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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended July 31, 2005



OR



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



For the transition period from              to



Commission File Number: 333-118844



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THE NEWARK GROUP, INC.

(Exact name of registrant as specified in its charter)



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



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





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



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



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



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



The number of common shares outstanding at July 31, 2005 was 3,852,242.



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##### Table of Contents

INDEX



|                               |  |                                                                                                    |  |     
|------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                    |  | Page
|PART I  FINANCIAL INFORMATION |  |                                                                                                   
|                               |  |                                                                                                   
|Item 1.                        |  | Unaudited Consolidated Financial Statements:                                                       |  |     
|                               |  |                                                                                                   
|                               |  | Consolidated Balance Sheets as of July 31, 2005 and April 30, 2005                                 |  | 1   
|                               |  |                                                                                                   
|                               |  | Consolidated Statements of Operations for the three months ended July 31, 2005 and 2004            |  | 2   
|                               |  |                                                                                                   
|                               |  | Consolidated Statements of Cash flows for the three months ended July 31, 2005 and 2004            |  | 3   
|                               |  |                                                                                                   
|                               |  | Consolidated Statements of Permanent Stockholders Equity for the three months ended July 31, 2005 |  | 4   
|                               |  |                                                                                                   
|                               |  | Notes to Consolidated Financial Statements                                                         |  | 5   
|                               |  |                                                                                                   
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 13  
|                               |  |                                                                                                   
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 21  
|                               |  |                                                                                                   
|Item 4.                        |  | Controls and Procedures                                                                            |  | 22  
|                               | 
|Part II  OTHER INFORMATION    |  |                                                                                                   
|                               |  |                                                                                                   
|Item 1.                        |  | Legal Proceedings                                                                                  |  | 23  
|Item 2.                        |  | Unregistered Sale of Equity Securities and Use of Proceeds                                         |  | 23  
|Item 3.                        |  | Defaults Upon Senior Securities                                                                    |  | 23  
|Item 4.                        |  | Submission of Matters to a Vote of Security-Holders                                                |  | 23  
|Item 5.                        |  | Other Information                                                                                  |  | 23  
|Item 6.                        |  | Exhibits                                                                                           |  | 23  
|                               |  |                                                                                                   
|                               |  | SIGNATURES                                                                                         |  |     



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



PART
I FINANCIAL INFORMATION



Item 1. Financial Statements.



CONSOLIDATED BALANCE SHEETS - UNAUDITED

AS OF JULY 31, 2005 AND APRIL 30, 2005

(Dollars in Thousands, Except Share Data)



|                                                                                                                 |  |               |         |   |                |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | -------------- | - | ------- | -
|                                                                                                                 |  | July 31, 2005 |         |   | April 30, 2005 |  
|ASSETS                                                                                                           |  |               |         |   |                |   |         |  
|CURRENT ASSETS:                                                                                                  |  |               |         |   |                |   |         |  
|Cash and cash equivalents                                                                                        |  | $             | 7,698   |   |                | $ | 2,991   |  
|Accounts receivable (less allowance for doubtful accounts of $6,216 and $6,356, respectively)                    |  |               | 116,239 |   |                |   | 119,815 |  
|Inventories                                                                                                      |  |               | 61,791  |   |                |   | 61,760  |  
|Other current assets                                                                                             |  |               | 7,773   |   |                |   | 3,840   |  
|                                                                                                                 |  |               |         |   |                |   |         |  
|Total current assets                                                                                             |  |               | 193,501 |   |                |   | 188,406 |  
|                                                                                                                 |  |              
|RESTRICTED CASH                                                                                                  |  |               | 194     |   |                |   | 131     |  
|PROPERTY, PLANT AND EQUIPMENT  Net                                                                              |  |               | 313,581 |   |                |   | 320,947 |  
|GOODWILL                                                                                                         |  |               | 45,666  |   |                |   | 47,256  |  
|LONG-TERM INVESTMENTS                                                                                            |  |               | 16,386  |   |                |   | 16,776  |  
|OTHER ASSETS                                                                                                     |  |               | 25,887  |   |                |   | 26,568  |  
|                                                                                                                 |  |               |         |   |                |   |         |  
|TOTAL ASSETS                                                                                                     |  | $             | 595,215 |   |                | $ | 600,084 |  
|                                                                                                                 |  |               |         |   |                |   |         |  
|LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS EQUITY                                                 |  |               |         |   |                |   |         |  
|CURRENT LIABILITIES:                                                                                             |  |               |         |   |                |   |         |  
|Accounts payable                                                                                                 |  | $             | 83,142  |   |                | $ | 85,068  |  
|Current portion of long-term debt                                                                                |  |               | 3,936   |   |                |   | 2,621   |  
|Income taxes and other taxes payable                                                                             |  |               | 4,892   |   |                |   | 2,979   |  
|Accrued salaries and wages                                                                                       |  |               | 13,896  |   |                |   | 14,183  |  
|Other accrued expenses                                                                                           |  |               | 16,427  |   |                |   | 13,981  |  
|                                                                                                                 |  |               |         |   |                |   |         |  
|Total current liabilities                                                                                        |  |               | 122,293 |   |                |   | 118,832 |  
|                                                                                                                 |  |              
|SENIOR DEBT                                                                                                      |  |               | 77,102  |   |                |   | 79,097  |  
|SUBORDINATED DEBT                                                                                                |  |               | 181,858 |   |                |   | 175,599 |  
|DEFERRED INCOME TAXES                                                                                            |  |               | 4,664   |   |                |   | 5,073   |  
|PENSION OBLIGATION                                                                                               |  |               | 28,006  |   |                |   | 27,980  |  
|SWAP OBLIGATION                                                                                                  |  |               | 19,045  |   |                |   | 22,399  |  
|OTHER LIABILITIES                                                                                                |  |               | 6,274   |   |                |   | 6,435   |  
|MINORITY INTEREST                                                                                                |  |               | 87      |   |                |   | 92      |  
|                                                                                                                 |  |               |         |   |                |   |         |  
|Total liabilities                                                                                                |  |               | 439,329 |   |                |   | 435,507 |  
|                                                                                                                 |  |               |         |   |                |   |         |  
|COMMITMENTS AND CONTINGENCIES (Note 7)                                                                           |  |               |         |   |                |   |         |  
|                                                                                                                 |  |              
|TEMPORARY EQUITY - COMMON STOCK, SUBJECT TO PUT RIGHTS, (668,442 and 866,442 shares, respectively)               |  |               | 30,708  |   |                |   | 38,418  |  
|                                                                                                                 |  |               |         |   |                |   |         |  
|PERMANENT STOCKHOLDERS EQUITY:                                                                                  |  |               |         |   |                |   |         |  
|Common stock, $.01 per share stated value; authorized 10,000,000 shares, issued and outstanding 6,005,000 shares |  |               | 60      |   |                |   | 60      |  
|Additional paid-in capital                                                                                       |  |               | 374     |   |                |   | 374     |  
|Retained earnings                                                                                                |  |               | 188,976 |   |                |   | 190,330 |  
|Accumulated other comprehensive loss                                                                             |  |               | (11,981 | ) |                |   | (12,354 | )
|Treasury stock, 2,152,758 shares at cost                                                                         |  |               | (52,251 | ) |                |   | (52,251 | )
|                                                                                                                 |  |               |         |   |                |   |         |  
|Total permanent stockholders equity                                                                             |  |               | 125,178 |   |                |   | 126,159 |  
|                                                                                                                 |  |               |         |   |                |   |         |  
|TOTAL LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS EQUITY                                           |  | $             | 595,215 |   |                | $ | 600,084 |  
|                                                                                                                 |  |               |         |   |                |   |         |  



See notes to consolidated financial
statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

