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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 January 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
January 31, 2007 was 3,634,080.



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INDEX

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|                               |  |                                                                                                               |  |   
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------- |  | --
|                               |  | Page                                                                                                         
|PART I  FINANCIAL INFORMATION |  |                                                                                                              
|                               |  |                                                                                                              
|Item 1.                        |  | Unaudited Condensed Consolidated Financial Statements:                                                        |  |   
|                               |  |                                                                                                              
|                               |  | Condensed Consolidated Balance Sheets as of January 31, 2007 and April 30, 2006                               |  | 1 
|                               |  |                                                                                                              
|                               |  | Condensed Consolidated Statements of Operations for the three and nine months ended January 31, 2007 and 2006 |  | 2 
|                               |  |                                                                                                              
|                               |  | Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2007 and 2006           |  | 3 
|                               |  |                                                                                                              
|                               |  | Condensed Consolidated Statement of Permanent Stockholders Equity for the nine months ended January 31, 2007 |  | 4 
|                               |  |                                                                                                              
|                               |  | Notes to Condensed Consolidated Financial Statements                                                          |  | 5 
|                               |  |                                                                                                              
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                         |  | 18
|                               |  |                                                                                                              
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  | 30
|                               |  |                                                                                                              
|Item 4.                        |  | Controls and Procedures                                                                                       |  | 31
|                               | 
|Part II  OTHER INFORMATION    |  |                                                                                                              
|                               |  |                                                                                                              
|Item 1.                        |  | Legal Proceedings                                                                                             |  | 32
|Item 1A.                       |  | Risk Factors                                                                                                  |  | 32
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                   |  | 32
|Item 3.                        |  | Defaults Upon Senior Securities                                                                               |  | 32
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                           |  | 32
|Item 5.                        |  | Other Information                                                                                             |  | 33
|Item 6.                        |  | Exhibits                                                                                                      |  | 33
|                               | 
|SIGNATURES                     |  | 34                                                                                                           



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THE NEWARK GROUP, INC. AND SUBSIDIARIES

PART I FINANCIAL INFORMATION



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

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

AS OF JANUARY 31, 2007 AND APRIL 30, 2006

(Dollars in Thousands, Except Share Data)

---



|                                                                                                                 |  |                 |         |   |               |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                 |  | January 31,2007 |         |   | April 30,2006 |  
|ASSETS                                                                                                           |  |                 |         |   |               |   |         |  
|CURRENT ASSETS:                                                                                                  |  |                 |         |   |               |   |         |  
|Cash and cash equivalents                                                                                        |  | $               | 9,024   |   |               | $ | 6,688   |  
|Accounts receivable (less allowance for doubtful accounts of $4,558 and $5,784, respectively)                    |  |                 | 111,517 |   |               |   | 112,856 |  
|Inventories                                                                                                      |  |                 | 67,426  |   |               |   | 69,073  |  
|Other current assets                                                                                             |  |                 | 7,480   |   |               |   | 6,522   |  
|Assets held for sale                                                                                             |  |                 | 1,033   |   |               |   |        |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total current assets                                                                                             |  |                 | 196,480 |   |               |   | 195,139 |  
|                                                                                                                 |  |                
|RESTRICTED CASH                                                                                                  |  |                 | 309     |   |               |   | 134     |  
|PROPERTY, PLANT AND EQUIPMENT  Net                                                                              |  |                 | 298,078 |   |               |   | 307,207 |  
|GOODWILL                                                                                                         |  |                 | 47,453  |   |               |   | 46,761  |  
|LONG-TERM INVESTMENTS                                                                                            |  |                 | 17,413  |   |               |   | 17,233  |  
|OTHER ASSETS                                                                                                     |  |                 | 16,935  |   |               |   | 16,733  |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|TOTAL ASSETS                                                                                                     |  | $               | 576,668 |   |               | $ | 583,207 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|                                                                                                                 |  |                
|LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS EQUITY                                                 |  |                 |         |   |               |   |         |  
|CURRENT LIABILITIES:                                                                                             |  |                 |         |   |               |   |         |  
|Accounts payable                                                                                                 |  | $               | 83,404  |   |               | $ | 81,564  |  
|Current maturities of debt                                                                                       |  |                 | 7,194   |   |               |   | 31,844  |  
|Income taxes and other taxes payable                                                                             |  |                 | 3,390   |   |               |   | 3,067   |  
|Accrued salaries and wages                                                                                       |  |                 | 13,703  |   |               |   | 14,124  |  
|Other accrued expenses                                                                                           |  |                 | 13,434  |   |               |   | 11,466  |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total current liabilities                                                                                        |  |                 | 121,125 |   |               |   | 142,065 |  
|                                                                                                                 |  |                
|SENIOR DEBT                                                                                                      |  |                 | 84,124  |   |               |   | 68,190  |  
|SUBORDINATED DEBT                                                                                                |  |                 | 180,436 |   |               |   | 180,967 |  
|DEFERRED INCOME TAXES                                                                                            |  |                 | 7,650   |   |               |   | 5,775   |  
|PENSION OBLIGATION                                                                                               |  |                 | 17,727  |   |               |   | 17,690  |  
|SWAP OBLIGATION                                                                                                  |  |                 | 13,110  |   |               |   | 16,269  |  
|OTHER LIABILITIES                                                                                                |  |                 | 5,918   |   |               |   | 6,063   |  
|MINORITY INTEREST                                                                                                |  |                 |        |   |               |   | 91      |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total liabilities                                                                                                |  |                 | 430,090 |   |               |   | 437,110 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|COMMITMENTS AND CONTINGENCIES (Note 10)                                                                          |  |                 |         |   |               |   |         |  
|                                                                                                                 |  |                
|TEMPORARY EQUITY  COMMON STOCK, SUBJECT TO PUT RIGHTS, (648,279 shares)                                         |  |                 | 27,911  |   |               |   | 27,911  |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|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                                                                                                |  |                 | 184,545 |   |               |   | 184,702 |  
|Accumulated other comprehensive loss                                                                             |  |                 | (5,259  | ) |               |   | (5,897  | )
|Treasury stock, 2,370,920 shares at cost                                                                         |  |                 | (61,053 | ) |               |   | (61,053 | )
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total permanent stockholders equity                                                                             |  |                 | 118,667 |   |               |   | 118,186 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|TOTAL LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS EQUITY                                           |  | $               | 576,668 |   |               | $ | 583,207 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  

See notes to condensed consolidated financial statements



-1-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2007 AND 2006

(Dollars in Thousands)

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|                                                                |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------------- | ------- | - | ------------------------ | - | ------- | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                |  | For the Three MonthsEnded |         |   | For the Nine MonthsEnded |  
|                                                                |  | January 31,2007           |         |   | January 31,2006          |   |         | January 31,2007 |  |   | January 31,2006 |  
|NET SALES                                                       |  | $                         | 223,116 |   |                          | $ | 206,241 |                 |  | $ | 681,920         |   |  | $ | 648,582 |  
|COST OF SALES                                                   |  |                           | 199,231 |   |                          |   | 182,558 |                 |  |   | 598,139         |   |  |   | 575,570 |  
|                                                                |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|Gross profit                                                    |  |                           | 23,885  |   |                          |   | 23,683  |                 |  |   | 83,781          |   |  |   | 73,012  |  
|                                                                |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|OPERATING EXPENSES:                                             |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|Selling, general and administrative                             |  |                           | 20,714  |   |                          |   | 19,441  |                 |  |   | 61,792          |   |  |   | 59,444  |  
|Restructuring and impairments                                   |  |                           | 189     |   |                          |   | 628     |                 |  |   | 636             |   |  |   | 1,877   |  
|                                                                |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|Total operating expenses                                        |  |                           | 20,903  |   |                          |   | 20,069  |                 |  |   | 62,428          |   |  |   | 61,321  |  
|                                                                |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|OPERATING INCOME                                                |  |                           | 2,982   |   |                          |   | 3,614   |                 |  |   | 21,353          |   |  |   | 11,691  |  
|                                                                |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|OTHER (EXPENSE) INCOME:                                         |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|Interest expense                                                |  |                           | (6,710  | ) |                          |   | (6,814  | )               |  |   | (20,480         | ) |  |   | (19,684 | )
|Interest income                                                 |  |                           | 21      |   |                          |   | 54      |                 |  |   | 177             |   |  |   | 107     |  
|Equity in income of affiliates                                  |  |                           | 665     |   |                          |   | 493     |                 |  |   | 1,979           |   |  |   | 1,505   |  
|Other income (expense)  net                                    |  |                           | 24      |   |                          |   | (3      | )               |  |   | 89              |   |  |   | (429    | )
|                                                                |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|Total other expense                                             |  |                           | (6,000  | ) |                          |   | (6,270  | )               |  |   | (18,235         | ) |  |   | (18,501 | )
|                                                                |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|(LOSS) EARNINGS FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES |  |                           | (3,018  | ) |                          |   | (2,656  | )               |  |   | 3,118           |   |  |   | (6,810  | )
|INCOME TAX EXPENSE                                              |  |                           | 850     |   |                          |   | 1,929   |                 |  |   | 3,275           |   |  |   | 368     |  
|                                                                |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|NET LOSS                                                        |  | $                         | (3,868  | ) |                          | $ | (4,585  | )               |  | $ | (157            | ) |  | $ | (7,178  | )
|                                                                |  |                           |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  

See notes to condensed consolidated financial statements



-2-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

FOR THE NINE MONTHS ENDED JANUARY 31, 2007 AND 2006

(Dollars in Thousands)

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|                                                                                |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                |  | 2007 |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |  |      |         |   |      |   |         |  
|Net loss                                                                        |  | $    | (157    | ) |      | $ | (7,178  | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                   |  |      | 25,736  |   |      |   | 25,759  |  
|Impairment of assets                                                            |  |      | 40      |   |      |   | 502     |  
|(Gain) loss on sale of property, plant and equipment                            |  |      | (185    | ) |      |   | 278     |  
|Equity in income of affiliates                                                  |  |      | (1,979  | ) |      |   | (1,505  | )
|Loss (gain) due to hedge ineffectiveness                                        |  |      | 63      |   |      |   | (198    | )
|Proceeds from dividends paid by equity investments in affiliates                |  |      | 2,204   |   |      |   | 923     |  
|Deferred income tax expense (benefit)                                           |  |      | 1,021   |   |      |   | (674    | )
|Other                                                                           |  |      |        |   |      |   | 165     |  
|                                                                                |  |     
|Changes in assets and liabilities:                                              |  |      |         |   |      |   |         |  
|Decrease in accounts receivable                                                 |  |      | 2,196   |   |      |   | 9,889   |  
|Decrease (increase) in inventories                                              |  |      | 2,120   |   |      |   | (4,703  | )
|Increase in other current assets                                                |  |      | (1,083  | ) |      |   | (2,917  | )
|Decrease (increase) in other assets                                             |  |      | 421     |   |      |   | (3,149  | )
|Increase (decrease) in accounts payable and accrued expenses                    |  |      | 3,977   |   |      |   | (194    | )
|Decrease in other liabilities                                                   |  |      | (3,960  | ) |      |   | (1,650  | )
|                                                                                |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                       |  |      | 30,414  |   |      |   | 15,348  |  
|                                                                                |  |      |         |   |      |   |         |  
|                                                                                |  |     
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |  |      |         |   |      |   |         |  
|Capital expenditures                                                            |  |      | (15,599 | ) |      |   | (13,017 | )
|Acquisition costs                                                               |  |      | (1,447  | ) |      |   |        |  
|Proceeds from sale of property, plant and equipment                             |  |      | 750     |   |      |   | 1,190   |  
|(Increase) decrease in restricted cash                                          |  |      | (175    | ) |      |   | 62      |  
|                                                                                |  |      |         |   |      |   |         |  
|Net cash used in investing activities                                           |  |      | (16,471 | ) |      |   | (11,765 | )
|                                                                                |  |      |         |   |      |   |         |  
|                                                                                |  |     
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |  |      |         |   |      |   |         |  
|Proceeds from long-term debt                                                    |  |      |        |   |      |   | 2,857   |  
|Repayments of long-term debt                                                    |  |      | (9,620  | ) |      |   | (1,142  | )
|Changes in cash overdraft                                                       |  |      | (1,493  | ) |      |   | (1,706  | )
|                                                                                |  |      |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                             |  |      | (11,113 | ) |      |   | 9       |  
|                                                                                |  |      |         |   |      |   |         |  
|                                                                                |  |     
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                         |  |      | (494    | ) |      |   | (875    | )
|                                                                                |  |      |         |   |      |   |         |  
|                                                                                |  |     
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                       |  |      | 2,336   |   |      |   | 2,717   |  
|                                                                                |  |     
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                  |  |      | 6,688   |   |      |   | 5,692   |  
|                                                                                |  |      |         |   |      |   |         |  
|                                                                                |  |     
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                        |  | $    | 9,024   |   |      | $ | 8,409   |  
|                                                                                |  |      |         |   |      |   |         |  
|                                                                                |  |     
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                              |  |      |         |   |      |   |         |  
|Cash paid during the period for:                                                |  |      |         |   |      |   |         |  
|Interest                                                                        |  | $    | 15,866  |   |      | $ | 14,528  |  
|                                                                                |  |      |         |   |      |   |         |  
|Income Taxes:                                                                   |  |      |         |   |      |   |         |  
|Paid                                                                            |  | $    | 2,872   |   |      | $ | 2,286   |  
|                                                                                |  |      |         |   |      |   |         |  
|(Refunded)                                                                      |  | $    | (5      | ) |      | $ |        |  
|                                                                                |  |      |         |   |      |   |         |  
|Note issued in connection with stock repurchase                                 |  | $    |        |   |      | $ | 7,875   |  
|                                                                                |  |      |         |   |      |   |         |  
|Net change in accrued purchases of property, plant and equipment                |  | $    | 891     |   |      | $ | 637     |  
|                                                                                |  |      |         |   |      |   |         |  

