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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 31, 2008

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

THE NEWARK GROUP, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|New Jersey                                                     |  | 22-2884844                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                        |  |           
|--------------------------------------- |  | ----------
|20 Jackson Drive                        |  | 07016     
|Cranford, New Jersey                    | 
|(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)

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, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.

Large accelerated filer     ̈        Accelerated filer     ̈        Non-accelerated
filer    x        Smaller reporting company     ̈

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

The number of common shares outstanding at
October 31, 2008 was 3,560,403.









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INDEX



|                               |  |                                                                                                              |  |   
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------ |  | --
|                               |  | Page                                                                                                        
|PART I  FINANCIAL INFORMATION |  |                                                                                                             
|                               |  |                                                                                                             
|Item 1.                        |  | Unaudited Condensed Consolidated Financial Statements:                                                       |  |   
|                               |  |                                                                                                             
|                               |  | Condensed Consolidated Balance Sheets as of October 31, 2008 and April 30, 2008                              |  | 1 
|                               |  |                                                                                                             
|                               |  | Condensed Consolidated Statements of Operations for the three and six months ended October 31, 2008 and 2007 |  | 2 
|                               |  |                                                                                                             
|                               |  | Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 2008 and 2007           |  | 3 
|                               |  |                                                                                                             
|                               |  | Condensed Consolidated Statement of Permanent Stockholders Equity for the six months ended October 31, 2008 |  | 4 
|                               |  |                                                                                                             
|                               |  | Notes to Condensed Consolidated Financial Statements                                                         |  | 5 
|                               |  |                                                                                                             
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 17
|                               |  |                                                                                                             
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 30
|                               |  |                                                                                                             
|Item 4T.                       |  | Controls and Procedures                                                                                      |  | 31
|                               | 
|Part II  OTHER INFORMATION    |  |                                                                                                             
|                               |  |                                                                                                             
|Item 1.                        |  | Legal Proceedings                                                                                            |  | 31
|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                                                                                            |  | 32
|Item 6.                        |  | Exhibits                                                                                                     |  | 32
|                               |  |                                                                                                             
|                               |  | SIGNATURES                                                                                                   |  | 33



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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 OCTOBER 31, 2008 AND APRIL
30, 2008

(Dollars in Thousands, Except Per-Share Data)



|                                                                                                                 |  |                 |         |   |               |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                 |  | October 31,2008 |         |   | April 30,2008 |  
|ASSETS                                                                                                           |  |                 |         |   |               |   |         |  
|CURRENT ASSETS:                                                                                                  |  |                 |         |   |               |   |         |  
|Cash and cash equivalents                                                                                        |  | $               | 7,632   |   |               | $ | 15,327  |  
|Accounts receivable (less allowance for doubtful accounts of $3,722 and $3,912, respectively)                    |  |                 | 106,571 |   |               |   | 132,573 |  
|Inventories                                                                                                      |  |                 | 77,467  |   |               |   | 83,318  |  
|Other current assets                                                                                             |  |                 | 9,027   |   |               |   | 8,092   |  
|Assets held for sale                                                                                             |  |                 | 900     |   |               |   | 900     |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total current assets                                                                                             |  |                 | 201,597 |   |               |   | 240,210 |  
|                                                                                                                 |  |                
|RESTRICTED CASH                                                                                                  |  |                 |        |   |               |   | 141     |  
|PROPERTY, PLANT AND EQUIPMENT  Net                                                                              |  |                 | 274,766 |   |               |   | 294,218 |  
|GOODWILL                                                                                                         |  |                 | 47,652  |   |               |   | 53,130  |  
|LONG-TERM INVESTMENTS                                                                                            |  |                 | 18,608  |   |               |   | 22,011  |  
|OTHER ASSETS                                                                                                     |  |                 | 12,337  |   |               |   | 12,518  |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|TOTAL ASSETS                                                                                                     |  | $               | 554,960 |   |               | $ | 622,228 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS EQUITY                                                 |  |                 |         |   |               |   |         |  
|CURRENT LIABILITIES:                                                                                             |  |                 |         |   |               |   |         |  
|Accounts payable                                                                                                 |  | $               | 94,257  |   |               | $ | 123,366 |  
|Current maturities of debt                                                                                       |  |                 | 21,453  |   |               |   | 5,977   |  
|Income taxes and other taxes payable                                                                             |  |                 | 1,832   |   |               |   | 3,644   |  
|Accrued salaries and wages                                                                                       |  |                 | 13,381  |   |               |   | 14,711  |  
|Swap obligation                                                                                                  |  |                 | 4,006   |   |               |   |        |  
|Other accrued expenses                                                                                           |  |                 | 13,107  |   |               |   | 11,016  |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total current liabilities                                                                                        |  |                 | 148,036 |   |               |   | 158,714 |  
|                                                                                                                 |  |                
|SENIOR DEBT                                                                                                      |  |                 | 110,290 |   |               |   | 114,035 |  
|SUBORDINATED DEBT                                                                                                |  |                 | 180,160 |   |               |   | 179,973 |  
|DEFERRED INCOME TAXES                                                                                            |  |                 | 7,713   |   |               |   | 8,113   |  
|PENSION OBLIGATION                                                                                               |  |                 | 9,936   |   |               |   | 10,113  |  
|SWAP OBLIGATION                                                                                                  |  |                 |        |   |               |   | 16,653  |  
|OTHER LIABILITIES                                                                                                |  |                 | 7,199   |   |               |   | 6,888   |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total liabilities                                                                                                |  |                 | 463,334 |   |               |   | 494,489 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|COMMITMENTS AND CONTINGENCIES (Note 9)                                                                           |  |                 |         |   |               |   |         |  
|                                                                                                                 |  |                
|TEMPORARY EQUITY  COMMON STOCK, SUBJECT TO PUT RIGHTS, (574,602 shares)                                         |  |                 | 22,174  |   |               |   | 22,174  |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|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                                                                                                |  |                 | 146,318 |   |               |   | 166,588 |  
|Accumulated other comprehensive (loss) income                                                                    |  |                 | (13,065 | ) |               |   | 2,778   |  
|Treasury stock, 2,444,597 shares, at cost                                                                        |  |                 | (64,235 | ) |               |   | (64,235 | )
|                                                                                                                 |  |                 |         |   |               |   |         |  
|Total permanent stockholders equity                                                                             |  |                 | 69,452  |   |               |   | 105,565 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  
|TOTAL LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS EQUITY                                           |  | $               | 554,960 |   |               | $ | 622,228 |  
|                                                                                                                 |  |                 |         |   |               |   |         |  

See notes to unaudited condensed consolidated financial statements



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSUNAUDITED

FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2008 AND 2007

(Dollars in Thousands)



|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|--------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                |  | For the Three Months Ended |         |   | For the Six Months Ended |  
|                                                                |  | October 31,2008            |         |   | October 31,2007          |   |         | October 31,2008 |  |   | October 31,2007 |  
|NET SALES                                                       |  | $                          | 231,478 |   |                          | $ | 262,174 |                 |  | $ | 487,141         |   |  | $ | 517,849 |  
|COST OF SALES                                                   |  |                            | 205,316 |   |                          |   | 235,155 |                 |  |   | 441,870         |   |  |   | 458,509 |  
|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|Gross profit                                                    |  |                            | 26,162  |   |                          |   | 27,019  |                 |  |   | 45,271          |   |  |   | 59,340  |  
|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|OPERATING EXPENSES:                                             |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|Selling, general and administrative                             |  |                            | 19,294  |   |                          |   | 20,824  |                 |  |   | 40,187          |   |  |   | 41,802  |  
|Restructuring and impairments                                   |  |                            | 4,438   |   |                          |   | 215     |                 |  |   | 9,315           |   |  |   | 326     |  
|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|Total operating expenses                                        |  |                            | 23,732  |   |                          |   | 21,039  |                 |  |   | 49,502          |   |  |   | 42,128  |  
|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|OPERATING INCOME (LOSS)                                         |  |                            | 2,430   |   |                          |   | 5,980   |                 |  |   | (4,231          | ) |  |   | 17,212  |  
|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|OTHER (EXPENSE) INCOME:                                         |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|Interest expense                                                |  |                            | (7,864  | ) |                          |   | (7,229  | )               |  |   | (14,555         | ) |  |   | (14,166 | )
|Interest income                                                 |  |                            | 26      |   |                          |   | 48      |                 |  |   | 111             |   |  |   | 915     |  
|Equity in income of affiliates                                  |  |                            | 69      |   |                          |   | 532     |                 |  |   | 400             |   |  |   | 1,263   |  
|Loss on extinguishment of debt                                  |  |                            | (1,922  | ) |                          |   |        |                 |  |   | (1,922          | ) |  |   |        |  
|Other income  net                                              |  |                            | 394     |   |                          |   | 128     |                 |  |   | 830             |   |  |   | 144     |  
|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|Total other expense                                             |  |                            | (9,297  | ) |                          |   | (6,521  | )               |  |   | (15,136         | ) |  |   | (11,844 | )
|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|(LOSS) EARNINGS FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES |  |                            | (6,867  | ) |                          |   | (541    | )               |  |   | (19,367         | ) |  |   | 5,368   |  
|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|INCOME TAX EXPENSE                                              |  |                            | 78      |   |                          |   | 1,046   |                 |  |   | 903             |   |  |   | 2,022   |  
|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  
|NET (LOSS) EARNINGS                                             |  | $                          | (6,945  | ) |                          | $ | (1,587  | )               |  | $ | (20,270         | ) |  | $ | 3,346   |  
|                                                                |  |                            |         |   |                          |   |         |                 |  |   |                 |   |  |   |         |  

See notes to unaudited condensed consolidated financial statements



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED

FOR THE SIX MONTHS ENDED OCTOBER 31, 2008 AND 2007

(Dollars in
Thousands)



|                                                                                                     |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                     |  | 2008 |         |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                |  |      |         |   |      |   |         |  
|Net (loss) earnings                                                                                  |  | $    | (20,270 | ) |      | $ | 3,346   |  
|Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities: |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                                        |  |      | 16,723  |   |      |   | 17,091  |  
|(Gain) loss on sale of property, plant and equipment                                                 |  |      | (1,064  | ) |      |   | 109     |  
|Gain on insurance proceeds on equipment                                                              |  |      | (1,278  | ) |      |   |        |  
|Loss on extinguishment of debt                                                                       |  |      | 1,922   |   |      |   |        |  
|Loss due to impairment of assets                                                                     |  |      | 4,867   |   |      |   |        |  
|Equity in income of affiliates                                                                       |  |      | (400    | ) |      |   | (1,263  | )
|(Gain) loss on derivative instruments                                                                |  |      | (1,445  | ) |      |   | 427     |  
|Proceeds from dividends paid by equity investments in affiliates                                     |  |      | 435     |   |      |   | 272     |  
|Deferred income tax expense (benefit)                                                                |  |      | 149     |   |      |   | (2,071  | )
|                                                                                                     |  |     
|Changes in assets and liabilities:                                                                   |  |      |         |   |      |   |         |  
|Decrease in accounts receivable                                                                      |  |      | 18,161  |   |      |   | 1,886   |  
|Decrease (increase) in inventories                                                                   |  |      | 52      |   |      |   | (1,592  | )
|(Increase) decrease in other current assets                                                          |  |      | (615    | ) |      |   | 1,595   |  
|(Increase) decrease in other assets                                                                  |  |      | (707    | ) |      |   | 3,971   |  
|(Decrease) increase in accounts payable and accrued expenses                                         |  |      | (22,796 | ) |      |   | 8,598   |  
|Decrease in other liabilities                                                                        |  |      | (4,447  | ) |      |   | (4,007  | )
|                                                                                                     |  |      |         |   |      |   |         |  
|Net cash (used in) provided by operating activities                                                  |  |      | (10,713 | ) |      |   | 28,362  |  
|                                                                                                     |  |      |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                |  |      |         |   |      |   |         |  
|Capital expenditures                                                                                 |  |      | (9,097  | ) |      |   | (11,437 | )
|Acquisition costs                                                                                    |  |      | (829    | ) |      |   | (1,585  | )
|Proceeds from sale of property, plant and equipment                                                  |  |      | 1,444   |   |      |   | 55      |  
|Proceeds from insurance on equipment                                                                 |  |      | 1,278   |   |      |   |        |  
|Decrease (increase) in restricted cash                                                               |  |      | 141     |   |      |   | (250    | )
|                                                                                                     |  |      |         |   |      |   |         |  
|Net cash used in investing activities                                                                |  |      | (7,063  | ) |      |   | (13,217 | )
|                                                                                                     |  |      |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                |  |      |         |   |      |   |         |  
|Proceeds from long-term debt                                                                         |  |      | 29,402  |   |      |   | 23,447  |  
|Repayments of long-term debt                                                                         |  |      | (13,220 | ) |      |   | (26,168 | )
|Financing costs                                                                                      |  |      | (1,572  | ) |      |   |        |  
|Changes in cash overdraft                                                                            |  |      | (3,319  | ) |      |   | (3,475  | )
|                                                                                                     |  |      |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                                  |  |      | 11,291  |   |      |   | (6,196  | )
|                                                                                                     |  |      |         |   |      |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                              |  |      | (1,210  | ) |      |   | 150     |  
|                                                                                                     |  |      |         |   |      |   |         |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                 |  |      | (7,695  | ) |      |   | 9,099   |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                       |  |      | 15,327  |   |      |   | 11,806  |  
|                                                                                                     |  |      |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                             |  | $    | 7,632   |   |      | $ | 20,905  |  
|                                                                                                     |  |      |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                   |  |      |         |   |      |   |         |  
|Cash paid during the period for:                                                                     |  |      |         |   |      |   |         |  
|Interest                                                                                             |  | $    | 14,284  |   |      | $ | 14,420  |  
|                                                                                                     |  |      |         |   |      |   |         |  
|Income Taxes:                                                                                        |  |      |         |   |      |   |         |  
|Paid                                                                                                 |  | $    | 1,039   |   |      | $ | 525     |  
|                                                                                                     |  |      |         |   |      |   |         |  
|Purchases of property, plant and equipment included in accounts payable                              |  | $    | 1,670   |   |      | $ | 2,655   |  
|                                                                                                     |  |      |         |   |      |   |         |  