FOR THE THREE MONTHS ENDED JULY 31, 2005 AND 2004

(Dollars in Thousands)



|                                                                |  |      |         |   |               |   |         |  
|--------------------------------------------------------------- |  | ---- | ------- | - | ------------- | - | ------- | -
|                                                                |  | 2005 |         |   | 2004          |  
|                                                                |  |      |         |   | (As Restated) |  
|NET SALES                                                       |  | $    | 224,443 |   |               | $ | 216,059 |  
|COST OF SALES                                                   |  |      | 199,131 |   |               |   | 187,443 |  
|                                                                |  |      |         |   |               |   |         |  
|Gross profit                                                    |  |      | 25,312  |   |               |   | 28,616  |  
|                                                                |  |      |         |   |               |   |         |  
|OPERATING EXPENSES:                                             |  |      |         |   |               |   |         |  
|Selling, general and administrative                             |  |      | 20,139  |   |               |   | 20,819  |  
|Restructuring and impairments                                   |  |      | 832     |   |               |   | 950     |  
|                                                                |  |      |         |   |               |   |         |  
|Total operating expenses                                        |  |      | 20,971  |   |               |   | 21,769  |  
|                                                                |  |      |         |   |               |   |         |  
|OPERATING INCOME                                                |  |      | 4,341   |   |               |   | 6,847   |  
|                                                                |  |      |         |   |               |   |         |  
|OTHER (EXPENSE) INCOME:                                         |  |      |         |   |               |   |         |  
|Interest expense                                                |  |      | (6,257  | ) |               |   | (6,160  | )
|Interest income                                                 |  |      | 1       |   |               |   | 21      |  
|Equity in income of investees                                   |  |      | 578     |   |               |   | 528     |  
|Other (expense) income  net                                    |  |      | (302    | ) |               |   | 275     |  
|                                                                |  |      |         |   |               |   |         |  
|Total other expense                                             |  |      | (5,980  | ) |               |   | (5,336  | )
|                                                                |  |      |         |   |               |   |         |  
|(LOSS) EARNINGS FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES |  |      | (1,639  | ) |               |   | 1,511   |  
|                                                                |  |     
|INCOME TAX (BENEFIT) EXPENSE                                    |  |      | (285    | ) |               |   | 741     |  
|                                                                |  |      |         |   |               |   |         |  
|NET (LOSS) EARNINGS                                             |  | $    | (1,354  | ) |               | $ | 770     |  
|                                                                |  |      |         |   |               |   |         |  



See notes to consolidated financial
statements



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

FOR THE THREE MONTHS ENDED JULY 31, 2005 AND 2004

(Dollars in Thousands)



|                                                                                           |  |      |        |   |               |   |        |  
|------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ------------- | - | ------ | -
|                                                                                           |  | 2005 |        |   | 2004          |  
|                                                                                           |  |      |        |   | (As Restated) |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |  |      |        |   |               |   |        |  
|Net (loss) earnings                                                                        |  | $    | (1,354 | ) |               | $ | 770    |  
|Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: |  |      |        |   |               |   |        |  
|Depreciation and amortization                                                              |  |      | 8,632  |   |               |   | 7,847  |  
|Impairment of assets                                                                       |  |      | 260    |   |               |   | 41     |  
|Loss on sale of property, plant and equipment                                              |  |      | 171    |   |               |   | 39     |  
|Equity in income of affiliates                                                             |  |      | (578   | ) |               |   | (528   | )
|Stock-based compensation expense                                                           |  |      | 165    |   |               |   |       |  
|(Gain) loss due to hedge ineffectiveness                                                   |  |      | (187   | ) |               |   | 14     |  
|Proceeds from dividends paid by equity investments in affiliates                           |  |      |       |   |               |   | 423    |  
|Deferred income tax benefit                                                                |  |      | (478   | ) |               |   | (598   | )
|                                                                                           |  |     
|Changes in assets and liabilities:                                                         |  |      |        |   |               |   |        |  
|Decrease (increase) in accounts receivable                                                 |  |      | 1,189  |   |               |   | (4,645 | )
|Increase in inventories                                                                    |  |      | (981   | ) |               |   | (4,160 | )
|Increase in other current assets and prepaids                                              |  |      | (3,633 | ) |               |   | (334   | )
|Decrease (increase) in other assets                                                        |  |      | 78     |   |               |   | (261   | )
|Increase in accounts payable and accrued expenses                                          |  |      | 6,087  |   |               |   | 10,868 |  
|Decrease in other liabilities                                                              |  |      | (1,878 | ) |               |   | (58    | )
|                                                                                           |  |      |        |   |               |   |        |  
|Net cash provided by operating activities                                                  |  |      | 7,493  |   |               |   | 9,418  |  
|                                                                                           |  |      |        |   |               |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |  |      |        |   |               |   |        |  
|Proceeds from sale of marketable securities                                                |  |      |       |   |               |   | 44     |  
|Capital expenditures                                                                       |  |      | (3,906 | ) |               |   | (5,290 | )
|Proceeds from sale of property, plant and equipment                                        |  |      | 1,073  |   |               |   | 16     |  
|Increase in restricted cash                                                                |  |      | (63    | ) |               |   |       |  
|                                                                                           |  |      |        |   |               |   |        |  
|Net cash used in investing activities                                                      |  |      | (2,896 | ) |               |   | (5,230 | )
|                                                                                           |  |      |        |   |               |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |  |      |        |   |               |   |        |  
|Repayment of long-term debt                                                                |  |      | (1,785 | ) |               |   | (2,241 | )
|Proceeds from long-term debt                                                               |  |      |       |   |               |   | 8,700  |  
|Changes in cash overdraft                                                                  |  |      | (178   | ) |               |   | (6,418 | )
|Purchase of treasury stock                                                                 |  |      |       |   |               |   | (390   | )
|                                                                                           |  |      |        |   |               |   |        |  
|Net cash used in financing activities                                                      |  |      | (1,963 | ) |               |   | (349   | )
|                                                                                           |  |      |        |   |               |   |        |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                    |  |      | 2,073  |   |               |   | 1      |  
|                                                                                           |  |      |        |   |               |   |        |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                  |  |      | 4,707  |   |               |   | 3,840  |  
|                                                                                           |  |     
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                             |  |      | 2,991  |   |               |   | 2,003  |  
|                                                                                           |  |      |        |   |               |   |        |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                   |  | $    | 7,698  |   |               | $ | 5,843  |  
|                                                                                           |  |      |        |   |               |   |        |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                         |  |      |        |   |               |   |        |  
|Cash paid during the period for:                                                           |  |      |        |   |               |   |        |  
|Interest                                                                                   |  | $    | 1,349  |   |               | $ | 1,045  |  
|                                                                                           |  |      |        |   |               |   |        |  
|Income Taxes:                                                                              |  |      |        |   |               |   |        |  
|Paid                                                                                       |  | $    | 3      |   |               | $ |       |  
|                                                                                           |  |      |        |   |               |   |        |  
|(Refunded)                                                                                 |  | $    |       |   |               | $ | (17    | )
|                                                                                           |  |      |        |   |               |   |        |  
|SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:                                    |  |      |        |   |               |   |        |  
|Note issued in connection with stock repurchase                                            |  | $    | 7,875  |   |               | $ |       |  
|                                                                                           |  |      |        |   |               |   |        |  



See notes to consolidated financial
statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF PERMANENT STOCKHOLDERS EQUITY - UNAUDITED

FOR THE THREE MONTHS ENDED JULY 31, 2005

(Dollars in Thousands)



|                                                                  |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |        |  
|----------------------------------------------------------------- |  | ----- | ------- | - | ------------------------------------------ | - | ------- | ------------- |  | - | ---------------- | - |  | ------------------------ | ------- | ----------- |  | ------------------------ | --- |  | - | -- |  | - | ------ | -
|                                                                  |  | Total |         |   | AccumulatedOtherComprehensiveIncome (Loss) |   |         | TreasuryStock |  |   | RetainedEarnings |   |  | AdditionalPaid InCapital |         | CommonStock |  | TotalComprehensiveIncome |    
|BALANCE APRIL 30, 2005                                            |  | $     | 126,159 |   |                                            | $ | (12,354 | )             |  | $ | (52,251          | ) |  | $                        | 190,330 |             |  | $                        | 374 |  | $ | 60 |  |   |        |  
|                                                                  |  |       |         |   |                                            |   |        
|Net loss                                                          |  |       | (1,354  | ) |                                            |   |        |               |  |   |                 |   |  |                          | (1,354  | )           |  |                          |    |  |   |   |  | $ | (1,354 | )
|Other comprehensive income (loss), net of tax:                    |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |        |  
|Foreign currency translation adjustments (net of taxes of $799)   |  |       | (1,198  | ) |                                            |   | (1,198  | )             |  |   |                 |   |  |                          |        |             |  |                          |    |  |   |   |  |   | (1,198 | )
|Change in fair value of cash flow hedges (net of taxes of $1,047) |  |       | 1,571   |   |                                            |   | 1,571   |               |  |   |                 |   |  |                          |        |             |  |                          |    |  |   |   |  |   | 1,571  |  
|                                                                  |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |        |  
|BALANCE JULY 31, 2005                                             |  | $     | 125,178 |   |                                            | $ | (11,981 | )             |  | $ | (52,251          | ) |  | $                        | 188,976 |             |  | $                        | 374 |  | $ | 60 |  | $ | (981   | )
|                                                                  |  |       |         |   |                                            |   |         |               |  |   |                  |   |  |                          |         |             |  |                          |     |  |   |    |  |   |        |  



See notes to consolidated financial
statements



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##### Table of Contents

THE NEWARK GROUP, INC. AND SUBSIDIARIES



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

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



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



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



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



Operating results for the
three-month period ended July 31, 2005 are not necessarily indicative of the results that may be expected for the year ending April 30, 2006 due to seasonal and other factors. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and related notes included in the Companys Form 10-K filing for the year ended April 30, 2005.