See notes to condensed consolidated financial statements



-3-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENT OF PERMANENT STOCKHOLDERS EQUITY - UNAUDITED

FOR THE NINE MONTHS ENDED JANUARY 31,
2007

(Dollars in Thousands)

---



|                                         |  |       |         |   |                                               |   |        |               |  |   |                  |   |  |                            |         |              |  |                            |     |  |   |    |  |   |      |  
|---------------------------------------- |  | ----- | ------- | - | --------------------------------------------- | - | ------ | ------------- |  | - | ---------------- | - |  | -------------------------- | ------- | ------------ |  | -------------------------- | --- |  | - | -- |  | - | ---- | -
|                                         |  | Total |         |   | Accumulated Other Comprehensive Income (Loss) |   |        | TreasuryStock |  |   | RetainedEarnings |   |  | Additional Paid In Capital |         | Common Stock |  | Total Comprehensive Income |    
|BALANCE APRIL 30, 2006                   |  | $     | 118,186 |   |                                               | $ | (5,897 | )             |  | $ | (61,053          | ) |  | $                          | 184,702 |              |  | $                          | 374 |  | $ | 60 |  |   |      |  
|Net loss                                 |  |       | (157    | ) |                                               |   |       |               |  |   |                 |   |  |                            | (157    | )            |  |                            |    |  |   |   |  | $ | (157 | )
|Other comprehensive income:              |  |       |         |   |                                               |   |        |               |  |   |                  |   |  |                            |         |              |  |                            |     |  |   |    |  |   |      |  
|Foreign currency translation adjustments |  |       | 256     |   |                                               |   | 256    |               |  |   |                 |   |  |                            |        |              |  |                            |    |  |   |   |  |   | 256  |  
|Change in fair value of cash flow hedges |  |       | 382     |   |                                               |   | 382    |               |  |   |                 |   |  |                            |        |              |  |                            |    |  |   |   |  |   | 382  |  
|                                         |  |       |         |   |                                               |   |        |               |  |   |                  |   |  |                            |         |              |  |                            |     |  |   |    |  |   |      |  
|BALANCE JANUARY 31, 2007                 |  | $     | 118,667 |   |                                               | $ | (5,259 | )             |  | $ | (61,053          | ) |  | $                          | 184,545 |              |  | $                          | 374 |  | $ | 60 |  | $ | 481  |  
|                                         |  |       |         |   |                                               |   |        |               |  |   |                  |   |  |                            |         |              |  |                            |     |  |   |    |  |   |      |  

See notes to condensed consolidated financial statements



-4-



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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 normal
recurring adjustments and accruals necessary for a fair presentation have been reflected in these condensed consolidated financial statements. Additionally, the preparation of these financial statements requires management to make estimates and
assumptions that affect: a) the reported amounts of assets and liabilities, b) the disclosure of contingent assets and liabilities at the date of the financial statements and c) the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Operating results for the three and nine-month periods ended January 31, 2007 are not necessarily indicative of the results that may be expected for the year ending April 30, 2007
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,
2006 included in the Companys annual report on Form 10-K.

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

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

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 $4,834 and $6,326 as of January 31, 2007 and April 30, 2006, respectively.

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 FAS 5, Accounting for Contingencies and Statement of Position 96-1 Environmental Remediation Liabilities. 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 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 10).



-5-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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.

Goodwill and Other Intangible Assets Pursuant to FAS No. 142, Goodwill and Other Intangible Assets, goodwill is reviewed for impairment annually or if an event or circumstances change that would more likely than not reduce the fair value of a reporting unit below
its carrying amount. The Company conducted an impairment test based on the estimated fair value of the underlying business as of November 1, 2006 and determined that there was no impairment.



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

In
September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB
108). SAB 108 provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment and is effective for fiscal years ending after
November 15, 2006. The Company has determined that SAB 108 will have no impact on its financial statements in fiscal 2007.

In
September 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 157 (FAS 157), Fair Value Measurements. 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 adoption of FAS 157 is not expected to have a material effect on the Companys
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.

Effective May 1, 2006, the Company adopted FAS 123(R), Share-Based Payment (FAS 123(R)), which requires the measurement of all employee share-based payments to employees, including grants
of employee stock options, using a fair-value-based method and the recording of such expense in the Companys condensed consolidated statements of operations. According to FAS 123(R), the Company is considered a non-public entity as the Company
only has debt securities, as opposed to equity securities, trading in the public market. This pronouncement must be adopted by non-public companies on an interim basis for fiscal years beginning after December 15, 2005. FAS 123(R) allows
non-public companies the ability to elect to measure its liability awards at their intrinsic value through the date of settlement, and the Company elected to continue to measure its liability awards at intrinsic value instead of fair value. Prior to
the adoption of FAS 123(R), the Company had accounted for employee stock options and stock appreciation rights in accordance with the guidance provided in FAS 123. The Company adopted the provisions of FAS 123(R) using the prospective method
effective May 1, 2006. As such, there was no accounting effect on any outstanding awards and the adoption of FAS 123(R) did not have a material effect on the Companys condensed consolidated financial statements. At this time, the Company
has two share-based payment plans covered by FAS 123(R), as described below.



-6-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



The Company has a non-qualifying Stock Option Plan under which it is authorized to grant 300,000
stock options in tandem with stock appreciation rights (SARs) to certain employees. The options and SARs vest over a nine-year period from the date of grant. Upon exercise of an option, the holder is entitled to purchase exercisable
option shares at the grant price. Alternatively, upon exercise of a tandem SAR, the holder is entitled to receive cash equal to the amount by which the put value of the Companys common stock on the exercise date exceeds the grant price of the
related stock options. As SARs are exercised, the corresponding options are cancelled and as options are exercised the corresponding SARs are cancelled.

Stock Option Plan



|                                                                 |  |                                    |  |                                   |       |        |        |                                |   |      
|---------------------------------------------------------------- |  | ---------------------------------- |  | --------------------------------- | ----- | ------ | ------ | ------------------------------ | - | -----
|                                                                 |  | Three Months EndedJanuary 31, 2007 |  | Nine Months EndedJanuary 31, 2007
|                                                                 |  | Shares                             |  | Weighted-AverageExercise Price    |       | Shares |        | Weighted-AverageExercise Price
|Outstanding at beginning of period                               |  | 25,000                             |  | $                                 | 41.93 |        | 25,000 |                                | $ | 41.93
|Granted                                                          |  |                                   |  |                                   |      |        |       |                                |   |     
|Exercised                                                        |  |                                   |  |                                   |      |        |       |                                |   |     
|Forfeited                                                        |  |                                   |  |                                   |      |        |       |                                |   |     
|                                                                 |  |                                    |  |                                   |       |        |        |                                |   |      
|Outstanding at end of period                                     |  | 25,000                             |  |                                   | 41.93 |        | 25,000 |                                |   | 41.93
|                                                                 |  |                                    |  |                                   |       |        |        |                                |   |      
|Options exercisable at period-end                                |  | 17,500                             |  | $                                 | 39.25 |        | 17,500 |                                | $ | 39.25
|                                                                 |  |                                    |  |                                   |       |        |        |                                |   |      
|Weighted-average fair value of options granted during the period |  |                                    |  | $                                 |      |        |        |                                | $ |     

There were no options exercised in either of the periods ended January 31, 2007 or 2006.

The following table summarizes information about stock options outstanding and exercisable at January 31, 2007. The exercisable
options have a weighted average remaining contractual life of 2.6 years.



|                   |  |                                            |  |                                |       |                    |        |                                |   |      
|------------------ |  | ------------------------------------------ |  | ------------------------------ | ----- | ------------------ | ------ | ------------------------------ | - | -----
|Outstanding        |  | Exercisable                               
|Outstanding Shares |  | Weighted AverageRemaining Contractual Life |  | Weighted AverageExercise Price |       | Exercisable Shares |        | Weighted AverageExercise Price
|10,000             |  | 1                                          |  | $                              | 33.93 |                    | 10,000 |                                | $ | 33.93
|5,000              |  | 3                                          |  |                                | 42.72 |                    | 3,500  |                                |   | 42.72
|10,000             |  | 6                                          |  |                                | 49.53 |                    | 4,000  |                                |   | 49.53
|                   |  |                                            |  |                                |       |                    |        |                                |   |      
|25,000             |  | 3.4                                        |  |                                | 41.93 |                    | 17,500 |                                |   | 39.25
|                   |  |                                            |  |                                |       |                    |        |                                |   |      

The Company has a second employee stock compensation plan under which it grants SARs without
options to certain employees. The outstanding SARs have a weighted average remaining contractual life of 3.3 years and the exercisable SARs have a weighted average remaining contractual life of 2.6 years.



|                                                              |  |                                    |   |                                   |                                |       |        |         |   |                                |   |      
|------------------------------------------------------------- |  | ---------------------------------- | - | --------------------------------- | ------------------------------ | ----- | ------ | ------- | - | ------------------------------ | - | -----
|                                                              |  | Three Months EndedJanuary 31, 2007 |   | Nine Months Ended January 31,2007
|                                                              |  | Shares                             |   |                                   | Weighted-AverageExercise Price |       | Shares |         |   | Weighted-AverageExercise Price
|Outstanding at beginning of period                            |  | 113,000                            |   |                                   | $                              | 46.86 |        | 122,500 |   |                                | $ | 47.04
|                                                              |  |                                    |   |                                  
|Granted                                                       |  |                                   |   |                                   |                                |      |        | 4,000   |   |                                |   | 43.06
|                                                              |  |                                    |   |                                  
|Exercised                                                     |  |                                   |   |                                   |                                |      |        |        |   |                                |   |     
|                                                              |  |                                    |   |                                  
|Forfeited                                                     |  | (1,000                             | ) |                                   |                                | 45.97 |        | (14,500 | ) |                                |   | 47.29
|                                                              |  |                                    |   |                                  
|Outstanding at end of period                                  |  | 112,000                            |   |                                   |                                | 46.87 |        | 112,000 |   |                                |   | 46.87
|                                                              |  |                                    |   |                                  
|SARs exercisable at period-end                                |  | 59,819                             |   |                                   |                                | 47.80 |        | 59,819  |   |                                |   | 47.80
|                                                              |  |                                    |   |                                  
|Weighted-average fair value of SARs granted during the period |  |                                    |   |                                   | $                              |      |        |         |   |                                | $ | 43.06



-7-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



No compensation cost was recorded in either of the periods ended January 31, 2007 or 2006.
Options and SARs that vested during the nine months ended January 31, 2007 and 2006 had no intrinsic value since the grant price exceeded the put value of Company common stock.

