** **

**SECURITIES AND EXCHANGE COMMISSION**Washington, D.C.20549

----

**FORM 10-Q**

| **(Mark One)**                                    |   | ** **                                                                         |
|---------------------------------------------------|--------|------------------------------------------------------------------------------------|
| **x**                                             |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES**  |
| ** **                                        |   | **EXCHANGE ACT OF 1934**                                                           |
| ** **                                        |   | ** **                                                                         |
| **For the  quarterly period ended June 30, 200**7 |
| ** **                                        |   | ** **                                                                         |
| **OR**                                            |
| ** **                                        |   | ** **                                                                         |
| o                                                 |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES** |
| ** **                                        |   | **EXCHANGE ACT OF 1934**                                                           |

** **

**Forthe transition period from                 to**

**Commissionfile number 333-40067**

**PLIANT CORPORATION**(Exactname of registrant as specified in its charter)

| **Delaware**                     |   | **43-2107725**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**1475Woodfield Road, Suite 700Schaumburg, IL 60173(847) 969-3300**(Address of principal executiveoffices and telephone number)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

Large acceleratedfiler o      Acceleratedfiler o      Non-acceleratedfiler x

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

APPLICABLE ONLY TOREGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THEPRECEDING FIVE YEARS

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Section 12, 13 or 15(d)of the Securities Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court. Yes x  No o

As of August 10, 2007 there were [100,003] outstandingshares of the Registrant’s common stock. As of August 10, 2007, persons otherthan affiliates of the Registrant held [49,871], or approximately [49.87%], ofthe outstanding shares of the Registrant’s common stock.  There is no established trading market forthe Registrant’s common stock and, therefore, the aggregate market value ofshares held by non-affiliates cannot be determined by reference to recent salesor bid and asked prices.

#  

 

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**PLIANTCORPORATION AND SUBSIDIARIESTABLE OF CONTENTS**
| PART I. FINANCIAL  INFORMATION                                                                                    |   |   |
|------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                   |   |   |
| ITEM  1. FINANCIAL STATEMENTS                                                                                          |   |   |
|                                                                                                                   |   |   |
| CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30,  2007 (Unaudited) AND DECEMBER 31, 2006                      |   | 3      |
|                                                                                                                   |   |   |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR  THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited) |   | 4      |
|                                                                                                                   |   |   |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR  THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)      |   | 5      |
|                                                                                                                   |   |   |
| CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’  DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)    |   | 6      |
|                                                                                                                   |   |   |
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)                                                      |   | 7      |
|                                                                                                                   |   |   |
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                    |   | 27     |
|                                                                                                                   |   |   |
| ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                    |   | 41     |
|                                                                                                                   |   |   |
| ITEM 4. CONTROLS AND PROCEDURES                                                                                        |   | 42     |
|                                                                                                                   |   |   |
| PART II.  OTHER INFORMATION                                                                                       |   |   |
|                                                                                                                   |   |   |
| ITEM  1. LEGAL PROCEEDINGS                                                                                             |   | 44     |
|                                                                                                                   |   |   |
| ITEM  1A. RISK FACTORS                                                                                                 |   | 44     |
|                                                                                                                   |   |   |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                                                   |   | 44     |
|                                                                                                                   |   |   |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                                                |   | 44     |
|                                                                                                                   |   |   |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                           |   | 44     |
|                                                                                                                   |   |   |
| ITEM 5. OTHER INFORMATION                                                                                              |   | 44     |
|                                                                                                                   |   |   |
| ITEM 6.  EXHIBITS                                                                                                      |   | 44     |

 

#  

2

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**PART I.   FINANCIALINFORMATION**

**ITEM1.**                    FINANCIALSTATEMENTS

**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**ASOF JUNE 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006 (DOLLARS IN THOUSANDS)**
| ** **                                                                                                                                                                                                                                                                       | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                       | ** ** | ** **              | ** ** | ** **                  | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                  |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                       |       | $                       | 8,691      |                        | $          | 4,199 |   |
| Restricted cash                                                                                                                                                                                                                                                                  |       | 22,593                  |       | —                      |       |
| Receivables, net  of allowances of $3,592 and $3,751, respectively                                                                                                                                                                                                               |       | 135,822                 |       | 140,477                     |       |
| Inventories  (Note 3)                                                                                                                                                                                                                                                            |       | 103,304                 |       | 100,103                     |       |
| Prepaid expenses  and other                                                                                                                                                                                                                                                      |       | 5,626                   |       | 7,279                       |       |
| Income taxes  receivable, net                                                                                                                                                                                                                                                    |       | 1,083                   |       | 998                         |       |
| Deferred income  taxes                                                                                                                                                                                                                                                           |       | 8,474                   |       | 13,754                      |       |
| Total current  assets                                                                                                                                                                                                                                                            |       | 285,593                 |       | 266,810                     |       |
| PLANT AND EQUIPMENT,  net                                                                                                                                                                                                                                                        |       | 313,173                 |       | 304,443                     |       |
| GOODWILL                                                                                                                                                                                                                                                                         |       | 72,385                  |       | 72,257                      |       |
| INTANGIBLE ASSETS, net                                                                                                                                                                                                                                                           |       | 11,847                  |       | 12,389                      |       |
| OTHER ASSETS                                                                                                                                                                                                                                                                     |       | 21,280                  |       | 21,858                      |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                                     |       | $                       | 704,278    |                        | $          | 677,757 |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                                                                                                  | ** ** | ** **              | ** ** | ** **                  | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                             |       |                    |       |                        |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                               |       | $                       | 23,714     |                        | $          | 975 |   |
| Trade accounts  payable                                                                                                                                                                                                                                                          |       | 94,550                  |       | 81,231                      |       |
| Accrued  liabilities:                                                                                                                                                                                                                                                            |       |                    |       |                        |       |
| Interest payable                                                                                                                                                                                                                                                                 |       | 10,218                  |       | 10,055                      |       |
| Customer rebates                                                                                                                                                                                                                                                                 |       | 6,791                   |       | 7,403                       |       |
| Other                                                                                                                                                                                                                                                                            |       | 33,657                  |       | 44,463                      |       |
| Total current  liabilities                                                                                                                                                                                                                                                       |       | 168,930                 |       | 144,127                     |       |
| LONG-TERM DEBT, net of  current portion                                                                                                                                                                                                                                          |       | 760,555                 |       | 736,656                     |       |
| OTHER LIABILITIES                                                                                                                                                                                                                                                                |       | 30,914                  |       | 29,446                      |       |
| DEFERRED INCOME TAXES                                                                                                                                                                                                                                                            |       | 22,586                  |       | 31,287                      |       |
| Total  Liabilities                                                                                                                                                                                                                                                               |       | 982,985                 |       | 941,516                     |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                                                                                                                                      |       |                    |       |                        |       |
| Redeemable  Preferred Stock—Series AA—335,650 shares authorized, par value $.01 per  share, with a redemption and liquidation value of $1,000 per share plus  accumulated dividends, 335,592 shares outstanding at June 30, 2007 and  December 31, 2006 |       | 222,353                 |       | 198,899                     |       |
| Redeemable  Preferred Stock—Series M—8,000 shares authorized, par value $.01 per  share, 8,000 shares outstanding at June 30, 2007 and no shares outstanding at  December 31, 2006                                                                           |       | —                  |       | —                      |       |
| Common stock—par  value $.01 per share; 100,050,000 shares authorized, 100,003 shares  outstanding at June 30, 2007 and December 31, 2006                                                                                                                         |       | 1                       |       | 1                           |       |
| Paid in capital                                                                                                                                                                                                                                                                  |       | 155,341                 |       | 154,521                     |       |
| Accumulated  deficit                                                                                                                                                                                                                                                             |       | (639,734                | )          | (598,934                    | )          |
| Accumulated other  comprehensive loss                                                                                                                                                                                                                                            |       | (16,668                 | )          | (18,246                     | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                |       | (278,707                | )          | (263,759                    | )          |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                                 |       | $                       | 704,278    |                        | $          | 677,757 |   |

 

** **

**See notesto condensed consolidated financial statements.**

3

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**PLIANT CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (IN THOUSANDS)(UNAUDITED)**