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



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



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



Cash
and Cash Equivalents Cash and cash equivalents include cash on hand, cash in banks, and short-term investments with maturity of three months or less from date of purchase. Cash overdrafts are included in accounts payable and are $4,411
and $4,589 as of July 31, 2005 and April 30, 2005, respectively.



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



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



Prior to November 1, 2004, the Company used the last-in, first-out (LIFO) method of costing inventory for most of its North American
Operations, with the cost of the remaining inventories determined using the first-in, first-out (FIFO) method. Effective, November 1, 2004, the Company changed its method of accounting for its LIFO inventory to the FIFO method.
Management believes the FIFO method is preferable because it provides a better



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



matching of costs to revenues, provides a more meaningful presentation of the Companys financial position by
reflecting recent costs in the balance sheet, and provides a uniform costing method across the Companys business segments. In accordance with accounting principles generally accepted in the United States of America, the prior period
consolidated financial statements presented in this Form 10-Q have been restated to retroactively apply the FIFO method of accounting as depicted in the following table:



|                                    |  |                                  |         |            |   |       |             |  |   |        
|----------------------------------- |  | -------------------------------- | ------- | ---------- | - | ----- | ----------- |  | - | -------
|                                    |  | Three Months Ended July 31, 2004
|                                    |  | As Reported                      |         | Adjustment |   |       | As Restated
|Cost of Sales                       |  | $                                | 187,838 |            | $ | (395  | )           |  | $ | 187,443
|Earnings from Continuing Operations |  | $                                | 1,116   |            | $ | 395   |             |  | $ | 1,511  
|Net Income                          |  | $                                | 533     |            | $ | 237   |             |  | $ | 770    
|                                    |  |                                  |        
|Inventories                         |  | $                                | 57,187  |            | $ | 5,620 |             |  | $ | 62,807 



Inventories consist of
the following:



|                             |  |              |        |               |   |       
|---------------------------- |  | ------------ | ------ | ------------- | - | ------
|                             |  | July 31,2005 |        | April 30,2005
|Raw Materials                |  | $            | 20,624 |               | $ | 22,629
|Finished Goods               |  |              | 38,398 |               |   | 35,963
|Other Manufacturing Supplies |  |              | 2,769  |               |   | 3,168 
|                             |  |              |        |               |   |       
|                             |  | $            | 61,791 |               | $ | 61,760
|                             |  |              |        |               |   |       



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



|                                    |  |              |         |   |               |   |         |  
|----------------------------------- |  | ------------ | ------- | - | ------------- | - | ------- | -
|                                    |  | July 31,2005 |         |   | April 30,2005 |  
|Senior Subordinated Notes 9.75% (1) |  | $            | 175,000 |   |               | $ | 175,000 |  
|Three-Year Bank Credit Facility (2) |  |              | 8,490   |   |               |   | 9,009   |  
|Industrial Revenue Bonds (3)        |  |              | 69,310  |   |               |   | 70,780  |  
|Subordinated Notes (4)              |  |              | 8,833   |   |               |   | 1,077   |  
|All other                           |  |              | 1,263   |   |               |   | 1,451   |  
|                                    |  |              |         |   |               |   |         |  
|Total Debt                          |  |              | 262,896 |   |               |   | 257,317 |  
|                                    |  |             
|Less Current Portion                |  |              | (3,936  | ) |               |   | (2,621  | )
|                                    |  |              |         |   |               |   |         |  
|Long-Term Debt                      |  | $            | 258,960 |   |               | $ | 254,696 |  
|                                    |  |              |         |   |               |   |         |  

---

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

|(2) | The Company has a $150,000 senior secured credit facility with ten banks. Borrowing availability is subject to borrowing base requirements established by leverage ratios. In
addition, the Company has the ability to issue up to $95,000 for letters of credit, usage of which reduces borrowing availability under the facility. Letters of credit can be issued to enhance industrial revenue bonds, guarantee unpaid claim
reserves under insurance policies and/or to provide performance bonds and trade letters of credit. As of July 31, 2005 the Company has $83,398 in letters of credit obligations outstanding ($71,529 of which has been used to enhance security for the
industrial revenue bonds), $8,490 in loans outstanding and $58,112 of availability under the facility. The borrowings bear variable interest that is reset quarterly at a rate equal to, at the Companys discretion, either (1) Prime plus a spread
of 1% to 2% or (2) London Interbank Offered Rate (LIBOR) plus a spread of 2% to 3% depending on the type of borrowing. The rate of interest (4.99% as of July 31, 2005) is subject to applicable margin requirements established by leverage ratios.
Outstanding letters of credit are subject to a fee equal to the applicable margin for LIBOR based loans. The undrawn portion of the facility is subject to a facility fee at an annual rate of 0.50%. This debt is classified in Senior Debt in the
consolidated balance sheets.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



|(3) | The industrial revenue bonds are comprised of: Mercer IRB of $1,750, Mobile IRB of $4,975, Natick IRB of $40, Ohio IRB of $15,500, and Massachusetts IRBs of $47,045 as of July 31,
2005. These bonds are variable rate demand bonds with maturity dates ranging from July 2006 through July 2031 and where the interest rates range from 2.35% to 4.69% and are reset every seven days. This debt is classified in Senior Debt in the
consolidated balance sheets with a portion in Current Portion of Long Term Debt.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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



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



The Company has cross-currency interest
rate swap agreements with two banks. These agreements have been designated as cash flow hedges against the existing intercompany loan to the Companys European subsidiary. At July 31, 2005 and April 30, 2005, the fair value of the swaps
represented a liability of $19,045 and $22,399, respectively. The Company has recognized income of $187 and a charge of $14 within Other (expense) income  net on the consolidated statements of operations, related to hedge ineffectiveness,
during the three months ended July 31, 2005 and 2004, respectively.



With the exception of the cross-currency interest rate swaps, the Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage interest rate risk, foreign
currency exchange risks and certain energy price and raw material risks. The Company is exposed to credit losses in the event of non-performance by the counterparties to its derivative financial instruments. The Company anticipates, however, that
the counterparties will be able to fully satisfy their obligations under the contracts.



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



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



|                                              |  |                                  |        |   |              |   |        |  
|--------------------------------------------- |  | -------------------------------- | ------ | - | ------------ | - | ------ | -
|                                              |  | Pension Costs Three Months ended |       
|                                              |  | July 31,2005                     |        |   | July 31,2004 |  
|Service Cost                                  |  | $                                | 1,162  |   |              | $ | 943    |  
|Interest Cost on Projected Benefit Obligation |  |                                  | 1,554  |   |              |   | 1,466  |  
|Expected Return on Assets (Gain) Loss         |  |                                  | (1,519 | ) |              |   | (1,247 | )
|Net Amortization                              |  |                                  | 342    |   |              |   | 387    |  
|                                              |  |                                  |        |   |              |   |        |  
|Net Pension Expense                           |  | $                                | 1,539  |   |              | $ | 1,549  |  
|                                              |  |                                  |        |   |              |   |        |  



The Company estimates
a cash contribution to its domestic pension plans of approximately $6,800 during fiscal year ending April 30, 2006. As of July 31, 2005, 76% of the plans assets were in equity investments, 14% in fixed-income securities and 10% in cash and
other.