See notes to unaudited condensed consolidated financial statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENT OF PERMANENT STOCKHOLDERS EQUITY - UNAUDITED

FOR THE SIX MONTHS ENDED OCTOBER 31, 2008

(Dollars
in Thousands)



|                                                              |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |         |  
|------------------------------------------------------------- |  | ----- | ------- | - | ------------------------------------------ | - | ------- | ------------- |  | - | ---------------- | - |  | ------------------------ | ------- | ----------- |  | ------------------------ | --- |  | - | -- |  | - | ------- | -
|                                                              |  | Total |         |   | AccumulatedOtherComprehensiveIncome (Loss) |   |         | TreasuryStock |  |   | RetainedEarnings |   |  | AdditionalPaid InCapital |         | CommonStock |  | TotalComprehensiveIncome |    
|BALANCE APRIL 30, 2008                                        |  | $     | 105,565 |   |                                            | $ | 2,778   |               |  | $ | (64,235          | ) |  | $                        | 166,588 |             |  | $                        | 374 |  | $ | 60 |  |   |         |  
|Net loss                                                      |  |       | (20,270 | ) |                                            |   |        |               |  |   |                 |   |  |                          | (20,270 | )           |  |                          |    |  |   |   |  | $ | (20,270 | )
|Other comprehensive income:                                   |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |         |  
|Change in pension obligations (net of tax of $4)              |  |       | 353     |   |                                            |   | 353     |               |  |   |                 |   |  |                          |        |             |  |                          |    |  |   |   |  |   | 353     |  
|Foreign currency translation adjustments                      |  |       | (13,817 | ) |                                            |   | (13,817 | )             |  |   |                 |   |  |                          |        |             |  |                          |    |  |   |   |  |   | (13,817 | )
|Unrealized losses on marketable securities available for sale |  |       | (11     | ) |                                            |   | (11     | )             |  |   |                 |   |  |                          |        |             |  |                          |    |  |   |   |  |   | (11     | )
|Change in fair value of derivative instruments                |  |       | (2,368  | ) |                                            |   | (2,368  | )             |  |   |                 |   |  |                          |        |             |  |                          |    |  |   |   |  |   | (2,368  | )
|                                                              |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |         |  
|BALANCE OCTOBER 31, 2008                                      |  | $     | 69,452  |   |                                            | $ | (13,065 | )             |  | $ | (64,235          | ) |  | $                        | 146,318 |             |  | $                        | 374 |  | $ | 60 |  | $ | (36,113 | )
|                                                              |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |         |  

See notes to unaudited condensed consolidated financial statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

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



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

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

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial
information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments
consisting of normal recurring adjustments and accruals, as well as accounting changes considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements. Additionally, the preparation of these
financial statements requires management to make estimates and assumptions that affect: a) the reported amounts of assets and liabilities, b) the disclosure of contingent assets and liabilities at the date of the financial statements and c) the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating results for the six-month period ended October 31, 2008 are not necessarily indicative of the results that may be
expected for the year ending April 30, 2009 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, 2008 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, or 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.

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 $8,959 and $12,278 as of October 31, 2008 and April 30, 2008, respectively.



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

In
September 2008, the Financial Accounting Standards Board (the FASB) issued FASB Staff Position (FSP) FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB
Statement No. 133 and FASB Interpretation No 45; and Clarification of the Effective Date of FASB Statement No.161. This FSP requires certain disclosures to be made by sellers of credit derivatives and extends disclosures by guarantors to
include the current status of the payment/performance risk of any guarantees. The Company is not a seller of credit derivatives and does not guarantee the payment or performance of any third party. Therefore, application of these FSP provisions is
not expected to have any effect on the Companys financial reporting. In addition, this FSP clarifies that the derivative instrument and hedging activity disclosure requirements of FAS 161, as discussed below, are effective for both interim and
annual reporting periods beginning after November 15, 2008 (the three months beginning February 1, 2009 for the Company).

In
March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133 (FAS 161). FAS 161 changes the disclosure requirements for
derivative instruments and hedging activities by requiring enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FAS 133 and its
related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. As discussed above, FAS 161 is effective for fiscal years and interim
periods beginning after November 15, 2008 (the three months beginning February 1, 2009 for the Company). The Company is currently evaluating the effect, if any, the implementation of FAS 161 may have on its consolidated financial
statements.



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In December 2007, the FASB issued FAS 141 (R), Business Combinations (FAS
141(R)). FAS 141(R) expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date. FAS 141(R) also
requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date. FAS 141(R) further requires that acquisition costs generally be expensed as incurred,
restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax
expense. FAS 141(R) is effective for fiscal years beginning after December 15, 2008 with early adoption prohibited. While application of this standard will not impact the Companys financial statements for transactions prior to the
effective date, its application will have a significant impact on the Companys accounting for future acquisitions compared to current practice.

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 (FAS 159).
FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without being required to apply complex hedge accounting provisions. The Company adopted the provisions of FAS 159 effective May 1, 2008 and did not make any fair value elections. Therefore, the adoption of FAS 159 did
not have an impact on the Companys consolidated financial statements.

In September 2006, the FASB issued FAS No. 157, Fair
Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of FAS 157 are effective in two phases. On
May 1, 2008, the Company adopted the provisions of FAS 157 to its financial assets and financial liabilities (See Note 12  Fair Value Measurements). Beginning May 1, 2009, the provisions of FAS 157 will apply to the Companys
non-financial assets and liabilities, and the Company is currently evaluating the effects that such adoption may have on its consolidated financial statements. Additionally, in October 2008, the FASB issued FSP No. 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP FAS 157-3), which clarifies the application of FAS 157 when the market for a financial asset is inactive. Specifically, FSP FAS No. 157-3
clarifies (1) how managements internal assumptions should be considered in measuring fair value when observable data are not present, (2) how observable market information from an inactive market should be taken into account, and
(3) how the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. The guidance in FSP FAS No. 157-3 was effective immediately upon issuance and
had no impact on the Companys consolidated financial statements.



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

Inventories consist of the following:



|                             |  |             |        |           |   |       
|---------------------------- |  | ----------- | ------ | --------- | - | ------
|                             |  | October 31, |        | April 30,
|                             |  | 2008        |        | 2008     
|Raw Materials                |  | $           | 31,544 |           | $ | 33,078
|Finished Goods               |  |             | 42,537 |           |   | 46,478
|Other Manufacturing Supplies |  |             | 3,386  |           |   | 3,762 
|                             |  |             |        |           |   |       
|                             |  | $           | 77,467 |           | $ | 83,318
|                             |  |             |        |           |   |       



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

The Company entered into a
Purchase and Sale Agreement (the Agreement) dated August 2, 2006, for the sale of land in Natick, MA where the paperboard mill 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 has been delayed by additional due diligence matters, but is expected to
be completed within the next twelve months. The net book value of these assets is $900 and is reflected as Assets held for sale on the condensed consolidated balance sheets.



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



|                                    |  |                 |         |   |               |   |         |  
|----------------------------------- |  | --------------- | ------- | - | ------------- | - | ------- | -
|                                    |  | October 31,2008 |         |   | April 30,2008 |  
|Senior Subordinated Notes 9.75% (1) |  | $               | 175,000 |   |               | $ | 175,000 |  
|Asset-based Credit Facility (2)     |  |                 | 44,108  |   |               |   | 27,329  |  
|Term loan (2)                       |  |                 | 15,327  |   |               |   | 15,000  |  
|Industrial Revenue Bonds (3)        |  |                 | 58,855  |   |               |   | 65,295  |  
|Subordinated Notes (4)              |  |                 | 4,981   |   |               |   | 5,335   |  
|All other (5)                       |  |                 | 13,632  |   |               |   | 12,026  |  
|                                    |  |                 |         |   |               |   |         |  
|Total Debt                          |  |                 | 311,903 |   |               |   | 299,985 |  
|Less Current Portion                |  |                 | (21,453 | ) |               |   | (5,977  | )
|                                    |  |                 |         |   |               |   |         |  
|Long-Term Debt                      |  | $               | 290,450 |   |               | $ | 294,008 |  
|                                    |  |                 |         |   |               |   |         |  



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

|(2) | On March 9, 2007, the Company entered into a five-year asset-based credit agreement and a six-year credit-linked credit agreement. The asset-based facility provides the Company
a revolving line of credit in the aggregate principal amount of up to $85,000 (depending on the Companys borrowing base), up to $25,000 of which may be used for loans directly to the Companys European subsidiary and up to $15,000 of
which may be used for letters of credit, and other financial accommodations. The $90,000 credit-linked facility initially provided the Company with a $15,000 term loan and a $75,000 credit-linked letter of credit facility, and other financial
accommodations. The split between term loan and letter of credit facility can vary, but the overall credit-linked facility cannot exceed $90,000. This debt is classified in Senior Debt in the condensed consolidated balance sheets.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The credit-linked agreement was amended on August 12, 2008. In connection with the amendment, the Company paid a total
of $1,572 in fees, of which $750 was capitalized and $822 was recorded as a loss on extinguishment of debt during the second quarter in accordance with EITF 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. Based on
these same criteria, the Company recognized an additional $1,110 of loss on early extinguishment of debt during the second quarter to write-off portions of the previously capitalized loan costs.

Per the amendment, the most significant changes in the credit-linked agreement include (i) an increase to the credit spread to 5.5% on prime rate
borrowings or 6.5% on Eurodollar rate borrowings, (ii) required quarterly installment payments of $1,000, beginning on July 31, 2009, on any outstanding term loan balance, (iii) scheduled prepayments in September 2008 and 2009 of the
US dollar equivalent of Euros 3,000 and Euros 8,917, respectively and (iv) a Senior Leverage Ratio (as defined) for the twelve month periods ended July 31, 2008, October 31, 2008, January 31, 2009 and April 30,
2009 (and thereafter) of 4.75:1.0, 4.50:1.0, 3.50:1.0 and 3.00:1.0, respectively. Additionally, the Company no longer has the one-time option to increase the amounts of either the asset-based or credit-linked facilities. During September 2008, the
Company made its scheduled pre-payment on the credit-linked facility of the US dollar equivalent of 3,000 ($4,187).

Letters of Credit
are issued under the credit-linked facility primarily to enhance the Companys multiple Industrial Revenue Bond (IRB) issues with the credit spread being the same as the term loan. As of October 31, 2008, the Company had a
total of $68,551 in letters of credit obligations outstanding ($59,637 of which had been used to enhance the industrial revenue bonds) and $525 in letters of credit outstanding under the asset-based facility. During September 2008, the Company
converted several IRBs to term loan debt (see sub-note (3) below).

Separately under the asset-based facility, the Company had $44,108
in borrowings outstanding at rates between 4.00% and 6.67% (including credit spread), and under the credit-linked facility had $15,327 outstanding on the term loan at a rate of 10.00% (including credit spread). The Company had $20,505 of borrowing
availability under the asset-based facility at October 31, 2008. The undrawn portions of both the asset-based and credit-linked facilities are subject to a facility fee at an annual rate of 0.25% to 0.30%.



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|(3) | As of October 31, 2008, the IRBs are comprised of: Ohio IRB of $15,500 and Massachusetts IRBs of $43,355. These bonds are variable rate demand bonds, secured by letters of
credit, with maturity dates ranging from December 2026 through July 2031 and interest rates ranging from 4.18% to 7.98% (including letter of credit spread) and are reset every seven days. During the quarter ended October 31, 2008, the
Companys Mobile and Mercer IRB issues were converted into term-loan borrowings as allowed under the Companys credit-linked facility (see sub-note (2) above). All borrowings under these facilities are classified in Senior Debt in the
condensed consolidated balance sheets with a portion in Current maturities of debt.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The Company issued a subordinated note to a prior stockholder in exchange for the stockholders shares of common stock. The note bears interest at the prime rate in effect from
time to time, requires quarterly principal and interest payments and is due in July 2015. As of October 31, 2008, the remaining balance on the note is $4,784. In April 2008, the Company issued an additional subordinated note for $197 in
connection with its purchase of 50% of the outstanding shares of Jackson Drive Corp. 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 the following from our International operations: (i) $3,339 of discounted bills pending collection, (ii) $5,222 of a five-year loan where borrowings
bear a variable interest rate of EURIBOR plus .75%, or 5.625% as of October 31, 2008 and principal and interest are due every six months, at which point the interest rate is reset, (iii) an interest-free loan for $454, which requires equal
repayment amounts every six months beginning August 3, 2009 and (iv) $1,090 of borrowings under a credit facility entered into during October 2008. This is a three-year, 3,000 ($3,916) credit facility that carries an interest rate of
EURIBOR plus 1.50%, which is reset every three months, and where the facility commitment decreases by 1,000 annually each October. Also outstanding for our International operations was $557 drawn under a one-year line of credit that was
entered into during the current quarter. The total line of credit is for 750 ($979) and bears interest at a fixed rate of 6.25%. All other also includes a loan with Toronto Dominion Bank for $708, which bears interest at the rate of 4.75% (the
prime rate, 4.00% at October 31, 2008 plus 0.75%), payable monthly through May 2015. The loan is secured by a mortgage on the Companys Richmond, B.C., Canada facility. This loan is classified in Senior Debt in the condensed consolidated
balance sheets with a portion in Current maturities of debt. All other further includes borrowings by Jackson Drive Corp. for $2,262 which is secured by a mortgage on the Companys corporate headquarters. This loan matures in July 2024 and
carries a fixed interest rate of 5.625%.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The asset-based and credit-linked facilities include financial covenants as follows:
(a) if, during any quarter, Excess Availability, as defined under the credit facilities, falls below $10,000, the Company must achieve a Fixed Charge Coverage Ratio, as defined, of not less than 1.0 to 1.0. and (b) the Senior Leverage
Ratio, as described in sub-note (2) above. At October 31, 2008, the Company is not aware of any instances of non-compliance with financial covenants.

