE THREE MONTHS ENDED JULY 31,
2007

(Dollars in Thousands)

---



|                                                             |  |       |         |   |                                            |   |        |               |  |   |                  |   |                          |   |             |  |                          |     |  |   |    |  |   |        |  
|------------------------------------------------------------ |  | ----- | ------- | - | ------------------------------------------ | - | ------ | ------------- |  | - | ---------------- | - | ------------------------ | - | ----------- |  | ------------------------ | --- |  | - | -- |  | - | ------ | -
|                                                             |  | Total |         |   | AccumulatedOtherComprehensiveIncome (Loss) |   |        | TreasuryStock |  |   | RetainedEarnings |   | AdditionalPaid InCapital |   | CommonStock |  | TotalComprehensiveIncome |    
|BALANCE APRIL 30, 2007                                       |  | $     | 119,230 |   |                                            | $ | (534   | )             |  | $ | (62,492          | ) |                          | $ | 181,822     |  | $                        | 374 |  | $ | 60 |  |   |        |  
|                                                             |  |       |         |   |                                            |   |       
|Net income                                                   |  |       | 4,933   |   |                                            |   |       |               |  |   |                 |   |                          |   | 4,933       |  |                          |    |  |   |   |  | $ | 4,933  |  
|Other comprehensive income:                                  |  |       |         |   |                                            |   |        |               |  |   |                  |   |                          |   |             |  |                          |     |  |   |    |  |   |        |  
|Unrealized gains on marketable securities available for sale |  |       | 10      |   |                                            |   | 10     |               |  |   |                 |   |                          |   |            |  |                          |    |  |   |   |  |   | 10     |  
|Foreign currency translation adjustments                     |  |       | 338     |   |                                            |   | 338    |               |  |   |                 |   |                          |   |            |  |                          |    |  |   |   |  |   | 338    |  
|Change in fair value of cash flow hedges                     |  |       | (1,723  | ) |                                            |   | (1,723 | )             |  |   |                 |   |                          |   |            |  |                          |    |  |   |   |  |   | (1,723 | )
|                                                             |  |       |         |   |                                            |   |        |               |  |   |                  |   |                          |   |             |  |                          |     |  |   |    |  |   |        |  
|BALANCE JULY 31, 2007                                        |  | $     | 122,788 |   |                                            | $ | (1,909 | )             |  | $ | (62,492          | ) |                          | $ | 186,755     |  | $                        | 374 |  | $ | 60 |  | $ | 3,558  |  
|                                                             |  |       |         |   |                                            |   |        |               |  |   |                  |   |                          |   |             |  |                          |     |  |   |    |  |   |        |  

See notes to condensed consolidated financial statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



NOTES TO CONDENSED 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., including 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-month period ended July 31, 2007 are not necessarily indicative of the results that may be
expected for the year ending April 30, 2008 due to seasonal and other factors. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended April 30, 2007 included in the Companys annual report on Form 10-K.

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 $6,622 and $16,916
as of July 31, 2007 and April 30, 2007, respectively.

Derivative Instruments From time to time, the Company enters
into derivative instruments with third-party institutions to hedge its exposure to interest rate, foreign currency exchange and certain energy and other raw material price risks. All derivatives, whether designated in hedging relationships or not,
are recorded on the consolidated balance sheet at fair value. If the derivative is designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative is recorded in other comprehensive income (loss) and is
recognized in the income statement when the hedged item affects earnings. Changes in the fair value of derivatives that are not designated as cash flow hedges are recorded currently in earnings together with changes in the fair value of the hedged
item attributable to the ineffective portion of the hedge; ineffectiveness, if any, is recorded currently in earnings.

We discontinue hedge
accounting prospectively when (i) a derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item, (ii) a derivative expires or is sold, terminated or exercised, (iii) a derivative is
de-designated as a hedge because it is unlikely that a forecasted transaction will occur or (iv) we determine that designation of a derivative as a hedge is no longer appropriate.

When we discontinue cash flow hedge accounting because the hedging instrument is sold, terminated or no longer designated (de-designated), the amount
reported in other comprehensive income up to the date of sale, termination or de-designation continues to be reported in other comprehensive income until the forecasted underlying transaction affects earnings.

Environmental The Company is subject to extensive federal, state and local environmental laws and regulations, including those that relate
to air emissions, wastewater discharges, solid and hazardous waste management and disposal and site remediation. Concerning environmental claims, the Company records any liabilities and discloses the required information in accordance with Financial
Accounting Standard (FAS) No. 5, Accounting for Contingencies, Statement of Position 96-1, Environmental Remediation Liabilities and FAS 143, Accounting for Asset Retirement Obligations.
Additionally, from time to time, the Company may be identified, along with other entities, as being among parties potentially responsible for contribution to costs associated with the investigation, correction and remediation of environmental
conditions at disposal sites subject to federal and/or analogous state laws. Costs associated with environmental obligations are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information
develops or circumstances change. Estimates of costs for future environmental compliance and remediation are necessarily imprecise due to such factors as the continuing evolution of environmental laws and regulatory requirements, the availability
and application of technology, the



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



identification of currently unknown remediation sites and the allocation of costs among the potentially responsible parties under applicable statutes. Costs
of future expenditures for environmental remediation obligations are discounted to their present value when the amount and timing of expected cash payments are reliably determinable (see Note 9).



|2. | RECENT ACCOUNTING PRONOUNCEMENTS
|-- | --------------------------------

In February 2007,
the Financial Accounting Standards Board (the FASB) issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 (FAS
159). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without being required to apply complex hedge accounting provisions. FAS 159 is effective for fiscal years beginning after November 15, 2007, and the Company is currently evaluating the impact that FAS 159 may have
on its financial position and results of operations once adopted.

In September 2006, the FASB issued FAS No. 157, Fair Value
Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value, expands disclosures about fair value measurements and is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the effect that FAS 157 may have on its consolidated financial statements.

In September 2006, the FASB
issued FAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (FAS 158). FAS 158 requires an employer to
recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity. FAS 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. FAS 158 has
expanded the disclosure requirements for pension plans and other post-retirement plans. This statement provides different effective dates for the recognition and related disclosure provisions and for the required changes to a fiscal year-end
measurement date. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective for the Company as of the year ended April 30, 2008. The requirement to measure plan assets and benefit obligations
as of the date of the Companys fiscal year-end is effective for the Company for the fiscal year ended April 30, 2009. The Company is currently evaluating the impact this statement will have on its financial statements.

On July 13, 2006, the FASB issued FASB Interpretation 48 Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement
No.109 (FIN 48). FIN 48 was issued to clarify the accounting for uncertain tax positions recognized in the financial statements by prescribing a recognition threshold and measurement attribute for tax positions taken or expected to
be taken in a tax return. FIN 48 stipulates that the tax effects from an uncertain tax position can be recognized in the financial statements, only if it is more likely than not that the position would be sustained upon audit based on the technical
merits of the position. The provisions of FIN 48 became effective as of the beginning of the Companys 2008 fiscal year, and require the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained
earnings. As a result of the adoption, the Company concluded that no adjustment to opening retained earnings was required. Interest costs and penalties related to income taxes are classified as income tax expense in the Companys financial
statements.



|3. | INVENTORIES
|-- | -----------

Inventories consist of the following:



|                             |  |               |        |                |   |       
|---------------------------- |  | ------------- | ------ | -------------- | - | ------
|                             |  | July 31, 2007 |        | April 30, 2007
|                             |  |              
|Raw Materials                |  | $             | 28,098 |                | $ | 29,063
|Finished Goods               |  |               | 42,866 |                |   | 42,937
|Other Manufacturing Supplies |  |               | 3,959  |                |   | 3,266 
|                             |  |               |        |                |   |       
|                             |  | $             | 74,923 |                | $ | 75,266
|                             |  |               |        |                |   |       



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|4. | ASSETS HELD FOR SALE
|-- | --------------------

The Company entered into a
Purchase and Sale Agreement (the Agreement) dated August 2, 2006, for the sale of land in Natick, MA where the paperboard mill we closed in November 2005 is located. This facility was closed 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 closing of the property sale is expected to be completed within the next twelve months. The net book value of these
assets is $782 and is reflected as Assets held for sale on the condensed consolidated balance sheets.