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



|                                              |  |                                 |     |   |              |   |     |  
|--------------------------------------------- |  | ------------------------------- | --- | - | ------------ | - | --- | -
|                                              |  | Pension CostsThree Months ended |    
|                                              |  | July 31,2005                    |     |   | July 31,2004 |  
|Service Cost                                  |  | $                               | 48  |   |              | $ | 31  |  
|Interest Cost on Projected Benefit Obligation |  |                                 | 58  |   |              |   | 49  |  
|Expected Return on Assets (Gain) Loss         |  |                                 | (53 | ) |              |   | (34 | )
|                                              |  |                                 |     |   |              |   |     |  
|Net Pension Expense                           |  | $                               | 53  |   |              | $ | 46  |  
|                                              |  |                                 |     |   |              |   |     |  



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



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



2006 Restructuring



The Paperboard segment incurred $135 of expenses related to the maintenance of three facilities closed in prior years. Within the Converted Products
segment, the majority of both dismantling and impairment charges related to the leased facility in Neenah, WI which ceased production operations in April 2004 but continued to be used for warehousing purposes. The $166 within corporate represents
the loss on the sale of a vacant facility in Greenville, SC. Gross proceeds on the sale were $1,200.



2005 Restructuring



The Paperboard segment incurred severance costs of $14 relating to the operation in Sunrise, FL which closed on July 15, 2004. This location also incurred
$26 of costs to exit the property. The remaining charges of $193 in the Paperboard Segment relate to three locations that were closed in prior years.



The Converted Products segment incurred restructuring charges on six locations  Vancouver, WA, Stockton, CA, Mira Loma, CA, Kountze, TX, Oshkosh, WI
and Neenah, WI. Restructuring charges for the period ended July 31, 2004 were $717.



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



|                                 |  |            |     |                   |   |           |  |       |     |  |   |    
|-------------------------------- |  | ---------- | --- | ----------------- | - | --------- |  | ----- | --- |  | - | ---
|                                 |  | Paperboard |     | ConvertedProducts |   | Corporate |  | Total
|July 31, 2005                    |  |            |     |                   |   |           |  |       |     |  |   |    
|Severance                        |  | $          |    |                   | $ |          |  | $     |    |  | $ |   
|Dismantling, Mothballing & Other |  |            | 135 |                   |   | 271       |  |       | 166 |  |   | 572
|Asset Impairment                 |  |            |    |                   |   | 260       |  |       |    |  |   | 260
|                                 |  |            |     |                   |   |           |  |       |     |  |   |    
|Total Charges                    |  | $          | 135 |                   | $ | 531       |  | $     | 166 |  | $ | 832
|                                 |  |            |     |                   |   |           |  |       |     |  |   |    
|July 31, 2004                    |  |            |     |                   |   |           |  |       |     |  |   |    
|Severance                        |  | $          | 14  |                   | $ | 124       |  | $     |    |  | $ | 138
|Dismantling, Mothballing & Other |  |            | 219 |                   |   | 558       |  |       |    |  |   | 777
|Asset Impairment                 |  |            |    |                   |   | 35        |  |       |    |  |   | 35 
|                                 |  |            |     |                   |   |           |  |       |     |  |   |    
|Total Charges                    |  | $          | 233 |                   | $ | 717       |  | $     |    |  | $ | 950
|                                 |  |            |     |                   |   |           |  |       |     |  |   |    





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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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



|                                                               |  |                                      |      |   |                                   |   |                |  |   |      |  
|-------------------------------------------------------------- |  | ------------------------------------ | ---- | - | --------------------------------- | - | -------------- |  | - | ---- | -
|                                                               |  | Dismantling,Mothballing & OtherCosts |      |   | Severance andPayroll RelatedCosts |   | TotalProvision | 
|April 30, 2005 Accrual Balance                                 |  | $                                    | 46   |   |                                   | $ |               |  | $ | 46   |  
|Restructuring Charges for the Three Months Ended July 31, 2005 |  |                                      | 572  |   |                                   |   |               |  |   | 572  |  
|Amounts Paid Against 2005 Accruals                             |  |                                      | (46  | ) |                                   |   |               |  |   | (46  | )
|Amounts Paid Against 2006 Accruals                             |  |                                      | (489 | ) |                                   |   |               |  |   | (489 | )
|                                                               |  |                                      |      |   |                                   |   |                |  |   |      |  
|July 31, 2005 Accrual Balance                                  |  | $                                    | 83   |   |                                   | $ |               |  | $ | 83   |  
|                                                               |  |                                      |      |   |                                   |   |                |  |   |      |  



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



|                   |  |                                         |        |                                                   |   |                                                          |  |                                                       |       |  |   |       
|------------------ |  | --------------------------------------- | ------ | ------------------------------------------------- | - | -------------------------------------------------------- |  | ----------------------------------------------------- | ----- |  | - | ------
|                   |  | CumulativeCosts as of July 31, 2005 (1) |        | Costs for the ThreeMonths Ended July 31, 2005 (2) |   | Estimated Costs toCompleteInitiatives as ofJuly 31, 2005 |  | Total EstimatedCosts ofInitiatives as ofJuly 31, 2005
|Paperboard         |  | $                                       | 13,891 |                                                   | $ | 121                                                      |  | $                                                     | 1,500 |  | $ | 15,512
|Converted Products |  |                                         | 1,531  |                                                   |   | 531                                                      |  |                                                       | 600   |  |   | 2,662 
|Corporate          |  |                                         |       |                                                   |   |                                                         |  |                                                       |      |  |   |      
|                   |  |                                         |        |                                                   |   |                                                          |  |                                                       |       |  |   |       
|                   |  | $                                       | 15,422 |                                                   | $ | 652                                                      |  | $                                                     | 2,100 |  | $ | 18,174
|                   |  |                                         |        |                                                   |   |                                                          |  |                                                       |       |  |   |       

---

|(1) | Of the $15,422 in cumulative restructuring costs, $7,349 million were non-cash charges.
|--- | ---------------------------------------------------------------------------------------

|(2) | The total costs incurred in the three months ended July 31, 2005, $652, does not agree with the three month total charges of $832 from the table above since some of the costs are
related to plans initiated prior to January 1, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The effective rate of income tax benefit for the period ended July 31, 2005 was 17%, compared to a 52% expense rate at July 31, 2004. The net tax benefit
at July 31, 2005 includes $579 of expense relating to an increase in the valuation allowance for the benefits of the state net operating losses not expected to be realized. This is the result of changes to the tax law enacted in the State of Ohio,
effective June 2005, that will eliminate the Ohio franchise tax over the five-year period ending December 31, 2010.



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



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



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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



The Company operates in principally three business segments.



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



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



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



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



Identifiable assets are accumulated by facility within each business
segment.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