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                    | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| NET SALES                                                     |       | $                                | 277,036    |                           | $          | 289,073 |   | $ | 537,428 |   | $ | 586,729 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| COST OF SALES                                                 |       | 241,418                          |       | 252,118                        |       | 467,374 |   | 515,425 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Gross Profit                                                  |       | 35,618                           |       | 36,955                         |       | 70,054 |   | 71,304 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| OPERATING  EXPENSES:                                          |       |                             |       |                           |       |   |   |   |   |
| Sales, General and Administrative                             |       | 16,513                           |       | 17,831                         |       | 36,051 |   | 35,931 |   |
| Research and Development                                      |       | 3,136                            |       | 2,304                          |       | 6,201 |   | 4,602 |   |
| Restructuring and Other Costs (Note 4)                        |       | 451                              |       | 15                             |       | 1,859 |   | 30 |   |
| Reorganization Cost (Note 2)                                  |       | 426                              |       | 10,271                         |       | 697 |   | 63,821 |   |
| Other operating costs (Note 13)                               |       | —                           |       | —                         |       | 1,101 |   | — |   |
| Total operating expenses                                      |       | 20,526                           |       | 30,421                         |       | 45,909 |   | 104,384 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| OPERATING INCOME  (LOSS)                                      |       | 15,092                           |       | 6,534                          |       | 24,145 |   | (33,080 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| INTEREST EXPENSE—Current  and Long-term debt (Note 5, 6) |       | (20,959                          | )          | (20,499                        | )          | (42,133 | ) | (40,340 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| INTEREST  EXPENSE—Redeemable Preferred Stock             |       | —                           |       | —                         |       | — |   | (271 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| OTHER INCOME  (EXPENSE)—Net                              |       | (38                              | )          | (11                            | )          | 313 |   | 137 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| LOSS BEFORE  INCOME TAXES                                     |       | (5,905                           | )          | (13,976                        | )          | (17,675 | ) | (73,554 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| INCOME TAX  EXPENSE (BENEFIT)                                 |       | (295                             | )          | 13                             |       | 383 |   | 1,242 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| NET LOSS                                                      |       | $                                | (5,610     | )                              | $          | (13,989 | ) | $ | (18,058 | ) | $ | (74,796 | ) |

** **

**See notesto condensed consolidated financial statements.**

#  

4

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**PLIANT CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW**

**FORTHE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (IN THOUSANDS) (UNAUDITED)**

 
| ** **                                                                            | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **June  30,**                  | ** ** |
| ** **                                                                            | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                |       |                           |       |   |   |
| Net loss                                                                              |       | $                              | (18,058    | ) | $ | (74,796 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                        |       | 23,109                         |       | 20,012 |   |
| Amortization of  deferred financing costs and accretion of debt discount              |       | 20,178                         |       | 18,621 |   |
| Deferred  dividends and accretion on preferred shares                                 |       | —                         |       | 271 |   |
| Write off of  deferred financing costs                                                |       | —                         |       | 15,777 |   |
| Write off of  original issue debt discount and premium                                |       | —                         |       | 30,453 |   |
| Deferred income  taxes                                                                |       | (3,593                         | )          | (331 | ) |
| (Gain) / loss on  disposal of assets                                                  |       | 32                             |       | 28 |   |
| Non cash other  operating costs                                                       |       | 664                            |       | — |   |
| Changes in  assets and liabilities:                                                   |       |                           |       |   |   |
| Receivables                                                                           |       | 5,660                          |       | (5,830 | ) |
| Inventories                                                                           |       | (2,471                         | )          | 478 |   |
| Prepaid expenses  and other                                                           |       | 1,772                          |       | 1,013 |   |
| Income taxes  payable/receivable                                                      |       | 42                             |       | 591 |   |
| Other assets                                                                          |       | (430                           | )          | 6,519 |   |
| Trade accounts  payable                                                               |       | 12,684                         |       | 11,784 |   |
| Accrued  liabilities                                                                  |       | (14,404                        | )          | 18,166 |   |
| Other  liabilities                                                                    |       | 4,940                          |       | 9 |   |
| Net cash  provided by operating activities                                            |       | 30,125                         |       | 42,765 |   |
|                                                                                  |       |                           |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                |       |                           |       |   |   |
| Capital  expenditures for plant and equipment                                         |       | (24,041                        | )          | (18,364 | ) |
| Net cash used in  investing activities                                                |       | (24,041                        | )          | (18,364 | ) |
|                                                                                  |       |                           |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                |       |                           |       |   |   |
| Proceeds from  issuance of preferred stock                                            |       | 157                            |       | — |   |
| Payment of  financing fees                                                            |       | (1,559                         | )          | (1,652 | ) |
| Repayment of  capital leases and other, net                                           |       | (290                           | )          | (946 | ) |
| Restricted cash  deposits with trustee                                                |       | (22,593                        | )          | — |   |
| Issuance of  senior subordinated notes                                                |       | 24,000                         |       | — |   |
| Net cash used in  financing activities                                                |       | (285                           | )          | (2,598 | ) |
| EFFECT OF EXCHANGE RATE  CHANGES ON CASH AND CASH EQUIVALENTS                         |       | (1,307                         | )          | (882 | ) |
| NET INCREASE IN CASH  AND CASH EQUIVALENTS                                            |       | 4,492                          |       | 20,921 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF THE PERIOD                                   |       | 4,199                          |       | 12,802 |   |
| CASH AND CASH  EQUIVALENTS, END OF THE PERIOD                                         |       | $                              | 8,691      |   | $ | 33,723 |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                   |       |                           |       |   |   |
| Cash paid during  the period for:                                                     |       |                           |       |   |   |
| Interest                                                                              |       | 20,282                         |       | 6,700 |   |
| Income taxes                                                                          |       | 1,000                          |       | 626 |   |
| Supplemental  schedule of non-cash investing and financing activities:                |       |                           |       |   |   |
| Preferred Stock  dividends accrued but not paid                                       |       | —                         |       | 257 |   |
| Plant and equipment  acquired under capital leases                                    |       | 4,998                          |       | — |   |

 

** **

**See notesto condensed consolidated financial statements.**

** **

5

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**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT**

**FORTHE SIX MONTHS ENDED JUNE 30, 2007 (IN THOUSANDS) (UNAUDITED)**

 
| ** **                               | ** ** | ** ** | ** ** | **Preferred Stock** | ** ** | **Common Stock**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|--------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | ** ** | ** ** | **Series AA**       | ** ** | **Series M** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumu-** | ** ** |
| ** **                               | ** ** | ** ** | ** ** | ** **               | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **lated** | ** ** |
| ** **                               | ** ** | ** ** | ** ** | ** **               | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Other** | ** ** |
| ** **                               | ** ** | ** ** | ** ** | ** **               | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumu-** | ** ** | **Compre-** | ** ** |
| ** **                               | ** ** | ** ** | ** ** | ** **               | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Paid In ** | ** ** | **lated** | ** ** | **hensive** | ** ** |
| ** **                               | ** ** | **Total**  | ** ** | **Shares**               | ** ** | **Amount**        | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Loss** | ** ** |
| BALANCE-December 31,  2006          |       | $          | (263,759   | )                        | 335        |              | $          | 198,899    |       | —     |       | $ | — |   | 100 |   | $ | 1 |   | $ | 154,521 |   | $ | (598,934 | ) | $ | (18,246 | ) |
| Cumulative effect  of adoption of FIN 48 |       | 712        |       |                     |       |              |       |       |       |       |       |   |   |   |   |   |   | 712 |   |   |   |
| Adjusted Balance  January 1, 2007        |       | $          | (263,047   | )                        | 335        |              | $          | 198,899    |       | —     |       | $ | — |   | 100 |   | $ | 1 |   | $ | 154,521 |   | $ | (598,222 | ) | $ | (18,246 | ) |
| Comprehensive  loss:                     |       |       |       |                     |       |              |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                 |       | (18,058    | )          |                     |       |              |       |       |       |       |       |   |   |   |   |   |   | (18,058 | ) |   |   |
| Foreign currency translation adjustment  |       | 1,578      |       |                     |       |              |       |       |       |       |       |   |   |   |   |   |   |   |   | 1,578 |   |
| Comprehensive  loss:                     |       | (16,480    | )          |                     |       |              |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Issuance of  Series M Preferred Stock    |       | 820        |       |                     |       |              |       | 8          |       | —     |       |   |   |   |   | 820 |   |   |   |   |   |
| Preferred stock  dividends               |       | —     |       |                     |       | 23,454            |       |       |       |       |       |   |   |   |   |   |   | (23,454 | ) |   |   |
|                                     |       | $          | (278,707   | )                        | 335        |              | $          | 222,353    |       | 8          |       | $ | — |   | 100 |   | $ | 1 |   | $ | 155,341 |   | $ | (639,734 | ) | $ | (16,668 | ) |

 

#  

**See notesto condensed consolidated financial statements.**

 

6

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**PLIANTCORPORATION AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**1.   BASIS OFPRESENTATION**

*The unaudited interim condensed consolidated financialstatements of*Pliant Corporation and its subsidiaries(collectively “Pliant”, the “Company” or ”we”) *were prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”),*and pursuant to the rules and regulations of theSecurities and Exchange Commission (the “SEC”). The information reflects all normal recurring adjustments that, in theopinion of management, are necessary for a fair presentation of the financialposition, results of operations and cash flows of Pliant as of the dates andfor the periods presented.