|5. | LONG-TERM DEBT
|-- | --------------



|                                    |  |               |         |   |                |   |         |  
|----------------------------------- |  | ------------- | ------- | - | -------------- | - | ------- | -
|                                    |  | July 31, 2007 |         |   | April 30, 2007 |  
|Senior Subordinated Notes 9.75% (1) |  | $             | 175,000 |   |                | $ | 175,000 |  
|Asset-based Credit Facility (2)     |  |               | 11,000  |   |                |   | 18,000  |  
|Term loan (2)                       |  |               | 15,000  |   |                |   | 15,000  |  
|Industrial Revenue Bonds (3)        |  |               | 65,545  |   |                |   | 67,215  |  
|Subordinated Notes (4)              |  |               | 5,670   |   |                |   | 5,967   |  
|All other (5)                       |  |               | 16,915  |   |                |   | 8,952   |  
|                                    |  |               |         |   |                |   |         |  
|Total Debt                          |  |               | 289,130 |   |                |   | 290,134 |  
|Less Current Portion                |  |               | (13,250 | ) |                |   | (10,878 | )
|                                    |  |               |         |   |                |   |         |  
|Long-Term Debt                      |  | $             | 275,880 |   |                | $ | 279,256 |  
|                                    |  |               |         |   |                |   |         |  

---

|(1) | The Company has $175,000 of 9.75% unsecured senior subordinated notes outstanding. 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 condensed consolidated balance sheets.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On March 9, 2007, the Company entered into a five-year asset-based credit agreement and a six-year credit-linked credit agreement. The asset-based facility provides the Company
a revolving line of credit in the aggregate principal amount of up to $85,000 (depending on the Companys borrowing base), up to $25,000 of which may be used for loans directly to the Companys International subsidiary and up to $15,000 of
which may be used for letters of credit, and other financial accommodations. The credit-linked facility provides the Company a $15,000 term loan and a $75,000 credit-linked letter of credit facility, and other financial accommodations. Borrowings
under the asset-based facility bear interest at a rate of prime or the Eurodollar rate plus a credit spread determined based on availability under the facility. The term loan under the credit-linked facility bears interest at a rate of prime plus 1%
or the Eurodollar rate plus a credit spread of 2.25%. Letters of Credit are issued under the credit-linked facility primarily to enhance the Companys multiple Industrial Revenue Bond (IRB) issues with the credit spread being the
same as the term loan. Subject to meeting certain conditions, the Company has a one-time option prior to March 9, 2010 to increase the asset-based credit facility by an amount of up to $15,000. Likewise, subject to meeting certain
conditions, the Company has a one-time option prior to March 9, 2010 to increase the credit-linked facility by an amount of up to $10,000. As of July 31, 2007, the Company had a total of $81,600 in letters of credit obligations outstanding
($68,302 of which had been used to enhance the industrial revenue bonds) which includes $6,600 outstanding under the asset-based facility. Separately, under the asset-based facility, the Company had $11,000 in borrowings outstanding at a rate of
6.82%, and under the credit-linked facility had $15,000 outstanding on the term loan at a rate of 7.57%. The Company had $45,464 of borrowing availability under the asset-based facility at July 31, 2007. The undrawn portions of the facilities
are subject to a facility fee at an annual rate of 0.25% to 0.30%. This debt is classified in Senior Debt in the condensed consolidated balance sheets.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The Industrial Revenue Bonds are comprised of: Mercer IRB of $1,250, Mobile IRB of $4,115, Ohio IRB of $15,500, and Massachusetts IRBs of $44,680 as of July 31, 2007. These
bonds are variable rate demand bonds, secured by letters of credit, with maturity dates ranging from November 2011 through July 2031 and where the interest rates range from 6.105% to 7.825% (including letter of credit spread) and are reset every
seven days. All borrowings under these facilities are classified in Senior Debt in the condensed consolidated balance sheets with a portion in Current maturities of debt.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(4) | The Company issued a subordinated note to a prior stockholder in exchange for the stockholders shares of common stock. 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 July 31, 2007, the remaining balance on the note is $5,670. The debt associated with this notes is classified in Subordinated Debt in the condensed
consolidated balance sheets with a portion in Current maturities of debt.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | All other includes the following from our International operations: $4,978 of borrowings on a line of credit, $4,159 of discounted bills pending collection and $6,828 of a five year
loan. The borrowings under this five year loan bear a variable interest rate of EURIBOR plus .75%, or 5.12% as of July 31, 2007. Principal and interest are due every six months, at which point the interest rate is reset. Other also includes a
loan with Toronto Dominion Bank for $950, which bears interest at the prime rate plus 0.75% (the prime rate is 6.25% as of July 31, 2007), payable monthly through May 2015. The loan is secured by a mortgage on the Companys Richmond, B.C.,
Canada facility. This loan is classified in Senior Debt in the condensed consolidated balance sheets with a portion in Current maturities of debt.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The asset-based and credit-linked facilities include financial covenants as follows: (a) if, during any quarter, Excess Availability, as defined under the revolving credit facility, falls below $10,000, the
Company must achieve a Fixed Charge Coverage Ratio, as defined, of not less than 1.0 to 1.0. and (b) the Senior Leverage Ratio, as defined, for each twelve-month period ending as of each fiscal quarter end shall be less than or equal to 3.0 to
1.0. At July 31, 2007, the Company was in compliance with all financial ratios.

Under the asset-based agreement, the Company
(a) granted the lenders a first priority lien on all of its accounts receivable and inventory (the ABL Priority Collateral) and a second priority lien on substantially all of its other assets, including certain real property, and
(b) guaranteed the obligations, under this facility, of its International subsidiary. Under the credit-linked agreement, the Company granted the lenders a first priority lien on substantially all of its assets, including certain real property
(excluding accounts receivable and inventory), and a second priority lien on all ABL Priority Collateral.

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.

The Company has cross-currency interest rate swap agreements with a member of our bank group that had been designated as a
cash flow hedge against an existing intercompany loan to the Companys European subsidiary. Effective May 1, 2007, the Company de-designated these swaps as hedges. With this de-designation, the amount in other comprehensive income, $172,
remains and will be reclassified into earnings over the life of the original agreements, which are scheduled to terminate in September 2009. At July 31, 2007 and April 30, 2007, the fair value of the swaps represented a liability of
$14,896 and $14,775, respectively. During the quarter ended July 31, 2007, the Company entered into another swap agreement in relation to a second intercompany loan with its European subsidiary that was not designated as a hedge and represented
a liability of $117 as of July 31, 2007. The Company has recognized a gain of $87 and a loss of $42 within Other (expense) income  net on the condensed consolidated statements of operations, related to derivative activities, during the
three months ended July 31, 2007 and 2006, respectively.



|6. | RETIREMENT PLANS
|-- | ----------------

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



|                                              |  |                                  |        |   |               |   |        |  
|--------------------------------------------- |  | -------------------------------- | ------ | - | ------------- | - | ------ | -
|                                              |  | Pension Costs Three Months ended |       
|                                              |  | July 31, 2007                    |        |   | July 31, 2006 |  
|                                              |  |                                 
|Service Cost                                  |  | $                                | 820    |   |               | $ | 1,208  |  
|Interest Cost on Projected Benefit Obligation |  |                                  | 1,887  |   |               |   | 1,605  |  
|Expected Return on Assets Gain                |  |                                  | (2,383 | ) |               |   | (1,815 | )
|Net Amortization                              |  |                                  | 241    |   |               |   | 416    |  
|                                              |  |                                  |        |   |               |   |        |  
|Net Pension Expense                           |  | $                                | 565    |   |               | $ | 1,414  |  
|                                              |  |                                  |        |   |               |   |        |  



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The Company estimates a cash contribution to its domestic pension plans of approximately $6,000
during fiscal year ending April 30, 2008 and has made a contribution of $750 towards that $6,000 total during the three months ended July 31, 2007. As of July 31, 2007, 66% of the plans assets were in equity investments, 11% in
fixed-income securities and 23% in cash and other.