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



|                                                               |  |                            |         |   |                |   |         |  
|-------------------------------------------------------------- |  | -------------------------- | ------- | - | -------------- | - | ------- | -
|                                                               |  | For the Three Months Ended |        
|                                                               |  | July 31, 2005              |         |   | July 31, 2004  |  
|                                                               |  |                            |         |   | (As restated)  |  
|Sales (aggregate):                                             |  |                            |         |   |                |   |         |  
|Paperboard                                                     |  | $                          | 154,122 |   |                | $ | 150,215 |  
|Converted Products                                             |  |                            | 71,140  |   |                |   | 70,054  |  
|International                                                  |  |                            | 39,182  |   |                |   | 36,581  |  
|                                                               |  |                            |         |   |                |   |         |  
|Total:                                                         |  | $                          | 264,444 |   |                | $ | 256,850 |  
|                                                               |  |                            |         |   |                |   |         |  
|Less sales (inter-segment):                                    |  |                            |         |   |                |   |         |  
|Paperboard                                                     |  | $                          | (37,996 | ) |                | $ | (38,991 | )
|Converted Products                                             |  |                            | (2,007  | ) |                |   | (1,845  | )
|International                                                  |  |                            | 2       |   |                |   | 45      |  
|                                                               |  |                            |         |   |                |   |         |  
|Total:                                                         |  | $                          | (40,001 | ) |                | $ | (40,791 | )
|                                                               |  |                            |         |   |                |   |         |  
|Sales (external customers):                                    |  |                            |         |   |                |   |         |  
|Paperboard                                                     |  | $                          | 116,126 |   |                | $ | 111,224 |  
|Converted Products                                             |  |                            | 69,133  |   |                |   | 68,209  |  
|International                                                  |  |                            | 39,184  |   |                |   | 36,626  |  
|                                                               |  |                            |         |   |                |   |         |  
|Total:                                                         |  | $                          | 224,443 |   |                | $ | 216,059 |  
|                                                               |  |                            |         |   |                |   |         |  
|Operating Income:                                              |  |                            |         |   |                |   |         |  
|Paperboard                                                     |  | $                          | 6,151   |   |                | $ | 7,844   |  
|Converted Products                                             |  |                            | (1,624  | ) |                |   | (1,630  | )
|International                                                  |  |                            | 3,851   |   |                |   | 3,942   |  
|                                                               |  |                            |         |   |                |   |         |  
|Total Segment Operating Income:                                |  |                            | 8,378   |   |                |   | 10,156  |  
|                                                               |  |                           
|Corporate Expense                                              |  |                            | 4,037   |   |                |   | 3,309   |  
|                                                               |  |                            |         |   |                |   |         |  
|Total Operating Income:                                        |  |                            | 4,341   |   |                |   | 6,847   |  
|                                                               |  |                           
|Interest Expense                                               |  |                            | (6,257  | ) |                |   | (6,160  | )
|Interest Income                                                |  |                            | 1       |   |                |   | 21      |  
|Equity in Income of Affiliates                                 |  |                            | 578     |   |                |   | 528     |  
|Other (Expense) Income, Net                                    |  |                            | (302    | ) |                |   | 275     |  
|                                                               |  |                            |         |   |                |   |         |  
|(Loss) Earnings from Continuing Operations Before Income Taxes |  |                            | (1,639  | ) |                |   | 1,511   |  
|Income Tax (Benefit) Expense                                   |  |                            | (285    | ) |                |   | 741     |  
|                                                               |  |                            |         |   |                |   |         |  
|(Loss) Earnings from Continuing Operations                     |  | $                          | (1,354  | ) |                | $ | 770     |  
|                                                               |  |                            |         |   |                |   |         |  
|Depreciation and Amortization:                                 |  |                            |         |   |                |   |         |  
|Paperboard                                                     |  | $                          | 5,716   |   |                | $ | 5,285   |  
|Converted Products                                             |  |                            | 1,305   |   |                |   | 1,071   |  
|International                                                  |  |                            | 1,063   |   |                |   | 951     |  
|Corporate                                                      |  |                            | 548     |   |                |   | 540     |  
|                                                               |  |                            |         |   |                |   |         |  
|Total:                                                         |  | $                          | 8,632   |   |                | $ | 7,847   |  
|                                                               |  |                            |         |   |                |   |         |  
|Purchases of Property, Plant and Equipment:                    |  |                            |         |   |                |   |         |  
|Paperboard                                                     |  | $                          | 3,131   |   |                | $ | 3,410   |  
|Converted Products                                             |  |                            | 320     |   |                |   | 1,755   |  
|International                                                  |  |                            | 444     |   |                |   | 110     |  
|Corporate                                                      |  |                            | 11      |   |                |   | 15      |  
|                                                               |  |                            |         |   |                |   |         |  
|Total:                                                         |  | $                          | 3,906   |   |                | $ | 5,290   |  
|                                                               |  |                            |         |   |                |   |         |  
|                                                               |  |                           
|                                                               |  | July 31, 2005              |         |   | April 30, 2005 |  
|Identifiable Assets:                                           |  |                            |         |   |                |   |         |  
|Paperboard                                                     |  | $                          | 329,140 |   |                | $ | 332,259 |  
|Converted Products                                             |  |                            | 98,869  |   |                |   | 97,479  |  
|International                                                  |  |                            | 133,484 |   |                |   | 137,606 |  
|Corporate                                                      |  |                            | 33,722  |   |                |   | 32,740  |  
|                                                               |  |                            |         |   |                |   |         |  
|Total:                                                         |  | $                          | 595,215 |   |                | $ | 600,084 |  
|                                                               |  |                            |         |   |                |   |         |  



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Geographic Regions



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



|                                                            |  |              |         |               |   |        
|----------------------------------------------------------- |  | ------------ | ------- | ------------- | - | -------
|                                                            |  | July 31,2005 |         | July 31,2004 
|Sales to Unaffiliated Customers                             |  |              |         |               |   |        
|United States                                               |  | $            | 182,805 |               | $ | 177,179
|Europe                                                      |  |              | 39,182  |               |   | 36,626 
|Canada                                                      |  |              | 2,456   |               |   | 2,254  
|                                                            |  |              |         |               |   |        
|Total                                                       |  | $            | 224,443 |               | $ | 216,059
|                                                            |  |              |         |               |   |        
|                                                            |  |             
|                                                            |  | July 31,2005 |         | April 30,2005
|Net Property, Plant and Equipment, Goodwill and Intangibles |  |              |         |               |   |        
|                                                            |  |             
|United States                                               |  | $            | 296,947 |               | $ | 301,979
|Europe                                                      |  |              | 55,425  |               |   | 59,452 
|Canada                                                      |  |              | 6,894   |               |   | 6,793  
|                                                            |  |              |         |               |   |        
|Total                                                       |  | $            | 359,266 |               | $ | 368,224
|                                                            |  |              |         |               |   |        



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



The Company leases its corporate headquarters located at 20 Jackson Drive, Cranford, New Jersey from Jackson Drive Corp., a corporation owned by two
Directors of the Company. For each of the three-month periods ended July 31, 2005 and 2004, the amount paid to that company under the lease was $87.



On July 5, 2005, pursuant to a May 1, 1980 agreement, as amended, the Companys former Chairman and current Director put the 198,000
shares of the Companys common stock owned by him to the Company. This put required the reclassification of the value of these shares on the consolidated balance sheet from Temporary Equity to Subordinated Debt (see Note 10).



The paperboard mills in our International segment purchased
approximately $1,963 and $2,133 of raw material from affiliated entities accounted for as equity method investments during the three-month periods ended July 31, 2005 and 2004, respectively.



The International segment also recorded sales of approximately $602 and $403
to two affiliated entities accounted for as equity method investments during the three-month periods ended July 31, 2005 and 2004, respectively.



The Company paid approximately $1,029 and $1,039 to Integrated Paper Recyclers, LLC, an affiliated entity accounted for as an equity method investment,
primarily for hauling services of recyclable material during the three-month periods ended July 31, 2005 and 2004, respectively.



|10. | SUBSEQUENT EVENTS
|--- | -----------------



On August 10, 2005, the Company completed the purchase from its former Chairman and current Director of the 198,000 shares of the Companys common
stock owned by him. This director had exercised his right to put the subject stock to the Company pursuant to a May 1, 1980 agreement, as amended. The aggregate purchase price for the stock was $7,875, which amount is to be paid pursuant
to a Subordinated Installment Promissory Note (the Note), with $788 plus accrued interest paid on August 18, 2005 and the balance being due in 40 equal and consecutive quarterly installments, with interest, commencing on October 1, 2005,
and continuing thereafter on the first day of the months of January, April, July and October. Interest will accrue on the outstanding principal balance of the Note at the prime rate of interest as in effect from time to time. The obligation under
the Note is classified as Subordinated Debt on the consolidated balance sheets (see Note 9).



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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.



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



Overview



The Newark Group is an integrated producer of 100% recycled paperboard and paperboard
products with leading market positions in North America and Europe. We primarily manufacture folding carton, core board and industrial converting grades of paperboard, and are among the largest producers of these grades in North America. We are also
a leading producer of laminated products and graphicboard in North America and Europe as well as a major producer of tubes, cores and allied products in North America. We supply our products to the paper, packaging, stationery, book printing,
construction, plastic film, furniture and game industries. In addition, we are engaged in the collection, trading and processing of recovered paper in North America and believe that we are among the five largest participants in this industry. We
have more than 8,000 customers worldwide and our relationships with our top 70 customers, as measured by sales dollars, averages in excess of 17 years. No single customer accounted for more than 2.8% of our sales in our fiscal year ended April 30,
2005.



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



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



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



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



Sales volumes are also impacted by the highly competitive environment in which
we operate. This competition, combined with the business slowdown that began during fiscal year 2000, resulted in decreased industry capacity utilization rates. As a result, we initiated a mill capacity rationalization program which led to the
closures of five paperboard mills: the Gardiner, Maine facility in October 2001; the Lawrence, Massachusetts facility in September 2002; the Middletown, Ohio facility in October 2002; the Stockton, California facility in March 2003; and the Newark,
New Jersey facility in July 2003. Combined, these five closures resulted in a capacity reduction of approximately 300,000 tons per year, which led to approximately $30 million per year of overhead savings and loss avoidance. As a result of these
closures, and a shift of business to other mills, our paperboard mills capacity utilization rates rebounded from a low of 89% in 2002 to 98% in the first quarter of fiscal 2006, despite the fact that we lost approximately four machine days of
production in our southeastern US mill during a two-day shutdown in the first quarter of fiscal 2006 due to Hurricane Dennis.