On July 13, 2006, the FASB issued FASB Interpretation 48 Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No.109
(FIN48). FIN48 clarifies the accounting for uncertainty involved in the recognition and measurement of a tax position taken or expected to be taken in a tax return and is effective for the Company beginning in fiscal year 2008. The
Company is evaluating the effects, if any, that the adoption of FIN48 will have on its financial results.

In November 2004, the FASB issued
Statement of Financial Accounting Standards (FAS) No. 151, Inventory Costs (FAS 151). FAS 151 requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as
current-period expense rather than as part of inventory costs. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The effects of
this statement are required to be reflected in financial statements for fiscal years beginning after June 15, 2005, although application is permitted in fiscal years beginning after November 2004. The Companys adoption of the provisions
of FAS 151 effective May 1, 2006 had no effect on its inventory valuation methodologies or results of operations.



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

Inventories consist of the following:



|                             |  |                 |        |                |   |       
|---------------------------- |  | --------------- | ------ | -------------- | - | ------
|                             |  | January 31,2007 |        | April 30, 2006
|Raw Materials                |  | $               | 26,282 |                | $ | 24,612
|Finished Goods               |  |                 | 37,816 |                |   | 41,135
|Other Manufacturing Supplies |  |                 | 3,328  |                |   | 3,326 
|                             |  |                 |        |                |   |       
|                             |  | $               | 67,426 |                | $ | 69,073
|                             |  |                 |        |                |   |       



|4. | ACQUISITION COSTS
|-- | -----------------

During the quarter ended
January 31, 2007, the Company incurred $1,447 of direct costs related to its planned acquisition of a paperboard mill in Germany which have been deferred in accordance with FAS 141, Business Combinations. At any point that this
proposed acquisition should prove unsuccessful, these costs would be expensed in our Statement of Operations.



|5. | 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 the Company 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 one year from the execution of the
Agreement. The net book value of these assets is $706 and is reflected as Assets held for sale on the condensed consolidated balance sheets.

On January 11, 2007, the Company entered into a contract (the Agreement) for the sale of a building and land in South Gardiner, ME which once served as an operating facility in the Converted Products segment. The Company
moved to a larger facility in the fall of 2006 due to expanding business, and the closing of the property sale is expected to be completed within one year from the signing of the Agreement. The net book value of these assets is $327 and is reflected
in Assets held for sale on the condensed consolidated balance sheets.

During the quarter ended January 31, 2007, the Company concluded
the sale of its Kountze, TX property. Net proceeds from the sale were $316, resulting in a gain of $5. This property was home to a facility in the Converted Products segment before it was shut down in June 2004 following continuing operating losses.



-8-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



|6. | LONG-TERM DEBT
|-- | --------------



|                                    |  |                  |         |   |                |   |         |  
|----------------------------------- |  | ---------------- | ------- | - | -------------- | - | ------- | -
|                                    |  | January 31, 2007 |         |   | April 30, 2006 |  
|Senior Subordinated Notes 9.75% (1) |  | $                | 175,000 |   |                | $ | 175,000 |  
|Three-Year Bank Credit Facility (2) |  |                  | 18,145  |   |                |   | 25,415  |  
|Industrial Revenue Bonds (3)        |  |                  | 67,215  |   |                |   | 69,040  |  
|Subordinated Notes (4)              |  |                  | 6,264   |   |                |   | 7,155   |  
|All other (5)                       |  |                  | 5,130   |   |                |   | 4,391   |  
|                                    |  |                  |         |   |                |   |         |  
|Total Debt                          |  |                  | 271,754 |   |                |   | 281,001 |  
|                                    |  |                 
|Less Current Portion                |  |                  | (7,194  | ) |                |   | (31,844 | )
|                                    |  |                  |         |   |                |   |         |  
|Long-Term Debt                      |  | $                | 264,560 |   |                | $ | 249,157 |  
|                                    |  |                  |         |   |                |   |         |  

| | 
| | 

| | (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) | The Company has a $150,000 senior secured credit facility with ten banks which matures on March 11, 2007. Borrowing availability is subject to borrowing base requirements
established by leverage ratios. In addition, the Company has the ability to issue up to $95,000 for letters of credit, the usage of which reduces borrowing availability under the facility. Letters of credit can be issued to enhance industrial
revenue bonds, guarantee unpaid claim reserves under insurance policies and/or to provide performance bonds and trade letters of credit. As of January 31, 2007 the Company has $81,978 in letters of credit obligations outstanding ($68,539 of
which has been used to enhance security for the industrial revenue bonds), $18,145 in loans outstanding and $49,877 of availability under the facility. The borrowings bear variable interest that is reset quarterly at a rate equal to, at the
Companys discretion, one of the following (1) the prime rate plus a spread of 1% to 2%, (2) London Interbank Offered Rate (LIBOR) plus a spread of 2% to 3% or (3) Euro Interbank Offered Rate (EURIBOR) plus a spread of 2% to 3%.
The credit spread on both LIBOR and EURIBOR borrowings is subject to applicable credit spread requirements established by leverage ratios. The rate of interest (including credit spread) as of January 31, 2007 was 6.12% for the Companys
EURIBOR denominated debt; there were no outstanding LIBOR denominated borrowings at January 31, 2007. Outstanding letters of credit are subject to a fee equal to the applicable credit spread for LIBOR based loans. The undrawn portion of the
facility is subject to a facility fee at an annual rate of 0.50%. This debt is classified in Senior Debt in the condensed consolidated balance sheets, and outstanding borrowings have been excluded from Current maturities of debt as a result of the
Companys refinancing  see Note 13.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The industrial revenue bonds are comprised of: Mercer IRB of $1,250, Mobile IRB of $4,560, Ohio IRB of $15,500, and Massachusetts IRBs of $45,905 as of January 31, 2007. During
the nine months ended January 31, 2007, the remaining balance on the Natick IRB was paid. The outstanding bonds are variable rate demand bonds with maturity dates ranging from November 2011 through July 2031 and where the interest rates range
from 6.13% to 7.98% (including letter of credit fee) and are reset every seven days. This debt is classified in Senior Debt in the condensed consolidated balance sheets with a portion in Current maturities of debt.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Pursuant to the July 5, 2005 put of Company common stock to the Company by its former Chairman (see Note 12), the Company issued a subordinated note on
August 10, 2005 for $7,875 to the former Chairman in exchange for the 198,000 shares of Company common stock owned by him. The note bears interest at the prime rate in effect from time to time, requires quarterly principal and interest payments
and is due in July 2015. As of January 31, 2007, the remaining balance on the note is $6,024. The Company had previously issued a separate subordinated note to a stockholder in exchange for the stockholders shares of common stock. That
note bears interest at the rate of 5% per year, payable quarterly. As of January 31, 2007, the amount outstanding on that note is $239 and is due June 2007. The debt associated with these notes is classified in Subordinated Debt in the
condensed consolidated balance sheets with a portion in Current maturities of debt.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | All other includes $40 and $4,179 of borrowings on a line of credit and discounted bills pending collection, respectively, from the Companys International operations. It also
includes a loan with Toronto Dominion Bank for $911. The loan bears interest at the prime rate plus 0.75% (the prime rate is 6.00% as of January 31, 2007), is payable monthly through May 2015 and 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-9-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



The Companys senior secured revolving credit facility requires that the Company satisfy certain
financial covenants, as defined in the credit facility agreement. These covenants consist of an interest coverage test, a $30,000 maximum level of annual capital expenditures and certain leverage ratios. At January 31, 2007, the Company is in
compliance with all financial covenants.

Assets pledged as collateral under the credit facility include substantially all domestic
machinery, equipment and receivables, as well as inventories, certain real estate and 65% of the Companys foreign subsidiaries stock.

The Company has cross-currency interest rate swap agreements with two banks. These agreements have been designated as cash flow hedges against the existing intercompany loan to the Companys European subsidiary. At January 31,
2007 and April 30, 2006, the fair value of the swaps represented a liability of $13,110 and $16,269, respectively, the decrease resulting from a scheduled principal payment and the effects of the change in foreign currency exchange rates.
Relating to hedge ineffectiveness, the Company has recognized a loss of $63 and income of $198 within Other income (expense)  net on the condensed consolidated statements of operations during the nine months ended January 31, 2007 and
2006, respectively.

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



|7. | RETIREMENT PLANS
|-- | ----------------

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



|                                              |  |                                 |        |   |                                |   |        |                  |  |   |                  |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---------------- |  | - | ---------------- | - |  | - | ------ | -
|                                              |  | Pension CostsThree Months ended |        |   | Pension CostsNine Months ended |  
|                                              |  | January 31, 2007                |        |   | January 31, 2006               |   |        | January 31, 2007 |  |   | January 31, 2006 |  
|Service Cost                                  |  | $                               | 779    |   |                                | $ | 865    |                  |  | $ | 2,359            |   |  | $ | 3,025  |  
|Interest Cost on Projected Benefit Obligation |  |                                 | 1,785  |   |                                |   | 1,413  |                  |  |   | 5,404            |   |  |   | 4,951  |  
|Expected Return on Assets Gain                |  |                                 | (2,045 | ) |                                |   | (1,597 | )                |  |   | (6,195           | ) |  |   | (5,597 | )
|Net Amortization                              |  |                                 | 230    |   |                                |   | 366    |                  |  |   | 698              |   |  |   | 1,283  |  
|                                              |  |                                 |        |   |                                |   |        |                  |  |   |                  |   |  |   |        |  
|Net Pension Expense                           |  | $                               | 749    |   |                                | $ | 1,047  |                  |  | $ | 2,266            |   |  | $ | 3,662  |  
|                                              |  |                                 |        |   |                                |   |        |                  |  |   |                  |   |  |   |        |  

The Company estimates a cash contribution to its domestic pension plans of approximately $10,000
during fiscal year ending April 30, 2007 and has made contributions of $5,630 towards that $10,000 total during the nine months ended January 31, 2007. As of January 31, 2007, 69% of the plans assets were in equity investments,
12% in fixed-income securities and 19% in cash and other.

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



|                                              |  |                                 |     |   |                                |   |     |                  |  |   |                  |   |  |   |      |  
|--------------------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ---------------- |  | - | ---------------- | - |  | - | ---- | -
|                                              |  | Pension CostsThree Months ended |     |   | Pension CostsNine Months ended |  
|                                              |  | January 31, 2007                |     |   | January 31, 2006               |   |     | January 31, 2007 |  |   | January 31, 2006 |  
|Service Cost                                  |  | $                               | 8   |   |                                | $ | 46  |                  |  | $ | 24               |   |  | $ | 142  |  
|Interest Cost on Projected Benefit Obligation |  |                                 | 40  |   |                                |   | 57  |                  |  |   | 118              |   |  |   | 174  |  
|Expected Return on Assets Gain                |  |                                 | (35 | ) |                                |   | (52 | )                |  |   | (103             | ) |  |   | (160 | )
|Net Amortization                              |  |                                 | (8  | ) |                                |   |    |                  |  |   | (24              | ) |  |   |     |  
|                                              |  |                                 |     |   |                                |   |     |                  |  |   |                  |   |  |   |      |  
|Net Pension Expense                           |  | $                               | 5   |   |                                | $ | 51  |                  |  | $ | 15               |   |  | $ | 156  |  
|                                              |  |                                 |     |   |                                |   |     |                  |  |   |                  |   |  |   |      |  



-10-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



|8. | RESTRUCTURING AND IMPAIRMENTS
|-- | -----------------------------

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

Fiscal 2007 Restructuring

The Paperboard segment incurred $173 of expenses related to the maintenance of facilities closed in prior years. The Converted Products segment incurred a
net of $16 in expenses relating to facilities closed in prior years; dismantling costs of $34 were offset by releasing $18 of accrued expenses on our Kountze, TX facility as a result of its sale in January 2007.

Fiscal 2006 Restructuring

The
Paperboard segment incurred charges of $582, of which $525 related to the closure of the Natick, MA mill, which occurred in November 2005. Total charges for Natick included $109 of non-cash impairment charges on fixed assets. The remaining $57 of
Paperboard restructuring charges related to costs to exit facilities closed in prior years, as did the $46 of charges in the Converted Products segment.