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



|                                              |  |                                 |     |   |               |   |     |  
|--------------------------------------------- |  | ------------------------------- | --- | - | ------------- | - | --- | -
|                                              |  | Pension CostsThree Months ended |    
|                                              |  | July 31, 2007                   |     |   | July 31, 2006 |  
|Service Cost                                  |  | $                               | 9   |   |               | $ | 8   |  
|Interest Cost on Projected Benefit Obligation |  |                                 | 56  |   |               |   | 39  |  
|Expected Return on Assets (Gain) Loss         |  |                                 | (42 | ) |               |   | (34 | )
|Net Amortization                              |  |                                 |    |   |               |   | (8  | )
|                                              |  |                                 |     |   |               |   |     |  
|Net Pension Expense                           |  | $                               | 23  |   |               | $ | 5   |  
|                                              |  |                                 |     |   |               |   |     |  



|7. | RESTRUCTURING AND IMPAIRMENTS
|-- | -----------------------------

For the Three Months
Ended July 31, 2007 and 2006:

Fiscal 2008 Restructuring

The Paperboard segment incurred $111 of charges for costs to exit previously shut down locations.

Fiscal 2007 Restructuring

The
Paperboard segment incurred $111 of charges which related to costs to exit previously shut down locations. Within the Converted Products segment, $23 of the total charges of $43 related to building repairs.

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



|                                 |  |            |     |                   |   |           |  |       |   |  |   |    
|-------------------------------- |  | ---------- | --- | ----------------- | - | --------- |  | ----- | - |  | - | ---
|                                 |  | Paperboard |     | ConvertedProducts |   | Corporate |  | Total
|July 31, 2007                    |  |            |     |                   |   |           |  |       |   |  |   |    
|Dismantling, Mothballing & Other |  | $          | 111 |                   | $ |          |  | $     |  |  | $ | 111
|                                 |  |            |     |                   |   |           |  |       |   |  |   |    
|Total Charges                    |  | $          | 111 |                   | $ |          |  | $     |  |  | $ | 111
|                                 |  |            |     |                   |   |           |  |       |   |  |   |    
|July 31, 2006                    |  |            |     |                   |   |           |  |       |   |  |   |    
|Dismantling, Mothballing & Other |  | $          | 111 |                   | $ | 43        |  | $     |  |  | $ | 154
|                                 |  |            |     |                   |   |           |  |       |   |  |   |    
|Total Charges                    |  | $          | 111 |                   | $ | 43        |  | $     |  |  | $ | 154
|                                 |  |            |     |                   |   |           |  |       |   |  |   |    

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



|                                                               |  |                                       |      |  
|-------------------------------------------------------------- |  | ------------------------------------- | ---- | -
|                                                               |  | Dismantling,Mothballing & Other Costs |     
|April 30, 2007 Accrual Balance                                 |  | $                                     | 113  |  
|Restructuring Charges for the Three Months Ended July 31, 2007 |  |                                       | 111  |  
|Amounts Paid Against 2007 Accruals                             |  |                                       | (113 | )
|Amounts Paid Against 2008 Accruals                             |  |                                       | (27  | )
|                                                               |  |                                       |      |  
|July 31, 2007 Accrual Balance                                  |  | $                                     | 84   |  
|                                                               |  |                                       |      |  

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



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|                   |  |                                         |        |                                                  |   |                                                          |  |                                                       |       |  |   |       
|------------------ |  | --------------------------------------- | ------ | ------------------------------------------------ | - | -------------------------------------------------------- |  | ----------------------------------------------------- | ----- |  | - | ------
|                   |  | CumulativeCosts as ofApril 30, 2007 (1) |        | Costs for the ThreeMonths EndedJuly 31, 2007 (2) |   | Estimated Costs toCompleteInitiatives as ofJuly 31, 2007 |  | Total EstimatedCosts ofInitiatives as ofJuly 31, 2007
|Paperboard         |  | $                                       | 16,033 |                                                  | $ | 99                                                       |  | $                                                     | 2,680 |  | $ | 18,812
|Converted Products |  |                                         | 2,437  |                                                  |   |                                                         |  |                                                       |      |  |   | 2,437 
|                   |  |                                         |        |                                                  |   |                                                          |  |                                                       |       |  |   |       
|                   |  | $                                       | 18,470 |                                                  | $ | 99                                                       |  | $                                                     | 2,680 |  | $ | 21,249
|                   |  |                                         |        |                                                  |   |                                                          |  |                                                       |       |  |   |       

| | 
| | 

| | (1) | Of the $18,470 in cumulative restructuring costs, $7,999 were non-cash charges related to asset impairment.
| | --- | -----------------------------------------------------------------------------------------------------------

| | (2) | The total costs incurred in the three months ended July 31, 2007, $99, does not agree with the three month total charges of $111 from a prior table above since some of the
costs are related to plans initiated prior to January 1, 2003.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | INCOME TAXES
|-- | ------------

The Companys consolidated tax
rate is computed using an annual effective rate for each taxable jurisdiction. The Company records income tax expense related to its state and foreign jurisdictions in which it has taxable income. During the three months ended July 31, 2007 and
2006, the Company has not recorded US federal income tax expense due to the reduction in its valuation allowance against its deferred tax assets  net operating losses.

The Company adopted the provision of FIN 48 on May 1, 2007. Upon the adoption of FIN 48, the Company had $770 of gross unrecognized tax benefits of
which $33 would affect the Companys tax rate, if recognized. The difference between the gross amount of unrecognized tax benefits and the portion that would affect the effective tax rate is attributable to items that would be offset by the
existing valuation allowance and the federal tax benefit related to state tax items. Interest costs of $4 and penalties of $16 related to income taxes are classified as income tax expense in the Companys financial statements. Tax returns for
all years from 2003 forward are subject to future examination by federal, state and Spanish tax authorities. Other foreign jurisdictions are open to examination for years beginning 2005.

No material adjustments have been made to unrecognized tax benefits as of July 31, 2007. The Company does not anticipate a material change to its
unrecognized tax benefits within the next twelve months.



|9. | COMMITMENT AND CONTINGENCIES
|-- | ----------------------------

The Company and its
subsidiaries are party to various claims, legal actions, complaints and administrative proceedings, including workers compensation claims, arising in the ordinary course of business. Although 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, in the event of one or more adverse determinations related to these issues, the impact on the Companys
results of operations could be material to any specific period.

Current Environmental Matters

The Company has identified environmental contamination at three of its closed facilities that may require remediation upon retirement of these assets.
However, no such liability has been recognized for these facilities, as the Company currently does not have sufficient information available to assess if remediation will be required or to reasonably estimate any potential obligation. For these
three locations, any potential obligation cannot be reasonably estimated as the settlement date or potential settlement dates, the settlement method or potential settlement methods, and other relevant facts to determine a reasonable estimate for the
obligation are unknown at this time.

The Massachusetts Attorney Generals Office has asserted that the Company, at one or more of its
Massachusetts mills, exceeded permitted air emissions, failed to accurately report certain emissions, and failed to submit certain required monitoring and compliance reports. The Company has agreed, in principle, subject to a definitive written
agreement, to settle these allegations by paying $600 and agreeing to certain injunctive relief. The $600 had been accrued by April 30, 2007, with such amounts being recorded in the Selling, general and administrative line on the condensed
consolidated statements of operations.



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By letters dated February 14, 2006 and June 2, 2006, the United States Environment
Protection Agency (EPA) notified the Company of its potential liability relating to the Lower Passaic River Study Area (LPRSA), which is part of the Diamond Alkali Superfund Site, under Section 107(a) of the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980. The Company is one of at least 70 potentially responsible parties (PRPs) identified thus far. The EPA alleges that hazardous substances were released from the
Companys now-closed Newark, NJ paperboard mill into the Lower Passaic River. The EPA informed the Company that it may be potentially liable for response costs that the government may incur relating to the study of the LPRSA and for unspecified
natural resource damages. The EPA demanded that the Company pay $2,830 in unreimbursed past response costs on a joint and several liability basis. Alternatively, the EPA gave the Company the opportunity to obtain a release from these past response
costs by joining the Cooperating Parties Group (the Group) and agreeing to fund an environmental study by the EPA. In 2006, the EPA notified the Group that the cost of the study would exceed its initial estimates and offered the
Group the opportunity to conduct the study by itself rather than reimburse the government for the additional costs incurred. The Group engaged in discussions with the EPA and the Group agreed to assume responsibility for the study pursuant to
an Administrative Order on Consent. Cumulatively, as of July 31, 2007, the Company has expensed $688 (none of which was expensed in the quarter ended July 31, 2007), of which $456 remains accrued based upon the most recent estimates
for the study. Due to uncertainties inherent in this matter, management is unable to estimate the Companys potential exposure, including possible remediation or other environmental responsibilities that may result from this matter at this
time; such information is not expected to be known for a number of years. These uncertainties primarily include the completion and outcome of the environmental study and the percentage of contamination, if any, ultimately determined to be
attributable to the Company and other parties. It is possible that the Companys ultimate liability resulting from this issue could materially differ from the July 31, 2007 accrual balance.



|10. | SEGMENT INFORMATION
|--- | -------------------

The Company identifies its
reportable segments in accordance with FAS 131, Disclosures about Segments of an Enterprise and Related Information by reviewing the nature of products sold, nature of the production processes, type and class of customer, methods to
distribute product and nature of regulatory environment. Profits from intercompany sales are not transferred between segments, they remain within the segment in which the sales originated. The Company principally operates in three reportable
segments which include five product lines.