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

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

The Company has cross-currency interest rate swap agreements with a member of our bank group. At October 31, 2008 and April 30, 2008, the fair value of the swaps represented a liability of $4,006 and
$13,070, respectively. The decrease is mainly due to the making of a scheduled payment in September 2008, but was also affected by the change in foreign currency exchange rates between the US dollar and the Euro. The Company has another swap
agreement in relation to a second intercompany loan with its European subsidiary that represented an asset of $378 as of October 31, 2008 versus a liability of $3,583 as of April 30, 2008, with the change due to the strengthening of the US
dollar versus the Euro. The Company has recognized a gain of $1,445 and a loss of $427 within Other (expense) income  net on the condensed consolidated statements of operations, related to derivative activities, during the six months ended
October 31, 2008 and 2007, respectively.



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

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



|                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                 |        |   |                               |   |        |                 |  |   |                 |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------ | -
|                                                                                                                                                                                                                                                                                                                                                                                                       |  | Pension CostsThree Months ended |        |   | Pension CostsSix Months ended |  
|                                                                                                                                                                                                                                                                                                                                                                                                       |  | October 31,2008                 |        |   | October 31,2007               |   |        | October 31,2008 |  |   | October 31,2007 |  
|Service Cost                                                                                                                                                                                                                                                                                                                                                                                           |  | $                               | 684    |   |                               | $ | 854    |                 |  | $ | 1,368           |   |  | $ | 1,674  |  
|Interest Cost on Projected Benefit Obligation                                                                                                                                                                                                                                                                                                                                                          |  |                                 | 1,998  |   |                               |   | 1,890  |                 |  |   | 3,996           |   |  |   | 3,777  |  
|Expected Return on Assets (Gain) Loss                                                                                                                                                                                                                                                                                                                                                                  |  |                                 | (2,281 | ) |                               |   | (2,529 | )               |  |   | (4,563          | ) |  |   | (4,912 | )
|Net Amortization                                                                                                                                                                                                                                                                                                                                                                                       |  |                                 | 183    |   |                               |   | 240    |                 |  |   | 366             |   |  |   | 481    |  
|                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                 |        |   |                               |   |        |                 |  |   |                 |   |  |   |        |  
|Net Pension Expense                                                                                                                                                                                                                                                                                                                                                                                    |  | $                               | 584    |   |                               | $ | 455    |                 |  | $ | 1,167           |   |  | $ | 1,020  |  
|                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                 |        |   |                               |   |        |                 |  |   |                 |   |  |   |        |  
|                                                                                                                                                                                                                                                                                                                                                                                                      
|The Company estimates a cash contribution to its domestic pension plans of approximately $5,600 during the fiscal year ending April 30, 2009, and has made contributions
totaling $1,103 towards that $5,600 total during the six months ended October 31, 2008. As of October 31, 2008, 46% of the plans assets were in equity investments, 46% in fixed-income securities and 8% 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 CostsSix Months ended |  
|                                                                                                                                                                                                                                                                                                                                                                                                       |  | October 31,2008                 |        |   | October 31,2007               |   |        | October 31,2008 |  |   | October 31,2007 |  
|Service Cost                                                                                                                                                                                                                                                                                                                                                                                           |  | $                               | 5      |   |                               | $ | 9      |                 |  | $ | 11              |   |  | $ | 18     |  
|Interest Cost on Projected Benefit Obligation                                                                                                                                                                                                                                                                                                                                                          |  |                                 | 52     |   |                               |   | 56     |                 |  |   | 109             |   |  |   | 112    |  
|Expected Return on Assets (Gain) Loss                                                                                                                                                                                                                                                                                                                                                                  |  |                                 | (45    | ) |                               |   | (42    | )               |  |   | (94             | ) |  |   | (84    | )
|Net Amortization                                                                                                                                                                                                                                                                                                                                                                                       |  |                                 | (2     | ) |                               |   |       |                 |  |   | (4              | ) |  |   |       |  
|                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                 |        |   |                               |   |        |                 |  |   |                 |   |  |   |        |  
|Net Pension Expense                                                                                                                                                                                                                                                                                                                                                                                    |  | $                               | 10     |   |                               | $ | 23     |                 |  | $ | 22              |   |  | $ | 46     |  
|                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                 |        |   |                               |   |        |                 |  |   |                 |   |  |   |        |  



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

For the Three Months
Ended October 31, 2008 and 2007:

Fiscal 2009 Restructuring

The Paperboard segment incurred $2,323 of restructuring charges in the three months ended October 31, 2008. Of this amount, $2,133 related to
severance and dismantling, mothballing & other charges in connection with the previously announced shutdowns of the Companys Haverhill and Bennington paperboard mills and a paper machine at one of the Companys California
locations. The remaining $190 of restructuring charges related to costs to exit and maintain previously shut-down facilities.

The Converted
Products segment incurred $2,115 of restructuring and impairment charges in the three months ended October 31, 2008. Of this amount, $2,121 related to non-cash impairment charges associated with the previously announced closure of the
Companys solidboard plant in Madera, California. The remainder was a de minimis reversal of a prior severance accrual.

Fiscal
2008 Restructuring

The Paperboard segment incurred $215 of charges for costs to exit previously shut down facilities.



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



|                                 |  |            |       |                   |   |       |       |  |   |      
|-------------------------------- |  | ---------- | ----- | ----------------- | - | ----- | ----- |  | - | -----
|                                 |  | Paperboard |       | ConvertedProducts |   |       | Total
|October 31, 2008                 |  |            |       |                   |   |       |       |  |   |      
|Severance                        |  | $          | 87    |                   | $ | (6    | )     |  | $ | 81   
|Dismantling, Mothballing & Other |  |            | 2,236 |                   |   |      |       |  |   | 2,236
|Asset Impairment                 |  |            |      |                   |   | 2,121 |       |  |   | 2,121
|                                 |  |            |       |                   |   |       |       |  |   |      
|Total Charges                    |  | $          | 2,323 |                   | $ | 2,115 |       |  | $ | 4,438
|                                 |  |            |       |                   |   |       |       |  |   |      
|October 31, 2007                 |  |            |       |                   |   |       |       |  |   |      
|Dismantling, Mothballing & Other |  | $          | 215   |                   | $ |      |       |  | $ | 215  
|                                 |  |            |       |                   |   |       |       |  |   |      
|Total Charges                    |  | $          | 215   |                   | $ |      |       |  | $ | 215  
|                                 |  |            |       |                   |   |       |       |  |   |      

For the Six Months Ended October 31, 2008 and 2007:

Fiscal 2009 Restructuring

The
Paperboard segment incurred $7,200 of restructuring and impairment charges in the six months ended October 31, 2008. Of this amount, $1,851 were severance related costs associated with the Companys recently shut down Haverhill and
Bennington paperboard mills and a paper machine at one of the Companys California locations. Of the $2,604 included in Dismantling, Mothballing & Other, $2,124 related to the aforementioned recent shutdowns, while the remaining $480
of these restructuring charges related to costs to exit previously shut-down facilities. Non-cash impairment charges for the Paperboard segment for the six months ended October 31, 2008 totaled $2,745, with $2,399 related to the shutdown of the
Haverhill and Bennington paperboard mills and $346 related to the shutdown of a paper machine at one of the Companys California locations.

The Converted Products segment incurred $2,115 of restructuring and impairment charges in the six months ended October 31, 2008. The majority of this amount, $2,121, related to non-cash impairment charges associated with the announced
closure of the Companys solidboard plant in Madera, California. The remainder was a de minimis reversal of a prior severance accrual.

Non-cash impairment charges on the assets of the Companys shut down mills, paper machines and other machinery are based on estimates made by Company management. Managements initial estimates are based on estimated proceeds
realization from the used equipment and/or scrap metal markets at the time of determination, and these estimates may change significantly based on conditions in those markets.

Fiscal 2008 Restructuring

The
Paperboard segment incurred $326 of charges for costs to exit previously shut down facilities.

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



|                                 |  |            |       |                   |   |       |       |  |   |      
|-------------------------------- |  | ---------- | ----- | ----------------- | - | ----- | ----- |  | - | -----
|                                 |  | Paperboard |       | ConvertedProducts |   |       | Total
|October 31, 2008                 |  |            |       |                   |   |       |       |  |   |      
|Severance                        |  | $          | 1,851 |                   | $ | (6    | )     |  | $ | 1,845
|Dismantling, Mothballing & Other |  |            | 2,604 |                   |   |      |       |  |   | 2,604
|Asset Impairment                 |  |            | 2,745 |                   |   | 2,121 |       |  |   | 4,866
|                                 |  |            |       |                   |   |       |       |  |   |      
|Total Charges                    |  | $          | 7,200 |                   | $ | 2,115 |       |  | $ | 9,315
|                                 |  |            |       |                   |   |       |       |  |   |      
|October 31, 2007                 |  |            |       |                   |   |       |       |  |   |      
|Dismantling, Mothballing & Other |  | $          | 326   |                   | $ |      |       |  | $ | 326  
|                                 |  |            |       |                   |   |       |       |  |   |      
|Total Charges                    |  | $          | 326   |                   | $ |      |       |  | $ | 326  
|                                 |  |            |       |                   |   |       |       |  |   |      



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



|                                                                |  |                                      |        |   |                                   |   |        |                |  |   |        |  
|--------------------------------------------------------------- |  | ------------------------------------ | ------ | - | --------------------------------- | - | ------ | -------------- |  | - | ------ | -
|                                                                |  | Dismantling,Mothballing & OtherCosts |        |   | Severance andPayroll RelatedCosts |   |        | TotalProvision | 
|April 30, 2008 Accrual Balance                                  |  | $                                    | 58     |   |                                   | $ | 194    |                |  | $ | 252    |  
|Restructuring Charges for the Six Months Ended October 31, 2008 |  |                                      | 2,604  |   |                                   |   | 1,851  |                |  |   | 4,455  |  
|Amounts Paid Against 2008 Accruals                              |  |                                      | (58    | ) |                                   |   | (194   | )              |  |   | (252   | )
|Adjustment of prior accruals                                    |  |                                      |       |   |                                   |   | (6     | )              |  |   | (6     | )
|Amounts Paid Against 2009 Accruals                              |  |                                      | (1,144 | ) |                                   |   | (1,516 | )              |  |   | (2,660 | )
|                                                                |  |                                      |        |   |                                   |   |        |                |  |   |        |  
|October 31, 2008 Accrual Balance                                |  | $                                    | 1,460  |   |                                   | $ | 329    |                |  | $ | 1,789  |  
|                                                                |  |                                      |        |   |                                   |   |        |                |  |   |        |  

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



|                   |  |                                         |        |                                                   |   |                                                             |  |                                                          |       |  |   |       
|------------------ |  | --------------------------------------- | ------ | ------------------------------------------------- | - | ----------------------------------------------------------- |  | -------------------------------------------------------- | ----- |  | - | ------
|                   |  | CumulativeCosts as ofApril 30, 2008 (1) |        | Costs for theSix Months EndedOctober 31, 2008 (2) |   | Estimated Costs toCompleteInitiatives as ofOctober 31, 2008 |  | Total EstimatedCosts ofInitiatives as ofOctober 31, 2008
|Paperboard         |  | $                                       | 18,069 |                                                   | $ | 7,187                                                       |  | $                                                        | 5,700 |  | $ | 30,956
|                   |  |                                         |        |                                                  
|Converted Products |  |                                         | 2,645  |                                                   |   | 2,115                                                       |  |                                                          |      |  |   | 4,760 
|                   |  |                                         |        |                                                   |   |                                                             |  |                                                          |       |  |   |       
|                   |  | $                                       | 20,714 |                                                   | $ | 9,302                                                       |  | $                                                        | 5,700 |  | $ | 35,716
|                   |  |                                         |        |                                                   |   |                                                             |  |                                                          |       |  |   |       



|(1) | Of the $20,714 in cumulative restructuring costs, $9,388 were non-cash charges related to asset impairment.
|--- | -----------------------------------------------------------------------------------------------------------

|(2) | Total costs incurred in the six months ended October 31, 2008, $9,302, do not agree with the six month total charges of $9,315 from a prior table above since some of the costs
are related to plans initiated prior to January 1, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

The Companys consolidated tax
rate is computed using an annual effective rate for each taxable jurisdiction. The Company records income tax expense related to its state and foreign jurisdictions in which it has taxable income. During the six months ended October 31, 2008
and 2007, the Company had not recorded US federal income tax expense due to the uncertainty of the realization of the net deferred tax assets which is dependent upon generating taxable income in future periods. Accordingly, the Company has a
valuation allowance recorded against all of its US net federal deferred tax assets.

During the current quarter ended October 31, 2008,
the Company changed its permanent reinvestment status in regards to its foreign subsidiaries. Accordingly, the Company has provided for income taxes on approximately $80,000 of accumulated earnings and profits from foreign subsidiaries. This
resulted in an increase of the Companys net deferred tax liabilities of approximately $27,997 with an offsetting decrease to the Companys valuation allowance.



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

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

Current Environmental Matters

The Company has identified environmental contamination at three of its closed facilities that may or will require remediation upon retirement of these
assets. However, no such liability has been recognized for these facilities, as the



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Company currently does not have sufficient information available to reasonably estimate any potential obligation. For these three locations, any potential
obligation cannot be reasonably estimated as the full extent of contamination, the methods of remediation and other relevant facts to determine a reasonable estimate for the obligation are unknown at this time.