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



|                                 |  |            |     |                    |   |       |  |   |    
|-------------------------------- |  | ---------- | --- | ------------------ | - | ----- |  | - | ---
|                                 |  | Paperboard |     | Converted Products |   | Total
|January 31, 2007                 |  |            |     |                    |   |       |  |   |    
|Dismantling, Mothballing & Other |  | $          | 173 |                    | $ | 16    |  | $ | 189
|                                 |  |            |     |                    |   |       |  |   |    
|Total Charges                    |  | $          | 173 |                    | $ | 16    |  | $ | 189
|                                 |  |            |     |                    |   |       |  |   |    
|January 31, 2006                 |  |            |     |                    |   |       |  |   |    
|Severance                        |  | $          | 206 |                    | $ |      |  | $ | 206
|Dismantling, Mothballing & Other |  |            | 267 |                    |   | 46    |  |   | 313
|Asset Impairment                 |  |            | 109 |                    |   |      |  |   | 109
|                                 |  |            |     |                    |   |       |  |   |    
|Total Charges                    |  | $          | 582 |                    | $ | 46    |  | $ | 628
|                                 |  |            |     |                    |   |       |  |   |    

For the Nine Months Ended January 31, 2007 and 2006:

Fiscal 2007 Restructuring

The
Paperboard segment incurred $358 of expenses related to the maintenance of facilities closed in prior years. The Converted Products segment incurred $251 of dismantling costs on previously shut down facilities, the total of which includes $145
related to the net buyout of the remaining lease term on one facility and the release of $18 of accrued expenses. The Converted Products segment also incurred $27 of non-cash impairment charges on equipment.

Fiscal 2006 Restructuring

The
Paperboard segment incurred $1,079 of restructuring charges, $783 of which related to the closure of the Natick, MA mill. Of Naticks total, $224 was related to the non-cash impairment of fixed assets, $352 was for severance and the remainder
for mothballing and other charges. Upon closure, there were 58 severed employees, primarily representing the hourly workforce. The decision to close the mill was made based on the need for rationalization of capacity and the near-term requirement of
significant capital investment at the facility which offered little or no return. The remaining charges in Paperboard were comprised of the costs to exit previously shut-down facilities.

Within the Converted Products segment, the majority of both dismantling and impairment charges related to a leased facility which ceased production
operations in April 2004 but continued to be used for warehousing purposes. The $166 within Corporate represented the loss on the sale of a previously restructured facility in Greenville, SC. Gross proceeds on the sale were $1,078.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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



|                                 |  |            |       |                    |   |           |  |       |     |  |   |      
|-------------------------------- |  | ---------- | ----- | ------------------ | - | --------- |  | ----- | --- |  | - | -----
|                                 |  | Paperboard |       | Converted Products |   | Corporate |  | Total
|January 31, 2007                 |  |            |       |                    |   |           |  |       |     |  |   |      
|Dismantling, Mothballing & Other |  | $          | 358   |                    | $ | 251       |  | $     |    |  | $ | 609  
|Asset Impairment                 |  |            |      |                    |   | 27        |  |       |    |  |   | 27   
|                                 |  |            |       |                    |   |           |  |       |     |  |   |      
|Total Charges                    |  | $          | 358   |                    | $ | 278       |  | $     |    |  | $ | 636  
|                                 |  |            |       |                    |   |           |  |       |     |  |   |      
|January 31, 2006                 |  |            |       |                    |   |           |  |       |     |  |   |      
|Severance                        |  | $          | 352   |                    | $ |          |  | $     |    |  | $ | 352  
|Dismantling, Mothballing & Other |  |            | 503   |                    |   | 354       |  |       | 166 |  |   | 1,023
|Asset Impairment                 |  |            | 224   |                    |   | 278       |  |       |    |  |   | 502  
|                                 |  |            |       |                    |   |           |  |       |     |  |   |      
|Total Charges                    |  | $          | 1,079 |                    | $ | 632       |  | $     | 166 |  | $ | 1,877
|                                 |  |            |       |                    |   |           |  |       |     |  |   |      

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



|                                                                 |  |                                        |      |  
|---------------------------------------------------------------- |  | -------------------------------------- | ---- | -
|                                                                 |  | Dismantling, Mothballing & Other Costs |     
|April 30, 2006 Accrual Balance                                   |  | $                                      | 180  |  
|Restructuring Charges for the Nine Months Ended January 31, 2007 |  |                                        | 609  |  
|Amounts Paid Against 2006 Accruals                               |  |                                        | (180 | )
|Amounts Paid Against 2007 Accruals                               |  |                                        | (524 | )
|                                                                 |  |                                        |      |  
|January 31, 2007 Accrual Balance                                 |  | $                                      | 85   |  
|                                                                 |  |                                        |      |  

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



|                   |  |                                         |        |                                                     |   |                                                                |  |                                                            |       |  |   |       
|------------------ |  | --------------------------------------- | ------ | --------------------------------------------------- | - | -------------------------------------------------------------- |  | ---------------------------------------------------------- | ----- |  | - | ------
|                   |  | Cumulative Costs as ofApril 30,2006 (1) |        | Costs for the Nine Months EndedJanuary 31, 2007 (2) |   | Estimated Costs to Complete Initiatives as
of January 31, 2007 |  | Total Estimated Costs of Initiatives as
of January 31,2007
|Paperboard         |  | $                                       | 15,645 |                                                     | $ | 318                                                            |  | $                                                          | 1,250 |  | $ | 17,213
|                   |  |                                         |        |                                                    
|Converted Products |  |                                         | 2,159  |                                                     |   | 278                                                            |  |                                                            | 50    |  |   | 2,487 
|                   |  |                                         |        |                                                     |   |                                                                |  |                                                            |       |  |   |       
|                   |  | $                                       | 17,804 |                                                     | $ | 596                                                            |  | $                                                          | 1,300 |  | $ | 19,700
|                   |  |                                         |        |                                                     |   |                                                                |  |                                                            |       |  |   |       

| | 
| | 

| | (1) | Of the $17,804 in cumulative restructuring costs, $7,972 were non-cash charges related to asset impairment.
| | --- | -----------------------------------------------------------------------------------------------------------

| | (2) | The total costs incurred in the nine months ended January 31, 2007, $596, does not agree with the nine month total charges of $636 from a prior table above since some of the
costs are related to plans initiated prior to January 1, 2003.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. | INCOME TAXES
|-- | ------------

During the nine months ended
January 31, 2007, the Company continued to record a full valuation allowance against its net domestic deferred tax asset and will continue to evaluate future realization on a quarterly basis. Income tax expense relates to state and foreign
jurisdictions in which we have taxable income.

Also, during the quarter ended January 31, 2007, Spanish authorities enacted a
two-tiered rate change for corporate taxpayers. The corporate income tax rate was changed from 35% to 32.5% and 30.0% for tax years beginning after December 31, 2006 and 2007, respectively. This change represents a tax benefit of approximately
$800.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



|10. | COMMITMENTS 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. 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.

Current
Environmental Matters

The Company has identified environmental contamination at three of our 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. During the quarter ended
October 31, 2006, the Company had agreed, in principle, subject to a definitive written agreement, to settle these allegations by paying $575 and agreeing to certain injunctive relief. As of that date, the Company had previously accrued a
minimal amount in relation to these assertions, but based on new information, accrued the remainder of the $575 in the quarter ended October 31, 2006. Based upon further updated information, the Company accrued an additional $25 during the
quarter ended January 31, 2007. The effects of such accruals are recorded in the Selling, general and administrative line on the Condensed Consolidated Statements of Operations.

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 50 potentially responsible parties (PRPs) named thus far. The EPA alleges that hazardous substances were released from the Companys now-closed Newark, NJ paperboard mill into the LPRSA. 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
pay $250 toward the costs of the study. By joining the Group, the Company would also share in certain past and on-going legal fees and other costs of the Group. Considering the history of industrial and other discharges into the LPRSA from other
sources, including named PRPs, the Company believes any releases from its now-closed site to be de minimis in comparison; however, it is not possible at this time to predict that outcome with certainty or to estimate the Companys ultimate
liability in the matter, including any liability for natural resource damages. Given the uncertainty, the Company, by letter dated June 16, 2006, informed the EPA of its intent to enter into the arrangement with the EPA and the Group and
accrued the required $250 contribution during the first quarter.



|11. | 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.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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.



-14-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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



|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|-------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | - | ------- | --------------- |  | - | --------------- | - |  | - | -------- | -
|                                                               |  | For the Three Months Ended |         |   | For the Nine Months Ended |  
|                                                               |  | January 31,2007            |         |   | January 31,2006           |   |         | January 31,2007 |  |   | January 31,2006 |  
|Sales (aggregate):                                             |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Paperboard                                                     |  | $                          | 144,869 |   |                           | $ | 138,622 |                 |  | $ | 450,665         |   |  | $ | 441,186  |  
|Converted Products                                             |  |                            | 67,274  |   |                           |   | 64,774  |                 |  |   | 218,675         |   |  |   | 206,807  |  
|International                                                  |  |                            | 44,875  |   |                           |   | 39,154  |                 |  |   | 127,642         |   |  |   | 115,251  |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Total                                                          |  | $                          | 257,018 |   |                           | $ | 242,550 |                 |  | $ | 796,982         |   |  | $ | 763,244  |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Less sales (inter-segment):                                    |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Paperboard                                                     |  | $                          | (32,164 | ) |                           | $ | (34,670 | )               |  | $ | (109,569        | ) |  | $ | (109,153 | )
|Converted Products                                             |  |                            | (1,738  | ) |                           |   | (1,639  | )               |  |   | (5,493          | ) |  |   | (5,537   | )
|International                                                  |  |                            |        |   |                           |   |        |                 |  |   |                |   |  |   | 28       |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Total                                                          |  | $                          | (33,902 | ) |                           | $ | (36,309 | )               |  | $ | (115,062        | ) |  | $ | (114,662 | )
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Sales (external customers):                                    |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Paperboard                                                     |  | $                          | 112,705 |   |                           | $ | 103,952 |                 |  | $ | 341,096         |   |  | $ | 332,033  |  
|Converted Products                                             |  |                            | 65,536  |   |                           |   | 63,135  |                 |  |   | 213,182         |   |  |   | 201,270  |  
|International                                                  |  |                            | 44,875  |   |                           |   | 39,154  |                 |  |   | 127,642         |   |  |   | 115,279  |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Total                                                          |  | $                          | 223,116 |   |                           | $ | 206,241 |                 |  | $ | 681,920         |   |  | $ | 648,582  |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Operating Income:                                              |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Paperboard                                                     |  | $                          | 5,477   |   |                           | $ | 5,364   |                 |  | $ | 26,750          |   |  | $ | 16,184   |  
|Converted Products                                             |  |                            | (2,090  | ) |                           |   | (2,845  | )               |  |   | (3,745          | ) |  |   | (5,126   | )
|International                                                  |  |                            | 3,719   |   |                           |   | 4,555   |                 |  |   | 10,041          |   |  |   | 12,179   |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Total Segment Operating Income                                 |  |                            | 7,106   |   |                           |   | 7,074   |                 |  |   | 33,046          |   |  |   | 23,237   |  
|                                                               |  |                            |         |  
|Corporate Expense                                              |  |                            | 4,124   |   |                           |   | 3,460   |                 |  |   | 11,693          |   |  |   | 11,546   |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Total Operating Income                                         |  |                            | 2,982   |   |                           |   | 3,614   |                 |  |   | 21,353          |   |  |   | 11,691   |  
|                                                               |  |                            |         |  
|Interest Expense                                               |  |                            | (6,710  | ) |                           |   | (6,814  | )               |  |   | (20,480         | ) |  |   | (19,684  | )
|Interest Income                                                |  |                            | 21      |   |                           |   | 54      |                 |  |   | 177             |   |  |   | 107      |  
|Equity in Income of Affiliates                                 |  |                            | 665     |   |                           |   | 493     |                 |  |   | 1,979           |   |  |   | 1,505    |  
|Other Income (Expense), Net                                    |  |                            | 24      |   |                           |   | (3      | )               |  |   | 89              |   |  |   | (429     | )
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|(Loss) Earnings from Continuing Operations Before Income Taxes |  |                            | (3,018  | ) |                           |   | (2,656  | )               |  |   | 3,118           |   |  |   | (6,810   | )
|Income Tax Expense                                             |  |                            | 850     |   |                           |   | 1,929   |                 |  |   | 3,275           |   |  |   | 368      |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Loss from Continuing Operations                                |  | $                          | (3,868  | ) |                           | $ | (4,585  | )               |  | $ | (157            | ) |  | $ | (7,178   | )
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Depreciation and Amortization:                                 |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Paperboard                                                     |  | $                          | 5,964   |   |                           | $ | 5,688   |                 |  | $ | 17,757          |   |  | $ | 17,124   |  
|Converted Products                                             |  |                            | 1,223   |   |                           |   | 1,324   |                 |  |   | 3,792           |   |  |   | 3,948    |  
|International                                                  |  |                            | 899     |   |                           |   | 928     |                 |  |   | 2,552           |   |  |   | 3,053    |  
|Corporate                                                      |  |                            | 545     |   |                           |   | 541     |                 |  |   | 1,635           |   |  |   | 1,634    |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Total                                                          |  | $                          | 8,631   |   |                           | $ | 8,481   |                 |  | $ | 25,736          |   |  | $ | 25,759   |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Purchases of Property, Plant and Equipment:                    |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Paperboard                                                     |  | $                          | 4,663   |   |                           | $ | 3,315   |                 |  | $ | 11,938          |   |  | $ | 9,828    |  
|Converted Products                                             |  |                            | 459     |   |                           |   | 457     |                 |  |   | 1,011           |   |  |   | 1,487    |  
|International                                                  |  |                            | 619     |   |                           |   | 591     |                 |  |   | 2,442           |   |  |   | 1,220    |  
|Corporate                                                      |  |                            | 173     |   |                           |   | 342     |                 |  |   | 208             |   |  |   | 482      |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Total                                                          |  | $                          | 5,914   |   |                           | $ | 4,705   |                 |  | $ | 15,599          |   |  | $ | 13,017   |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|                                                               |  |                            |         |  
|                                                               |  |                            |         |   |                           |   |         | January 31,2007 |  |   | April 30,2006   |  
|Identifiable Assets:                                           |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Paperboard                                                     |  |                            |         |   |                           |   |         |                 |  | $ | 328,895         |   |  | $ | 332,664  |  
|Converted Products                                             |  |                            |         |   |                           |   |         |                 |  |   | 89,108          |   |  |   | 94,812   |  
|International                                                  |  |                            |         |   |                           |   |         |                 |  |   | 146,884         |   |  |   | 138,766  |  
|Corporate                                                      |  |                            |         |   |                           |   |         |                 |  |   | 11,781          |   |  |   | 16,965   |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  
|Total                                                          |  |                            |         |   |                           |   |         |                 |  | $ | 576,668         |   |  | $ | 583,207  |  
|                                                               |  |                            |         |   |                           |   |         |                 |  |   |                 |   |  |   |          |  