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. 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.

Identifiable assets are accumulated by facility within each business segment.



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



|                                                        |  |                            |         |   |                |   |         |  
|------------------------------------------------------- |  | -------------------------- | ------- | - | -------------- | - | ------- | -
|                                                        |  | For the Three Months Ended |        
|                                                        |  | July 31, 2007              |         |   | July 31, 2006  |  
|Sales (aggregate):                                      |  |                            |         |   |                |   |         |  
|Paperboard                                              |  | $                          | 168,491 |   |                | $ | 151,680 |  
|Converted Products                                      |  |                            | 80,159  |   |                |   | 74,325  |  
|International                                           |  |                            | 49,580  |   |                |   | 42,968  |  
|                                                        |  |                            |         |   |                |   |         |  
|Total:                                                  |  | $                          | 298,230 |   |                | $ | 268,973 |  
|                                                        |  |                            |         |   |                |   |         |  
|Less sales (inter-segment):                             |  |                            |         |   |                |   |         |  
|Paperboard                                              |  | $                          | (40,411 | ) |                | $ | (40,032 | )
|Converted Products                                      |  |                            | (2,144  | ) |                |   | (1,833  | )
|International                                           |  |                            |        |   |                |   |        |  
|                                                        |  |                            |         |   |                |   |         |  
|Total:                                                  |  | $                          | (42,555 | ) |                | $ | (41,865 | )
|                                                        |  |                            |         |   |                |   |         |  
|Sales (external customers):                             |  |                            |         |   |                |   |         |  
|Paperboard                                              |  | $                          | 128,080 |   |                | $ | 111,648 |  
|Converted Products                                      |  |                            | 78,015  |   |                |   | 72,492  |  
|International                                           |  |                            | 49,580  |   |                |   | 42,968  |  
|                                                        |  |                            |         |   |                |   |         |  
|Total:                                                  |  | $                          | 255,675 |   |                | $ | 227,108 |  
|                                                        |  |                            |         |   |                |   |         |  
|Operating Income:                                       |  |                            |         |   |                |   |         |  
|Paperboard                                              |  | $                          | 10,735  |   |                | $ | 11,589  |  
|Converted Products                                      |  |                            | 1,360   |   |                |   | (698    | )
|International                                           |  |                            | 3,527   |   |                |   | 3,014   |  
|                                                        |  |                            |         |   |                |   |         |  
|Total Segment Operating Income:                         |  |                            | 15,622  |   |                |   | 13,905  |  
|                                                        |  |                           
|Corporate Expense                                       |  |                            | 4,390   |   |                |   | 3,616   |  
|                                                        |  |                            |         |   |                |   |         |  
|Total Operating Income:                                 |  |                            | 11,232  |   |                |   | 10,289  |  
|                                                        |  |                           
|Interest Expense                                        |  |                            | (6,937  | ) |                |   | (6,943  | )
|Interest Income                                         |  |                            | 867     |   |                |   | 61      |  
|Equity in Income of Affiliates                          |  |                            | 731     |   |                |   | 682     |  
|Other Income (Expense), Net                             |  |                            | 16      |   |                |   | (52     | )
|                                                        |  |                            |         |   |                |   |         |  
|Earnings from Continuing Operations Before Income Taxes |  |                            | 5,909   |   |                |   | 4,037   |  
|Income Tax Expense                                      |  |                            | 976     |   |                |   | 1,136   |  
|                                                        |  |                            |         |   |                |   |         |  
|Net Earnings                                            |  | $                          | 4,933   |   |                | $ | 2,901   |  
|                                                        |  |                            |         |   |                |   |         |  
|Depreciation and Amortization:                          |  |                            |         |   |                |   |         |  
|Paperboard                                              |  | $                          | 6,050   |   |                | $ | 5,845   |  
|Converted Products                                      |  |                            | 1,213   |   |                |   | 1,302   |  
|International                                           |  |                            | 926     |   |                |   | 824     |  
|Corporate                                               |  |                            | 440     |   |                |   | 544     |  
|                                                        |  |                            |         |   |                |   |         |  
|Total:                                                  |  | $                          | 8,629   |   |                | $ | 8,515   |  
|                                                        |  |                            |         |   |                |   |         |  
|Purchases of Property, Plant and Equipment:             |  |                            |         |   |                |   |         |  
|Paperboard                                              |  | $                          | 3,205   |   |                | $ | 2,614   |  
|Converted Products                                      |  |                            | 421     |   |                |   | 230     |  
|International                                           |  |                            | 1,507   |   |                |   | 944     |  
|Corporate                                               |  |                            |        |   |                |   | 26      |  
|                                                        |  |                            |         |   |                |   |         |  
|Total:                                                  |  | $                          | 5,133   |   |                | $ | 3,814   |  
|                                                        |  |                            |         |   |                |   |         |  
|                                                        |  |                           
|                                                        |  | July 31, 2007              |         |   | April 30, 2007 |  
|Identifiable Assets:                                    |  |                            |         |   |                |   |         |  
|Paperboard                                              |  | $                          | 334,866 |   |                | $ | 348,997 |  
|Converted Products                                      |  |                            | 93,910  |   |                |   | 93,744  |  
|International                                           |  |                            | 173,534 |   |                |   | 161,301 |  
|Corporate                                               |  |                            | 16,102  |   |                |   | 12,060  |  
|                                                        |  |                            |         |   |                |   |         |  
|Total:                                                  |  | $                          | 618,412 |   |                | $ | 616,102 |  
|                                                        |  |                            |         |   |                |   |         |  



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Geographic Regions

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



|                                                            |  |               |         |                |   |        
|----------------------------------------------------------- |  | ------------- | ------- | -------------- | - | -------
|                                                            |  | July 31, 2007 |         | July 31, 2006 
|Sales to External Customers                                 |  |               |         |                |   |        
|United States                                               |  | $             | 202,597 |                | $ | 181,358
|Europe                                                      |  |               | 49,580  |                |   | 42,968 
|Canada                                                      |  |               | 3,498   |                |   | 2,782  
|                                                            |  |               |         |                |   |        
|Total                                                       |  | $             | 255,675 |                | $ | 227,108
|                                                            |  |               |         |                |   |        
|                                                            |  |              
|                                                            |  | July 31, 2007 |         | April 30, 2007
|Net Property, Plant and Equipment, Goodwill and Intangibles |  |               |         |                |   |        
|United States                                               |  | $             | 271,318 |                | $ | 274,724
|Europe                                                      |  |               | 63,277  |                |   | 62,791 
|Canada                                                      |  |               | 7,284   |                |   | 6,989  
|                                                            |  |               |         |                |   |        
|Total                                                       |  | $             | 341,879 |                | $ | 344,504
|                                                            |  |               |         |                |   |        



|11. | 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 the Companys current Chief Executive Officer (CEO) and former CEO. For each of the three-month periods ended
July 31, 2007 and 2006, the amount paid to that company under the lease was $87.

The paperboard mills in our International segment
purchased approximately $4,006 and $2,657 of raw material from affiliated entities accounted for as equity method investments during the three-month periods ended July 31, 2007 and 2006, respectively.

The International segment also recorded sales of approximately $1,008 and $688 to two affiliated entities accounted for as equity method investments
during the three-month periods ended July 31, 2007 and 2006, respectively.

The Company paid approximately $1,337 and $1,297 to
Integrated Paper Recyclers, LLC, an affiliated entity accounted for as an equity method investment, primarily for hauling services of recyclable material during the three-month periods ended July 31, 2007 and 2006, respectively.



|12. | OTHER MATTERS
|--- | -------------

During the quarter ended
July 31, 2007, the Company received a $2,861 settlement resulting from state sales-tax related litigation. Of this total, $2,054 was recorded as a reduction to cost of sales as it represented a refund of sales taxes paid which were originally
recorded to cost of sales. The remainder, $807, was for interest on the principal amount of the settlement and was recorded on the Interest income line on our condensed consolidated statement of operations.