By letters dated February 14, 2006 and June 2, 2006, the United States Environment Protection Agency (EPA) notified the Company of
its potential liability relating to the Lower Passaic River Study Area (LPRSA), which is part of the Diamond Alkali Superfund Site, under Section 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act of
1980. The Company is one of at least 70 potentially responsible parties (PRPs) identified thus far. The EPA alleges that hazardous substances were released from the Companys now-closed Newark, NJ paperboard mill into the Lower
Passaic River. The EPA informed the Company that it may be potentially liable for response costs that the government may incur relating to the study of the LPRSA and for unspecified natural resource damages. The EPA demanded that the Company pay
$2,830 in unreimbursed past response costs on a joint and several liability basis. Alternatively, the EPA gave the Company the opportunity to obtain a release from these past response costs by joining the Cooperating Parties Group (the
Group) and agreeing to fund an environmental study by the EPA; the Company subsequently joined the Group. In 2006, the EPA notified the Group that the cost of the study would exceed its initial estimates and offered the Group the
opportunity to conduct the study by itself rather than reimburse the government for the additional costs incurred. The Group engaged in discussions with the EPA and the Group agreed to assume responsibility for the study pursuant to an
Administrative Order on Consent. Cumulatively, as of October 31, 2008 and based upon the most recent estimates for the study, the Company has expensed $762 (of which $3 was expensed in the quarter ended October 31, 2008), of which
$234 remains accrued in other liabilities.

Additionally, by letter dated August 2, 2007, the National Oceanic and Atmospheric
Administration (NOAA) of the United States Department of Commerce sent a letter to the Company and other companies identified as PRPs notifying them that it intended to perform an assessment of injuries to natural resources in connection
with the release of hazardous substances at or from the Diamond Alkali Superfund Site. In this letter, the NOAA invited all of the identified PRPs, including the Company, to participate in the development and performance of this assessment. The
Group, collectively, decided not to participate, although some of the members of the Group, excluding the Company, are considering entering into a cooperation agreement with the NOAA to evaluate natural resource damage issues.

Due to uncertainties inherent in these matters, management is unable to estimate the Companys potential exposure, including possible remediation or
other environmental responsibilities that may result from these matters at this time; such information is not expected to be known for a number of years. These uncertainties primarily include the completion and outcome of the environmental
study and the percentage of contamination/natural resource damage, if any, ultimately determined to be attributable to the Company and other parties. It is possible that the Companys ultimate liability resulting from these issues could be
material.



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

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

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

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

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



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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.

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



|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|-------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---------------- |  | - | ---------------- | - |  | - | ------- | -
|                                                               |  | For the Three Months Ended |         |   | For the Six Months Ended |  
|                                                               |  | October 31, 2008           |         |   | October 31, 2007         |   |         | October 31, 2008 |  |   | October 31, 2007 |  
|Sales (aggregate):                                             |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | 150,070 |   |                          | $ | 172,178 |                  |  | $ | 313,105          |   |  | $ | 340,669 |  
|Converted Products                                             |  |                            | 72,095  |   |                          |   | 75,510  |                  |  |   | 147,567          |   |  |   | 155,669 |  
|International                                                  |  |                            | 47,386  |   |                          |   | 52,018  |                  |  |   | 103,537          |   |  |   | 101,598 |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total                                                          |  | $                          | 269,551 |   |                          | $ | 299,706 |                  |  | $ | 564,209          |   |  | $ | 597,936 |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Less sales (inter-segment):                                    |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | (37,022 | ) |                          | $ | (36,136 | )                |  | $ | (74,989          | ) |  | $ | (76,547 | )
|Converted Products                                             |  |                            | (1,051  | ) |                          |   | (1,396  | )                |  |   | (2,079           | ) |  |   | (3,540  | )
|International                                                  |  |                            |        |   |                          |   |        |                  |  |   |                 |   |  |   |        |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total                                                          |  | $                          | (38,073 | ) |                          | $ | (37,532 | )                |  | $ | (77,068          | ) |  | $ | (80,087 | )
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Sales (external customers):                                    |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | 113,048 |   |                          | $ | 136,042 |                  |  | $ | 238,116          |   |  | $ | 264,122 |  
|Converted Products                                             |  |                            | 71,044  |   |                          |   | 74,114  |                  |  |   | 145,488          |   |  |   | 152,129 |  
|International                                                  |  |                            | 47,386  |   |                          |   | 52,018  |                  |  |   | 103,537          |   |  |   | 101,598 |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total                                                          |  | $                          | 231,478 |   |                          | $ | 262,174 |                  |  | $ | 487,141          |   |  | $ | 517,849 |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Operating Income (Loss):                                       |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | 6,571   |   |                          | $ | 4,591   |                  |  | $ | (500             | ) |  | $ | 15,326  |  
|Converted Products                                             |  |                            | (1,912  | ) |                          |   | 1,164   |                  |  |   | (1,140           | ) |  |   | 2,524   |  
|International                                                  |  |                            | 1,302   |   |                          |   | 3,888   |                  |  |   | 3,798            |   |  |   | 7,415   |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total Segment Operating Income                                 |  |                            | 5,961   |   |                          |   | 9,643   |                  |  |   | 2,158            |   |  |   | 25,265  |  
|                                                               |  |                            |         |  
|Corporate Expense                                              |  |                            | 3,531   |   |                          |   | 3,663   |                  |  |   | 6,389            |   |  |   | 8,053   |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total Operating Income (Loss)                                  |  |                            | 2,430   |   |                          |   | 5,980   |                  |  |   | (4,231           | ) |  |   | 17,212  |  
|                                                               |  |                            |         |  
|Interest Expense                                               |  |                            | (7,864  | ) |                          |   | (7,229  | )                |  |   | (14,555          | ) |  |   | (14,166 | )
|Interest Income                                                |  |                            | 26      |   |                          |   | 48      |                  |  |   | 111              |   |  |   | 915     |  
|Equity in Income of Affiliates                                 |  |                            | 69      |   |                          |   | 532     |                  |  |   | 400              |   |  |   | 1,263   |  
|Other Income, Net                                              |  |                            | (1,528  | ) |                          |   | 128     |                  |  |   | (1,092           | ) |  |   | 144     |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|(Loss) Earnings from Continuing Operations Before Income Taxes |  |                            | (6,867  | ) |                          |   | (541    | )                |  |   | (19,367          | ) |  |   | 5,368   |  
|Income Tax Expense                                             |  |                            | 78      |   |                          |   | 1,046   |                  |  |   | 903              |   |  |   | 2,022   |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|(Loss) Earnings from Continuing Operations                     |  | $                          | (6,945  | ) |                          | $ | (1,587  | )                |  | $ | (20,270          | ) |  | $ | 3,346   |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Depreciation and Amortization:                                 |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | 5,604   |   |                          | $ | 5,829   |                  |  | $ | 11,501           |   |  | $ | 11,879  |  
|Converted Products                                             |  |                            | 1,124   |   |                          |   | 1,139   |                  |  |   | 2,253            |   |  |   | 2,352   |  
|International                                                  |  |                            | 1,052   |   |                          |   | 1,063   |                  |  |   | 2,089            |   |  |   | 1,989   |  
|Corporate                                                      |  |                            | 434     |   |                          |   | 431     |                  |  |   | 880              |   |  |   | 871     |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total                                                          |  | $                          | 8,214   |   |                          | $ | 8,462   |                  |  | $ | 16,723           |   |  | $ | 17,091  |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Purchases of Property, Plant and Equipment:                    |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  | $                          | 2,564   |   |                          | $ | 3,576   |                  |  | $ | 6,489            |   |  | $ | 6,781   |  
|Converted Products                                             |  |                            | 660     |   |                          |   | 613     |                  |  |   | 1,193            |   |  |   | 1,034   |  
|International                                                  |  |                            | 834     |   |                          |   | 1,798   |                  |  |   | 1,317            |   |  |   | 3,305   |  
|Corporate                                                      |  |                            | 11      |   |                          |   | 317     |                  |  |   | 98               |   |  |   | 317     |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total                                                          |  | $                          | 4,069   |   |                          | $ | 6,304   |                  |  | $ | 9,097            |   |  | $ | 11,437  |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|                                                               |  |                            |         |  
|                                                               |  |                            |         |   |                          |   |         | October 31, 2008 |  |   | April 30, 2008   |  
|Identifiable Assets:                                           |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Paperboard                                                     |  |                            |         |   |                          |   |         |                  |  | $ | 306,922          |   |  | $ | 327,589 |  
|Converted Products                                             |  |                            |         |   |                          |   |         |                  |  |   | 83,783           |   |  |   | 90,520  |  
|International                                                  |  |                            |         |   |                          |   |         |                  |  |   | 152,420          |   |  |   | 191,762 |  
|Corporate                                                      |  |                            |         |   |                          |   |         |                  |  |   | 11,835           |   |  |   | 12,357  |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  
|Total                                                          |  |                            |         |   |                          |   |         |                  |  | $ | 554,960          |   |  | $ | 622,228 |  
|                                                               |  |                            |         |   |                          |   |         |                  |  |   |                  |   |  |   |         |  



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The amounts of investments in equity method investees in the Paperboard segment at October 31
and April 30, 2008 are $1,228 and $1,427, respectively. The amounts of investments in equity method investees in the International segment at October 31 and April 30, 2008 are $17,307 and $20,467, respectively.

Geographic Regions

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



|                                                            |  |                 |         |                 |   |        
|----------------------------------------------------------- |  | --------------- | ------- | --------------- | - | -------
|                                                            |  | October 31,2008 |         | October 31,2007
|Sales to External Customers                                 |  |                 |         |                 |   |        
|United States                                               |  | $               | 376,298 |                 | $ | 409,292
|Europe                                                      |  |                 | 103,537 |                 |   | 101,598
|Canada                                                      |  |                 | 7,306   |                 |   | 6,959  
|                                                            |  |                 |         |                 |   |        
|Total                                                       |  | $               | 487,141 |                 | $ | 517,849
|                                                            |  |                 |         |                 |   |        
|                                                            |  |                
|                                                            |  | October 31,2008 |         | April 30,2008  
|Net Property, Plant and Equipment, Goodwill and Intangibles |  |                 |         |                 |   |        
|United States                                               |  | $               | 253,355 |                 | $ | 264,636
|Europe                                                      |  |                 | 63,153  |                 |   | 75,449 
|Canada                                                      |  |                 | 5,933   |                 |   | 7,291  
|                                                            |  |                 |         |                 |   |        
|Total                                                       |  | $               | 322,441 |                 | $ | 347,376
|                                                            |  |                 |         |                 |   |        



|11. | RELATED PARTY TRANSACTIONS
|--- | --------------------------

The paperboard mills in
our International segment purchased approximately $7,235 and $8,320 of raw material from affiliated entities accounted for as equity method investments during the six-month periods ended October 31, 2008 and 2007, respectively.

The International segment also recorded sales of approximately $2,413 and $2,155 to two affiliated entities accounted for as equity method investments
during the six-month periods ended October 31, 2008 and 2007, respectively.

The Company paid approximately $3,523 and $2,862 to
Integrated Paper Recyclers, LLC, an affiliated entity accounted for as an equity method investment, primarily for hauling services of recyclable material during the six-month periods ended October 31, 2008 and 2007, respectively.



|12. | FAIR VALUE MEASUREMENTS
|--- | -----------------------

On May 1, 2008, the
Company adopted the provisions of FAS 157 to its financial assets and financial liabilities. FAS 157 requires quantitative disclosures using a tabular format in all reporting periods and qualitative disclosures about the valuation techniques used to
measure fair value in all annual periods. In February 2008, the FASB deferred the implementation of this standard for all non-financial assets and non-financial liabilities, except those recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The Company does not currently have any non-financial assets or non-financial liabilities that are measure at fair value on a recurring basis.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
FAS 157 requires that these financial assets and liabilities be classified into one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market
based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not
corroborated by market data.



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The following table sets forth information regarding the Companys financial assets and
liabilities that are measured at fair value.



|                                                |  |                 |       |                                                                        |   |                                           |  |                                        |       |  |   |  
|----------------------------------------------- |  | --------------- | ----- | ---------------------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | ----- |  | - | -
|                                                |  |                 |       | Fair Value Measurements at Reporting Date Using                       
|Description                                     |  | October 31,2008 |       | Quoted Prices inActive Marketsfor IdenticalAssets/Liabilities(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Assets:                                         |  |                 |       |                                                                        |   |                                           |  |                                        |       |  |   |  
|Cross-currency interest rate swap               |  | $               | 378   |                                                                        | $ |                                          |  | $                                      | 378   |  | $ | 
|Liabilities:                                    |  |                 |       |                                                                        |   |                                           |  |                                        |       |  |   |  
|Over-the-counter natural gas purchase contracts |  | $               | 2,308 |                                                                        | $ |                                          |  | $                                      | 2,308 |  | $ | 
|Cross-currency interest rate swaps              |  | $               | 4,006 |                                                                        | $ |                                          |  | $                                      | 4,006 |  | $ | 

As a result of the Companys global operating and financing activities, it is exposed to
market risks from changes in interest and foreign currency exchange rates and commodity prices, which may adversely affect the Companys operating results and financial position. When deemed appropriate, the Company minimizes its risks from
foreign currency exchange rate and commodity price fluctuations through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes, and the Company
does not use leveraged derivative financial instruments.

The fair value of cross-currency interest rate swaps are characterized as Level 2
since the measurements are based upon observable inputs such as interest rates, yield curves and spot and future exchange rates.