-15-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Geographic Regions

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



|                                |  |                 |         |                  |   |        
|------------------------------- |  | --------------- | ------- | ---------------- | - | -------
|                                |  | January 31,2007 |         | January 31, 2006
|Sales to Unaffiliated Customers |  |                 |         |                  |   |        
|United States                   |  | $               | 546,982 |                  | $ | 525,987
|Europe                          |  |                 | 127,642 |                  |   | 115,279
|Canada                          |  |                 | 7,296   |                  |   | 7,316  
|                                |  |                 |         |                  |   |        
|Total                           |  | $               | 681,920 |                  | $ | 648,582
|                                |  |                 |         |                  |   |        



|                                                            |  |                 |         |               |   |        
|----------------------------------------------------------- |  | --------------- | ------- | ------------- | - | -------
|                                                            |  | January 31,2007 |         | April 30,2006
|Net Property, Plant and Equipment, Goodwill and Intangibles |  |                 |         |               |   |        
|United States                                               |  | $               | 279,404 |               | $ | 288,273
|Europe                                                      |  |                 | 59,455  |               |   | 58,298 
|Canada                                                      |  |                 | 6,692   |               |   | 7,416  
|                                                            |  |                 |         |               |   |        
|Total                                                       |  | $               | 345,551 |               | $ | 353,987
|                                                            |  |                 |         |               |   |        



|12. | 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 nine-month periods ended
January 31, 2007 and 2006, the amount paid to that company under the lease was $261.

On July 5, 2005, pursuant to a May 1,
1980 agreement, as amended, the Companys former CEO put the 198,000 shares of the Companys common stock owned by him to the Company. This put required the reclassification of the value of these shares on the
condensed consolidated balance sheet from Temporary Equity to Subordinated Debt (see Note 5).

The paperboard mills in our International
segment purchased approximately $8,661 and $6,839 of raw material from affiliated entities accounted for as equity method investments during the nine-month periods ended January 31, 2007 and 2006, respectively.

The International segment also recorded sales of approximately $2,286 and $1,547 to two affiliated entities accounted for as equity method investments
during the nine-month periods ended January 31, 2007 and 2006, respectively.

The Company paid approximately $4,024 and $3,971 to
Integrated Paper Recyclers, LLC, an affiliated entity accounted for as an equity method investment, primarily for hauling services of recyclable material during the nine-month periods ended January 31, 2007 and 2006, respectively.



-16-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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

On March 6, 2007, the
Company closed on the sale of its South Gardiner, ME facility. Net proceeds on the sale were $323, resulting in a loss of $4. See Note 5 for additional information regarding this transaction.

On March 9, 2007, (i) The Newark Group, Inc. and subsidiaries entered into a new 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 $85,000 (depending on our borrowing base), up to $25,000 of which may be used for loans directly to our International subsidiary and up to
$15,000 of which may be used for letters of credit, and other financial accommodations, and (ii) The Newark Group, Inc. and its domestic subsidiaries entered into a credit-linked facility whereby the credit-linked lenders will provide to us a
$15,000 term loan and a $75,000 credit-linked letter of credit facility, and other financial accommodations. Under the agreement referred to in (i) above, the Company (a) granted the lenders a first priority lien on all of the 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) guarantee the obligations of its International subsidiary. Under
the agreement referred to in (ii) above, 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 to the
lenders on all ABL Priority Collateral. Borrowings under the asset-based facility will 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 will bear interest at a rate of prime plus 1% or the Eurodollar rate plus a credit spread of 2.25%. Letters of Credit will be 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. The term of the asset-based credit agreement is 5 years, and the term of the credit-linked credit agreement is 6 years. Subject to meeting certain conditions, the Company has a one-time option
prior to March 9, 2010 to increase the revolving 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. The facilities include financial covenants as follows: (a) if, during any quarter, Excess Availability under the revolving credit facility falls below $10,000, the Company 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.



-17-



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



|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 dated April 30, 2006.

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, 2006. 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 2.9% of our sales in our fiscal year ended April 30, 2006.

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 products. In our Paperboard segment we handle recovered paper and manufacture grades of recycled paperboard used in the production of folding cartons,
rigid boxes, tubes, cores and other products. In our Converted Products segment we manufacture tubes, cores and allied products, solidboard packaging and products used for book covers, game boards, jigsaw puzzles and loose-leaf binders. In our
International segment, which consists of a vertically integrated network of facilities in Europe, we produce 100% recycled paperboard, laminated products, graphicboard and solidboard packaging, primarily for the European market.

For the fiscal year ended April 30, 2006, 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. Most 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.

Sales volumes are also impacted by the highly competitive environment in which
we operate. Overcapacity has plagued the paperboard industry over the last seven years, and although much has been taken offline by industry-wide mill shutdowns over that same period, the Company believes there may still be some overcapacity
remaining. In September 2005, we announced the closure of our Natick, MA mill, which represented the sixth mill we have closed over the past five years. As a result of these closures, and a shift of business to our other mills, our paperboard
mills capacity utilization rate has risen from a low of 89% in 2002 to 95% for the nine-month period ended January 31, 2007. Our capacity utilization rate for the nine-month period ended January 31, 2006 was 93%, with the lower rate
partially attributable to our loss of 20 machine days in our Southeastern US mill due to Hurricanes Dennis and Katrina.

Recovered paper is our most
significant raw material. Historically, the cost of recovered paper has fluctuated significantly due to market and industry conditions. For example, our average North American recovered paper cost per ton of



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



paperboard produced rose from $99 per ton in 2004 to $116 per ton in 2005, before dropping to $108 per ton in 2006. Average recovered paper cost per ton of
paperboard produced in the quarter ended January 31, 2007 was $112, a 12% increase when compared to $101 per ton in the quarter ended January 31, 2006. For the nine months ended January 31, 2007, the average recovered paper cost per
ton of paperboard produced was $115, 4% higher than in the same nine-month period in the prior year.

Energy, which consists of electricity and fuel used
to generate steam for use in the paper making process, is also a significant manufacturing cost for us. The average energy cost in our North American mill system has increased substantially in recent years, averaging approximately $88, $73 and $68
per ton of paperboard produced in fiscal years 2006, 2005 and 2004, respectively, as compared to $43 per ton in 2000. This increase is primarily due to overall increases in natural gas, fuel oil and electricity prices. We expect that prices may
remain at an elevated level 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. Although energy
prices in North America have stabilized and even decreased from this time last year, our average energy cost per ton of paperboard produced in our North American mills was $95 for the three months ended January 31, 2007, a 1% increase when
compared to the three months ended January 31, 2006. This increase is due to the Companys active natural gas hedging program which put hedging contracts into place well before the start of the 2006 hurricane season, which was predicted to
be very active and damaging. As the hurricane season turned out to be extremely mild, the hedges that settled during the nine months ended January 31, 2007 finished out of the money, whereas the hedges that settled during the same period last
year settled well in the money. Energy costs in Western Europe, particularly relating to natural gas, began to rise significantly in our fourth quarter of fiscal 2006 and continued to rise through the early parts of our current fiscal year. As in
North America, prices have stabilized some in the quarter ended January 31, 2007, but remain at elevated levels. These elevated energy costs continue to have a negative impact on the operating results in our International segment. Comparing the
nine-month periods ended January 31, 2007 and 2006, per ton energy prices have increased 48% on a Euro basis, to an average of 57 per ton of paperboard produced in the current period versus 38 per ton in the prior
year. Factoring in the 6% weakening of the US dollar in relation to the Euro in the nine months ended January 31, 2007 compared to the nine months ended January 31, 2006 (where average exchange rates were 1.28 and 1.21 EUR/USD,
respectively), energy prices have increased 54% per ton of paperboard produced.

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. During our second quarter ended October 31, 2005, in an effort to offset increased fuel costs, we announced a fuel surcharge
on our finished products across our North American segments. This surcharge was replaced with a permanent price increase of approximately the same amount in February 2006. Additionally, 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. When comparing the nine months ended January 31, 2007 to the same period in the prior year, average sales price for our converted products and recycled
paperboard increased 4% and 2%, or $31 per ton and $8 per ton, respectively.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Our Results of Operations

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



|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|----------------------- |  | ------------------------------ | ------- | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                        |  | Three Months Ended January 31, |         |   | Nine Months Ended January 31, |  
|(in thousands)          |  | 2007                           |         |   | 2006                          |   |         | 2007 |  |   | 2006    |  
|Net Sales               |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Paperboard              |  | $                              | 112,705 |   |                               | $ | 103,952 |      |  | $ | 341,096 |   |  | $ | 332,033 |  
|Converted Products      |  |                                | 65,536  |   |                               |   | 63,135  |      |  |   | 213,182 |   |  |   | 201,270 |  
|International           |  |                                | 44,875  |   |                               |   | 39,154  |      |  |   | 127,642 |   |  |   | 115,279 |  
|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Total                   |  | $                              | 223,116 |   |                               | $ | 206,241 |      |  | $ | 681,920 |   |  | $ | 648,582 |  
|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Cost of Sales           |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Paperboard              |  | $                              | 99,245  |   |                               | $ | 89,978  |      |  | $ | 289,786 |   |  | $ | 290,511 |  
|Converted Products      |  |                                | 62,693  |   |                               |   | 61,010  |      |  |   | 201,452 |   |  |   | 190,749 |  
|International           |  |                                | 37,293  |   |                               |   | 31,570  |      |  |   | 106,901 |   |  |   | 94,310  |  
|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Total                   |  | $                              | 199,231 |   |                               | $ | 182,558 |      |  | $ | 598,139 |   |  | $ | 575,570 |  
|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Restructuring           |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Paperboard              |  | $                              | 173     |   |                               | $ | 582     |      |  | $ | 358     |   |  | $ | 1,079   |  
|Converted Products      |  |                                | 16      |   |                               |   | 46      |      |  |   | 278     |   |  |   | 632     |  
|Corporate               |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   | 166     |  
|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Total                   |  | $                              | 189     |   |                               | $ | 628     |      |  | $ | 636     |   |  | $ | 1,877   |  
|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|SG&A                    |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Paperboard              |  | $                              | 7,810   |   |                               | $ | 8,028   |      |  | $ | 24,202  |   |  | $ | 24,259  |  
|Converted Products      |  |                                | 4,917   |   |                               |   | 4,924   |      |  |   | 15,197  |   |  |   | 15,015  |  
|International           |  |                                | 3,863   |   |                               |   | 3,029   |      |  |   | 10,700  |   |  |   | 8,790   |  
|Corporate               |  |                                | 4,124   |   |                               |   | 3,460   |      |  |   | 11,693  |   |  |   | 11,380  |  
|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Total                   |  | $                              | 20,714  |   |                               | $ | 19,441  |      |  | $ | 61,792  |   |  | $ | 59,444  |  
|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Operating Income (Loss) |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Paperboard              |  | $                              | 5,477   |   |                               | $ | 5,364   |      |  | $ | 26,750  |   |  | $ | 16,184  |  
|Converted Products      |  |                                | (2,090  | ) |                               |   | (2,845  | )    |  |   | (3,745  | ) |  |   | (5,126  | )
|International           |  |                                | 3,719   |   |                               |   | 4,555   |      |  |   | 10,041  |   |  |   | 12,179  |  
|Corporate               |  |                                | (4,124  | ) |                               |   | (3,460  | )    |  |   | (11,693 | ) |  |   | (11,546 | )
|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Total                   |  | $                              | 2,982   |   |                               | $ | 3,614   |      |  | $ | 21,353  |   |  | $ | 11,691  |  
|                        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  