Certain locations within the Companys Paperboard segment are awarded credits for air emissions. These locations monitor their emissions and
routinely invest funds to maintain compliance levels or to improve performance and from time to time, the Company sells excess Nitrogen Oxide emission credits. Costs for environmental maintenance and improvement projects are recorded in Cost of
sales and the gains from the sales of these credits are likewise recorded in Cost of sales. During July 2006, the Company sold excess emission credits through an open market created specifically to trade such emission credits, and recorded a gain
from these sales in the amount of $3,277.



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|13. | SUBSEQUENT EVENTS
|--- | -----------------

On August 1, 2007, the
Company completed the purchase of a recycled paperboard mill in Viersen, Germany, at a total cost of approximately $4,400, which includes the land, buildings, equipment and finished product, and covers all pre-acquisition costs for legal, accounting
and consulting services. The Company also has a signed agreement to purchase a cogeneration facility located next to this mill, which is expected to close within the next fiscal quarter, for approximately $1,300.



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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 in
the Annual Report on Form 10-K for the year ended April 30, 2007.

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, 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, 2007. 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, 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 3.2% of our sales in our fiscal year ended April 30, 2007.

We operate in three segmentsPaperboard, Converted Products and Internationaland our products are 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. 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 produce 100% recycled paperboard, laminated products, graphicboard and solidboard packaging, primarily for the European market.

For the fiscal year ended April 30, 2007, the Paperboard segment represented 51% of our total sales, the Converted Products segment represented 31% 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. Percentages and dollar amounts have been rounded to aid presentation.

Our operating results are primarily influenced by sales price and volume, mill capacity utilization, recovered paper cost, energy costs and freight costs.

Our sales volumes are generally driven by overall economic conditions and more specifically by consumer non-durable goods consumption. While the industry has rationalized approximately 1.5 million tons over the
last several years, we believe there remains some overcapacity in uncoated recycled paperboard (URB). However, our mill utilization rates have remained at 97% for each of the quarters ended July 31, 2007 and 2006.

Recovered paper is our most significant raw material, and the cost of such paper has historically fluctuated significantly due to market and industry conditions. For
example, our average North American recovered paper cost per ton of paperboard produced rose from $99 per ton in 2004 to $116 per ton in 2005, dropped to $108 per ton in 2006 and rose again in 2007 to $123 per ton. This escalation in recovered paper
costs continued into our first quarter ended July 31, 2007, where our costs rose 26% to $144 per ton of paperboard produced compared to $114 per ton of paperboard produced during the quarter ended July 31, 2006. Additionally, our average
recovered paper cost per ton of paperboard produced in our international mills increased 45% in the quarter ended July 31, 2007 to $164 per ton from $113 per ton in the same quarter last year.



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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. Average energy costs in our North American mill system, though relatively stable over the last two years at $90 and $88 per ton of paperboard produced in 2007 and 2006, respectively, are significantly higher
than the $43 per ton average energy cost in 2000, due to overall increases in natural gas, fuel oil and electricity prices. We believe that prices will likely remain at these elevated levels 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. During the quarter ended July 31, 2007, we had approximately 30% of our natural gas needs
hedged at prices favorable to our budget, and have approximately 50% of our needs hedged through March 2008, again at prices favorable to budget. For the quarters ended July 31, 2007 and 2006, our average energy cost per ton of paperboard
produced in our North American mills remained essentially flat at $84 and $85 per ton, respectively. Energy costs in Western Europe have escalated over the last two years, particularly relating to natural gas, and as a result, our energy costs
averaged 58 per ton of paperboard produced in 2007 versus 40 per ton in 2006. Prices have seemed to stabilize, though, with our average energy costs at 54 per ton of paperboard produced in the quarter ended
July 31, 2007 compared to 56 per ton in the quarter ended July 31, 2006.

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 always maintain our operating margins in the face of
cost increases. We experience a reduction in margin during periods of recovered paper price 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 may be materially and adversely affected by time delays in the implementation of price increases. A price increase on all grades of coated and uncoated recycled paperboard became effective at the end of
June 2006 for all North American customers and a price increase on all grades of uncoated recycled paperboard became effective for North American customers at the beginning of March 2007. As a result of the realization of these increases, when
comparing the quarters ended July 31, 2007 and 2006, average sales price for our recycled paperboard and converted products increased 6% and 3%, or $26 per ton and $25 per ton, respectively.

Our Results of Operations

The following table sets out our segmented
financial and operating information for the periods indicated.



|                   |  |                             |         |      |   |        
|------------------ |  | --------------------------- | ------- | ---- | - | -------
|                   |  | Three Months Ended July 31,
|(in thousands)     |  | 2007                        |         | 2006
|Net Sales          |  |                             |         |      |   |        
|Paperboard         |  | $                           | 128,080 |      | $ | 111,648
|Converted Products |  |                             | 78,015  |      |   | 72,492 
|International      |  |                             | 49,580  |      |   | 42,968 
|                   |  |                             |         |      |   |        
|Total              |  | $                           | 255,675 |      | $ | 227,108
|                   |  |                             |         |      |   |        
|Cost of Sales      |  |                             |         |      |   |        
|Paperboard         |  | $                           | 109,445 |      | $ | 91,843 
|Converted Products |  |                             | 71,530  |      |   | 68,130 
|International      |  |                             | 42,379  |      |   | 36,591 
|                   |  |                             |         |      |   |        
|Total              |  | $                           | 223,354 |      | $ | 196,564
|                   |  |                             |         |      |   |        
|Restructuring      |  |                             |         |      |   |        
|Paperboard         |  | $                           | 111     |      | $ | 111    
|Converted Products |  |                             |        |      |   | 43     
|                   |  |                             |         |      |   |        
|Total              |  | $                           | 111     |      | $ | 154    
|                   |  |                             |         |      |   |        
|SG&A               |  |                             |         |      |   |        
|Paperboard         |  | $                           | 7,789   |      | $ | 8,105  
|Converted Products |  |                             | 5,125   |      |   | 5,017  
|International      |  |                             | 3,674   |      |   | 3,363  
|Corporate          |  |                             | 4,390   |      |   | 3,616  
|                   |  |                             |         |      |   |        
|Total              |  | $                           | 20,978  |      | $ | 20,101 
|                   |  |                             |         |      |   |        



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|                        |  |                             |        |   |      |   |        |  
|----------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                        |  | Three Months Ended July 31, |       
|(in thousands)          |  | 2007                        |        |   | 2006 |  
|Operating Income (Loss) |  |                             |        |   |      |   |        |  
|Paperboard              |  | $                           | 10,735 |   |      | $ | 11,589 |  
|Converted Products      |  |                             | 1,360  |   |      |   | (698   | )
|International           |  |                             | 3,527  |   |      |   | 3,014  |  
|Corporate               |  |                             | (4,390 | ) |      |   | (3,616 | )
|                        |  |                             |        |   |      |   |        |  
|Total                   |  | $                           | 11,232 |   |      | $ | 10,289 |  
|                        |  |                             |        |   |      |   |        |  

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 July 31 |  
|                                             |  | 2007                       |   |  | 2006  |  
|Net sales                                    |  | 100.0                      | % |  | 100.0 | %
|Cost of sales                                |  | 87.4                       |   |  | 86.6  |  
|Selling, general and administration expenses |  | 8.2                        |   |  | 8.9   |  
|Restructuring and impairments                |  |                           |   |  | 0.1   |  
|Operating income                             |  | 4.4                        |   |  | 4.5   |  
|Interest expense                             |  | 2.7                        |   |  | 3.1   |  
|Income tax expense                           |  | 0.4                        |   |  | 0.5   |  
|Net earnings                                 |  | 1.9                        |   |  | 1.3   |  

Results of Operations

Period Ended July 31, 2007 Compared to Period Ended July 31, 2006

Overview

Net Sales. Net sales for the period ended July 31, 2007 were $255.7 million, which represents a $28.6 million, or 13%, increase over the $227.1 million in
the same period in the prior fiscal year. The realization of price increases across all segments led sales higher, along with increased sales volumes in our North American and European converting operations. However, our mill volumes decreased 3%
and 2% in Europe and North America, respectively. The 6% weakening of the US dollar to the Euro when comparing the average exchange rates for the quarter ended July 31, 2007 to the same quarter in 2006 also contributed to higher sales.