The fair
value of over-the-counter natural gas purchase contracts are characterized as Level 2 since the measurements are based on exchange-traded natural gas contracts with terms similar to the contracts entered into by the Company.



|13. | COMPREHENSIVE (LOSS)/INCOME
|--- | ---------------------------

Comprehensive
(loss)/income is comprised of net (loss)/earnings, pension adjustments, foreign currency translation adjustments, unrealized gains/losses on available-for-sale securities and changes in fair value of derivative instruments. Comprehensive
(loss)/income for the six months ended October 31, 2008 and 2007 were a loss of ($36,113) and income of $6,644, respectively. Comprehensive (loss)/income for the three months ended October 31, 2008 and 2007 were a loss of ($21,816) and
income of $3,086, respectively.



|14. | OTHER MATTERS
|--- | -------------

In early June 2008, the Company
closed on the acquisition of a cogeneration facility located next to its mill in Viersen, Germany. The Company paid approximately $420 towards the total price in February 2008 and $829 as final payment in early June 2008. Included in the final
payment was $235 in refundable VAT tax.

During the quarter ended July 31, 2008, the Company sold certain water rights at one of its
paperboard mills in California for $1,100, recording a gain of $975 from the sale. This gain was recorded as a reduction to cost of sales as it represents a recovery of expenditures originally recorded as cost of sales.



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During the quarter ended October 31, 2008, the Company received $1,278 in insurance proceeds
related to equipment failure that occurred in February 2008 at one of the Companys paperboard mills. Upon receipt, these proceeds were recorded as a reduction to cost of sales in our Paperboard segment as they represent a reimbursement of
costs that were originally recorded on that line in the Companys statement of operations. The Company also recorded a gain of $892 during the current quarter from a flood insurance claim at one of the Companys paperboard mills in Ohio.
Upon receipt, these proceeds were also recorded as a reduction to cost of sales as they represent a reimbursement of repair costs that were originally recorded in that line in the Companys statement of operations.

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

Certain locations within the Companys Paperboard
segment are awarded credits for air emissions. These locations monitor their emissions and routinely invest funds to maintain compliance levels or to improve performance and from time to time, the Company sells excess nitrogen oxide emission
credits. Costs for environmental maintenance and improvement projects are recorded in Cost of sales and the gains from the sales of these credits are likewise recorded in Cost of sales. During August 2007, 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 $137.



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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 for the year ended April 30, 2008.

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, 2008. 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 six largest participants in this industry. No single customer accounted for more than 3.6% of our sales in our fiscal year ended
April 30, 2008.

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

For the fiscal year ended April 30, 2008, the Paperboard segment
represented 51% of our total sales, the Converted Products segment represented 28% of our total sales and the International segment represented 21% of our total sales.

Our fiscal year ends April 30. All references to years, quarters or other periods in this section refer to fiscal years, quarters or periods whether or not specifically indicated. Percentages and dollar amounts
have been rounded to aid presentation.

Our operating results are primarily influenced by sales price and volume, mill capacity utilization, recovered
paper cost, energy costs and freight costs. Sales volumes are generally driven by overall economic conditions and more specifically by consumer non-durable goods consumption. Overcapacity and an overall sluggish US economy have affected operating
rates within the industry, and we and others in the industry have developed and begun right-sizing plans in an effort to bring capacity in line with overall demand. The end result of these initiatives will be the removal of approximately 580,000
tons of capacity. Our right-sizing efforts have produced a 95% mill utilization rate for the six months ended October 31, 2008, a slight decrease from 96% in the same period of the prior year.

Recovered paper is our most significant raw material, and the cost of such paper has historically fluctuated significantly due to market and industry conditions. Our
average North American recovered paper cost per ton of paperboard produced was $108 per ton in 2006, rose to $123 per ton in 2007 and then rose again to $156 per ton in 2008, resulting in a 45% increase in just two years. When comparing the average
cost for the six months ended October 31, 2008 to the same period of the prior year, our average cost was 4% higher in the current six-month period. However, the current state of the economy has begun to have its effect on recovered paper
prices, as our average cost during the three months ended October 31, 2008 was $156 per ton, a 4% decrease from the same period of last year and a 5% decrease from the three months ended July 31, 2008. The recent decline in recovered paper
costs is also reflected in our International segment



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where average cost for the six months ended October 31, 2008 was 112 per ton, down from 122 per ton during the same period of the
prior fiscal year. After factoring in the effects of foreign currency exchange rates, our average per-ton recovered paper costs remained flat at $167 when comparing the six months ended October 31, 2008 and 2007. Average recovered paper cost in
our International segment for the three months ended October 31, 2008 was 109 per ton, a decrease of 5% from the three months ended July 31, 2008.

Energy, which consists of electricity, natural gas and fuel oil used to generate steam for use in the paper making process, is also a significant manufacturing cost for us. Average energy costs per ton of paperboard
produced in our North American mill system increased 27% in the six months ended October 31, 2008 to $104 per ton when compared to $83 per ton in the same six months of the prior fiscal year. These costs are significantly higher than what we
experienced at the early part of the decade, where our average energy cost per ton of paperboard produced was just $43 in 2000. The rise in costs is due to overall increases in natural gas, fuel oil and electricity prices. With conditions in the
Middle East being as they are, and with the current state of the worldwide economy, energy costs have seen significant decreases in the recent past and we believe these costs will remain depressed for the near term. When energy costs do increase,
our operating margins are adversely affected. Therefore, we attempt to manage fluctuations in our energy costs by utilizing financial hedges and purchasing forward contracts for a portion of our energy needs. As of October 31, 2008, we had
approximately 70% of our natural gas needs through April 2009 hedged at prices favorable to targeted levels. Energy costs in Western Europe are at elevated levels compared to just a few years ago, particularly relating to natural gas. In 2006, our
average energy cost per ton of paperboard produced in our international mills was 40, but that rose 43% to an average of 58 per ton in 2007 and remained at that level for fiscal 2008. For the six-month period ended October 31,
2008, our average energy price per ton of paperboard produced was 65, 12% higher than average 2008 costs and 17% higher than our average cost in the six-month period ended October 31, 2007.

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. Price increases on all grades of uncoated recycled paperboard, graphicboard, tubes, cores and other allied products were announced throughout December 2007 and January 2008. Further price increases were announced
in July 2008 on all grades of recycled paperboard, graphicboard, tubes, cores and allied products. Full realization of announced price increases and the timing of such realization is impacted by many factors including competition, the general state
of the economy and contractual obligations. When comparing the six-month periods ended October 31, 2008 and 2007, average North American sales price for both our converted and recycled paperboard products increased 8%.

Our Results of Operations

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



|                   |  |                               |         |                             |   |         |  |      |         |  |   |        
|------------------ |  | ----------------------------- | ------- | --------------------------- | - | ------- |  | ---- | ------- |  | - | -------
|                   |  | Three Months EndedOctober 31, |         | Six Months EndedOctober 31,
|(in thousands)     |  | 2008                          |         | 2007                        |   | 2008    |  | 2007
|Net Sales          |  |                               |         |                             |   |         |  |      |         |  |   |        
|Paperboard         |  | $                             | 113,048 |                             | $ | 136,042 |  | $    | 238,116 |  | $ | 264,122
|Converted Products |  |                               | 71,044  |                             |   | 74,114  |  |      | 145,488 |  |   | 152,129
|International      |  |                               | 47,386  |                             |   | 52,018  |  |      | 103,537 |  |   | 101,598
|                   |  |                               |         |                             |   |         |  |      |         |  |   |        
|Total              |  | $                             | 231,478 |                             | $ | 262,174 |  | $    | 487,141 |  | $ | 517,849
|                   |  |                               |         |                             |   |         |  |      |         |  |   |        
|Cost of Sales      |  |                               |         |                             |   |         |  |      |         |  |   |        
|Paperboard         |  | $                             | 96,870  |                             | $ | 123,087 |  | $    | 215,968 |  | $ | 232,532
|Converted Products |  |                               | 66,206  |                             |   | 68,051  |  |      | 135,121 |  |   | 139,581
|International      |  |                               | 42,240  |                             |   | 44,017  |  |      | 90,781  |  |   | 86,396 
|                   |  |                               |         |                             |   |         |  |      |         |  |   |        
|Total              |  | $                             | 205,316 |                             | $ | 235,155 |  | $    | 441,870 |  | $ | 458,509
|                   |  |                               |         |                             |   |         |  |      |         |  |   |        
|Restructuring      |  |                               |         |                             |   |         |  |      |         |  |   |        
|Paperboard         |  | $                             | 2,323   |                             | $ | 215     |  | $    | 7,200   |  | $ | 326    
|Converted Products |  |                               | 2,115   |                             |   |        |  |      | 2,115   |  |   |       
|                   |  |                               |         |                             |   |         |  |      |         |  |   |        
|Total              |  | $                             | 4,438   |                             | $ | 215     |  | $    | 9,315   |  | $ | 326    
|                   |  |                               |         |                             |   |         |  |      |         |  |   |        



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|                        |  |                               |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|----------------------- |  | ----------------------------- | ------ | - | --------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                        |  | Three Months EndedOctober 31, |        |   | Six Months EndedOctober 31, |  
|(in thousands)          |  | 2008                          |        |   | 2007                        |   |        | 2008 |  |   | 2007   |  
|SG&A                    |  |                               |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Paperboard              |  | $                             | 7,284  |   |                             | $ | 8,149  |      |  | $ | 15,448 |   |  | $ | 15,938 |  
|Converted Products      |  |                               | 4,635  |   |                             |   | 4,899  |      |  |   | 9,392  |   |  |   | 10,024 |  
|International           |  |                               | 3,844  |   |                             |   | 4,113  |      |  |   | 8,958  |   |  |   | 7,787  |  
|Corporate               |  |                               | 3,531  |   |                             |   | 3,663  |      |  |   | 6,389  |   |  |   | 8,053  |  
|                        |  |                               |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Total                   |  | $                             | 19,294 |   |                             | $ | 20,824 |      |  | $ | 40,187 |   |  | $ | 41,802 |  
|                        |  |                               |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Operating Income (Loss) |  |                               |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Paperboard              |  | $                             | 6,571  |   |                             | $ | 4,591  |      |  | $ | (500   | ) |  | $ | 15,326 |  
|Converted Products      |  |                               | (1,912 | ) |                             |   | 1,164  |      |  |   | (1,140 | ) |  |   | 2,524  |  
|International           |  |                               | 1,302  |   |                             |   | 3,888  |      |  |   | 3,798  |   |  |   | 7,415  |  
|Corporate               |  |                               | (3,531 | ) |                             |   | (3,663 | )    |  |   | (6,389 | ) |  |   | (8,053 | )
|                        |  |                               |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Total                   |  | $                             | 2,430  |   |                             | $ | 5,980  |      |  | $ | (4,231 | ) |  | $ | 17,212 |  
|                        |  |                               |        |   |                             |   |        |      |  |   |        |   |  |   |        |  

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 endedOctober 31, |   |  | Six Months endedOctober 31, |  
|                                             |  | 2008                          |   |  | 2007                        |   |  | 2008  |   |  | 2007  |  
|Net sales                                    |  | 100.0                         | % |  | 100.0                       | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                                |  | 88.7                          |   |  | 89.7                        |   |  | 90.7  |   |  | 88.5  |  
|Selling, general and administration expenses |  | 8.3                           |   |  | 7.9                         |   |  | 8.2   |   |  | 8.1   |  
|Restructuring and impairments                |  | 1.9                           |   |  | 0.1                         |   |  | 1.9   |   |  | 0.1   |  
|Operating income                             |  | 1.1                           |   |  | 2.3                         |   |  | (0.9  | ) |  | 3.4   |  
|Interest expense                             |  | 3.4                           |   |  | 2.8                         |   |  | 3.0   |   |  | 2.8   |  
|Income tax expense                           |  |                              |   |  | 0.4                         |   |  | 0.2   |   |  | 0.4   |  
|Net (loss) earnings                          |  | (3.0                          | ) |  | (0.6                        | ) |  | (4.2  | ) |  | 0.7   |  

Results of Operations

Six Months Ended October 31, 2008 Compared to Six Months Ended October 31, 2007

Overview

As more fully described below, we experienced a very challenging first six months of fiscal 2009, resulting in a net loss of $20.3 million compared to net earnings of
$3.3 million in the same six months of fiscal 2008. Decreased volumes throughout North America and in our international converting operations, as well as elevated input costs, far outweighed advances from price increase realization. However, our
second quarter loss was approximately half of what it was in the first quarter, and it also included $1.9 million of an accounting loss related to the amendment of our credit-linked credit facility on August 12, 2008. Operating income in the
quarter ended October 31, 2008 was $2.4 million compared to an operating loss of $6.7 million in the first quarter, with the improvement due to cost savings from our right-sizing initiatives as well as price increase realization across our
North American operations and on converted products in our International segment. Our North American mill utilization rates have also improved to 95% in the quarter ended October 31, 2008 compared to 94% in the quarter ended July 31, 2008.
In the quarters ended July 31, 2008 and October 31, 2008, we incurred $4.4 million and $4.9 million of restructuring and impairment costs, respectively, in relation to managements decisions to shut down one of two paper machines at
one of our California mills in addition to two other mills, one in North Hoosick, New York and the other in Haverhill, Massachusetts. We also recorded non-cash impairment charges during October on our solidboard plant in Madera, California. The full
and partial cessation of operations at these facilities has already begun to yield substantial benefits through both cost reduction and earnings improvement.



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Net Sales. Net sales for the six months ended October 31, 2008 were $487.1 million, 6% or $30.7 million,
less than $517.8 million in the six months ended October 31, 2007. Lower volumes across North American operations, as well as in our international converting operations, were the primary drivers of the decrease, partially offset by higher
average sales prices throughout North America.