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Recovered paper is our most significant raw material. Historically, the cost of recovered paper has fluctuated significantly due to market
and industry conditions. For example, our average North American recovered paper cost per ton of paperboard produced declined from $101 per ton in fiscal 2001 to $75 per ton in fiscal 2002, a decrease of 26%, before increasing by 35% to $102 per ton
in fiscal 2003. Fiscal 2004 saw a slight reduction of 3% to $99 per ton though recovered paper prices increased by $17 per ton, or 17%, to $116 per ton in fiscal 2005. For the period ended July 31, 2005, recovered paper prices increased slightly by
$1 per ton to $117 per ton from the average fiscal 2005 prices and remained flat when compared to the first quarter of fiscal 2005.



Energy, which consists of electricity and fuel used to generate steam for use in the paper making process, is also a significant manufacturing cost for us. The average
energy cost in our North American mill system has increased substantially in recent years, averaging approximately $73, $68 and $58 per ton of paperboard produced in fiscal years 2005, 2004 and 2003, respectively, as compared to $43 per ton in 2000.
This increase primarily is due to overall increases in natural gas, fuel oil and electricity prices. We expect that prices may continue to rise in response to conditions in the Middle East, natural gas shortages in the United States and other
economic conditions and the related uncertainties regarding the outcome and implications of such events. Our operating margins are adversely affected when energy costs increase, notwithstanding that we attempt to manage fluctuations in our energy
costs by utilizing financial hedges and purchasing forward contracts for a portion of our energy needs. Despite our hedging efforts, our average energy cost per ton for the current quarter ended July 31, 2005 was $78, up 7% from the average fiscal
year 2005 per ton cost and up 14% when compared to the first quarter of 2005.



We attempt to raise our selling prices in response to increases in raw material and energy costs. However, we are not always able to pass the full amount of these costs through to our customers on a timely basis, if at all, and as a result,
cannot maintain our operating margins in the face of meaningful cost increases. We experience a reduction in margin during periods of recovered paper 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 still will be materially and adversely affected by time delays in the implementation of price increases. Price increases for sales from our
Paperboard and Converted Products segments were announced commencing in April 2004, with a second price increase announced in September 2004. We have realized approximately $31 per ton of price increases for our paperboard products and $40 per ton
for our converted products since the first price increase announcement. Sales price is up 5% and 8% for our paperboard and converted products, respectively, and $14 per ton and $57 per ton, respectively, when the current quarter is compared to the
same quarter last year.



As a result of Hurricane Katrina, which hit the Gulf
Coast region of the United States in late August 2005, minor structural damage was suffered at two facilities in our Paperboard segment located in Mobile, AL, as well as a facility in our Converted Products segment located in Bay Minette, AL. The
electrical service interruption and gas supply concerns that followed led to shut-downs of a week or less at these facilities. These facilities are currently running normally and we are still evaluating the long-term effects, if any, of the
hurricane on our operations at these sites.



Our Results of Operations



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



|                        |  |                             |         |   |               |   |         |  
|----------------------- |  | --------------------------- | ------- | - | ------------- | - | ------- | -
|                        |  | Three Months Ended July 31, |        
|(in thousands)          |  | 2005                        |         |   | 2004          |  
|                        |  |                             |         |   | (As Restated) |  
|Net Sales               |  |                             |         |   |               |   |         |  
|Paperboard              |  | $                           | 116,126 |   |               | $ | 111,224 |  
|Converted Products      |  |                             | 69,133  |   |               |   | 68,209  |  
|International           |  |                             | 39,184  |   |               |   | 36,626  |  
|                        |  |                             |         |   |               |   |         |  
|Total                   |  | $                           | 224,443 |   |               | $ | 216,059 |  
|                        |  |                             |         |   |               |   |         |  
|Cost of Sales           |  |                             |         |   |               |   |         |  
|Paperboard              |  | $                           | 101,855 |   |               | $ | 94,834  |  
|Converted Products      |  |                             | 65,168  |   |               |   | 63,900  |  
|International           |  |                             | 32,108  |   |               |   | 28,942  |  
|Corporate               |  |                             |        |   |               |   | (233    | )
|                        |  |                             |         |   |               |   |         |  
|Total                   |  | $                           | 199,131 |   |               | $ | 187,443 |  
|                        |  |                             |         |   |               |   |         |  
|SG&A                    |  |                             |         |   |               |   |         |  
|Paperboard              |  | $                           | 7,985   |   |               | $ | 8,313   |  
|Converted Products      |  |                             | 5,058   |   |               |   | 5,222   |  
|International           |  |                             | 3,225   |   |               |   | 3,742   |  
|Corporate               |  |                             | 3,871   |   |               |   | 3,542   |  
|                        |  |                             |         |   |               |   |         |  
|Total                   |  | $                           | 20,139  |   |               | $ | 20,819  |  
|                        |  |                             |         |   |               |   |         |  
|Restructuring           |  |                             |         |   |               |   |         |  
|Paperboard              |  | $                           | 135     |   |               | $ | 233     |  
|Converted Products      |  |                             | 531     |   |               |   | 717     |  
|International           |  |                             |        |   |               |   |        |  
|Corporate               |  |                             | 166     |   |               |   |        |  
|                        |  |                             |         |   |               |   |         |  
|Total                   |  | $                           | 832     |   |               | $ | 950     |  
|                        |  |                             |         |   |               |   |         |  
|Operating Income (Loss) |  |                             |         |   |               |   |         |  
|Paperboard              |  | $                           | 6,151   |   |               | $ | 7,844   |  
|Converted Products      |  |                             | (1,624  | ) |               |   | (1,630  | )
|International           |  |                             | 3,851   |   |               |   | 3,942   |  
|Corporate               |  |                             | (4,037  | ) |               |   | (3,309  | )
|                        |  |                             |         |   |               |   |         |  
|Total                   |  | $                           | 4,341   |   |               | $ | 6,847   |  
|                        |  |                             |         |   |               |   |         |  



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



|                                             |  |                            |   |  |       |  
|-------------------------------------------- |  | -------------------------- | - |  | ----- | -
|                                             |  | Three Months Ended July 31 |  
|                                             |  | 2005                       |   |  | 2004  |  
|Net sales                                    |  | 100.0                      | % |  | 100.0 | %
|Cost of sales                                |  | 88.7                       |   |  | 86.8  |  
|Selling, general and administration expenses |  | 9.0                        |   |  | 9.6   |  
|Restructuring and impairments                |  | 0.4                        |   |  | 0.4   |  
|Operating income (loss)                      |  | 1.9                        |   |  | 3.2   |  
|Interest expense                             |  | 2.8                        |   |  | 2.9   |  
|Income tax (benefit) expense                 |  | (0.1                       | ) |  | 0.3   |  
|Net (loss) earnings                          |  | (0.6                       | ) |  | 0.4   |  



Results of Operations



Period Ended July 31, 2005 Compared to Period Ended July 31, 2004



Overview



Net Sales. Net sales for the period ended July 31, 2005 increased 4% to $224.4
million from $216.1 million in the same period of the prior fiscal year. This increase is predominantly the result of sales price increases realized across all business segments: an average of 8% between the Paperboard and Converted Products
segments and 5% in the International segment, as well as volume increases of 2% in the Paperboard segment and 16% in International converted products sales.



Cost of Sales. Cost of sales for the quarter ended July 31, 2005 increased 6% to $199.1 from $187.4 million during the quarter ended July 31, 2004. This increase
was driven by the higher volumes noted above, as well as increases in both energy and freight costs, which increased 14% and 11%, respectively, an increase of approximately $2.5 million each when compared to the first quarter of 2005.



SG&A.SG&A decreased 3% in the quarter ended July 31, 2005 to $20.1 million
from $20.8 million in the quarter ended July 31, 2004. This improvement results from our previous rationalization efforts and our continued focus on cost containment.



Restructuring and Impairments. We recorded restructuring charges of $0.8 million during the first quarter of 2006 as compared to $1.0
million during the first quarter of 2005. Current year expenses include on-going costs related to previously shut down operations in our Converted Products and Paperboard segments, as well as a loss on the sale of a vacant facility sold in June
2005. Of these costs, $0.3 million were non-cash charges for the impairment of capitalized building improvements on a leased facility in our Converted Products segment.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Operating Income. Operating income decreased $2.5 million to $4.3 million during the first quarter of fiscal 2006 as compared to $6.8
million during the first quarter of fiscal 2006. This decrease is mainly the result of the increased energy costs and freight costs, which were up 14% and 11%, respectively when compared to the previous years quarter.