Cost of Sales. Cost of sales for the quarter ended July 31, 2007 was $223.4 million, $26.8 million, or 14%, higher than the $196.6 million
during the quarter ended July 31, 2006. Our cost of recovered paper both internationally and domestically rose sharply in the current quarter, 40% and 38%, respectively, when compared to the same quarter last year. Also contributing to the
increase were higher energy costs across all segments and higher volumes in both our domestic and international converting operations. Non-recurring reductions to costs of sales for the quarters ended July 31, 2007 and 2006 were $2.0 million
from a state sales-tax related settlement and a $3.3 million gain from the sales of certain air emission credits at one of our California locations, respectively (see Note 12 to the Condensed Consolidated Financial Statements).

Restructuring and Impairments. Restructuring charges totaled $0.1 million during the quarter ended July 31, 2007 as compared to $0.2 million during the
quarter ended July 31, 2006. Current year expenses represent costs to exit previously shut down locations in our Paperboard segment while prior year expenses related to similar costs in both our Paperboard and Converted Products segments.

SG&A.SG&A costs rose 4% in the quarter ended July 31, 2007 to $21.0 million compared to $20.1 million in the quarter ended
July 31, 2006. Higher compensation costs and an increase to our bad debt reserve, along with higher commission expense in our International segment, more than offset not having to record an environmental charge in our Paperboard segment in the
quarter ended July 31, 2007 after having recorded one in the same quarter of the prior year.

Operating Income. Operating income increased 9%
in the quarter ended July 31, 2007 to $11.2 million from $10.3 million in the quarter ended July 31, 2006, primarily due to increased prices across all segments and higher volumes in our worldwide converting operations. Lower volumes in
our domestic and international mills, along with a $1.3 million reduction to decreases in cost of sales from non-recurring transactions, served to partially offset the pricing and volume increases.



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Paperboard

Net sales in the Paperboard segment increased by $16.5 million, or 15%, to $128.1 million in the quarter ended July 31, 2007 when compared to $111.6 million for the quarter ended July 31, 2006. Driving this advance was a price
increase of 6% on our recycled paperboard. Additionally, 33% and 1% increases in the price and volume of the sales of recovered paper to third parties also pushed net sales upward. These increases were partially offset by a 2% drop in the volume of
our mill recycled paperboard.

Cost of sales for the quarter ended July 31, 2007 was $109.4 million, a $17.6 million, or 19%, increase from the $91.8
million in the same quarter of the prior year. The major force driving costs upward was a 38% spike in the cost of recovered paper. Adding to the rise in costs was a 1% increase in overall energy costs. Non-recurring reductions to costs of sales for
the quarters ended July 31, 2007 and 2006 were $2.0 million from a state sales-tax related settlement and a $3.3 million gain from the sales of certain air emission credits at one of our California locations, respectively.

Restructuring costs remained flat at $0.1 million with charges in each quarter comprised of costs to exit previously shut down locations.

Our mill utilization rates remained flat at 97% in each of the quarters ended July 31, 2007 and 2006.

SG&A decreased 4%, or $0.3 million, from $8.1 million in the quarter ended July 31, 2006 to $7.8 million in the quarter ended July 31, 2007. This decrease is primarily a result of our recording an
environmental reserve in the quarter ended July 31, 2006 after being named a potential responsible party by the EPA in relation to the Lower Passaic River Study Area, while not having to record such an accrual in the current quarter.

Operating Income for the Paperboard segment decreased 7% to $10.7 million in the quarter ended July 31, 2007 compared to $11.6 million in the quarter
ended July 31, 2006. The dramatic increase in the costs of recovered paper, along with the decrease in mill volume, overcame the benefits from the higher sales prices.

Converted Products

Net sales in the Converted Products segment were $78.0 million in the quarter ended
July 31, 2007, $5.5 million, or 8%, higher than the $72.5 million during the same quarter in 2006, the result of a 3% increase in sales price and a 2% increase in volume.

Cost of sales for the quarter ended July 31, 2007 was $71.5 million, an increase of 5%, or $3.4 million, compared to the $68.1 million in the quarter ended July 31, 2006, the result of the 2% volume increase
and a 2% increase in raw material paperboard costs.

The Converted Products segment incurred no restructuring charges in the quarter ended July 31,
2007 compared to $0.1 million in the quarter ended July 31, 2006. Prior-year charges reflect costs to exit previously shut down locations.

SG&A
expenses remained essentially flat when comparing the quarters ended July 31, 2007 and 2006 at $5.1 million and $5.0 million, respectively.

The
Converted Products segment posted operating income of $1.4 million in the quarter ended July 31, 2007 as compared to an operating loss of $0.7 million in the quarter ended July 31, 2006. The effects of price increase realization and better
efficiencies through prior restructuring efforts resulted in substantial margin improvement in the current quarter. These positive impacts, along with higher volumes, more than offset the incremental costs associated with increased volumes, such as
raw material paperboard.

International

Net
sales in the International segment increased 15%, or $6.6 million, to $49.6 million in the quarter ended July 31, 2007 compared to $43.0 million in the quarter ended July 31, 2006. Average sales price increases of 16% and 13% on our
international mill and converted products, respectively, along with a 6% increase in converting operations volume, were the reasons for the increase, but were partially offset by a 3% decrease in mill volume. The weakening of the US dollar against
the Euro also factored into increased sales, as the average US dollar/Euro exchange rate during the current quarter was 1.36 as compared to 1.27 in the quarter ended July 31, 2006, a 6% change. Excluding the effects of exchange rates, our
average mill and converting sales prices increased 9% and 6%, respectively.



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Cost of sales in the International segment was $42.4 million for the quarter ended July 31, 2007, 16%, or $5.8
million, higher than the $36.6 million experienced in the quarter ended July 31, 2006. The largest impact on this increase was a 40% surge in our recovered paper cost. A rise in total energy and freight costs of 8% and 6% per ton,
respectively, also pushed our cost of sales higher, as did our higher converting volumes and the weaker US dollar.

SG&A in the International segment
was $3.7 million in the quarter ended July 31, 2007, $0.3 million, or 9%, higher than in the same quarter in the prior year. The 6% weakening of the US dollar versus the Euro, along with a 7% increase in commission expense on a Euro basis,
account for this increase.

Despite a higher percentage increase in cost of sales compared to the increase in net sales, operating income for the
International segment increased $0.5 million in the quarter ended July 31, 2007 to $3.5 million from $3.0 million in the quarter ended July 31, 2006. Higher sales prices on both our mill and converted products, along with increased
converting volumes, more than offset a sharp rise in wastepaper costs and elevated freight and energy costs. The weaker US dollar versus the Euro also contributed to the increase.

Corporate

Unallocated corporate expense for the quarter ended July 31, 2007 was $4.4 million, $0.8
million, or 21%, higher than $3.6 million in the quarter ended July 31, 2006, the result of higher compensation expense and an increase in our bad debt reserve.

Other (Expense) Income

Interest expense remained flat for the quarters ended July 31, 2007 and 2006 at
$6.9 million despite average outstanding borrowings during the quarter ended July 31, 2007 increasing to $289.6 million from $277.0 million in the quarter ended July 31, 2006. Lower interest rates on the credit facilities entered into in
March 2007 versus the rates from the facility in effect in the prior year are responsible for the lack of an increase in the current quarter.

Excluding
interest expense, Other (expense) incomenet increased from income of $0.7 million in the quarter ended July 31, 2006 to $1.6 million in the quarter ended July 31, 2007. The vast majority of the increase, $0.8 million, is the result
of interest received as part of a state sales-tax related settlement, as described above, along with an increase in affiliate earnings.

Income Tax
Expense (Benefit)

Our consolidated tax rate is computed using an annual effective rate for each taxable jurisdiction. We record income tax expense
related to our state and foreign jurisdictions in which we have taxable income. During the three months ended July 31, 2007 and 2006, we did not record US federal income tax expense due to the reduction of our valuation allowance against our
deferred tax assets  net operating losses.

Although pre-tax income has increased when comparing the quarters ended July 31, 2007 and 2006, our
income tax expense remained relatively flat at $1.0 million and $1.1 million, respectively, due to the majority of the increase in pre-tax income stemming from North American operations, where we currently do not record US income tax expense due to
the reduction of our valuation allowance against our deferred tax assets  net operating losses.