Cost of Sales. Cost of sales was $441.9 million for the six months ended October 31, 2008, a
$16.6 million, or 4%, decrease from $458.5 million for the six-month period ended October 31, 2007, primarily due to lower volumes. Additionally, there was a $1.2 million increase to non-routine reductions to cost of sales in our Paperboard
segment when comparing the six months ended October 31, 2008 to the same period in 2007. Current period reductions are comprised of (i) a $1.3 million gain from insurance proceeds on equipment, (ii) a $1.0 million gain from the sale
of certain water rights at one of our California mills and (iii) a $0.9 million gain from insurance proceeds from a flood claim at one of our Ohio mills, while the prior year reduction resulted from a gain of $2.0 million that stemmed from a
state sales-tax settlement. Partially offsetting the cost decreases from lower volumes and non-routine reductions were higher worldwide per-ton energy costs in our mills and increased per-ton raw material paperboard costs in our converting
operations.

Restructuring and Impairments. Restructuring and impairment charges were $9.3 million in the six months ended October 31, 2008, a
$9.0 million increase compared to $0.3 million in the same period of 2007. Current year expenses include $7.2 million in our Paperboard segment, most of which relates to the July 2008 shutdown of one paper machine and the August 2008 shutdowns of
two paperboard mills. Current year expenses also includes $2.1 million in our Converted Products segment, representing non-cash impairment charges on fixed assets in relation to the shutdown of our solidboard plant in California which was announced
in early November 2008.

Selling, General & Administrative.Selling, General & Administrative (SG&A) expenses for the
six-month periods ended October 31, 2008 and 2007 were $40.2 million and $41.8 million, respectively, a 4% drop for the current year. The majority of the decrease comes from savings as a result of the facilities closures in our Paperboard and
Converted Products segments, partially offset by higher costs in our International segment resulting from costs for the mill in Germany that was acquired in August 2007.

Operating Income. We reported an operating loss in the six months ended October 31, 2008 of $4.2 million compared to operating income of $17.2 million in the six months ended October 31, 2007. Lower
volumes, higher restructuring costs and increased per-ton energy and freight costs more than offset North American price increases.

Paperboard

Net sales in the Paperboard segment for the six months ended October 31, 2008 were $238.1 million, 10% or $26.0 million less than $264.1
million in the same period of the prior year. Volumes of our recycled paperboard products dropped 10%, approximately 80% of which is the result of the shutdowns of one paper machine in July 2008 and the closure of two paperboard mills in August
2008. The remaining drop in volume is due to general slowness in the US economy. Volume in the recovered paper we sell to third parties was also affected by the economy, decreasing 16%. Offsetting these factors negatively affecting sales were an 8%
increase in the average sales price on our recycled paperboard products and a 3% increase in the average price of recovered paper we sell to third parties. Mill utilization rates decreased slightly in the current six-month period from 96% in the six
months ended October 31, 2007 to 95% in the six months ended October 31, 2008.

Cost of sales decreased 7% from $232.5 million in the six months
ended October 31, 2007 to $216.0 million in the six months ended October 31, 2008. The volume decreases and lower costs stemming from current economic conditions and the aforementioned shutdowns more than offset increases in various costs,
including a 23% increase in average per-ton freight costs, a 27% increase in energy costs per ton of paperboard produced and a 4% increase in the cost of recovered paper per ton of paperboard produced in our mills. Additionally, there was a $1.2
million increase to non-routine reductions to cost of sales when comparing the six months ended October 31, 2008 to the same period in 2007. Current period reductions are comprised of (i) a $1.3 million gain from insurance proceeds on
equipment, (ii) a $1.0 million gain from the sale of certain water rights at one of our California mills and (iii) a $0.9 million gain from insurance proceeds from a flood claim at one of our Ohio mills, while the prior year reduction
resulted from a gain of $2.0 million that stemmed from a state sales-tax settlement.

Restructuring costs were $7.2 million in the six-month period ended
October 31, 2008, a $6.9 million increase over $0.3 million in the same period of the prior year. Costs related to the announced shutdowns of two paperboard mills and one paper machine account for $6.7 million of the total, with $2.1 million of
that amount related to dismantling and mothballing costs, $1.9 million to severance costs and $2.7 million being non-cash impairment charges on fixed assets. Costs in the current period of $0.5 million were to maintain previously shut down
facilities, as were the $0.3 million of prior year costs.



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SG&A costs in the six months ended October 31, 2008 were $15.4 million, a decrease of $0.5 million, or 3%,
when compared to the same period of the prior year primarily due to the closures of the two paperboard mills and one paper machine as discussed above.

The
Paperboard segment incurred an operating loss for the six months ended October 31, 2008 of $0.5 million compared to operating income of $15.3 million in the same six-month period of the prior year. Lower volumes, higher restructuring costs and
increased per-ton energy, freight and recovered paper costs in our mills more than offset increased prices on our recycled paperboard products and recovered paper we sell to third parties, as well as lower SG&A costs.

Converted Products

Sales in the Converted Products segment
for the six months ended October 31, 2008 were $145.5 million, a decrease of 4%, or $6.6 million, from $152.1 million for the six months ended October 31, 2007. Volume decreases of 12% more than offset an 8% increase in average sales
price.

Cost of sales in the six-month period ended October 31, 2008 was $135.1 million, 3%, or $4.5 million, less than $139.6 million in the same
six-month period of the prior year due to the noted lower volumes more than offsetting a 26% increase in per-ton freight costs and a 6% increase in per-ton raw material paperboard costs.

Restructuring costs were $2.1 million in the six months ended October 31, 2008 compared to the Company having no such costs in the same period of the prior year. Current year costs are for non-cash impairment
charges on fixed assets related to the previously announced shut down of our solidboard plant in California.

SG&A costs for the six-month period ended
October 31, 2008 were $9.4 million, 6%, or $0.6 million, less than the six-month period ended October 31, 2007 due to past operational streamlining efforts.

The Converted Products segment reported an operating loss of $1.1 million for the six months ended October 31, 2008 compared to operating income of $2.5 million in the six-month period ended October 31,
2007. Lower volumes, higher restructuring costs and increased per-ton freight and raw material costs more than offset increases in average sales price.

International

Net sales in the International segment were $103.5 million in the six months ended October 31, 2008, a 2%, or
$1.9 million, increase over $101.6 million in the six months ended October 31, 2007. A 4% increase in recycled paperboard product volume and a slightly weaker US dollar versus the Euro pushed net sales higher, but were partially offset by a 2%
decrease in converting volumes. Excluding the effects of foreign currency exchange, average sales price on our recycled paperboard products decreased 3% while the price on our converted products showed a slight increase.

Cost of sales in the International segment was $90.8 million in the six-month period ended October 31, 2008, 5%, or $4.4 million, higher than $86.4 million for the
six months ended October 31, 2007. In addition to the mill volume increase noted above, factors contributing to higher cost of sales were a 22% increase in per-ton energy costs in our mills and a 13% rise in per-ton raw material paperboard
costs in our converting operations. These items were partially offset by lower volumes.

SG&A costs for the six months ended October 31, 2008 were
$9.0 million, $1.2 million, or 15%, higher than $7.8 million for the same period in the prior year partly due to the current period reflecting six months of expenses for the German mill that we acquired in August 2007 while the prior years
period only reflects three months of expenses. Current year totals also reflect additional costs allocated from the corporate office.

Operating income for
the International segment was $3.8 million for the six months ended October 31, 2008, $3.6 million less than $7.4 million in the same period of the prior year. Higher per-ton energy costs in our mills and raw material costs on our converting
operations, lower converting volumes and increased SG&A costs more than offset higher mill volumes.

Corporate

Unallocated corporate expense was $6.4 million in the six-month period ended October 31, 2008 compared to $8.1 million in the same period last year, a $1.7 million
decrease. Approximately $1.0 million of the decrease related to lower professional fees for legal services and Sarbanes-Oxley compliance, with the remaining decrease in employee-related costs.



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Other Income (Expense)

Interest expense in the six months ended October 31, 2008 was $14.6 million, an increase of $0.4 million from $14.2 million in the six months ended October 31, 2007 due to higher interest rates under our
amended credit-linked facility and increased average borrowings, which were $305.9 million for the six months ended October 31, 2008 compared to $290.7 million for the six months ended October 31, 2007.

Excluding Interest expense, Other income (expense) - net was a net expense of $0.6 million in the current six-month period versus income of $2.3 million in the prior
year period. This change is primarily due to the current six months including $1.9 million of a loss on debt extinguishment, $0.9 million less in earnings of equity method affiliates and $0.8 million received in the prior year from interest received
as part of a state sales-tax related settlement. Current year results also reflect $0.7 million more of gains from favorable swings in foreign currency exchange rates.

Income Tax Expense

Our consolidated tax rate is computed using an annual effective rate for each taxable
jurisdiction. We record income tax expense related to foreign jurisdictions in which we have taxable income and for certain state jurisdictions. When comparing the six months ended October 31, 2008 and 2007, the European effective rate
decreased from 35% to 34% primarily due to the drop in the Spanish statutory tax rate from 32.5% to 30%. Pre-tax income from foreign jurisdictions has decreased approximately $4.3 million to $1.8 million when comparing these two periods and income
tax expense has decreased approximately $1.5 million. We do not provide for US federal income taxes due to our previous recording of a full valuation allowance against our net deferred tax assets  net operating losses. The recording of such
allowance was due to the uncertainty of the realization of the net deferred tax assets which is dependant upon generating taxable income in future periods.

During the quarter ended October 31, 2008, we changed our permanent reinvestment status in regards to our foreign subsidiaries. Accordingly, we provided for income taxes on approximately $80.0 million of accumulated earnings and
profits from foreign subsidiaries. This resulted in an increase of our net deferred tax liabilities of approximately $28.0 million with an offsetting decrease to our valuation allowance.

Net Income

In summary, we reported a net loss of $20.3 million in the six months ended October 31, 2008
compared to net income of $3.4 million in the same period of the prior year. Lower volumes due to shutdowns in our Paperboard segment, as well as a generally weak US economy and higher input and restructuring costs, more than offset increased
selling prices and a $1.1 million decrease in income tax expense.

Three Months Ended October 31, 2008 Compared to Three Months Ended
October 31, 2007

Overview

Net
Sales. Net sales for the quarter ended October 31, 2008 were $231.5 million, 12% or $30.7 million less than $262.2 million in the same period of the prior year. Lower volumes in all segments were the main driver of the decrease, and lower
prices on recovered paper we sell to third parties also contributed to the drop. Partially offsetting these factors were increases in the average sales price of our mill products in both North America and Europe as well as increased sales price on
our North American converted products.

Cost of Sales. Cost of sales was $205.3 million in the quarter ended October 31, 2008, a decrease of
$29.9 million, or 13%, compared to $235.2 million in the quarter ended October 31, 2007. Lower volumes were the primary reason for the decrease, along with lower costs of recovered paper per ton of paperboard produced in our North American and
European mills. Additionally, in the current quarter, there were non-routine reductions to cost of sales in our Paperboard segment of (i) $1.3 million from insurance proceeds on equipment and (ii) $0.9 million of insurance proceeds from a
flood claim at one of our Ohio paperboard mills. Partially offsetting these cost reductions were increases in the per-ton costs of energy and freight in both our North American and European mills, and increase in raw material paperboard costs in
both our North American and European converting operations. Per-ton freight costs also increased in our North American converting operations.

Restructuring and Impairments. Restructuring and impairment charges were $4.4 million in the current quarter compared to $0.2 million in the quarter ended October 31, 2007, a $4.2 million increase. Current year charges are split
between (i) dismantling and mothballing costs in our Paperboard segment in connection with the shutdowns of two paperboard mills and one paper machine at one of our California locations and (ii) non-cash impairment charges in our Converted
Products segment. Prior year charges were to maintain previously shut down facilities.



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SG&A.Total SG&A costs decreased $1.5 million to $19.3 million in the quarter ended October 31,
2008 from $20.8 million in the same quarter of the prior year, with the majority of the decline stemming from previously announced right-sizing initiatives in our Paperboard and Converted Products segments.

Operating Income. Operating income for the quarter ended October 31, 2008 was $2.4 million, $3.6 million less than $6.0 million in the quarter ended
October 31, 2007, primarily due to lower volumes across all segments. Higher per-ton energy and freight costs in our North American and European mills, increased restructuring and impairment charges and elevated raw material paperboard costs in
our worldwide converting operations more than offset higher average sales prices on our recycled paperboard products in both North America and Europe.

Paperboard

Net sales in the Paperboard segment were $113.0 million for the three months ended October 31, 2008 compared to
$136.0 million in the same period of the prior year, a decrease of $23.0 million, or 17%. A volume decrease of 19% in our recycled paperboard products is the primary reason for the overall reduction, due mainly to the mill and paper machine
shut-downs announced in the first quarter of the current year. Additionally, the volume and average sales price of recovered paper we sell to third parties experienced reductions of 6% and 4%, respectively, when comparing current quarter activity to
the same period last year. Somewhat offsetting the negative effects on net sales was an increase in the average sales price of our recycled paperboard products of 13% when comparing current quarter average price to the average price in the prior
years quarter. Our mill utilization rates were 96% during each of the quarters ended October 31, 2008 and 2007.

Cost of sales for the
three-month period ended October 31, 2008 were $96.9 million, 21% or $26.2 million, less than $123.1 million in the three-month period ended October 31, 2007, essentially the result of the volume decreases. Total recovered paper and energy
costs decreased 21% and 3%, respectively, in relation to the lower volumes. However, we experienced higher per-ton costs in both freight and energy costs, which rose 30% and 18%, respectively, on our recycled paperboard products. Our average cost of
recovered paper per ton of paperboard produced decreased 4% in the current quarter versus the same quarter of the prior year. Additionally, in the current quarter, there were non-routine reductions to cost of sales of (i) $1.3 million from
insurance proceeds on equipment and (ii) $0.9 million of insurance proceeds from a flood claim at one of our Ohio paperboard mills.

Restructuring
costs for the period ended October 31, 2008 were $2.3 million, an increase of $2.1 million from $0.2 million in the period ended October 31, 2007. Current year charges are primarily comprised of dismantling and mothballing costs in
connection with the shutdowns of two paperboard mills and one paper machine, with a small amount related to maintaining previously shut down locations. Prior year charges were to maintain previously shut down facilities.