Certain information infootnote disclosures normally included in financial statements presented inaccordance with GAAP has been condensed or omitted in accordance with therules and regulations of the SEC. These statements should be read inconjunction with the Company’s Annual Report on Form 10-K for theyear ended December 31, 2006.

*Nature of operations*   TheCompany produces polymer-based (plastic), value-added films for flexiblepackaging, personal care, medical, agricultural and industrial applications.Our manufacturing facilities are located in the United States, Canada, Mexico,Germany and Australia.

*Chapter 11 BankruptcyProceedings and Reorganization*   The Company andten of its subsidiaries filed for protection under Chapter 11 of Title 11 ofthe U.S. Bankruptcy Code (the “Bankruptcy Code”) in January 2006. OnJune 19, 2006, the Company filed with the United States Bankruptcy Courtfor the District of Delaware (the “Bankruptcy Court”) its Fourth Amended JointPlan of Reorganization (the “Plan” or “Plan of Reorganization”) which wasapproved by the Bankruptcy Court on June 23, 2006. On July 18, 2006,the Company consummated its reorganization through a series of transactionscontemplated in the Plan and emerged from bankruptcy.  We have worked diligently in an effort toanalyze each of the claims filed in our Chapter 11 cases, and have already madesignificant progress in reconciling such claims with our books and records. SeeNote 2 to the Financial Statements for more detailed information on ouremergence from bankruptcy.

American Instituteof Certified Public Accountants Statement of Position 90-7, “FinancialReporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”),applies to the Company’s financial statements while the Company operates underthe provisions of Chapter 11. SOP 90-7 generally does not change the manner inwhich financial statements are prepared. However, it does require that thefinancial statements for periods subsequent to the filing of the Chapter 11petition distinguish transactions and events that are directly associated withthe reorganization from the ongoing operations of the business. Expenses,realized gains and losses, and provisions for losses that can be directlyassociated with the reorganization of the business are reported separately asreorganization costs in the statements of operations. Liabilities affected byimplementation of a plan of reorganization are reported at amounts expected tobe allowed, even if they may be settled for lesser amounts. In addition,reorganization related items that significantly impact cash provided bycontinuing operations are disclosed separately in the statement ofcash flows.

7

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**2.**   REORGANIZATION

**On January 3, 2006, Pliant and ten subsidiaries filedvoluntary petitions in the Bankruptcy Court seeking relief under theBankruptcy Code. Three of the Company’s subsidiaries with Canadian operationscommenced ancillary proceedings in a Canadian court to recognize theChapter 11 bankruptcy proceedings as “foreign proceedings.”  TheCompany’s operations in Mexico, Germany, and Australia were not included in theChapter 11 filing. For additional information regarding ourreorganization, see Part I, Item 1 “Business — Chapter 11 BankruptcyProceedings and Reorganization” and Part II, Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operation” in theCompany’s Annual Report on Form 10-K for year ending December 31, 2006.**

On June 19,2006, we filed with the Bankruptcy Court our Plan which was approved by theBankruptcy Court on June 23, 2006. On July 18, 2006, we consummatedour reorganization through a series of transactions contemplated in the Planand we filed with the Bankruptcy Court a notice announcing the effectiveness ofthe Plan.

Pursuant to thePlan, on July 18, 2006, we effected the following transactions:

·         changedour state of incorporation from Utah to Delaware;

·         extinguishedour Series B Preferred Stock, no par value (“Series B Preferred Stock”);

·         issued(i) an aggregate principal amount of $34,967,000 of 13% SeniorSubordinated Notes due 2010 (the “2006 Subordinated Notes”), (ii) 335,592 shares of Series AA Redeemable Preferred Stock, parvalue $.01 per share (“Series AA Preferred Stock”), and (iii) 100,003shares of new common stock, par value $.01 per share (“Common Stock”) inexchange for (A) all of our 13% Senior Subordinated Notes due 2010 (the “2000/2002Notes”), (B) all of our Series A Cumulative Exchangeable RedeemablePreferred Stock, no par value (the “Series A Preferred Stock”),(C) our existing common stock, par value $.01 per share  (“Old Common Stock”) and (D) warrants topurchase our Old Common Stock;

·         madecash payments to the applicable trustee of (A) $3,200,000 for furtherdistribution to the holders of the 2000/2002 Notes and (B) $18,529,375.55($4 million of which was a consent fee and the balance of which was the missedMarch 1, 2006 interest payment and the interest owed on that interestpayment) for further distribution to the holders of our 111¤8% SeniorSecured Notes due 2009 (the “2003 Notes”) and reinstated the 2003 Notes;

·         reinstatedour 11.35% (formerly 111¤8%)Senior Secured Discount Notes due 2009 (the “2004 Notes”) and our 11.85%(formerly 115¤8%) Senior Secured Notes due 2009 (the “Amended 2004 Notes”) and increased theinterest rate on the 2004 Notes and the Amended 2004 Notes by .225%;

·         enteredinto (i) a Working Capital Credit Agreement, among the Company, certain ofits subsidiaries, the lenders party thereto, Merrill Lynch Bank USA, asadministrative agent, and Merrill Lynch Commercial Finance Corp., as sole leadarranger and book manager (the “Working Capital Credit Agreement”), and(ii) a Fixed Asset Credit Agreement, among Pliant Corporation Pty Ltd.,Pliant Corporation of Canada Ltd., Pliant Film Products GmbH and AspenIndustrial, S.A. de C.V., as borrowers, the lenders party thereto, MerrillLynch Bank USA, as administrative agent, and Merrill Lynch Commercial FinanceCorp., as sole lead arranger and book manager (the “Fixed Asset CreditAgreement, and together with the Working Capital Credit Agreement, the “RevolvingCredit Facilities”) to replace the amended revolving credit facility datedNovember 21, 2005 (the “Amended and Restated Credit Agreement”) and theSenior Secured, Super Priority, Priming Debtor-in-Possession Credit Agreementdated as of January 4, 2006 (the “DIP Credit Facility”); and

·         enteredinto a Stockholders’ Agreement dated July 18, 2006 (the “Stockholders’Agreement”) with respect to the Common Stock and a Registration RightsAgreement dated July 18, 2006 (the “Registration Rights Agreement”) withrespect to the Series AA Preferred Stock.

 

As a result, theprior credit facilities, the indenture dated May 31, 2000 governing the2000 Notes (the “2000 Indenture”) and the indenture dated April 10, 2002governing the 2002 Notes (the “2002 Indenture”) were terminated, except, withrespect to the indentures, to the extent necessary to permit the trustee undersuch indentures to make distributions to the holders of the 2000/2002 Notesunder the Plan. In addition, on July 18, 2006, the Company’s Deferred CashIncentive Plan (the “Cash Plan”) and 2006 Restricted Stock Incentive Plan (the “StockPlan”), became effective.

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As referencedabove, the Company completed a debt for equity exchange whereby 100% of itsoutstanding $320 million of 2000/2002 Notes and $24.3 million in accruedinterest were exchanged for 265,123 shares or 79% of its new Series AAPreferred Stock, approximately 30,000 shares or 30% of its Common Stock, $3.2million in cash consideration and approximately $35 million in 2006Subordinated Notes. Pursuant to SFAS 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring, these$35 million of 2006 Subordinated Notes were recorded at aggregate principalplus interest to maturity of $20.1 million or a total of $55.1 million. Inaddition, 100% of the $ 298.0 million of shares subject to mandatoryredemption, including the Company’s Series A Preferred Stock were alsoexchanged for shares of its new Series AA Preferred Stock and shares ofits Common Stock. The fair market value of equity received in connection withthese exchanges was approximately $182.3 million. See Item 2 “Management’sDiscussion and Analysis of Financial Conditions and Results of Operations —Liquidity and Capital Resources” below for additional information regarding theRevolving Credit Facilities, the 2006 Subordinated Notes, the 2004 Notes and theAmended 2004 Notes.