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 January 31, |   |  | Nine Months ended January 31, |  
|                                             |  | 2007                           |   |  | 2006                          |   |  | 2007  |   |  | 2006  |  
|Net sales                                    |  | 100.0                          | % |  | 100.0                         | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                                |  | 89.3                           |   |  | 88.5                          |   |  | 87.7  |   |  | 88.7  |  
|Selling, general and administration expenses |  | 9.3                            |   |  | 9.4                           |   |  | 9.1   |   |  | 9.2   |  
|Restructuring and impairments                |  | 0.1                            |   |  | 0.3                           |   |  | 0.1   |   |  | 0.3   |  
|Operating income                             |  | 1.3                            |   |  | 1.8                           |   |  | 3.1   |   |  | 1.8   |  
|Interest expense                             |  | 3.0                            |   |  | 3.3                           |   |  | 3.0   |   |  | 3.0   |  
|Income tax expense                           |  | 0.4                            |   |  | 0.9                           |   |  | 0.5   |   |  | 0.1   |  
|Net loss                                     |  | (1.7                           | ) |  | (2.2                          | ) |  |      |   |  | (1.1  | )



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Results of Operations

Nine Months Ended January 31, 2007 Compared to Nine Months Ended January 31, 2006

Overview

Net Sales. Net sales in the nine months ended January 31, 2007 increased $33.3 million, or 5%, to $681.9 million compared to $648.6 million in the nine months
ended January 31, 2006. This increase was driven by higher sales prices across all segments and a rise in volumes in our North American segments, partially offset by lower volumes in both our International operations and the amount of recovered
paper sold to third parties in North America.

Cost of Sales. Cost of sales for the nine months ended January 31, 2007 was $598.1 million, a 4%
increase over the $575.6 million for the nine months ended January 31, 2006. This increase is the result of higher costs of recovered paper consumed in our worldwide mills, elevated energy costs in our International segment and higher raw
paperboard material costs in our worldwide converting operations more than offsetting lower freight costs in our North American mills and the recognition of a gain from the sale of certain air emission credits at one of our California locations.

Restructuring and Impairments. Restructuring and impairment charges decreased 66% during the nine-month period ended January 31, 2007 to $0.6
million from $1.9 million during the nine-month period ended January 31, 2006. Current year expenses include lease buy-out fees in our Converted Products segment and costs to exit previously shut down locations in our Converted Products and
Paperboard segments. Prior year charges were related to the closure of our Natick, MA paperboard mill, costs related to exit previously shut down operations in our Converted Products and Paperboard segments and a loss on the sale of a previously
restructured facility sold in June 2005. There were minimal non-cash impairment charges in the nine months ended January 31, 2007 whereas $0.5 million of non-cash impairment charges were included in total restructuring charges in the nine
months ended January 31, 2006.

SG&A.SG&A increased to $61.8 million in the nine months ended January 31, 2007, a 4% increase
over the $59.4 million in the nine months ended January 31, 2006, the result of higher relocation expenses, the absorption of strike-related costs in our Converted Products segment and the recording of an insurance claim deductible in our
International segment.

Operating Income. Operating income was $21.4 million during the nine-month period ended January 31, 2007, 83% higher
than the $11.7 million during the nine-month period ended January 31, 2006. The main factors driving the increase were higher worldwide sales prices, a rise in North American converting and mill volumes, a $3.3 million gain from the sale of
certain air emission credits and lower restructuring charges, partially offset by higher worldwide raw material costs in our mills and elevated energy costs in our International segment.

Paperboard

Net sales in the Paperboard segment increased $9.1 million, or 3%, in the nine months ended
January 31, 2007 to $341.1 million from $332.0 million in the nine months ended January 31, 2006. Increases in sales price and volume of recycled paperboard of 2% and 1%, respectively, more than offset a 3% decrease in the volume of
recovered paper sold to third parties. Included in the recycled paperboard volume increase is a 27% increase in volume at our Fitchburg, MA mill.

Cost of
sales decreased $0.7 million when comparing the nine-month periods ended January 31, 2007 and 2006, from $290.5 million in 2006 to $289.8 million in 2007. A $3.3 million gain from the sale of certain air emission credits and an 8% decrease in
freight costs on a per ton basis were offset by a $2.9 million increase in the cost of recovered paper consumed in our mills, resulting from higher volumes. Overall energy costs remained flat.

Restructuring costs decreased 67% to $0.4 million in the nine months ended January 31, 2007 from $1.1 million in the nine-month period ended January 31, 2006.
Current period charges represent costs to exit previously shut down locations while prior year charges largely related to the closure of our Natick, MA mill.

Our mill utilization rates increased to 95% during the nine months ended January 31, 2007 as compared to 93% in the nine months ended January 31, 2006. The prior year rate was partially affected by Hurricanes Dennis and Katrina
causing the loss of 20 machine days at our Mobile, AL mill.

SG&A remained essentially flat at $24.2 million for the nine-month period ended
January 31, 2007 compared to $24.3 million in the nine-month period ended January 31, 2006.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Operating income for the Paperboard segment increased 65% from $16.2 million in the period ended January 31,
2006 to $26.8 million in the period ended January 31, 2007, the result of higher sales prices and volumes of recycled paperboard, the gain from the sale of certain air emission credits and lower restructuring costs.

Converted Products

Net sales in the Converted Products
segment were $213.2 million in the nine months ended January 31, 2007, a $11.9 million, or 6%, increase over the $201.3 million in the same nine-month period in 2006. This increase is the result of a 4% increase in sales price and a 2% increase
in volume.

Cost of sales also increased 6% to $201.5 million in the nine months ended January 31, 2007 compared to $190.7 million in the nine months
ended January 31, 2006. Approximately $8.2 million of this $10.7 million increase is due to higher raw material paperboard costs, while a 3% rise in per ton freight costs was responsible for the remainder of the increase in total cost of sales.

Restructuring costs decreased almost $0.4 million to $0.3 million in the nine months ended January 31, 2007, a 56% drop from the same nine-month
period in the prior year. Current year charges are made up of net lease buy-out costs on a facility in Stockton, CA as well as costs to exit previously restructured facilities. Prior year costs include costs to exit previously closed facilities, as
well as dismantling and impairment charges related to a certain leased facility which ceased production operations in April 2004 but continued to be used for warehousing purposes.

SG&A increased 1%, or $0.2 million, to $15.2 million in the nine-month period ended January 31, 2007 from $15.0 million in the same nine-month period in the prior year. This slight increase is the result of
incurring strike-related costs and relocation expenses which more than offset realized cost savings from past restructuring efforts.

Operating loss
decreased $1.4 million, or 27%, from a loss of $5.1 million in the nine months ended January 31, 2006 to a loss of $3.7 million in the nine months ended January 31, 2007. Higher sales prices and volumes and lower restructuring costs more
than offset higher raw material paperboard, freight and slightly higher SG&A costs.

International

In the nine months ended January 31, 2007, net sales in the International segment increased $12.3 million, or 11%, to $127.6 million when compared to $115.3 million
in the nine months ended January 31, 2006. Price increases of 14% and 13% in our converting operations and mills, respectively, along with a 6% weakening of the US dollar versus the Euro more than offset volume decreases of 3% and 1% in our
converting operations and mills, respectively. Converting volumes were hurt by a weakened agricultural season.

Cost of sales in the nine months ended
January 31, 2007 were $106.9 million, 13% higher than the $94.3 million in the nine months ended January 31, 2006. This $12.6 million increase is partly due to the 6% weakening of the US dollar versus the Euro and a $3.6 million escalation
of energy costs, spurred by rising natural gas prices in Spain. Also affecting the increase was a $3.5 million, or 26%, increase in the cost of recovered paper consumed in our mills and a 5%, or $0.4 million, increase in freight costs.

SG&A in the International segment was $10.7 million in the nine months ended January 31, 2007, a $1.9 million increase over the nine months ended
January 31, 2006. The weakening of the US dollar against the Euro, higher allocated corporate expenses and the recording of a deductible on an insurance claim were responsible for this increase.

Operating income for the International segment decreased $2.2 million to $10.0 million in the nine months ended January 31, 2007 compared to $12.2 million in the
nine months ended January 31, 2006. This decrease in operating income is primarily the result of higher SG&A costs, the rise in the cost of recovered paper per ton of paperboard produced and elevated energy costs more than offsetting higher
sales prices for both our paperboard and converted products.

Corporate

Unallocated corporate expense increased by $0.2 million in the nine months ended January 31, 2007 to $11.7 million from $11.5 million in the nine months ended January 31, 2006. Increases in compensation
costs, professional fees and legal settlements were partially offset by the allocation of additional costs to the International segment. Additionally, there was a $0.2 million loss from the sale of certain real estate that was recognized in the
prior year.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Other Income (Expense)

Interest expense increased to $20.5 million in the nine-month period ended January 31, 2007 from $19.7 million in the nine-month period ended January 31, 2006 primarily due to our average outstanding
borrowings increasing to $276.4 million for the current nine-month period compared to $261.9 million for the same nine-month period in the prior year.

Excluding Interest expense, Other incomenet was $2.2 million for the nine-month period ended January 31, 2007 compared to $1.2 million for the nine-month period ended January 31, 2006, the result of an increase in affiliate
earnings and a favorable swing in foreign currency exchange rates.

Income Tax Expense (Benefit)

During the nine months ended January 31, 2007, the Company continued to record a full valuation allowance against its net domestic deferred tax asset and will
continue to evaluate future realization on a quarterly basis. Income tax expense relates to state and foreign jurisdictions in which we have taxable income.

Spanish authorities enacted a two-tiered rate change for corporate taxpayers. The corporate income tax rate was changed from 35% to 32.5% and 30.0% for tax years beginning after December 31, 2006 and 2007, respectively. This change
represents a tax benefit of approximately $0.8 million which was recognized in the quarter ended January 31, 2007.

Net Income

In summary, we reported a net loss of $0.2 million for the nine months ended January 31, 2007 as compared to a net loss of $7.2 million for
the nine months ended January 31, 2006. Higher sales prices across all segments, increased volumes in our North American mills and converting operations, lower restructuring costs and a gain from the sale of certain air emission credits drove
the reduction in the net loss, but were partially offset by a rise in raw material paperboard costs in our North American converting operations, higher energy costs in our International segment and higher overall SG&A costs.

Three Months Ended January 31, 2007 Compared to Three Months Ended January 31, 2006

Overview

Net Sales. Net sales for the quarter ended January 31, 2007 increased 8% to $223.1
million, up from $206.2 million in the quarter ended January 31, 2006. Driving this increase were higher sales prices increases in our Paperboard and International segments, higher volumes in our North American mills and converting operations
and the weakening of the US dollar versus the Euro. These gains were partially offset by lower volumes in our International segment.