Net Income

In summary, we recorded net income of $4.9 million in the quarter ended July 31, 2007 compared to $2.9 million in the quarter ended July 31, 2006, a 70%
improvement. Higher sales prices across all segments and worldwide converting volumes, along with substantial margin improvement in our Converted Products segment, more than offset large increases in the cost of recovered paper per ton of paperboard
produced in our domestic and international mills as well as a $1.3 million decrease in non-recurring cost of sales reductions in our Paperboard segment. Income tax expense decreased slightly from $1.1 million in the quarter ended July 31, 2006
to $1.0 million in the quarter ended July 31, 2007.

Liquidity Requirements

Operations. Our current cash requirements for operations consist primarily of expenditures to maintain our mills and plants, purchase inventory, meet
operating lease obligations, meet obligations to our lenders, and finance working capital



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requirements as well as other operating activities. We fund our current cash requirements with cash provided by operations and borrowings under our
asset-based and credit-linked facilities. We believe that these sources will be sufficient to meet the current and anticipated cash requirements of our operations for the next twelve months.

Capital Expenditures. Our total capital expenditures were $5.1 million and $3.8 million in the quarters ended July 31, 2007 and 2006, respectively. We
expect fiscal 2008 capital expenditures to be under $25.0 million.

Borrowings

At July 31, 2007, total debt (consisting of current maturities of debt, our asset-based and credit-linked facilities, and other long-term debt, as reported on our condensed consolidated balance sheets) was as
follows (in millions):



|                                         |  |               |      
|---------------------------------------- |  | ------------- | -----
|                                         |  | July 31, 2007
|9.75% Senior Subordinated Notes due 2014 |  | $             | 175.0
|Asset-based credit facility              |  |               | 11.0 
|Term loan                                |  |               | 15.0 
|Industrial Revenue Bonds (IRBs)        |  |               | 65.5 
|Other(1)                                 |  |               | 22.6 
|                                         |  |               |      
|Total debt                               |  | $             | 289.1
|                                         |  |               |      

| | 
| | 

| | (1) | See Note 5 to the accompanying condensed consolidated financial statements for the components of this total.
| | --- | ------------------------------------------------------------------------------------------------------------

In July 2007, our international subsidiary entered into a new five year loan in the amount of 5.0 million. Borrowings under this loan bear a variable interest rate
of EURIBOR plus .75%. Principal and interest payments are required every six months at which point the variable interest rate is reset.

On March 9,
2007, (i) we entered into a five-year asset-based senior secured revolving credit facility whereby the lenders agreed to provide to us a revolving line of credit in the aggregate principal amount of up to $85.0 million (depending on our
borrowing base), up to $25.0 million of which may be used for loans directly to our International subsidiary and up to $15.0 million of which may be used for letters of credit, and other financial accommodations, and (ii) we and our domestic
subsidiaries entered into a six-year credit-linked facility whereby the credit-linked lenders provided to us a $15.0 million term loan and a $75.0 million credit-linked letter of credit facility, and other financial accommodations. Under the
agreement referred to in (i) above, we (a) granted the lenders a first priority lien on all of our accounts receivable and inventory (the ABL Priority Collateral) and a second priority lien on substantially all of our other
assets, including certain real property, and (b) guaranteed the obligations, under this facility, of an international subsidiary. Under the agreement referred to in (ii) above, we granted the lenders a first priority lien on substantially
all of our assets, including certain real property (excluding accounts receivable and inventory), and a second priority lien to the lenders on all ABL Priority Collateral. Borrowings under the asset-based facility bear interest at a rate of prime or
the Eurodollar rate plus a credit spread determined based on availability under the facility. The term loan under the credit-linked facility bears interest at a rate of prime plus 1% or the Eurodollar rate plus a credit spread of 2.25%. Letters of
Credit are issued under the credit-linked facility primarily to enhance the Companys multiple IRB issues with the credit spread being the same as the term loan. Subject to meeting certain conditions, we have a one-time option prior to
March 9, 2010 to increase the revolving credit facility by an amount of up to $15.0 million. Likewise, subject to meeting certain conditions, we have a one-time option prior to March 9, 2010 to increase the credit-linked facility by
an amount of up to $10.0 million.

The facilities include financial covenants as follows: (a) if, during any quarter, Excess Availability, as defined
under the revolving credit facility, falls below $10.0 million, we must achieve a Fixed Charge Coverage Ratio, as defined in that agreement, of not less than 1.0 to 1.0. and (b) the Senior Leverage Ratio, as defined, for each twelve-month
period ending as of each fiscal quarter end shall be less than or equal to 3.0 to 1.0. At July 31, 2007, the Company was in compliance with all financial ratios.

In March 2004, we completed an offering of $175.0 million of 9.75% senior subordinated notes (the 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; on or after that date, we may redeem them at specified prices. The



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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.

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
|2008 (1)              |  | $     | 10.0 
|2009                  |  |       | 4.8  
|2010                  |  |       | 4.4  
|2011                  |  |       | 4.5  
|2012 (2)              |  |       | 15.7 
|Thereafter (3)        |  |       | 249.7

| | 
| | 

| | (1) | Represents remaining obligations for the fiscal year ended April 30, 2008.
| | --- | --------------------------------------------------------------------------

| | (2) | Includes $11.0 million due under the asset-based credit facility.
| | --- | -----------------------------------------------------------------

| | (3) | Includes $15.0 million due under the term loan.
| | --- | -----------------------------------------------

We are party to a series of cross-currency interest rate swap agreements (the 2001 Swaps) with a member of our bank
group that had been designated as a cash flow hedge against an existing intercompany loan to our European subsidiary. Effective May 1, 2007, we de-designated the 2001 Swaps as hedges. With this de-designation, the amount in other comprehensive
income, $0.2 million, remains and will be reclassified into earnings over the life of the original agreements, which are scheduled to terminate in September 2009. At July 31, 2007 and April 30, 2007, the fair value of the 2001 Swaps
represented a liability of $14.9 million and $14.8 million, respectively. During the quarter ended July 31, 2007, we entered into another swap agreement in relation to a second intercompany loan with our European subsidiary that was not
designated as a hedge which represented a liability of $0.1 million as of July 31, 2007.

Additionally, in our effort to manage costs, we, at varying
times, utilize energy and raw material price hedges. At July 31, 2007, the fair value of these hedges was a liability of approximately $1.7 million, which was entirely energy related.

Cash Flow

Net cash provided by operating activities

We generated cash from operating activities of $28.3 million and $20.6 million in the quarters ended July 31, 2007 and 2006, respectively. The $7.8
million increase was the result of the following: (i) a $1.9 million positive change in net earnings, (ii) the current year receipt of $1.9 million from the surrender of a life insurance policy, (iii) a $7.7 million decrease in
changes in accounts receivable more than offsetting a $2.5 decrease in changes in accounts payable, some of which is attributable to the cost of recovered paper we sell to third parties, offset by (i) $1.4 million less received in dividends
from equity affiliates.

Net cash used in investing activities

In the quarters ended July 31, 2007 and 2006, we used $6.1 million and $3.5 million of cash, respectively, in investing activities. The $2.6 million increase is mainly the result of a $2.1 increase in capital expenditures and
acquisition costs. The increased usage was also impacted by $0.3 million less in proceeds from the sale of property, plant and equipment and a $0.1 million increase in restricted cash.

Net cash used in financing activities

In the quarters ended July 31, 2007 and 2006, we used cash in financing
activities of $11.4 million and $12.2 million, respectively, a reduction of $0.8 million. This reduction is the result of $7.1 million less in net repayments of long-term debt offset by a $6.3 million decrease in cash overdrafts.



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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. The sales volumes of
certain of our converted products can also vary from quarter to quarter, partly due to the increased production of textbooks and binders before the beginning of the school year, as well as the production of board games and other products before the
start of the Christmas season. 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

Increases in raw material and energy prices have had, and continue to have, a material negative 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 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 three-month period ended July 31, 2007.