On July 18,2006, the Company entered into the Stockholders’ Agreement that is binding onall parties receiving shares of Common Stock, pursuant to the terms of thePlan. The Stockholders’ Agreement provides for certain restrictions on transferof the Common Stock and requires that all transferees of Common Stock become aparty to the Stockholders’ Agreement. The Stockholders’ Agreement also grantsto certain holders of Common Stock the right to purchase their pro rata shareof any new equity securities issued by the Company, subject to exceptions foracquisitions, management equity and certain other transactions. TheStockholders’ Agreement contains “drag-along rights” that require all holdersof Common Stock to participate in and vote in favor of certain sales of theCompany approved by the Board of Directors and certain holders of Common Stock.It further provides that the 5 (out of a total of 7) members of the Board ofDirectors to be elected by the holders of Common Stock will consist of theChief Executive Officer of the Company and 4 members designated by the holdersof a majority of the Common Stock held by persons defined as “permitted holders”under the indentures for the 2003 Notes, 2004 Notes and Amended 2004 Notes.Finally, the Stockholders’ Agreement provides that certain holders of CommonStock will have demand registration rights after July 18, 2009 andadditional demand and piggyback registration rights following an initial publicoffering of the Common Stock.

On July 18, 2006,the Company also entered into the Registration Rights Agreement that is bindingon all parties receiving shares of Series AA Preferred Stock, pursuant tothe terms of the Plan. The Registration Rights Agreement requires the Companyto take all actions reasonably required to permit the Series AA PreferredStock to be quoted on the NASDAQ OTC Bulletin Board (“OTCBB”) as soon aspracticable. The Registration Rights Agreement also provides that, at any timeafter the ninth month and prior to the second anniversary of the effective dateof the Plan, certain holders of the Series AA Preferred Stock can requirePliant to register an underwritten public offering of the Series AAPreferred Stock.

On August 1,2007, the Company’s Series AA Preferred Stock began to be quoted on theOTCBB.

The Companyadopted the Stock Plan on July 18, 2006, which provides for the issuanceto the Chief Executive Officer and other officers of the Company ofSeries M Preferred Stock, par value $.01 per share (“Series M Preferred Stock”)that, when combined with awards under the Cash Plan, will entitle such officersto a maximum of 8% of the equity value of the Company, in the aggregate.Participants in the Stock Plan and Cash Plan will only receive distributionsupon the occurrence of certain extraordinary corporate transactions, such as asale of all or substantially all of the Company’s assets or a change in controlof the Company. The Stock Plan and Cash Plan are administered by theCompensation Committee of the Company’s Board of Directors composed ofnon-employee directors. On February 20, 2007, the Company issued 8,000shares of its Series M Preferred Stock, to certain of its officerspursuant to its Stock Plan.

#  

9

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TheCompany incurred professional fees and other expenses directly associated withthe bankruptcy proceedings. In addition, the Company made certain adjustmentsto the carrying values of certain pre-petition assets and liabilities. Suchcosts and adjustments are classified as financial restructuring items in theaccompanying condensed consolidated statements of operations for the three andsix months ended June 30 and consist of the following (in thousands):
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                 | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Debt subject to compromise:**                            | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Write-off of  unamortized original issuance, discount, net |       | $                                | —     |                           | $          | — |   | $ |   |   | $ | 5,856 |   |
| Write-off of  unamortized capitalized financing fees       |       | —                           |       | —                         |       |   |   | 15,777 |   |
|                                                       |       | —                           |       | —                         |       |   |   | 21,633 |   |
| **Manditorily Redeemable  Preferred Stock**                | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Write-off of  unamortized original issuance discount       |       | —                           |       | —                         |       |   |   | 24,597 |   |
| **Professional fees and claim  settlements**               |       | 426                              |       | 10,271                         |       | 697 |   | 17,591 |   |
| **Reorganization Costs**                                   |       | $                                | 426        |                           | $          | 10,271 |   | $ | 697 |   | $ | 63,821 |   |

 

**3.   INVENTORIES**

Inventoriesare valued at the lower of cost (using the first-in, first-out method) ormarket value. Inventories as of June 30, 2007 and December 31, 2006consisted of the following (in thousands):
| ** **      | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished goods  |       | $                       | 51,522     |                        | $          | 45,564 |   |
| Raw materials   |       | 42,219                  |       | 44,656                      |       |
| Work-in-process |       | 9,563                   |       | 9,883                       |       |
| Total           |       | $                       | 103,304    |                        | $          | 100,103 |   |

 

**4.   RESTRUCTURING AND OTHER COSTS**

Restructuringand other costs include plant closing costs (including costs related torelocation of manufacturing equipment), office closing costs and other costsrelated to workforce reductions.

Thefollowing table summarizes restructuring and other costs for the three and sixmonths ended June 30 (in thousands):
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                         | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                               |       |                             |       |                           |       |   |   |   |   |
| **Plant  closing costs:**                          | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Severance                                          |       | $                                | 65         |                           | $          | — |   | $ | 235 |   | $ | — |   |
| Other plant closure costs                          |       | 255                              |       | 15                             |       | 277 |   | 30 |   |
| **Office  closing and workforce reduction costs:** | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Severance                                          |       | 108                              |       | —                         |       | 1,324 |   | — |   |
| Other                                              |       | 23                               |       | —                         |       | 23 |   | — |   |
| **Total Restructuring and other  costs**           |       | $                                | 451        |                           | $          | 15 |   | $ | 1,859 |   | $ | 30 |   |

 

10

 

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Thefollowing table summarizes the roll-forward of the accruals fromDecember 31, 2006 to June 30, 2007 (in thousands, except foremployees): 
| ** **                                           | ** **   | ** **           | ** **   | ** **   | ** ** | **Accruals for the six months ended  June 30, 2007** | ** ** | ** **    | ** ** | ** **  | ** **   | ** **   | ** **   |
|------------------------------------------------------|--------------|----------------------|--------------|--------------|------------|-----------------------------------------------------------------------------------------|------------|---------------|------------|-------------|--------------|--------------|--------------|
| ** **                                           | ** **   | ** **           | ** **   | ** **   | ** ** | ** **                                                                              | ** ** | ** **    | ** ** | **Other**   | ** **   | ** **   | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** **   | **12/31/2006**       | ** **   | ** **   | ** ** | ** **                                                                              | ** ** | **Plant**     | ** ** | ** **  | ** **   | ** **   | ** **   | **6/30/2007** | ** ** |
| ** **                                           | ** **   | **# Employees** | ** **   | **Accrual**  | ** ** | **Additional**                                                                          | ** ** | ** **    | ** ** | **Closure** | ** **   | ** **   | ** **   | **Payments/** | ** ** | **# Employees** | ** ** | **Accrual** | ** ** |
| ** **                                           | ** **   | **Terminated**       | ** **   | **Balance**  | ** ** | **Employees**                                                                           | ** ** | **Severance** | ** ** | **Costs**   | ** **   | **Total**    | ** **   | **Charges** | ** ** | **Terminated** | ** ** | **Balance** | ** ** |
| ***Plant  Closing Costs:***                          |         |                 |         |         |       |                                                                                    |       |          |       |        |         |         |         |   |   |   |   |   |   |
| Leases                                               |         | —               |         | 2,430        |       | —                                                                                  |       | —        |       | 84          |         | 84           |         | (1,577 | ) | — |   | 937 |   |
| Langley                                              |         | —               |         | —       |       | —                                                                                  |       | —        |       | 104         |         | 104          |         | (104 | ) | — |   | — |   |
| Barrie                                               |         | —               |         | —       |       | 19                                                                                      |       | 235           |       | 89          |         | 324          |         | (283 | ) | 19 |   | 41 |   |
|                                                 |         | —               |         | $            | 2,430      |                                                                                    | 19         |          | 235        |        | 277          |         | $            | 512 |   | $ | (1,964 | ) | 19 |   | $ | 978 |   |
| ***Office  Closing and Workforce Reduction Costs:*** | *** *** | *** ***         | *** *** | *** *** |       |                                                                                    |       |          |       |        | *** *** | *** *** | *** *** | *** *** |   |   | *** *** | *** *** | *** *** |
| Canada                                               |         | —               |         | —       |       | 7                                                                                       |       | 1,324         |       | 23          |         | 1,347        |         | (1,347 | ) | 7 |   | — |   |
|                                                 |         | —               |         | $            | —     |                                                                                    | 7          |          | $          | 1,324       |         | 23           |         | $ | 1,347 |   | $ | (1,347 | ) | 7 |   | $ | — |   |
| **Total Plant &  Office closing**      |         | —               | ** **   | **$**        | **2,430**  | ** **                                                                              | **26**     | ** **    | **$**      | **1,559**   | ** **   | **$**        | **300**      | ** ** | **$** | **1,859** | ** ** | **$** | **(3,311** | **)** | **26** | ** ** | **$** | **978** | ** ** |
|                                                      |              |                      |              |              |            |                                                                                         |            |               |            |             |              |              |              |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Plant Closing Costs***

***2007—***During the first quarter of 2007, weannounced the closure of our Barrie, Ontario and Langley, British Columbiaplants and the restructuring of our Canadian administrative functions. Ourtotal estimated costs include $1.3 million of severance costs related to ourEngineered Films segment, $8.2 million of severance and plant closing costsrelated to our Printed Products segment and $0.5 million of severance costsrelated to our Industrial Films segment. We incurred $0.3 million and $0.1million relating to severance and other plant closing costs in connection withthe shutdown of Barrie and Langley facilities, respectively and $1.3 million inconnection with the restructuring of the Canadian sales and administrativefunctions. $0.9 million of these restructuring charges relate to our EngineeredFilms segment, $0.4 million relate to our Industrial Films segment and $0.1million relate to our Printed Products segment.