Cost of Sales.
Cost of sales for the quarter ended January 31, 2007 was $199.2 million, a 9% increase over the quarter ended January 31, 2006. This increase was fueled by the higher cost of recovered paper per ton of paperboard produced in both our North
American and International mills, an increase in energy costs in our Paperboard and International segments and higher volumes in our North American mills and converting operations. Partially offsetting these increased costs are lower freight costs
in our Paperboard segment.

Restructuring and Impairments. Restructuring charges were $0.2 million in the quarter ended January 31, 2007, a 70%
decrease when compared to the quarter ended January 31, 2006. Current quarter expenses include the costs to maintain previously shut down locations, while the same period in the prior year include similar costs for the same locations as well as
costs in relation to a location in our Paperboard segment.

SG&A.SG&A costs were $20.7 million in the quarter ended January 31, 2007,
an increase of 7% when compared to $19.4 million in the quarter ended January 31, 2006, primarily the result of higher corporate expenses such as compensation, professional fees and legal settlements.

Operating Income. Operating income was $3.0 million in the quarter ended January 31, 2007, a decrease of $0.6 million from $3.6 million in the quarter ended
January 31, 2006. Higher SG&A expenses and cost of sales more than offset an increase in net sales and lower restructuring charges.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Paperboard

Net sales in the Paperboard segment increased 8%, or $8.7 million, to $112.7 million in the quarter ended January 31, 2007 when compared to $104.0 million in the quarter ended January 31, 2006. Driving the increase was a 9%
increase in the sales price of recovered paper sold to third parties, as well as 1% growth in both the volume and sales price of our recycled paperboard. The volume increase in our recycled paperboard was spurred on by a 35% volume improvement at
our Fitchburg, MA mill.

Overall cost of sales was $99.2 million during the quarter ended January 31, 2007, a 10% increase from $90.0 million in the
quarter ended January 31, 2006. A 12%, or $12, increase in the cost of recovered paper per ton of paperboard produced, along with a 5% increase in energy costs and higher costs related to the mill volume increase, were offset by a 7% decrease
in freight costs.

Restructuring costs decreased 71% from $0.6 million in the quarter ended January 31, 2006 to $0.2 million in the quarter ended
January 31, 2007. Current quarter charges represent costs to exit previously shut down locations while prior year amounts included charges relating to the closure of our Natick, MA mill.

Our mill utilization rates rose to 93% during the quarter ended January 31, 2007 as compared to 89% in the quarter ended January 31, 2006, primarily due to
prior rationalization of capacity.

SG&A decreased $0.2 million, or 3%, to $7.8 million in the quarter ended January 31, 2007 from $8.0 million in
the quarter ended January 31, 2006 due to cost savings from prior restructuring efforts.

Operating income for the Paperboard segment increased 2% to
$5.5 million in the quarter ended January 31, 2007 from $5.4 million in the quarter ended January 31, 2006, as lower restructuring and SG&A costs and higher net sales more than offset increases in both energy costs and the cost of
recovered paper per ton of paperboard produced.

Converted Products

Net sales in the Converted Products segment increased 4%, or $2.4 million, to $65.5 million in the quarter ended January 31, 2007 compared to $63.1 million in the quarter ended January 31, 2006, primarily
the result of a 3% increase in volume.

Cost of sales increased 3% from $61.0 million in the quarter ended January 31, 2006 to $62.7 million during
the quarter ended January 31, 2007. The volume increase noted above pushed costs higher and was partially offset by a 2% decrease in per ton raw material paperboard costs, due to a shift in product mix, and a 2% decrease in freight costs.

Restructuring costs essentially remained flat at $0.1 million or less in each of the quarters ended January 31, 2007 and 2006.

SG&A remained flat at $4.9 million in each of the quarters ended January 31, 2007 and 2006.

Operating loss for the Converted Products segment decreased 27% in the quarter ended January 31, 2007 to $2.1 million from $2.8 million in the quarter ended January 31, 2006, mainly the result of higher
volumes more than offsetting increased raw material paperboard and freight costs.

International

Net sales in the International segment increased 15%, or $5.7 million, to $44.9 million in the quarter ended January 31, 2007 compared to $39.2 million in the same
quarter last year. Sales price increases of 20% and 17% on our converted and mill products, respectively, more than offset a 4% decrease in volume. The average Euro to US dollar exchange rate for the quarter ended January 31, 2007 was 1.30 as
compared to 1.19 during the same quarter last year, reflecting a 9% weakening of the US dollar. Excluding the effects of foreign currency exchange, sales prices increased 10% and 7% on our converted and mill products, respectively.

Cost of sales in the International segment was $37.3 million the quarter ended January 31, 2007 compared to $31.6 million in the quarter ended January 31,
2006, a $5.7 million increase. Contributing to this increase was a $1.4 million increase in the cost of recovered paper per ton of paperboard produced, a $1.1 million increase in energy costs and a $0.3 million increase in freight costs. The 9%
change in average exchange rates between the Euro and the US dollar accounts for the remaining increase.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



SG&A in the International segment increased to $3.9 million in the quarter ended January 31, 2007 from $3.0
million in the quarter ended January 31, 2006 due to an increase in allocated corporate expense, the weakening of the US dollar and an increased bad debt provision.

Operating income for the quarter ended January 31, 2007 was $3.7 million, $0.8 million less than the quarter ended January 31, 2006. This decrease is the result of higher SG&A expenses, with increases in
net sales and cost of sales offsetting each other.

Corporate

Unallocated corporate expense increased $0.6 million to $4.1 million in the quarter ended January 31, 2007 compared to $3.5 million in the same quarter last year. This increase is equally attributable to the
recording of legal settlements, increased professional fees and higher compensation costs more than offsetting the allocation of additional costs to the International segment.

Other (Expense) Income

Interest expense decreased from $6.8 million in the quarter ended January 31,
2006 to $6.7 million in the quarter ended January 31, 2007. Average outstanding borrowings during the quarter were $270.6 million

Excluding interest
expense, Other incomenet increased to $0.7 million in the quarter ended January 31, 2007 from $0.5 million in the quarter ended January 31, 2006 due to increased earnings in affiliates.

Income Tax Expense (Benefit)

During the quarter ended
January 31, 2007, the Company continued to record a full valuation allowance against its net domestic deferred tax asset and will continue to evaluate future realization on a quarterly basis. Income tax expense relates to state and foreign
jurisdictions in which we have taxable income.

During the quarter ended January 31, 2007, Spanish authorities enacted a two-tiered rate change for
corporate taxpayers. The corporate income tax rate was changed from 35% to 32.5% and 30.0% for tax years beginning after December 31, 2006 and 2007, respectively. This change represents a tax benefit of approximately $0.8 million.

Net Income

In summary, during the quarter ended
January 31, 2007, we recorded a net loss of $3.9 million as compared to a net loss of $4.6 million in the quarter ended January 31, 2006. Increased sales across all segments, lower freight costs in our Paperboard and Converted Products
segments, lower restructuring costs and a 56% decrease in our income tax expense more than offset higher costs of recovered paper per ton of paperboard produced in both our North American and International mills and increased energy costs across all
segments.

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 requirements, as well as other operating activities. We fund our current cash requirements with cash provided by operations and borrowings under our senior credit facility. We believe that these sources, and our replacement senior
credit facility, 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 $15.6 million and $13.0 million in the nine months ended January 31, 2007 and 2006, respectively. We expect fiscal 2007 capital expenditures to be under $25.0 million.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Borrowings

At January 31, 2007, total debt (consisting of current maturities of debt, our senior credit facility, and other long-term debt, as reported on our condensed consolidated balance sheets) was as follows (in millions):



|                                          |  |                  |      
|----------------------------------------- |  | ---------------- | -----
|                                          |  | January 31, 2007
|Senior revolving credit facility(1)       |  | $                | 18.1 
|9.75 % Senior Subordinated Notes due 2014 |  |                  | 175.0
|Industrial Revenue Bonds                  |  |                  | 67.2 
|Other                                     |  |                  | 11.5 
|                                          |  |                  |      
|Total debt                                |  | $                | 271.8
|                                          |  |                  |      

| | 
| | 

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

In March 2004, we entered into a three-year, senior secured revolving credit facility with Wachovia Bank, National Association, as Agent. The facility is in the
aggregate principal amount of $150.0 million, with up to $95.0 million available for the issuance of letters of credit. Letters of credit are needed, in part, as security for our industrial revenue bonds. As of January 31, 2007, we had
approximately $82.0 million of letters of credit outstanding to secure our industrial revenue bonds and liability insurance claims and $18.1 million of other borrowings outstanding under the facility, leaving us with approximately $49.9 million
available under the revolver.

Our senior secured revolving credit facility requires that we satisfy certain financial covenants, as defined in the credit
facility agreement. These covenants consist of an interest coverage test, a $30.0 million maximum level of annual capital expenditures and certain leverage ratios. As of January 31, 2007, we were in compliance with these financial covenants.

On March 9, 2007, (i) we and our subsidiaries entered into a new 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 credit-linked facility whereby the credit-linked lenders will provide 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) guarantee the obligations of our 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 will 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 will
bear interest at a rate of prime plus 1% or the Eurodollar rate plus a credit spread of 2.25%. Letters of Credit will be 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. The term of the asset-based credit agreement is 5 years, and the term of the credit-linked credit agreement is 6 years. 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 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.

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, and we cannot redeem the Notes before March 15, 2009, except as described below. On or after that date, we may redeem them at specified prices. On or before
March 15, 2007, we may redeem up to 35% of the original principal amount of the Notes at 109.75% of their face amount, plus accrued interest, with money we raise from certain public equity offerings. The Notes rank junior in right of payment to
all of our existing and future senior debt and equal in right of payment with all of our existing and future senior subordinated debt. The Notes are not guaranteed by any of our subsidiaries, and therefore are effectively subordinated to all
liabilities of our subsidiaries. If we experience certain changes of control, we must offer to purchase the Notes at 101% of their face amount, plus accrued interest.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



We are also parties to a series of cross-currency rate swap transactions with members of our existing bank group (the
2001 Swaps). The 2001 Swaps have been designated as hedges against the existing inter-company loan to our European subsidiary. At January 31, 2007 the fair value of the 2001 Swaps represented a liability of $13.1 million.

Additionally, in our effort to manage costs, we have entered into several energy hedges. At January 31, 2007 the fair value of these hedges was a
liability of $2.1 million.

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



|                      |  |       |      
|--------------------- |  | ----- | -----
|Year Ending April 30, |  | Total
|2007(1,2)             |  | $     | 22.2 
|2008                  |  |       | 3.4  
|2009                  |  |       | 2.9  
|2010                  |  |       | 3.0  
|2011                  |  |       | 3.1  
|Thereafter            |  |       | 237.2
|                      |  |       |      
|                      |  | $     | 271.8
|                      |  |       |      

| | 
| | 

| | (1) | Represents remaining obligations for the fiscal year ended April 30, 2007.
| | --- | --------------------------------------------------------------------------

| | (2) | Includes $18.1 million due under revolving credit facility.
| | --- | -----------------------------------------------------------

Cash Flow

Net cash provided by operating activities

We generated $30.4 million of cash from operating activities in the nine months ended January 31, 2007 as compared to $15.3 million in the nine
months ended January 31, 2006. This increase in cash generated from operations was predominantly the result of the following: (i) a $6.9 million positive change in net earnings, (ii) a $6.8 million change in inventories as our mills
shipped more out of inventory to meet customer demand, (iii) a $1.8 million positive change due to the prior year pre-payment of our property and casualty insurance premiums and real estate taxes, (iv) a $1.3 million increase in dividends
received from equity investments in affiliates, (v) $1.2 million derived primarily from the current year receipt of funds from hurricane-related insurance claims, (vi) the current year receipt of $0.4 million released from an escrow
account and (vii) a $3.9 million increase in changes in accounts payable and accrued expenses more than offsetting a $7.4 million decrease in changes in accounts receivable due to our continued focus on cash management initiatives.