Pension

Our defined benefit pension plans are accounted for in accordance with FAS 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 discount rates used to discount plan liabilities, the expected long-term rate of return on plan assets and the level of
compensation increases. Our assumptions are described in Note 14 to our Annual Report on Form 10-K for the year ended April 30, 2007. At April 30, 2007, the discount rate was lowered to 6.0% from 6.3%. A 1.0% change in this discount rate
would create an impact to the statement of operations of approximately $1.2 million. The discount rate is based upon the demographics of the plan participants as well as benchmarking a certain index, e.g. Citigroup Pension Liability Index. To
determine our expected long-term rate of return on plan assets, we evaluate criteria such as asset allocation, historical returns by asset class, historical returns of our current pension portfolio managers and managements expectation of the
economic environment. Based upon this methodology, the expected long-term rate of return on assets was 8.8% as of April 30, 2007. A 1% change in the long-term rate of return on plan assets would create an impact to the statement of operations
of approximately $0.9 million. The level of compensation increase is established by management, and has the smallest direct impact of the three assumptions on the statement of operations. A 0.5% change in this compensation rate would create an
impact to the statement of operations of approximately $0.3 million. Pension expense was $4.7 million in 2006, $3.0 million in 2007 and is expected to be approximately $2.0 million in 2008.

Goodwill

We 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, 2007 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.



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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 on which we have information that the customer may be unable to meet its financial obligation, (e.g. bankruptcy), 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 $0.3 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.

Environmental Matters

We are subject to extensive federal, state and local environmental laws and regulations, including those that
relate to air emissions, wastewater discharges, solid and hazardous waste management and disposal and site remediation. Concerning environmental claims, we record any liabilities and disclose the required information in accordance with FAS 5,
Accounting for Contingencies, Statement of Position 96-1, Environmental Remediation Liabilities and FAS 143, Accounting for Asset Retirement Obligations. Additionally, from time to time, we may be identified,
along with other entities, as being among parties potentially responsible for contribution to costs associated with the investigation, correction and remediation of environmental conditions at disposal sites subject to federal and/or analogous state
laws. Costs associated with environmental obligations are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Estimates of costs for future environmental
compliance and remediation are necessarily imprecise due to such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown
remediation sites and the allocation of costs among the potentially responsible parties under applicable statutes. Costs of future expenditures for environmental remediation obligations are discounted to their present value when the amount and
timing of expected cash payments are reliably determinable.

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.

The Company assesses the need to record a valuation allowance, which is determined through the process of projecting
our net deferred tax assets while factoring in tax planning strategies, 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.

As of July 31, 2007, we had a full valuation allowance on our deferred tax assets for US federal income tax purposes and will maintain such allowance until positive
earnings are recorded in several consecutive reporting periods. We will continue to evaluate our valuation allowance on a quarterly basis.

As of
May 1, 2007, the Company adopted FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement 109 (FIN 48). This interpretation provides that the tax effects from an
uncertain tax position can be recognized in the financial statements, only if it is more likely than not that the position would be sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Consistent with the Companys previous accounting policy, interest costs and penalties related to income taxes are classified as
interest expense and selling, general and administrative costs, respectively in the Companys financial statements.

Impairment 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;
| | - |  | -----------------------------



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| |  |  | 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 10 to our Annual Report on Form 10-K for the year ended April 30, 2007.



|Item 3. | Quantitative And Qualitative 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 selling prices and our profitability. We estimate that a 10% increase in the price of recovered paper, with no corresponding increase in the prices of finished products, would have approximately a $17.5 million
negative effect on our operating income on an annual basis, 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 $10.4 million negative effect on our operating income
on an annual basis. We attempt to partially hedge our energy price risk by buying forward contracts for some of our future energy requirements.

Interest Rates/Cross-Currency Interest Rate Swaps: We are party to a series of cross-currency interest rate swap agreements (the 2001 Swaps) with a member of our bank group that had been designated as a cash flow
hedge against an existing intercompany loan to our European subsidiary. Effective May 1, 2007, we de-designated the 2001 Swaps as hedges. With this de-designation, the amount in other comprehensive income, $0.2 million, remains and will be
reclassified into earnings over the life of the original agreements, which are scheduled to terminate in September 2009. Despite this accounting-based de-designation, economic coverage of the exposure to changes in the Euro to US dollar exchange
rates remains as the interest rate derivative instruments remain in effect, only hedge accounting ceases. At July 31, 2007, the fair value of the 2001 Swaps represented a liability of $14.9 million. During the quarter ended July 31, 2007,
we entered into another swap agreement in relation to a second intercompany loan with our European subsidiary that was not designated as a hedge which represented a liability of $0.1 million as of July 31, 2007. As a result of derivative
activities during the three months ended July 31, 2007 and 2006, we recognized a gain of $0.1 million and a de minimis loss, 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%, or approximately 50 basis points, it would have approximately a $0.6 negative million effect on net earnings on an annual basis.

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



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|Item 4. | Controls and Procedures.
|------- | ------------------------

(a) Disclosure controls and procedures.

As of July 31, 2007, 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 July 31, 2007, 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.

(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
|------- | -----------------

We are party to various claims,
legal actions, complaints and administrative proceedings, including workers compensation claims, arising in the ordinary course of business. Although in managements opinion the ultimate disposition of these matters will not have a
material effect on our financial condition, results of operations or cash flows, in the event of one or more adverse determinations related to these issues, the impact on our results of operations could be material to any specific period.

The Massachusetts Attorney Generals Office has asserted that we, at one or more of our Massachusetts mills, exceeded permitted air
emissions, failed to accurately report certain emissions, and failed to submit certain required monitoring and compliance reports. We have agreed, in principle, subject to a definitive written agreement, to settle these allegations by paying $600
and agreeing to certain injunctive relief. We had accrued the $600 by April 30, 2007, with such amounts being recorded in the Selling, general and administrative line on the Consolidated Statements of Operations.

By letters dated February 14, 2006 and June 2, 2006, the United States Environment Protection Agency (EPA) notified us of our
potential liability relating to the Lower Passaic River Study Area (LPRSA), which is part of the Diamond Alkali Superfund Site, under Section 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act of
1980. We are one of at least 70 potentially responsible parties (PRPs) identified thus far. The EPA alleges that hazardous substances were released from our now-closed Newark, NJ paperboard mill into the Lower Passaic River. The EPA
informed us that we may be potentially liable for response costs that the government may incur relating to the study of the LPRSA and for unspecified natural resource damages. The EPA demanded we pay $2,830 in unreimbursed past response costs on a
joint and several liability basis. Alternatively, the EPA gave us the opportunity to obtain a release from these past response costs by joining the Cooperating Parties Group (the Group) and agreeing to fund an environmental study by the
EPA. In 2006, the EPA notified the Group that the cost of the study would exceed its initial estimates and offered the Group the opportunity to conduct the study by itself rather than reimburse the government for the additional costs
incurred. The Group engaged in discussions with the EPA and the Group agreed to assume responsibility for the study pursuant to an Administrative Order on Consent. Cumulatively, as of July 31, 2007, we have expensed $688 (none of
which was



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expensed in the quarter ended July 31, 2007), of which $456 remains accrued based upon the most recent estimates for the study. Due to
uncertainties inherent in this matter, management is unable to estimate our potential exposure, including possible remediation or other environmental responsibilities that may result from this matter at this time; such information is not expected to
be known for a number of years. These uncertainties primarily include the completion and outcome of the environmental study and the percentage of contamination, if any, ultimately determined to be attributable to us and other parties. It
is possible that our ultimate liability resulting from this issue could materially differ from the July 31, 2007 accrual balance.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

No changes



|ITEM 2. | UNREGISTERED SALES 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
|------- | ---------------------------------------------------

The Annual Meeting of The Newark Groups shareholders was held on July 20, 2007, at which time the shareholders voted all shares to re-elect all of the incumbent directors.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None



|ITEM 6. | EXHIBITS AND REPORTS
|------- | --------------------



|     |  |                                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------
|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:    September 12, 2007 |  |                        |  |                                             
|                            |  |                       
|                            |  | By:                    |  | /s/ Robert H. Mullen                        
|                            |  |                        |  | Robert H. Mullen                            
|                            |  |                        |  | Chief Executive Officer, President and      
|                            |  |                        |  | Chairman of the Board                       
|                            |  |                        |  | (Principal Executive Officer)               
|                            |  |                       
|Date:    September 12, 2007 |  |                        |  |                                             
|                            |  |                       
|                            |  | By:                    |  | /s/ Joseph E. Byrne                         
|                            |  |                        |  | Joseph E. Byrne                             
|                            |  |                        |  | Chief Financial Officer                     
|                            |  |                        |  | (Principal Financial and Accounting Officer)



27