***2006—***No restructuring activities were initiatedin the first six months of 2006.

***2005—***During 2005, the Company accrued $1.9million for the net costs to terminate the remaining lease agreementsassociated with its Shelbyville, Indiana facility. During the first quarter of2007, payments of $1.5 million were made to complete the buy out of theremaining obligations under these leases.

***2003—***During 2003, the Company accrued the presentvalue of future lease payments on three buildings it no longer occupied in anamount of $3.3 million. As of June 30, 2007, $0.9 million of these accruals areremaining.

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***5.   DEBT***

Debtas of June 30, 2007 and December 31, 2006 consists of the following (inthousands):
| ** **                        | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Credit  Facilities:               |       |                    |       |                        |       |
| Revolving credit  facility        |       | $                       | 113,579    |                        | $          | 113,579 |   |
| Amended 2004  Notes               |       | 320,298                 |       | 302,382                     |       |
| 2004 Notes                        |       | 7,816                   |       | 7,808                       |       |
| 2003 Notes                        |       | 250,000                 |       | 250,000                     |       |
| 2006  Subordinated Notes(a)       |       | 55,101                  |       | 55,101                      |       |
| 2007  Subordinated Notes          |       | 24,000                  |       | —                      |       |
| Obligations  under capital leases |       | 13,475                  |       | 8,761                       |       |
| Total                             |       | 784,269                 |       | 737,631                     |       |
| Less current  portion             |       | (23,714                 | )          | (975                        | )          |
| Long-term portion                 |       | $                       | 760,555    |                        | $          | 736,656 |   |

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(a) Onor about July 16, 2007, the 2006 Subordinated Notes were redeemed for anaggregate principal and interest amount of $22,592,777.78 and the differencebetween this amount and the carrying value of $55,100,884 or $32,508,107, hasbeen recognized as a gain on extinguishment of debt in the third quarter of2007.

For detaildescriptions of our debt facilities see Item 2 “Management’s Discussion andAnalysis of Financial Conditions and Results of Operations — Liquidity andCapital Resources” presented later in this report and in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006.

*2007 Subordinated Notes*

On June 14, 2007,the Company entered into an Indenture (the “2007 Subordinated Note Indenture”)among the Company, Pliant Corporation International, Pliant Film Products ofMexico, Inc., Pliant Packaging of Canada, LLC, Pliant Solutions Corporation, UniplastHoldings, Inc., Uniplast U.S., Inc. and Uniplast Industries Co., as guarantors(collectively, the “2007 Subordinated Note Guarantors”), and The Bank of NewYork Trust Company, N.A. (the “2007 Subordinated Note Trustee”), as trustee,with respect to the issuance on such date of the Company’s 18% SeniorSubordinated Notes due 2012 in an aggregate principal amount of $24,000,000(the “2007 Subordinated Notes”). The 2007 Subordinated Note Indenture providesthat interest will accrue on the 2007 Subordinated Notes from the date ofissuance at the rate of 18% per annum until maturity on July 15, 2012 and willbe payable semi-annually on each January 15 and July 15, commencing July 15,2007, to holders of record of the 2007 Subordinated Notes on the immediatelypreceding January 1 or July 1. Pursuant to the 2007 Subordinated NoteIndenture, the Company may redeem the 2007 Subordinated Notes in whole or inpart at the applicable redemption price, which in each of the first four yearsis equal to a de-escalating premium over par, plus accrued and unpaid interestto the redemption date, as set forth in the 2007 Subordinated Notes. The 2007Subordinated Note Indenture provides the holders of the 2007 Subordinated Noteswith the right to require the Company to repurchase the 2007 Subordinated Notesat a repurchase price equal to the then applicable redemption price plusaccrued and unpaid interest upon a change of control of the Company (as definedin the 2007 Subordinated Note Indenture). The 2007 Subordinated Note Indenturedoes not provide for a sinking fund with respect to the 2007 SubordinatedNotes. The 2007 Subordinated Note Indenture contains customary provisions thatmay result in an event of default, after notice and expiration of a cure periodin certain circumstances, and acceleration of the indebtedness thereunder,including failure to timely pay principal and interest on the 2007 SubordinatedNotes or comply with the covenants set forth in the 2007 Subordinated NoteIndenture. The 2007 Subordinated Note Trustee also acts as trustee with respectto the Company’s 2006 Subordinated Notes (as defined below).

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The 2007Subordinated Note Indenture contains various covenants including, among otherthings, covenants limiting the incurrence of indebtedness and restrictingcertain payments, limiting restrictions on the ability of subsidiaries to makedistributions to the Company, limiting sales of assets and subsidiary stock andthe entry into affiliate transactions, as well as provisions governing mergerand change of control transactions. The Company may be required under certaincircumstances to offer to repurchase 2007 Subordinated Notes with the proceedsof certain asset sales. Upon a change of control transaction, holders of 2007Subordinated Notes may require the Company (subject to certain exceptions) torepurchase 2007 Subordinated Notes at a purchase price equal to 101% of theprincipal amount plus accrued and unpaid interest. The 2007 Subordinated Noteswill automatically become due and payable without notice upon the occurrence ofan event of default involving insolvency or bankruptcy of the Company orcertain of its subsidiaries. In addition, upon the occurrence and during thecontinuation of any other event of default under the 2007 Subordinated Note Indenture,by notice given to the Company, the Trustee or holders of at least 25% inprincipal amount of the 2007 Subordinated Notes may declare the principal ofand accrued and unpaid interest on all the 2007 Subordinated Notes to beimmediately due and payable.

In connection witha private offering of the 2007 Subordinated Notes, the Company entered into aPurchase Agreement on June 14, 2007 with the purchasers of the 2007Subordinated Notes, pursuant to which, among other things, the Company agreedto sell to the purchasers, and the purchasers agreed to purchase from theCompany, the 2007 Subordinated Notes. One of the purchasers, UBS Willow Fund,LLC, has disclosed on a Schedule 13G filed December 31, 2006 that, togetherwith its affiliates, it may be deemed to be the beneficial owner of in excessof 10% of the Company’s Series AA Preferred Stock. In addition, another of thepurchasers, Goldman, Sachs & Co., performs investment banking services forthe Company and acted as placement agent in connection with the 2007Subordinated Notes.

On June 14, 2007,the Company and/or certain of its subsidiaries entered into Amendment No. 2 tothe Working Capital Credit Agreement  toallow for the incurrence of indebtedness under the 2007 Subordinated Note Indenture,including payment of regularly scheduled interest with respect to suchindebtedness, in replacement of indebtedness under the 2006 Subordinated NoteIndenture (as defined below).

*2006  Subordinated Notes*

On July 18,2006, the Company, certain of its subsidiaries as guarantors of the Company(the “2006 Subordinated Note Guarantors”) and The Bank of New York TrustCompany, N.A. (the “2006 Subordinated Note Trustee”), as trustee, entered intoan Indenture, dated as of July 18, 2006 (the “2006 Subordinated Note Indenture”),among the Company, the 2006 Subordinated Note Guarantors and the 2006Subordinated Note Trustee with respect to the issuance on such date of the 2006Subordinated Notes in an aggregate principal amount of $34,967,000.