Net cash used in investing activities

In the nine months ended
January 31, 2007 and 2006, we used $16.5 million and $11.8 million of cash, respectively, in investing activities. This increase over last year was the result of $2.6 million of additional capital expenditures in the current period, $0.4
million less proceeds from the sale of property, plant and equipment and a small increase in restricted cash versus a minimal decrease in restricted cash in the prior year. Additionally, in the nine months ended January 31, 2007, we incurred
$1.4 million of costs related to the proposed acquisition of a mill in Germany; no such costs were incurred in the nine months ended January 31, 2006. The costs are included in other long-term assets on the Condensed Consolidated Balance
Sheets.

Net cash used in financing activities

In the
nine months ended January 31, 2007, we used $11.1 of cash in financing activities as compared to having a nominal amount of cash provided by financing activities in the nine months ended January 31, 2006. This swing is due to having $9.6
million of net repayments of debt in the current nine-month period as compared to net borrowings of $1.7 million in the same nine-month period of the prior year offset by a $0.2 million change in cash overdrafts.

Seasonality

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



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Inflation

Changes 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 unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information, which
require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting matters which are both very important to the portrayal of our financial condition and results
and which require some of managements most difficult, subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which, in managements
judgment, could change in a manner that would materially affect managements future estimates with respect to such matters and, accordingly, could cause future reported financial condition and results to differ materially from the financial
condition and results reported based on managements current estimates. Changes in these estimates are recorded when better information is known. There have been no material changes in our critical accounting policies during the nine-month
period ended January 31, 2007.

Revenue Recognition

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

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, 2006. At April 30, 2006, the discount rate was raised to 6.3% from 5.7%.
A change of 1% in this discount rate would create an impact to the statement of operations of approximately $1.5 million. This discount rate is based upon the demographics of the plans participants as well as benchmarking certain indices, e.g.
Citigroup High Grade Credit Index as well as Aa- and Aaa-Rated Corporate Bonds. The assumption for the long-term rate of return on plan assets is determined based on historical results of the portfolio and managements expectation of the
current economic environment. As of April 30, 2006, this assumed rate of return was 9.2%. A 1% change in the long-term rate of return on plan assets would create an impact to the statement of operations of approximately $0.8 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. Periodic pension expense was $5.3 million in 2005, $4.7 million in 2006 and will be approximately $3.0 million in 2007.

Goodwill

Effective May 1, 2002, we adopted FAS No. 142, Goodwill and Other Intangible Assets. This
pronouncement requires us to perform a goodwill impairment test at least annually. The Company conducted an impairment test based on the estimated fair value of the underlying business as of November 1, 2006 and determined that there was no
impairment. See Note 1 to our Annual Report on Form 10-K for the year ended April 30, 2006 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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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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.

Stock-based Compensation

Effective May 1, 2006, we adopted FAS 123(R), Share-Based Payment (FAS 123(R)
which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the our condensed consolidated statements of
operations. According to FAS 123(R), we are considered a non-public entity as we only have debt securities, as opposed to equity securities, trading in the public market. FAS 123(R) allows non-public companies the ability to elect to measure its
liability awards at their intrinsic value through the date of settlement, and we elected to continue to measure our liability awards at intrinsic value instead of fair value. Prior to the adoption of FAS 123(R), we had accounted for employee stock
options and stock appreciation rights in accordance with the guidance provided in FAS 123. We adopted the provisions of FAS 123(R) using the prospective method effective May 1, 2006. As such, there was no accounting effect on any outstanding
awards and the adoption of FAS 123(R) did not have a material effect on our condensed consolidated financial statements. At this time, we have two share-based payment plans covered by FAS 123(R), as described below.

We have a non-qualifying Stock Option Plan (the Plan) under which we are authorized to grant 300,000 stock options in tandem with stock appreciation rights
(SARs) to certain employees. The options and SARs vest over a nine-year period from the date of grant. Upon exercise of an option, the holder is entitled to purchase exercisable option shares at the grant price. Alternatively, upon
exercise of a tandem SAR, the holder is entitled to receive cash equal to the amount by which the put value of our common stock on the exercise date exceeds the grant price of the related stock options. As SARs are exercised, the corresponding
options are cancelled and as options are exercised the corresponding SARs are cancelled. We have a second employee stock compensation plan under which we grant SARs without options to certain employees.

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 January 31, 2007, we had recorded 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.

Impairment of Long-Lived Assets

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



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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



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



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



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

The
impairment review requires management to estimate future undiscounted cash flows associated with an asset or asset group expected to result from the use and eventual disposition of the asset or asset group. Estimating future cash flows requires
management to make judgments regarding future economic conditions, product demand and pricing. Although we believe our estimates are appropriate, significant differences in the actual performance of the asset or asset group may materially affect our
asset values and results of operations. An impairment loss shall be recognized if the carrying amount of the long-lived asset or asset group exceeds fair value as determined by the sum of the undiscounted cash flows. For additional information, see
Note 10 to our Annual Report on Form 10-K for the year ended April 30, 2006.



|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 ($13.2) million
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 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.

Foreign
Currency:We are exposed to changes in foreign currency rates with respect to the Euro, which is the functional currency for our International segment operations. We have transaction gains and/or losses in our International segment because they
have purchases and sales denominated in non-Euro currencies. We also have translation gains and/or losses that result from translation of the results of operations of our International segment into US dollars for financial statement purposes. We
estimate that a 10% change in exchange rates between the US dollar and the Euro would have an $0.8 million effect on our operating income on an annual basis.

Interest Rates/Cross-Currency Interest Rate Swaps: We have cross-currency interest rate swap agreements with two banks as described above. The 2001 Swaps have been designated as hedges against the existing intercompany loan to
our European subsidiary. At January 31, 2007, the fair value of the 2001 Swaps represented a liability of $13.1 million and the results of hedge ineffectiveness related to these swap agreements during the nine months ended January 31, 2007
and 2006 were a $0.1 million loss and a $0.2 million gain, 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 ($0.5) million effect on net earnings on an annual basis.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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



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



|(a) | Disclosure controls and procedures.
|--- | -----------------------------------

As previously disclosed in our
Annual Report on Form 10-K for the year ended April 30, 2006 and the Quarterly Reports on Form 10-Q for the first and second fiscal quarters of 2007, management identified a material weakness in our internal control over
financial reporting solely due to the weakness described below.

Subsequent to the issuance of our 2005 consolidated financial statements, management
determined that it had inappropriately offset positive and negative cash balances that were maintained at separate financial institutions with which there was no contractual right to offset. As a result, amounts previously presented for Cash and
cash equivalents and Accounts payable on the balance sheet were understated and the amount shown for Changes in cash overdrafts was incorrectly reported within the Cash Flows from Financing Activities section of the Consolidated Statements of Cash
Flows. Additionally, management determined that it had inappropriately included amounts accrued for the purchase of property, plant and equipment in Changes in accounts payable in the Cash Flows from Operating Activities and in Capital expenditures
in the Cash Flows from Investing Activities on its Consolidated Statements of Cash Flows rather than as non-cash investing activities. There was no impact to the Consolidated Statements of Operations or Consolidated Statement of Permanent
Stockholders Equity. The Company determined that it did not have an effectively designed control process in place to ensure proper classification of positive and negative cash balances.

In connection with the filing of this Quarterly Report on Form 10-Q for the quarter ended January 31, 2007, our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, re-evaluated the effectiveness of our disclosure controls and procedures. In conducting their re-evaluation, our Chief Executive Officer and Chief Financial Officer considered the nature and timing of
our successful remediation of material weaknesses in internal control over financial reporting as discussed below in Changes in Internal Control Over Financial Reporting. In doing so, our Chief Executive Officer and Chief Financial Officer concluded
that the remediation efforts completed effectively remediated the material weakness in internal control that gave rise to the errors described above. Based upon their re-evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective.



|(b) | Changes in internal controls over financial reporting.
|--- | ------------------------------------------------------

During the fiscal
quarter ended January 31, 2007, no significant changes occurred with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting,
except as noted below:



| |  |  | In response to the identified material weakness, our management, with oversight from our Audit Committee, dedicated resources to support our efforts to improve
internal control over financial reporting in this area. Our remediation efforts included (i) enhancing our finance and accounting organization by hiring an employee who, in addition to our Corporate Controller and Accounting Manager 
External Reporting, possesses the technical accounting expertise necessary to ensure the appropriate selection and application of accounting policies and accompanying disclosures to non-routine or complex transactions in accordance with accounting
principles generally accepted in the United States, (ii) conducting a thorough review of our financial statements to ensure compliance with US GAAP and related disclosure requirements, and (iii) implementing new policies and
procedures, and related controls in the affected area.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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. In our opinion, the ultimate disposition of these matters will not have a material effect on our
financial condition, results of operations or cash flows.

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. During the quarter ended October 31, 2006, we had agreed,
in principle, subject to a definitive written agreement, to settle these allegations by paying $575,000 and agreeing to certain injunctive relief. As of that date, we had previously accrued a minimal amount in relation to these assertions, but based
on new information, accrued the remainder of the $575,000 in the quarter ended October 31, 2006. Based upon further information, we accrued an additional $25,000 during the quarter ended January 31, 2007.

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 50 potentially responsible parties (PRPs) named thus far. The EPA alleges that hazardous substances were released from our now-closed Newark, NJ paperboard mill into the LPRSA. 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 that we pay $2,830,000 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 pay $250,000 toward the costs of the study.
By joining the Group, we would also share in certain past and on-going legal fees and other costs of the Group. Considering the history of industrial and other discharges into the LPRSA from other sources, including named PRPs, we believe any
releases from our now-closed site to be de minimis in comparison; however, it is not possible at this time to predict that outcome with certainty or to estimate our ultimate liability in the matter, including any liability for natural resource
damages. Given the uncertainty, we, by letter dated June 16, 2006, informed the EPA of our intent to enter into the arrangement with the EPA and the Group and accrued the required $250,000 contribution during the first quarter.



|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
|------- | ---------------------------------------------------

None



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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

On March 9, 2007,
(I) we and our subsidiaries entered into a new asset-based senior secured revolving credit facility pursuant to a Loan and Security Agreement (the ABL Credit Agreement), with Wachovia Capital Markets, LLC and JPMorgan Securities
Inc. as joint lead arrangers, whereby the lenders agreed to provide to us a revolving line of credit in the aggregate principal amount of up to $85,000,000 (depending on our borrowing base), up to $25,000,000 of which may be used for loans directly
to our International subsidiary and up to $15,000,000 of which may be used for letters of credit, and other financial accommodations, and (II) we and our domestic subsidiaries entered into a credit-linked facility pursuant to a Loan and Security
Agreement (the CL Credit Agreement, and together with the ABL Credit Agreement, the Credit Agreements) with Wachovia Capital Markets, LLC and JPMorgan Securities Inc., as joint lead arrangers, whereby the lenders will provide
to us a $15,000,000 term loan and a $75,000,000 credit-linked letter of credit facility, and other financial accommodations. Under the ABL Credit Agreement, we (i) granted the asset-based 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 (ii) guarantee the obligations of our international subsidiary. Under
the CL Credit Agreement, we granted the credit-linked 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 credit-linked
lenders on all ABL Priority Collateral. Borrowings under the ABL facility will 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 CL facility will
bear interest at a rate of prime plus 1% or the Eurodollar rate plus a credit spread of 2.25%. Letters of Credit will be issued under the CL facility primarily to enhance the Companys multiple IRB issues with the credit spread being the same
as the term loan. The term of the ABL Credit Agreement is 5 years, and the term of the CL Credit Agreement is 6 years. 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 $15,000,000. 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 $10,000,000. The facilities include
financial covenants as follows: (a) if, during any quarter, Excess Availability under the revolving credit facility falls below $10,000,000, 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.



|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: March 9, 2007 |  |  |  |     |  |                                             
|                    |  |  |  | By: |  | /s/ Robert H. Mullen                        
|                    |  |  |  |     |  | Robert H. Mullen                            
|                    |  |  |  |     |  | Chief Executive Officer, President and      
|                    |  |  |  |     |  | Chairman of the Board                       
|                    |  |  |  |     |  | (Principal Executive Officer)               
|                    |  |  | 
|Date: March 9, 2007 |  |  |  |     |  |                                             
|                    |  |  |  | By: |  | /s/ Joseph E. Byrne                         
|                    |  |  |  |     |  | Joseph E. Byrne                             
|                    |  |  |  |     |  | Chief Financial Officer                     
|                    |  |  |  |     |  | (Principal Financial and Accounting Officer)



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