SG&A costs were $7.3 million in the quarter ended October 31, 2008, a decrease of $0.8 million compared to $8.1 million for the same period of the prior year,
resulting from the shut down of mills and one paper machine as announced in the first quarter of the current fiscal year.

Operating income for the
Paperboard segment in the quarter ended October 31, 2008 was $6.6 million, 43% or $2.0 million, higher than $4.6 million in the same period of 2007. The increase in average sales price on our recycled paperboard products and lower recovered
paper costs more than offset the volume decreases and higher per-ton freight and energy costs.

Converted Products

Net sales in the Converted products segment for the three-month period ended October 31, 2008 were $71.0 million, 4% or $3.1 million, less than the $74.1 million in
same period of the prior year. Overall volume in the segment dropped 11%; volume in our laminating business decreased 19% while our tube and core volume decreased only 5%. Partially offsetting the effects of the volume decreases was an increase in
average sales price of 8% across the segment, 12% on our laminated products and 4% on our tubes and cores.

Cost of sales was $66.2 million in the quarter
ended October 31, 2008, $1.9 million, or 3%, lower than $68.1 million in the quarter ended October 31, 2007. The lower volumes noted above were the main factor for the decrease, but were partially offset by higher per-ton freight and raw
material paperboard costs, which increased 21% and 10%, respectively, when comparing the current quarter to the same quarter of last year.

Restructuring
costs were $2.1 million in the three months ended October 31, 2008 compared to the Company having no such costs in the same period of the prior year. Essentially all of the current quarter costs are non-cash impairment charges on fixed assets
related to the previously announced shut down of our solidboard plant in California.



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SG&A costs in the current quarter were $4.6 million, a 5%, or $0.3 million, decrease from $4.9 million in the
quarter ended October 31, 2007 due to lower costs resulting from prior right-sizing initiatives.

The Converted Products segment reported an operating
loss of $1.9 million for the three months ended October 31, 2008 compared to reporting operating income of $1.2 million in the quarter ended October 31, 2007. Lower volumes, current period non-cash impairment charges and increases in
per-ton freight and raw material paperboard costs more than offset an increase in average sales price.

International

Net sales in the International segment were $47.4 million in the quarter ended October 31, 2008, a decrease of 9%, or $4.6 million, compared to $52.0 million in the
quarter ended October 31, 2007. Volumes were down in both our mills and converting operations, decreasing 13% and 10%, respectively, though average sales prices increased 6% and 1% on our converted and mill products, respectively. Excluding the
effects of foreign currency exchange, net sales prices increased 4% on our converted products but dropped slightly on our mill products. The average foreign exchange rates for the three months ended October 31, 2008 was 1.43 USD to Euro, a
change of 2% compared to the 1.39 average rate for the quarter ended October 31, 2007.

Cost of sales for the three months ended October 31, 2008
was $42.2 million, $1.8 million, or 4%, lower than $44.0 million in the three-month period ended October 31, 2007. The lower volumes accounted for a large portion of the decrease, along with an 11% decrease in the cost of recovered paper per
ton of paperboard produced in our mills. Partially offsetting these items were a 20% increase in the per-ton energy costs in our mills, a 16% increase in the per-ton freight costs of our recycled paperboard products and a 7% increase in raw material
costs in our converting operations.

SG&A costs were $3.8 million in the current quarter, relatively comparable to $4.1 million in the same quarter of
the prior year.

Operating income for the quarter ended October 31, 2008 was $1.3 million, $2.6 million less than $3.9 million in the same quarter of
the prior year. Lower volumes in both our mill and converting operations were the primary factors of the decrease, along with higher per-ton energy and freight costs in our mills. Partially offsetting these factors were an increase in average sales
price on a US dollar basis and lower costs for recovered paper per ton of paperboard produced.

Corporate

Unallocated corporate expense was $3.5 million for the three-month period ended October 31, 2008 compared to $3.7 million in the same three-month period of the prior
year.

Other (Expense) Income

Interest expense
increased $0.7 million to $7.9 million in the current quarter from $7.2 million in the quarter ended October 31, 2007 due to higher average outstanding borrowings and higher interest rates, mainly the result of the amendment to our
credit-linked facility (see Note 5 to the attached condensed consolidated financial statements). Average outstanding borrowings increased to $310.2 million for the quarter ended October 31, 2008 compared to $290.2 million in the same quarter of
last year.

Excluding interest expense, Other income (expense) - net was an expense of $1.4 million in the current quarter compared to income of $0.7
million in the same quarter of the prior year. The decrease is due to a $1.9 million charge relating to the amendment of the credit-linked facility and a decrease in the earnings of equity-method investments.

Income Tax Expense

Our consolidated tax rate is computed
using an annual effective rate for each taxable jurisdiction. We record income tax expense related to foreign jurisdictions in which we have taxable income and for certain state jurisdictions. When comparing the three months ended October 31,
2008 and 2007, the European effective rate decreased from 35% to 34% primarily due to the drop in the Spanish statutory tax rate from 32.5% to 30%. Pre-tax income from foreign jurisdictions has decreased approximately $3.2 million to ($0.1) million
when comparing these two periods and income tax expense has decreased approximately $1.0 million. We do not provide for US federal income taxes due to our previous recording of a full valuation allowance against our net deferred tax assets 
net operating losses.



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During the current quarter, we changed our permanent reinvestment status in regards to our foreign subsidiaries.
Accordingly, we provided for income taxes on approximately $80.0 million of accumulated earnings and profits from foreign subsidiaries. This resulted in an increase of our net deferred tax liabilities of approximately $28.0 million with an
offsetting decrease to our valuation allowance.

Net Income

In summary, we recorded a net loss of $6.9 million in the three months ended October 31, 2008 compared to a loss of $1.6 million in the quarter ended October 31, 2007, primarily the result of lower volumes.
Elevated per-ton input costs in our mills and converting operations, as well as higher restructuring costs, more than offset realized price increases and lower income tax expense.

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 asset-based and credit-linked facilities. We believe that these sources will be sufficient to meet the current and anticipated cash requirements of our operations for the next
twelve months.

Capital Expenditures. Our total capital expenditures were $9.1 million and $11.4 million in the six months ended
October 31, 2008 and 2007, respectively. We expect fiscal 2009 capital expenditures to be approximately $15.0 million.

Borrowings

At October 31, 2008, total debt (consisting of current maturities of debt, our asset-based and credit-linked facilities, and other long-term
debt, as reported on our condensed consolidated balance sheets) was as follows (in millions):



|                                          |  |                 |      
|----------------------------------------- |  | --------------- | -----
|                                          |  | October 31,2008
|9.75 % Senior Subordinated Notes due 2014 |  | $               | 175.0
|Asset-based credit facility               |  |                 | 44.1 
|Term loan                                 |  |                 | 15.3 
|Industrial Revenue Bonds (IRBs)         |  |                 | 58.9 
|Other(1)                                  |  |                 | 18.6 
|                                          |  |                 |      
|Total debt                                |  | $               | 311.9
|                                          |  |                 |      



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

In July 2007, our international subsidiary obtained a five-year loan in the amount of 5.0 million. Borrowings under this loan bear a variable interest rate of
EURIBOR plus 0.75%. Principal and interest payments are required every six months at which point the variable interest rate is reset. In October 2008, our international subsidiary entered into a three-year, 3.0 million credit facility.
Borrowings under this facility bear interest at a variable rate of EURIBOR plus 1.5%, and the facility commitment decreases, on an annual basis, by 1.0 million beginning in October 2009. Also in October 2008, our international subsidiary
obtained a 750 one-year line of credit which bears interest at a fixed rate of 6.25%.

On March 9, 2007, we entered into a five-year asset-based
senior secured revolving credit facility whereby the lenders agreed to provide to us a revolving line of credit in the aggregate principal amount of up to $85.0 million (depending on our borrowing base), up to $25.0 million of which may be used for
loans directly to our International subsidiary and up to $15.0 million of which may be used for letters of credit, and other financial accommodations. We and our domestic subsidiaries also entered into a six-year, $90.0 million credit-linked
facility whereby the credit-linked lenders initially provided to us a $15.0 million term loan and a $75.0 million credit-linked letter of credit facility, and other financial accommodations. The split of the $90.0 million between term loan and
letters of credit can vary, but the total facility cannot exceed $90.0 million.

Under the asset-based agreement, we (a) granted the lenders a first
priority lien on all of our accounts receivable and inventory (the ABL Priority Collateral) and a second priority lien on substantially all of our other assets, including certain real property, and (b) guaranteed the obligations,
under this facility, of an international subsidiary. Borrowings under the asset-based facility bear interest at a rate of prime or the Eurodollar rate plus a credit spread determined based on availability under the facility.



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Under the credit-linked agreement, 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. Pursuant to the amendment to the credit-linked facility dated August 12, 2008 (see Note 5
to the unaudited condensed consolidated financial statements), the term loan bears interest at a rate of prime plus 5.5% or the Eurodollar rate plus 6.5%. The amendment of the credit-linked credit facility also requires the Company to make certain
prepayments on the facility which include: (i) $1,000 quarterly installments beginning on July 31, 2009 on any outstanding term loan balance and (ii) payments in September 2008 and 2009 of the US dollar equivalent of
3.0 million and 8.9 million, respectively. For complete details on the amendment to the credit-linked facility, please refer to the Companys Form 10-K filed with the Securities and Exchange Commission on August 13,
2008. Letters of Credit are issued under the credit-linked facility primarily to enhance the Companys multiple IRB issues with the credit spread being the same as the term loan.

The asset-based and credit-linked facilities include financial covenants as follows: (a) if, during any quarter, Excess Availability, as defined under the credit facilities, falls below $10.0 million, the Company
must achieve a Fixed Charge Coverage Ratio, as defined, of not less than 1.0 to 1.0. and (b) the Senior Leverage Ratio, as defined and as amended in the credit-linked facility on August 12, 2008, for each twelve-month period ending as of
each of the following fiscal quarter ends shall be less than or equal to 4.50 to 1.0 at October 31, 2008, 3.50 to 1.0 at January 31, 2009 and 3.0 to 1.0 at April 30, 2009 and thereafter. At October 31, 2008, the Company was in
compliance with all financial covenants. Management continues to believe it will be able to achieve compliance with its financial covenants over the next twelve months. As previously disclosed in the risk factors of our 2008 Form 10-K, our failure
to comply with the covenants could result in an event of default that, if not cured or waived, could result in our being required to pay these borrowings before their due date. If we were unable to meet such an accelerated payment schedule or
otherwise refinance these borrowings, our lenders could foreclose on our assets, which would prohibit us from making any payments on our other indebtedness. Under these circumstances, we cannot give assurance that a refinancing would be possible or
that any additional financing could be obtained at acceptable terms.

In March 2004, we completed an offering of $175.0 million of 9.75% senior
subordinated notes (the Notes) with a maturity date of March 12, 2014. We pay interest semi-annually on March 15 and September 15 of each year. We cannot redeem the Notes before March 15, 2009; on or after that date,
we may redeem them at specified prices. The Notes rank junior in right of payment to all of our existing and future senior debt and equal in right of payment with all of our existing and future senior subordinated debt. The Notes are not guaranteed
by any of our subsidiaries, and therefore are effectively subordinated to all liabilities of our subsidiaries. If we experience certain changes of control, we must offer to purchase the Notes at 101% of their face amount, plus accrued interest.

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



|                      |  |       |      
|--------------------- |  | ----- | -----
|Year Ending April 30, |  | Total
|2009(1)               |  | $     | 5.1  
|2010(2)               |  |       | 19.1 
|2011                  |  |       | 4.8  
|2012(3)               |  |       | 48.4 
|2013                  |  |       | 3.4  
|Thereafter            |  |       | 231.1



|(1) | Represents remaining obligations for the fiscal year ended April 30, 2009.
|--- | --------------------------------------------------------------------------

|(2) | Includes $15.3 million due under the term loan.
|--- | -----------------------------------------------

|(3) | Includes $44.1 million due under the asset-based credit facility.
|--- | -----------------------------------------------------------------

We are
party to a series of cross-currency interest rate swap agreements (the 2001 Swaps) with a member of our bank group. At October 31, 2008 and April 30, 2008, the fair value of the 2001 Swaps represented a liability of $4.0
million and $13.1 million, respectively. We are party to another swap agreement in relation to an intercompany loan with our European subsidiary that represented an asset of $0.4 million at October 31, 2008 and a liability of $3.6 million as of
April 30, 2008.

Additionally, in our effort to manage costs, we, at varying times, utilize energy and raw material price hedges. At October 31,
2008, the fair value of these hedges was a liability of approximately $2.3 million, which was entirely energy related. These hedges are accounted for as cash flow hedges pursuant to the appropriate accounting standards.



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Cash Flow

Net cash used in operating activities

In the six-month period ended October 31, 2008, we used $10.7 million of cash in operating
activities compared to generating cash from operating activities of $28.4 million in the six-month period ended October 31, 2007, a change of $39.1 million. The change was primarily the result of the following items contributing to reduced cash
flows (i) a $23.6 million decrease in net earnings, where current period results include (a) $4.9 million of non-cash impairment charges, (b) $4.4 million of cash restructuring costs and (c) a $1.9 million loss on early
extinguishment of debt, (ii) a $31.4 million change in accounts payable due to the change in cost of wastepaper as well as cash management strategies and (iii) the prior year receipt of $1.9 million from the surrender of a life insurance
policy, partially offset by a $16.3 million change in the decrease in accounts receivable resulting from lower sales volumes.