Pursuant to SFAS15,*Accounting for Debtors and Creditors forTrouble Debt Restructuring*, the 2006 Subordinated Notes wererecorded at aggregate principal plus interest to maturity of $20.1 million or atotal of $55.1 million. The 2006 Subordinated Note Indenture provides thatinterest will accrue on the 2006 Subordinated Notes from the date of issuanceat the rate of 13% per annum until maturity on July 15, 2010 and will bepayable semi-annually on the 2006 Subordinated Notes on each January 15and July 15, commencing January 15, 2007, to holders of record on theimmediately preceding January 1 or July 1. The 2006 SubordinatedNotes were scheduled to accrue payment-in-kind interest with respect to thefirst two interest payment dates and then accrue semi-annual cash pay interestwith respect to the interest payment dates thereafter. However, the 2006Subordinated Notes were subject to the Company’s right, which was exercised onJune 14, 2007, to refinance the 2006 Subordinated Notes during the first yearafter issuance by tendering to the holders of all the 2006 Subordinated Notescash in an amount equal to (i) $20,000,000 plus (ii) interest accruedat a rate of 13% per annum from the date of issuance through the date ofpayment on a principal amount of $20,000,000 minus (iii) any interestpreviously paid in cash on the 2006 Subordinated Notes.

On June 14, 2007,the 2006 Subordinated Note Trustee issued, on behalf of the Company, a noticeto the holders of the 2006 Subordinated Notes stating that, on July 16, 2007(the “Redemption Date”), the entire $39,620,102 aggregate principal amount of2006 Subordinated Notes outstanding on the Redemption Date will 

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be redeemed. In accordance with the 2006 SubordinatedNote Indenture, the aggregate redemption price for the 2006 Subordinated Notesis $20,000,000 plus accrued interest thereon from July 18, 2006 through theRedemption Date in the amount of $2,592,777.78. The Company deposited with the2006 Subordinated Note Trustee, in its capacity as paying agent under the 2006Subordinated Note Indenture, funds provided solely from the issuance of the2007 Subordinated Notes sufficient to redeem the 2006 Subordinated Notes andthe 2006 Subordinated Note Trustee has acknowledged satisfaction and dischargeof the 2006 Subordinated Note Indenture. These deposited funds are separatelydisclosed as restricted cash on the Company’s accompanying CondensedConsolidated Balance Sheet as of June 30, 2007. On or about July 16, 2007, the2006 Subordinated Notes were redeemed for an aggregate principal and interestamount of $22,592,777.78 and the difference between this amount and thecarrying value of $55,100,884, or $32,508,107, has been recognized as a gain onextinguishment of debt in the third quarter of 2007.

**6.   INTEREST EXPENSE—Current and Long-termdebt**

Interestexpense—current and long-term debt in the statements of operations for thethree and six months ended June 30, 2007 and 2006 is as follows (in thousands):
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest  expense, net                    |       |                             |       |                           |       |   |   |   |   |
| Revolving credit facilities               |       | $                                | 2,235      |                           | $          | 2,534 |   | $ | 4,449 |   | $ | 5,055 |   |
| 2007 Notes                                |       | 192                              |       | —                         |       | 192 |   | — |   |
| Amended 2004 Notes                        |       | 9,002                            |       | 7,840                          |       | 17,916 |   | 15,681 |   |
| 2004 Notes                                |       | 222                              |       | 195                            |       | 443 |   | 390 |   |
| 2003 Notes                                |       | 6,953                            |       | 6,953                          |       | 13,906 |   | 13,906 |   |
| 2000/2002 Notes(a)                        |       | —                           |       | —                         |       | — |   | 471 |   |
| Other, net                                |       | 1,174                            |       | 1,723                          |       | 2,974 |   | 2,293 |   |
| Interest expense accrued, net             |       | 19,778                           |       | 19,245                         |       | 39,880 |   | 37,796 |   |
| Recurring  amortization of financing fees |       | 1,181                            |       | 1,254                          |       | 2,253 |   | 2,544 |   |
| TOTAL                                     |       | $                                | 20,959     |                           | $          | 20,499 |   | $ | 42,133 |   | $ | 40,340 |   |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Cash interest  payments                   |       |                             |       |                           |       |   |   |   |   |
| Revolving credit facilities               |       | $                                | 2,838      |                           | $          | 3,455 |   | $ | 5,543 |   | $ | 6,537 |   |
| 2004 Notes                                |       | 434                              |       | —                         |       | 434 |   | — |   |
| 2003 Notes                                |       | —                           |       | —                         |       | 13,906 |   | — |   |
| Other, net                                |       | 172                              |       | 80                             |       | 399 |   | 163 |   |
| TOTAL                                     |       | $                                | 3,444      |                           | $          | 3,535 |   | $ | 20,282 |   | $ | 6,700 |   |

 

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(a)The Company’s 2000/2002 Notes were exchanged for a combination of 2006Subordinated Notes, Series AA Preferred Stock and Common Stock in connectionwith the Company’s Plan of Reorganization. Interest on the 2000/2002 Notesabove includes interest for the two days, plus interest on interest, prior tothe bankruptcy filing plus interest on the December 1, 2005 unpaidinterest payment. Interest for the three and six months ended June 30, 2006 atthe stated rate of 13% would have been $10,400 and $20,800, respectively.

**7.   INCOME TAXES**

TheCompany adopted the provisions of Financial Accounting Board Interpretation No.48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation ofFASB Statement No. 109 (“SFAS 109”) on January 1, 2007. The interpretation prescribesa recognition threshold and measurement attribute criteria for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. The interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.

14

 

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TheCompany and its subsidiaries file income tax returns in the U.S. federaljurisdiction, and various state and foreign jurisdictions. With a fewexceptions, the Company is no longer subject to U.S. federal, state and local,or non-U.S. income tax examinations by tax authorities for the years prior to2000.****The Company’s policy is to recognizeinterest and penalties related to unrecognized tax benefits as income taxexpense. Accrued interest and penalties are insignificant at June 30, 2007. TheCompany believes that it has appropriate support for income tax positions takenor to be taken on its tax returns and that its accruals for tax liabilities areadequate for all open years based on an assessment of many factors includingpast experience and interpretations of tax law applied to the facts of eachmatter.

Thecumulative effect of adopting FIN 48 was a decrease in tax reserves of $0.7million and a decrease in Retained Deficit as of January 1, 2007 of $0.7million. As of January 1, 2007, the amount of unrecognized tax benefits was$2.9 million of which all would, if recognized, decrease our effective taxrate. There may be fluctuations in the amount of the liability, however, thechanges are not expected to be material.

Forthe three months ended June 30, 2007, income tax benefits of $0.3 million wererecorded on pretax losses from operations of $5.9 million compared to incometax expense of a negligible amount on pretax loss from operations of $14.0million for the three months ended June 30, 2006. For the six months ended June30, 2007, income tax expense was $0.4 million on pre-tax loss from operationsof $17.7 million compared to income tax expense of $1.2 million of pre-tax lossof $73.6 million for the six months ended June 30, 2006. Income tax benefitsrelated to net operating losses in the United States are offset by a valuationallowance as the realization of these tax benefits is not certain. Therefore, theincome tax expense in the statements of operations primarily reflects foreignincome taxes.

**8.   OTHER COMPREHENSIVE LOSS**

Othercomprehensive income (loss) for the three months ended June 30, 2007 and 2006was ($3.2) million and ($12.5) million, respectively. Comprehensive income(loss) for the six months ended June 30, 2007 and 2006 was ($16.5) million and($74.2) million, respectively. The components of other comprehensive loss arenet loss and foreign currency translation.

**9.   OPERATING SEGMENTS**

Operatingsegments are components of our business for which separate financialinformation is available that is evaluated regularly by our chief operatingdecision maker in deciding how to allocate resources and in assessingperformance. This information is reported on the basis that it is usedinternally for evaluating segment performance.

In 2006, the Companyreorganized its Specialty Products Group and separated it into two operatingsegments, Specialty Films and Printed Products. In addition, the Companycombined its prior Performance Films segment with its Engineered Films segment.These changes were in response to a re-evaluation of the Company’s aggregationcriteria. The Company now has four operating segments: Specialty Films, whichmanufactures personal care, medical and agricultural films; Printed Products,which produces printed rollstock, bags and sheets used to package food andconsumer goods; Industrial Films segment, which manufactures stretch film usedto bundle, unitize and protect palletized loads during shipping and storage andPVC films used by supermarkets, delicatessens and restaurants to wrap meat,cheese and produce; and Engineered Films segment, which manufactures film forsale to converters of flexible packaging and a variety of barrier and customfilms for smaller niche flexible packaging and industrial markets.

Segmentinformation in this report for 2006 has been reclassified to reflect thisreorganization. Sales and transfers between our segments are eliminated inconsolidation. We evaluate the performance of our operating segments based onnet sales (excluding inter-company sales) and segment profit. The segmentprofit reflects income before interest expense, income taxes, depreciation,amortization, restructuring costs and other non-cash charges and netadjustments for certain unusual items. Our reportable segments are managed separatelywith separate management teams, because each segment has differing products,customer requirements, technology and marketing strategies.