Paperboard



Net sales in the Paperboard segment increased by $4.9 million, or 4%, to $116.1 million for the quarter ended July 31, 2005 compared to
$111.2 million in the quarter ended July 31, 2004. This increase resulted primarily from a 5% increase in sales price of our paperboard products.



Overall cost of sales increased $7.1 million, or 7%, from $94.8 million in the period ended July 31, 2004 to $101.9 million in the current period. Energy and freight cost
increases are primarily responsible for the growth in cost of sales, each increasing 14%, or $2.5 million and $2.3, respectively, when compared to the first quarter of fiscal 2005. The remainder of the increase is spread among depreciation, labor,
employee benefits and repairs.



Restructuring costs decreased by $0.1, or 42%,
to $0.1 million as compared to the first quarter of fiscal 2005. The charges incurred during the current fiscal quarter represent continuing costs to exit previously shut down locations.



Our mill utilization rates increased to 98% during the quarter ended July 31, 2005 as compared to 95% in the quarter ended July 31, 2004;
Fitchburgs utilization rate was 88% for the first quarter of fiscal 2006 compared to 95% during the first quarter of fiscal 2005. However, Fitchburg productivity continues to increase as evidenced by the fact that there were 5,300 more tons
produced in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005.



SG&A decreased 4% from $8.3 million in the first quarter of fiscal 2005 to $8.0 million in the first quarter of fiscal 2006, primarily because of decreased costs during the period resulting from our closed
facilities.



Operating Income for the paperboard segment decreased 22%, from
$7.8 million in the first quarter of fiscal 2005 to $6.2 million in the first quarter of fiscal 2006, primarily due to the increased energy and freight costs referred to above.



Converted Products



Net sales in the Converted Products segment increased $0.9 million, or 1%, to $69.1 million for the first quarter of fiscal 2006 compared to $68.2 million for the first
quarter of fiscal 2005. This increase is due to an 5% increase in sales price offset by a 4% decrease in volume.



Cost of sales increased $1.3 million, or 2%, in the first quarter of fiscal 2006 when compared to the same period in fiscal 2005 primarily as a result of a $1.5 million
increase in raw material costs offset by $0.4 million decrease in labor and employee benefits costs.



Restructuring costs were $0.5 million in the quarter ended July 31, 2005, a $0.2 million decrease from $0.7 million in the quarter ended July 31, 2004. Current year charges reflect costs related to the Neenah, WI
facility, which we restructured in 2005. Prior year costs included charges for the closing of our Kountze, TX and our Stockton, CA plants, which we closed in the quarter ended July 31, 2004. Non-cash impairment charges in the first quarters of
fiscal years 2006 and 2005 were $0.3 million and $0.1 million, respectively.



SG&A decreased 3% from $5.2 million in the first quarter of fiscal 2005 to $5.1 million in the first quarter of fiscal 2006 due primarily to decreased costs resulting from our restructuring efforts.



Operating income remained flat when comparing the first quarters of fiscal years 2006 and
2005.



International



Net sales in the International segment increased by $2.6 million, or 7%, to $39.2 million in
the quarter ended July 31, 2005, compared to $36.6 million in the quarter ended July 31, 2004 due to increased converting volumes and sales price. The sales volume increase of 16% in the converting operations coupled with a 4% increase in sales
price more than offset the 3% mill volume decrease.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Cost of sales in the in the International segment was $32.1 million the quarter ended July 31, 2005 as compared to $28.9 million for the
quarter ended July 31, 2004, an increase of $3.2 million, or 11%. This increase is the result of a 13% increase in energy costs and a 6% increase in paperboard costs.



SG&A in the International segment showed a 14% improvement in the first quarter of fiscal 2006 when compared to the first quarter of
fiscal 2005. This improvement is primarily the result of the recovery of bad debts that had been written off in prior periods.



Operating income for the International segment was $3.8 million in the first quarter of fiscal 2006, or 2% lower than the $3.9 million reported in the first quarter of
fiscal 2005. This decrease in operating income is the result of increased energy and paperboard costs, as well as a slight strengthening of the US dollar to $1.20/Euro as compared to $1.21/Euro for the same period last year.



Corporate



Unallocated corporate expense increased by $0.7 million to $4.0 million in the first quarter of fiscal 2006. This increase is primarily the
result of increased legal and accounting fees.



Other (Expense)/Income



Interest expense increased from $6.2 million in the first quarter of
fiscal 2005 to $6.3 million in the first quarter of fiscal 2006, primarily due to higher interest rates on our variable rate debt. Average outstanding borrowings increased from $259 million during the quarter ended July 31, 2004 to $260 million
during the quarter ended July 31, 2005, and were coupled with a 0.4% borrowing rate increase from 8.0% during last years quarter to 8.4% during the current fiscal period.



Excluding interest expense, Other (expense) incomenet decreased from income of $0.8 million in the first quarter of fiscal 2005 to
income of $0.3 million in the first quarter of fiscal 2006. This decrease in Other Income is mainly the result of unfavorable swings in foreign currency exchange rates.



Income Tax (Benefit) Expense



The effective rate of income tax benefit for the period ended July 31, 2005 was 17%, compared to a 52% expense rate at July 31, 2004. The net tax benefit at July 31, 2005
includes $579 of expense relating to an increase in the valuation allowance for the benefits of the state net operating losses not expected to be realized. This is the result of changes to the tax law enacted in the State of Ohio, effective June
2005, that will eliminate the Ohio franchise tax over the five-year period ending December 31, 2010.



Net Income



In summary, our net
income, which decreased from income of $0.8 million in the first quarter of fiscal 2005 to net loss of $1.4 million in the first quarter of fiscal 2006, was adversely affected by the continued increase in energy costs and freight charges, and to a
lesser extent the increase in raw material costs. Additionally, income taxes were negatively impacted this period by the Ohio tax law change, which impacted our overall effective rate by 35%, reducing our tax benefit from 42% to 17%.



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 and other operating activities. We fund our current cash requirements with
cash provided by operations and borrowings under our senior credit facility. We believe that these sources are sufficient to meet the current and anticipated cash requirements of our operations.



As discussed in our Annual Report on Form 10-K for the year ended April 30, 2005, the Company
has provided for income taxes for the repatriation of $6.4 million of foreign earnings. We are currently in the process of reviewing our options as to the form of this repatriation.



Capital Expenditures. Since June 2000, we have been involved in constructing our new paperboard mill in Fitchburg, Massachusetts. See
BusinessOur Products and Our ProcessPaperboard SegmentFitchburg Paperboard Mill in our Annual Report on Form 10-K. Since that time, capital and operating expenditures at the Fitchburg mill have had the largest impact on
our liquidity. Through July 31, 2005, we have made capital expenditures of approximately $177.0



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million on the Fitchburg mill. Our total capital expenditures were $4.1 million and $5.3 million in the first quarters of fiscal 2006 and
2005, respectively of which $0.2 million and $0.7 million, respectively, were spent on the Fitchburg mill. We expect fiscal 2006 capital expenditures to be under $25.0 million.



Borrowings



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



|                                         |  |               |      
|---------------------------------------- |  | ------------- | -----
|                                         |  | July 31, 2005
|Senior revolving credit facility(1)      |  | $             | 8.5  
|93/4%
Senior Subordinated Notes due 2014 |  |               | 175.0
|Industrial Revenue Bonds                 |  |               | 69.3 
|Other(2)                                 |  |               | 10.1 
|                                         |  |               |      
|Total debt                               |  | $             | 262.9
|                                         |  |               |      

---

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

|(2) | Pursuant to the July 5, 2005 put of Company common stock to the Company by its former Chairman and current Director (see Notes 9 and 10 to the accompanying consolidated
financial statements), the Company issued a subordinated note on August 10, 2005 for $7,875 to the former Chairman in exchange for the 198,000 shares of Company common stock owned by him. The note bears interest at the prime rate in effect from time
to time, requires quarterly principal and interest payments and is due in July 2015.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In March 2004, we entered into a three-year, senior secured revolving credit facility with Wachovia Bank, National Association, as Agent. The facility is in the aggregate principal amount of $150.0 million, with up to
$95.0 million available for the issuance of letters of credit. Letters of credit are needed, in part, as security for our industrial revenue bonds. As of July 31, 2005, we had approximately $83.4 million of letters of credit outstanding to secure
our industrial revenue bonds and liability insurance claims and $8.5 million of other borrowings outstanding under the facility, leaving us with availability of approximately $58.1 million under the revolver.