Net cash used in
investing activities

In the six-month periods ended October 31, 2008 and 2007, we used $7.1 million and $13.2 million of cash, respectively, in
investing activities. The decrease in usage is attributable to the following changes when comparing activity in the current six-month period to the same period of the prior year: (i) $2.3 million less of capital expenditures, (ii) $1.4
million of additional proceeds from the sale of fixed assets, (iii) the receipt of $1.3 million of insurance proceeds on equipment and (iv) $0.8 million less in acquisition costs.

Net cash provided by (used in) financing activities

In the six
months ended October 31, 2008, financing activities provided $11.3 million compared to the use of $6.2 million in the six months ended October 31, 2007. In the current six-month period, we had net borrowings of long-term debt of $16.2
million compared to net repayments of debt in the prior year of $2.7 million, a swing of $18.9 million. Partially offsetting the net inflows of cash from borrowings was the payment of $1.6 million in financing costs in the current period.

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. Natural disasters
such as hurricanes, tornadoes, fires, ice storms, wind storms, floods and other weather conditions may materially and adversely affect our business and our earnings. In addition, poor weather conditions that reduce crop yields of packaged food
products and reduced customer demand for food containers can adversely affect our revenues and our operating results. The sales volumes of certain of our converted products can also vary from quarter to quarter, partly due to the increased
production of textbooks and binders before the beginning of the school year, as well as the production of board games and other products before the start of the Christmas season. Our overall level of sales and operating profit have historically been
lower in our third quarter, ended January 31, due in part to the cyclicality of the demand for our products as well as closures by us and our customers for the Thanksgiving, Christmas and New Years holidays.

Inflation

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

Critical Accounting Policies

Our accompanying
condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information, which require management to make estimates that affect the amounts of
revenues, expenses, assets and liabilities reported. The following are critical accounting matters which are both very important to the portrayal of our financial condition and results and which require some of managements most difficult,
subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which, in managements judgment, could change in a manner that would materially affect
managements future estimates with respect to such matters and, accordingly, could cause future reported financial condition and results to differ materially from the financial condition and results reported based on managements current
estimates. Changes in these estimates are recorded when better information is known. There have been no material changes in our critical accounting policies during the six-month period ended October 31, 2008.



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Pension

Our defined benefit pension plans are accounted for in accordance with FAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB No. 87, 88, 106 and
132(R) and FAS No. 87, Employers Accounting for Pensions, as amended. 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, 2008. At April 30, 2008, the discount rate was 6.55%. A 1.0% change in this discount rate would create an impact to the statement of operations of approximately $1.5 million. The discount rate is based upon the demographics of
the plan participants as well as benchmarking a certain index, e.g. Citigroup Pension Liability Index. To determine our expected long-term rate of return on plan assets, we evaluate criteria such as asset allocation, historical returns by asset
class, historical returns of our current pension portfolio managers and managements expectation of the economic environment. Based upon this methodology, the expected long-term rate of return on assets was 8.8% as of April 30, 2008. A 1%
change in the long-term rate of return on plan assets would create an impact to the statement of operations of approximately $1.1 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 $0.2 million. Excluding curtailment charges, pension expense was $3.0 million in 2007
and $1.9 million in 2008, and is expected to be approximately $2.3 million in 2009. We incurred curtailment expenses of $107 and $701 in 2007 and 2008, respectively.

Goodwill

We perform a goodwill impairment test, at a minimum, during the third quarter of each fiscal year.
See Note 1 to our Annual Report on Form 10-K for the year ended April 30, 2008 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 reporting units is impaired. Evaluating the impairment of
goodwill also requires us to estimate future operating results and cash flows, which also require judgment by management. Any resulting impairment loss could have a material adverse effect on our financial condition and results of operations.

Accounts Receivable

Our policy with respect to
trade and notes receivables is to maintain an adequate allowance or reserve for doubtful accounts for estimated losses from the inability of our customers to make required payments. For specific accounts 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 in our International segment, customer invoices are typically reserved once the invoice remains unpaid
at 180 days past due date. For all other accounts domestically, a percentage is applied to all receivables based upon historical experience.

Environmental Matters

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



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Income Taxes

Pursuant to FAS 109 Accounting for Income Taxes (FAS 109), we provide 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.
Deferred taxes are not provided on the undistributed earnings of foreign subsidiaries as such earnings are considered permanently reinvested.

We assess
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. 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 dependent upon, among other things, the generation
of future taxable income and tax management strategies. If we were to determine that we would be able to realize deferred tax assets in the future in excess of our net recorded amount, an adjustment to the net deferred tax asset would increase
income.

As of October 31, 2008, we had a full valuation allowance on our deferred tax assets for US federal and state income tax purposes. We also
have full valuation allowances against net assets of certain foreign jurisdictions. We will maintain such allowances until positive earnings are recorded in several consecutive reporting periods. We will continue to evaluate our valuation allowances
on a quarterly basis.

We believe that in situations in which future realization of deferred tax assets is dependent upon taxable income from future
operations, FAS 109 requires the relative significance of cumulative losses to be addressed within the guidance provided in paragraphs 24 and 103. Accordingly, in assessing the realization of US jurisdiction net operating loss carry-forwards for the
periods ended October 31, 2008 and 2007, and considering future taxable income, we have identified the key elements of both positive and negative evidence and evaluated such evidence by applying the guidance provided in paragraphs 24 and 103 of
FAS 109.

The Companys policy is to consider the following sources of taxable income, which may be available under the tax laws to realize a tax
benefit for deductible temporary differences and carry-forwards.



| |  |  | Future reversals of temporary differences
| | - |  | -----------------------------------------



| |  |  | Future taxable income exclusive of reversing temporary differences and carry-forwards
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Tax planning strategies that would, if necessary, be implemented to:
| | - |  | --------------------------------------------------------------------

o   Accelerate taxable amounts to utilize expiring carry-forwards

o   Change
the character of taxable or deductible amounts from ordinary income

Evidence available about each of those possible sources of taxable income will vary
between tax jurisdictions and possibly from year to year. To the extent evidence about one or more sources of taxable income is sufficient to support a conclusion that a valuation allowance is not necessary, the Companys policy is that other
sources of taxable income need not be considered. For any specific jurisdiction where a history of three years of cumulative losses has occurred, the Company does not rely on projections of taxable income.

FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement 109 (FIN 48) provides that the
tax effects from an uncertain tax position can be recognized in the financial statements only if it is more likely than not that the position would be sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance
on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company accounts for interest costs and penalties related to income taxes as income tax expense in the
Companys consolidated financial statements.

Impairment of Long-Lived Assets

We periodically evaluate long-lived assets, including property, plant and equipment and definite lived intangible assets whenever events or changes in conditions may
indicate that the carrying value may not be recoverable. Factors that management considers important that could initiate an impairment review include the following:



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



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



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| |  |  | 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, 2008.

Item 3. Quantitative And Qualitative
Disclosure About Market Risk

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

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

Commodity Prices: The markets for our recovered paper products, particularly Old Corrugated Containers (OCC), are highly cyclical and affected by such factors as global economic conditions,
demand for paper, municipal recycling programs, changes in industry production capacity and inventory levels. These factors all have a significant impact on selling prices and our profitability. We estimate that a 10% increase in the price of
recovered paper, with no corresponding increase in the prices of finished products, would have approximately a $17.9 million negative effect on our operating income on an annual basis, although this would be slightly mitigated by our sale of
recovered paper to third party customers.

Energy prices are also highly cyclical. We estimate that a 10% increase in our energy costs with no
corresponding increase in the prices of finished products would have approximately a $12.0 million negative effect on our operating income on an annual basis. We attempt to partially hedge our energy price risk by buying forward contracts for some
of our future energy requirements.

Interest Rates/Cross-Currency Interest Rate Swaps: We are party to a series of cross-currency interest rate
swap agreements (the 2001 Swaps) with a member of our bank group that had been designated as a cash flow hedge against an existing intercompany loan to our European subsidiary. Effective May 1, 2007, we de-designated the 2001 Swaps
as hedges. With this de-designation, the amount in other comprehensive income, $0.2 million, is to be reclassified into earnings over the life of the original agreements, which are scheduled to terminate in September 2009. Despite this
de-designation of an accounting hedge, the swaps continue to provide an economic hedge of the exposure to changes in the Euro to US dollar exchange rates. At October 31, 2008, the fair value of the 2001 Swaps represented a liability of $4.0
million. During the quarter ended July 31, 2007, we entered into another swap agreement in relation to a second intercompany loan with our European subsidiary that was not designated as a hedge which represented an asset of $0.4 million as of
October 31, 2008. As a result of derivative activities during the six months ended October 31, 2008 and 2007, we recognized a gain of $1.4 million and a loss of $0.4 million, respectively. We do not expect a material amount to be
reclassified from other comprehensive income to earnings to offset recognition of gains and losses on the intercompany loan in the next twelve months.

We
could be exposed to future changes in interest rates on our variable-rate debt, which accounts for approximately $130.7 million of all outstanding debt at October 31, 2008. Interest rate changes impact the amount of our interest payments on
this variable-rate debt 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% on this variable-rate debt, or approximately 50 basis points, it would
have approximately a $0.7 million negative effect on operating income on an annual basis. Additionally, as discussed in Note 5 to the attached unaudited condensed consolidated financial statements, our credit-linked senior secured credit facility
was amended in August 2008, resulting in increase to our credit spreads of 450 basis points and 425 basis points on prime rate and Eurodollar rate borrowings, respectively. These increases to our credit spreads will have approximately a $3.5 million
negative effect on operating income on an annual basis.

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



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Item 4(T). Controls and Procedures.

(a) Disclosure controls and procedures.

As of October 31, 2008, our
management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)
related to the recording, processing, summarization and reporting of information in our reports that we file with the SEC. These disclosure controls and procedures have been designed to ensure that material information relating to us, including our
subsidiaries, is made known to our management, including these officers, by other of our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the
SECs rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Our controls and procedures can only provide
reasonable, not absolute, assurance that the above objectives have been met.

Based on their evaluation as of October 31, 2008, our principal
executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to reasonably ensure that the
information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

(b) Changes in internal controls over financial reporting.

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

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

By letters dated February 14, 2006 and June 2, 2006, the United States Environment Protection Agency (EPA) notified us of our
potential liability relating to the Lower Passaic River Study Area (LPRSA), which is part of the Diamond Alkali Superfund Site, under Section 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act of
1980. We are one of at least 70 potentially responsible parties (PRPs) identified thus far. The EPA alleges that hazardous substances were released from our now-closed Newark, NJ paperboard mill into the Lower Passaic River. The EPA
informed us that we may be potentially liable for response costs that the government may incur relating to the study of the LPRSA and for unspecified natural resource damages. The EPA demanded that we pay $2,830 in unreimbursed past response costs
on a joint and several liability basis. Alternatively, the EPA gave us the opportunity to obtain a release from these past response costs by joining the Cooperating Parties Group (the Group) and agreeing to fund an environmental study by
the EPA; we subsequently joined the Group. In 2006, the EPA notified the Group that the cost of the study would exceed its initial estimates and offered the Group the opportunity to conduct the study by itself rather than reimburse the
government for the additional costs incurred. The Group engaged in discussions with the EPA and the Group agreed to assume responsibility for the study pursuant to an Administrative Order on Consent. Cumulatively, as of October 31,
2008 and based upon the most recent estimates for the study, we have expensed $762 (of which $3 was expensed in the quarter ended October 31, 2008), of which $234 remains accrued.

Additionally, by letter dated August 2, 2007, the National Oceanic and Atmospheric Administration (NOAA) of the United States Department
of Commerce sent a letter to us and other companies identified as PRPs notifying them that it intended to perform an assessment of injuries to natural resources in connection with the release of hazardous substances at or from the Diamond Alkali
Superfund Site. In this letter, the NOAA invited all of the identified PRPs,



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



including us, to participate in the development and performance of this assessment. The Group, collectively, decided not to participate, although some of the
members of the Group, excluding the Company, are considering entering into a cooperation agreement with the NOAA to evaluate natural resource damage issues.

Due to uncertainties inherent in these matters, management is unable to estimate our potential exposure, including possible remediation or other environmental responsibilities that may result from these matters at
this time; such information is not expected to be known for a number of years. These uncertainties primarily include the completion and outcome of the environmental study and the percentage of contamination/natural resource damage, if any,
ultimately determined to be attributable to us and other parties. It is possible that our ultimate liability resulting from these issues could be material.

ITEM 1A. RISK FACTORS

The Company has identified the following additional risk factor that
should be considered in addition to those disclosed in our 2008 Annual Report on Form 10-K:

We face risks related to the current
economic climate.

Much of the success of our business is dependent upon the financial strength of our customers and/or suppliers which
is affected, in large part, by events beyond our control. The recent turmoil and disruption in the credit markets pose a risk to the overall global economy that could potentially negatively impact our customers and/or suppliers ability
to conduct business on a normal basis. Through October 31, 2008, we have not realized such potential negative affects, however, we are beginning to see a reduction in the demand from our customers in the third quarter, which has and could continue
to adversely affect our financial position, future business and results of operations.

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.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS

31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

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



|                        |  |                        |  |                                             
|----------------------- |  | ---------------------- |  | --------------------------------------------
|                        |  | THE NEWARK GROUP, INC.
|                        |  |                       
|Date: December 12, 2008 |  |                        |  |                                             
|                        |  |                       
|                        |  | By:                    |  | /s/ Robert H. Mullen                        
|                        |  |                        |  | Robert H. Mullen                            
|                        |  |                        |  | Chief Executive Officer, President and      
|                        |  |                        |  | Chairman of the Board                       
|                        |  |                        |  | (Principal Executive Officer)               
|                        |  |                       
|Date: December 12, 2008 |  |                        |  |                                             
|                        |  |                       
|                        |  | By:                    |  | /s/ Joseph E. Byrne                         
|                        |  |                        |  | Joseph E. Byrne                             
|                        |  |                        |  | Chief Financial Officer                     
|                        |  |                        |  | (Principal Financial and Accounting Officer)



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