#  

15

 

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Segmentprofit and segment assets as of and for the periods ended June 30, 2007 and2006 are presented in the following table (in thousands). Certainreclassifications have been made to the prior year amounts to be consistentwith the 2007 presentation.
| ** **                            | ** ** | **Engineered  Films** | ** ** | **Industrial  Films** | ** ** | **Specialty  Films** | ** ** | **Printed  Products** | ** ** | **Corporate /  Other** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|----------------------|------------|-----------------------|------------|-----------------------------|------------|-----------|------------|
| **Three months ended June 30,  2007** |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Net sales to  customers               |       | $                     | 89,313     |                  | $          | 78,196               |       | $                     | 49,348     |                        | $          | 56,224    |       | $ | 3,955 |   | $ | 277,036 |   |
| Intersegment  sales                   |       | 3,311                 |       | 3,075                 |       | 2,999                |       | 1,388                 |       | (10,773                     | )          | —    |       |
| Total net sales                       |       | 92,624                |       | 81,271                |       | 52,347               |       | 57,612                |       | (6,818                      | )          | 277,036   |       |
| Depreciation and  amortization        |       | 3,048                 |       | 1,798                 |       | 2,532                |       | 2,416                 |       | 1,762                       |       | 11,556    |       |
| Interest expense                      |       | 682                   |       | 181                   |       | 21                   |       | 1,038                 |       | 19,037                      |       | 20,959    |       |
| Segment profit                        |       | 13,266                |       | 8,956                 |       | 6,096                |       | 3,595                 |       | (4,426                      | )          | 27,487    |       |
| Capital  expenditures                 |       | 3,017                 |       | 946                   |       | 3,527                |       | 2,777                 |       | 2,371                       |       | 12,638    |       |
| **Three months ended June 30,  2006** |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Net sales to  customers               |       | $                     | 96,943     |                  | $          | 80,673               |       | $                     | 49,086     |                        | $          | 60,605    |       | $ | 1,766 |   | $ | 289,073 |   |
| Intersegment  sales                   |       | 3,536                 |       | 3,240                 |       | 2,197                |       | 430                   |       | (9,403                      | )          | —    |       |
| Total net sales                       |       | 100,479               |       | 83,913                |       | 51,283               |       | 61,035                |       | (7,637                      | )          | 289,073   |       |
| Depreciation and  amortization        |       | 2,799                 |       | 1,695                 |       | 2,271                |       | 2,374                 |       | 895                         |       | 10,034    |       |
| Interest expense                      |       | 749                   |       | 54                    |       | —               |       | 1,533                 |       | 18,163                      |       | 20,499    |       |
| Segment profit                        |       | 14,202                |       | 6,711                 |       | 6,104                |       | 6,891                 |       | (7,064                      | )          | 26,844    |       |
| Capital  expenditures                 |       | 1,644                 |       | 1,119                 |       | 4,666                |       | 2,706                 |       | 552                         |       | 10,687    |       |
| **Six months ended June 30, 2007**    |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Net sales to  customers               |       | $                     | 173,055    |                  | $          | 151,424              |       | $                     | 97,343     |                        | $          | 107,526   |       | $ | 8,080 |   | $ | 537,428 |   |
| Intersegment  sales                   |       | 6,981                 |       | 7,547                 |       | 6,635                |       | 1,745                 |       | (22,908                     | )          | —    |       |
| Total net sales                       |       | 180,036               |       | 158,971               |       | 103,978              |       | 109,271               |       | (14,828                     | )          | 537,428   |       |
| Depreciation and  amortization        |       | 6,390                 |       | 3,574                 |       | 5,109                |       | 4,866                 |       | 3,170                       |       | 23,109    |       |
| Interest expense                      |       | 2,072                 |       | 364                   |       | 44                   |       | 2,081                 |       | 37,572                      |       | 42,133    |       |
| Segment profit                        |       | 26,658                |       | 17,153                |       | 12,118               |       | 7,462                 |       | (12,167                     | )          | 51,224    |       |
| Capital  expenditures                 |       | 6,211                 |       | 2,824                 |       | 5,969                |       | 4,205                 |       | 4,832                       |       | 24,041    |       |
| Segment assets                        |       | 226,300               |       | 112,833               |       | 146,944              |       | 139,101               |       | 79,100                      |       | 704,278   |       |
| **Six months ended June 30, 2006**    |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Net sales to  customers               |       | $                     | 200,169    |                  | $          | 158,824              |       | $                     | 104,250    |                        | $          | 119,668   |       | $ | 3,818 |   | $ | 586,729 |   |
| Intersegment  sales                   |       | 7,589                 |       | 8,262                 |       | 4,299                |       | 1,597                 |       | (21,747                     | )          | —    |       |
| Total net sales                       |       | 207,758               |       | 167,086               |       | 108,549              |       | 121,265               |       | (17,929                     | )          | 586,729   |       |
| Depreciation and  amortization        |       | 5,578                 |       | 3,334                 |       | 4,528                |       | 4,781                 |       | 1,791                       |       | 20,012    |       |
| Interest expense                      |       | 1,409                 |       | 111                   |       | —               |       | 2,995                 |       | 36,096                      |       | 40,611    |       |
| Segment profit                        |       | 26,890                |       | 14,217                |       | 13,176               |       | 10,426                |       | (13,789                     | )          | 50,920    |       |
| Capital  expenditures                 |       | 1,950                 |       | 1,874                 |       | 7,665                |       | 5,191                 |       | 1,684                       |       | 18,364    |       |
| **As of December 31, 2006**      |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Segment assets                        |       | $                     | 198,076    |                  | $          | 107,634              |       | $                     | 150,483    |                        | $          | 140,624   |       | $ | 80,940 |   | $ | 677,757 |   |

 

16

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Areconciliation of the totals reported for the operating segments to the totalsreported in the consolidated financial statements for the three and six monthsended June 30, 2007 and 2006, and as of June 30, 2007 and December 31,2006 is as follows (in thousands) (unaudited):
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                    | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Profit  or Loss**           | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total segment profit          |       | $                                | 27,487     |                           | $          | 26,844 |   | $ | 51,224 |   | $ | 50,920 |   |
| Depreciation and amortization |       | (11,556                          | )          | (10,035                        | )          | (23,109 | ) | (20,012 | ) |
| Restructuring and other costs |       | (451                             | )          | (15                            | )          | (1,859 | ) | (30 | ) |
| Reorganization costs          |       | (426                             | )          | (10,271                        | )          | (697 | ) | (63,821 | ) |
| Other operating costs         |       | —                           |       | —                         |       | (1,101 | ) | — |   |
| Interest expense              |       | (20,959                          | )          | (20,499                        | )          | (42,133 | ) | (40,611 | ) |
| Loss before  income taxes     |       | $                                | (5,905     | )                              | $          | (13,976 | ) | $ | (17,675 | ) | $ | (73,554 | ) |

 
| ** **                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **Assets**                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Total assets from reportable segments |       | 625,178           |       | 596,817               |       |
| Other unallocated assets              |       | 79,100            |       | 80,940                |       |
| Total consolidated assets             |       | $                 | 704,278    |                  | $          | 677,757 |   |
|                                       |            |                   |            |                       |            |  |  |

 

Net sales and long-lived assets of our US and foreign operations are asfollows:
| ** **           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **           | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net Sales            |       |                             |       |                           |       |   |   |   |   |
| United States        |       | $                                | 223,655    |                           | $          | 232,297 |   | $ | 433,722 |   | $ | 472,969 |   |
| Foreign countries(a) |       | 53,381                           |       | 56,776                         |       | 103,706 |   | 113,760 |   |
| Total                |       | $                                | 277,036    |                           | $          | 289,073 |   | $ | 537,428 |   | $ | 586,729 |   |

 
| ** **         | ** ** | **June 30,   2007** | ** ** | **December 31,   2006** | ** ** |
|--------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| Long-lived  assets |       |                          |       |                              |       |
| United States      |       | $                             | 263,833    |                              | $          | 255,622 |   |
| Foreign countries  |       | 49,340                        |       | 48,821                            |       |
| Total              |       | $                             | 313,173    |                              | $          | 304,443 |   |
|               |       |                          |       |                              |       |
| Total assets       |       |                          |       |                              |       |
| United States      |       | $                             | 581,754    |                              | $          | 561,846 |   |
| Foreign countries  |       | 122,524                       |       | 115,911                           |       |
| Total              |       | $                             | 704,278    |                              | $          | 677,757 |   |

----

(a)             Foreigncountries include Australia, Canada, Germany and Mexico, none of whichindividually represents 10% of consolidated net sales or long-lived assets.