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



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



We are also parties to a series
of cross-currency rate swap transactions with members of our existing bank group (the 2001 Swaps). The 2001 Swaps have been designated as hedges against the existing inter-company loan to our European subsidiary. At July 31, 2005 the
fair value of the 2001 Swaps represented a liability of $19.0 million.



Additionally, in our effort to manage costs, we have entered into several energy, and to a minimal extent waste paper, hedges. At July 31, 2005 the fair value of these hedges was an asset of $2.1 million.



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



|                      |  |       |      
|--------------------- |  | ----- | -----
|Year Ending April 30, |  | Total
|2006(1)               |  | $     | 2.1  
|2007(2)               |  |       | 11.7 
|2008                  |  |       | 2.9  
|2009                  |  |       | 2.9  
|2010                  |  |       | 3.0  
|Thereafter            |  |       | 240.3

---

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

|(2) | Includes $8.5 million due under revolving credit facility.
|--- | ----------------------------------------------------------



Cash Flow



Net cash provided by operating activities



In the quarters ended July 31, 2005, and 2004, we generated cash from operating activities of $7.5 million and $9.4 million, respectively. This $1.9 million decrease in cash generated from operations is mainly the result of decreased
earnings which is primarily due to higher energy and freight costs.



Net
cash used in investing activities



In the fiscal quarters ended July 31,
2005 and 2004, we used $2.9 million and $5.2 million of cash, respectively, in investing activities. The overall reduction compared to last year was due primarily to $1.4 million less of capital expenditures in the current period together with
increased proceeds from sale of property, plant and equipment.



Net cash
used in financing activities



In the first quarter of fiscal years 2006
and 2005, we used cash in financing activities of $2.0 million and $0.3 million, respectively. This increased use of cash is primarily due to the fact that in the first quarter of fiscal 2006, we had net repayments of long-term debt of $1.8 million
as compared to net borrowings of long-term debt of $5.5 million in the first quarter of fiscal 2005. This $7.3 million negative effect on financing cash flows was offset by a $6.2 million decrease in cash overdrafts. Additionally, we did not
purchase any treasury stock in the first quarter of fiscal 2006 as compared to $0.4 million of purchases in the same quarter of fiscal 2005.



Seasonality



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



Inflation



Changes in raw material and energy prices have had, and continue to
have, a material 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, except as it relates to energy prices, it has a material effect on our
operations.



Critical Accounting Policies



Our accompanying unaudited condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information, which require management to make estimates that affect the amounts of revenues, expenses, assets and
liabilities reported. The following are critical accounting matters which are both very important to the portrayal of our financial condition and results and which require some of managements most difficult, subjective and complex judgments.
The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which, in managements judgment, could



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change in a manner that would materially affect managements future estimates with respect to such matters and, accordingly, could
cause future reported financial condition and results to differ materially from the financial condition and results reported based on managements current estimates. Changes in these estimates are recorded when better information is known.
There have been no material changes in our critical accounting policies during the three-month period ended July 31, 2005.



Pension



Our defined benefit pension plans are accounted for in accordance with SFAS No. 87, Employers Accounting for Pensions. The determination of pension obligations and expense is dependent upon our
selection of certain assumptions, the most significant of which are the expected long-term rate of return on plan assets and the discount rates used to discount plan liabilities. Our assumptions are described in Note 12 to our Annual Report on Form
10-K for the year ended April 30, 2005. The assumption for the long-term rate of return on plan assets is determined based on historical results of the portfolio and managements expectation of the current economic environment. Effective May 1,
2003, this rate of return was 8.75% and has remained at that level. At April 30, 2004, the discount rate was reduced from 6.50% to 6.25% and subsequently reduced to 5.70% on April 30, 2005. A 1.0% change in this discount rate would create an impact
to the statement of operations of approximately $1.0 million. This discount rate is based upon the demographics of the plan participants as well as benchmarking certain indices, e.g. Citigroup High Grade Credit Index as well as Aa- and Aaa-Rated
Corporate Bonds. Pension expense was $5.3 million in 2005, $6.2 million in 2004 and $4.1 million in 2003.



Goodwill



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



Accounts Receivable



Our policy with respect to trade and notes receivables is to maintain an adequate allowance or reserve for doubtful accounts for estimated losses from the inability of
our customers to make required payments. For specific accounts for which we have information that the customer may be unable to meet its financial obligation, whether or not a bankruptcy is involved, a provision is recorded at time of occurrence
(e.g. in fiscal 2004, we incurred a bad debt write-off of $3.2 million for a long-standing customer who did file for Chapter 11 protection in July 2004). For all other accounts, percentages are applied to all receivables based up the age of the
specific invoices. The older invoices (e.g., all amounts greater than 90 days) receive a larger percentage of allowance, based upon managements best estimate. Another percentage, based upon managements best estimate, is applied to the
remaining receivable balance. A total reserve is calculated in this manner and is compared to historical experience. If collections were to slow by seven days, there would be an increase in this reserve of $0.3 million. If the financial condition of
our customers were to deteriorate and result in an inability for them to make their payments, additional allowances may be required.



Income Taxes



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



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



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Impairment of Long-Lived Assets



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



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



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



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



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



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



Item 3. Qualitative And Quantitative Disclosure About Market Risk



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



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



Commodity Prices: The markets for our recovered paper products, particularly Old Corrugated Containers (OCC), are highly cyclical and affected by such
factors as global economic conditions, demand for paper, municipal recycling programs, changes in industry production capacity and inventory levels. These factors all have a significant impact on 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 ($10.0) million effect on our operating income in fiscal 2006, although this would be slightly
mitigated by our sale of recovered paper to third party customers.



Energy
prices are also highly cyclical. We estimate that a 10% increase in our energy costs with no corresponding increase in the prices of finished products would have approximately a ($6.8) million effect on our operating income in fiscal 2006. 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 have cross-currency interest rate swap agreements with two banks as described above. The 2001 Swaps have been
designated as hedges against the existing intercompany loan to our European subsidiary. At July 31, 2005, the fair value of the 2001 Swaps represented a liability of $19.0 million and the results of hedge ineffectiveness related to these swap
agreements during the three months ended July 31, 2005 and 2004 were a gain of $0.2 million and a minimal loss, respectively. There were no charges recognized for ineffectiveness in the comparable period in the prior year. We do not expect a
material amount to be reclassified from other comprehensive income to earnings to offset recognition of gains and losses on the intercompany loan in the next twelve months.



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



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



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



Item 4. Controls and Procedures.



(a) Disclosure
controls and procedures.



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



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



(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 quarter 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.



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THE NEWARK GROUP, INC. AND SUBSIDIARIES



PART
II OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None



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



Not applicable



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



| | (a) | None
| | --- | ----



| | (b) | None
| | --- | ----



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



The Annual Meeting of The Newark Groups shareholders was held on July 19, 2005, at which time the shareholders elected the following slate of nominees as the Board of Directors: Robert H. Mullen, Edward K.
Mullen, Martin A. Chooljian, Joseph S. DiMartino, Benedict M. Kohl, Fred H. Rohn and Fred G. von Zuben. There were 3,852,242 shares of outstanding capital stock of The Newark Group entitled to vote at the meeting and each of the nominees was elected
unanimously.



ITEM 5. OTHER INFORMATION



None



ITEM 6. EXHIBITS AND REPORTS



| | (a) | Exhibits:
| | --- | ---------



|10.12 | Subordinated Installment Promissory Note, dated August 10, 2005, made by The Newark Group, Inc. in favor of Frederick G. von Zuben (incorporated by reference to Exhibit 10.12 of The
Newark Groups Current Report on Form 8-K, dated August 15, 2005).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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SIGNATURES



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



|                         |  |                        |  |                                             
|------------------------ |  | ---------------------- |  | --------------------------------------------
|                         |  | THE NEWARK GROUP, INC.
|                         |  |                       
|Date: September 13, 2005 |  |                        |  |                                             
|                         |  |                       
|                         |  | By:                    |  | /s/ Robert H. Mullen                        
|                         |  |                        |  | Robert H. Mullen                            
|                         |  |                        |  | Chief Executive Officer, President and      
|                         |  |                        |  | Chairman of the Board                       
|                         |  |                        |  | (Principal Executive Officer)               
|                         |  |                       
|Date: September 13, 2005 |  |                        |  |                                             
|                         |  |                       
|                         |  | By:                    |  | /s/ Joseph E. Byrne                         
|                         |  |                        |  | Joseph E. Byrne                             
|                         |  |                        |  | Chief Financial Officer                     
|                         |  |                        |  | (Principal Financial and Accounting Officer)



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