17

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**10.**   DEFINEDBENEFIT PLANS

TheCompany sponsors three noncontributory defined benefit pension plans (the “UnitedStates Plans”) covering domestic employees with 1,000 or more hours of service.The Company funds these in accordance with the funding requirements of theEmployee Retirement Income Security Act of 1974. Contributions are intended tonot only provide for benefits attributed to service to date but also for thoseexpected to be earned in the future. We also sponsor a defined benefit plan inGermany (the “Germany Plan”). Periodic pension expense for the German Plan wasimmaterial. For information on the Germany Plan please refer to the Company’sAnnual Report on Form 10-K for the year ended December 31,2006. In the second quarter of 2004, the Company redesigned its retirementprograms which led to the curtailment and “freeze” of the pension plan for U.S.salaried employees effective June 30, 2004.

Theconsolidated net periodic pension expense (benefit) for the three and sixmonths ended June 30, 2007 and 2006 includes the following components (inthousands):
| ** **                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **United  States Plans**                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost-benefits earned during the period |       | $                                               | 102        |                                          | $          | 111 |   | $ | 200 |   | $ | 222 |   |
| Interest cost on  projected benefit obligation  |       | 1,283                                           |       | 1,247                                         |       | 2,569 |   | 2,494 |   |
| Expected return  on assets                      |       | (1,568                                          | )          | (1,384                                        | )          | (3,138 | ) | (2,768 | ) |
| Other                                           |       | 35                                              |       | 31                                            |       | 63 |   | 62 |   |
| Net periodic pension  expense (benefit)         |       | $                                               | (148       | )                                             | $          | 5 |   | $ | (306 | ) | $ | 10 |   |

 

**11.   CONTINGENCIES**

*Litigation*   Weare involved in various litigation matters from time to time in the ordinarycourse of our business, including matters described in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006. In our opinion, noneof such litigation is material to our financial condition or results ofoperations.

**12.   CONDENSED CONSOLIDATING FINANCIALSTATEMENTS**

The followingcondensed consolidating financial statements present, in separate columns,financial information for (i) Pliant (on a parent only basis) with itsinvestment in its subsidiaries recorded under the equity method,(ii) guarantor subsidiaries (as specified in the Indenture dated as ofMay 30, 2003, as amended (the “2003 Indenture”) relating to the 2003Notes, the First Supplemental Indenture with respect to the Amended andRestated Indenture relating to the 2004 Notes and the Amended 2004 Notes, the2006 Subordinated Note Indenture relating to the 2006 Subordinated Notes andthe 2007 Subordinated Note Indenture relating to the 2007 Subordinated Notes(the 2003 Indenture, the Amended and Restated Indenture, as amended by theFirst Supplemental Indenture, the 2006 Subordinated Note Indenture and the 2007Note Indenture, collectively, the “Indentures”) on a combined basis, with anyinvestments in non-guarantor subsidiaries specified in the Indentures recordedunder the equity method, (iii) direct and indirect non-guarantorsubsidiaries on a combined basis, (iv) the eliminations necessary toarrive at the information for Pliant and its subsidiaries on a consolidatedbasis, and (v) Pliant on a consolidated basis, in each case as of June 30,2007 and December 31, 2006 and for the six months ended June 30, 2007 andJune 30, 2006. The 2003 Notes, the 2004 Notes, the Amended 2004 Notes, the 2006Subordinated Notes and 2007 Subordinated Notes are fully and unconditionallyguaranteed on a joint and several basis by each guarantor subsidiary and eachguarantor subsidiary is 100% owned, directly or indirectly, by Pliant, except thatthe 2003 Notes are not guaranteed by Uniplast Industries Co. and the Amended2004 Notes are not guaranteed by Pliant Solutions Corporation (“PliantSolutions”). Substantially all of the assets of Pliant Solutions were sold onSeptember 30, 2004 and the remainder disposed prior to December 31,2005. There are no contractual restrictions limiting transfers of cash fromguarantor and non-guarantor subsidiaries to Pliant. The condensed consolidatedfinancial statements are presented herein, rather than separate financialstatements for each of the guarantor subsidiaries, because management believesthat separate financial statements relating to the guarantor subsidiaries arenot material to investors.

18

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**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**ASOF JUNE 30, 2007 (DOLLARS IN THOUSANDS) (UNAUDITED)**

** **
| ** **                                               | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| **ASSETS**                                               | ** ** | ** **                                  | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                            | ** ** |
| CURRENT ASSETS:                                          |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| Cash and cash  equivalents                               |       | $                                           | 7          |                                  | $          | 3,474                                     |       | $                | 5,210      |                                  | —     |   | $ | 8,691 |   |
| Restricted cash                                          |       | 22,593                                      |       | —                                |       | —                                    |       | —           |       | 22,593                                |       |
| Receivables, net  of allowances                          |       | 102,984                                     |       | 8,142                                 |       | 24,696                                    |       | —           |       | 135,822                               |       |
| Inventories                                              |       | 86,169                                      |       | 6,143                                 |       | 10,992                                    |       | —           |       | 103,304                               |       |
| Prepaid expenses  and other                              |       | 2,219                                       |       | 450                                   |       | 2,957                                     |       | —           |       | 5,626                                 |       |
| Income taxes  receivable, net                            |       | (727                                        | )          | 1,483                                 |       | 327                                       |       | —           |       | 1,083                                 |       |
| Deferred income  taxes                                   |       | 8,181                                       |       | 7                                     |       | 286                                       |       | —           |       | 8,474                                 |       |
| Total current  assets                                    |       | 221,426                                     |       | 19,699                                |       | 44,468                                    |       | —           |       | 285,593                               |       |
| PLANT AND EQUIPMENT,  net                                |       | 263,833                                     |       | 16,802                                |       | 32,538                                    |       | —           |       | 313,173                               |       |
| GOODWILL                                                 |       | 57,777                                      |       | 13,153                                |       | 1,455                                     |       | —           |       | 72,385                                |       |
| INTANGIBLE ASSETS, net                                   |       | 2,063                                       |       | 9,775                                 |       | 9                                         |       | —           |       | 11,847                                |       |
| INVESTMENT IN  SUBSIDIARIES                              |       | (17,993                                     | )          | —                                |       | —                                    |       | 17,993           |       | —                                |       |
| OTHER ASSETS                                             |       | 18,177                                      |       | —                                |       | 3,103                                     |       | —           |       | 21,280                                |       |
| TOTAL ASSETS                                             |       | $                                           | 545,283    |                                  | $          | 59,429                                    |       | $                | 81,573     |                                  | $          | 17,993 |   | $ | 704,278 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**  |       |                                        |       |                                  |       |                                      |       |             |       |
| CURRENT LIABILITIES:                                     |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| Current portion  of long-term debt                       |       | $                                           | 23,617     |                                  | —     |                                      | $          | 97               |       | —                                |       | $ | 23,714 |   |
| Trade accounts  payable                                  |       | 77,571                                      |       | 4,272                                 |       | 12,707                                    |       | —           |       | 94,550                                |       |
| Accrued  liabilities                                     |       | 46,354                                      |       | 342                                   |       | 3,970                                     |       | —           |       | 50,666                                |       |
| Due to (from)  affiliates                                |       | (87,737                                     | )          | 70,816                                |       | 16,921                                    |       | —           |       | —                                |       |
| Total current  liabilities                               |       | 59,805                                      |       | 75,430                                |       | 33,695                                    |       | —           |       | 168,930                               |       |
| LONG-TERM DEBT, net of  current portion                  |       | 722,349                                     |       | 16,700                                |       | 21,506                                    |       | —           |       | 760,555                               |       |
| OTHER LIABILITIES                                        |       | 24,634                                      |       | 1,228                                 |       | 5,052                                     |       | —           |       | 30,914                                |       |
| DEFERRED INCOME TAXES                                    |       | 17,202                                      |       | 2,734                                 |       | 2,650                                     |       | —           |       | 22,586                                |       |
| Total  Liabilities                                       |       | 823,990                                     |       | 96,092                                |       | 62,903                                    |       | —           |       | 982,985                               |       |
| STOCKHOLDERS’ EQUITY  (DEFICIT):                    |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| Preferred stock                                          |       | 222,353                                     |       | —                                |       | —                                    |       | —           |       | 222,353                               |       |
| Common stock                                             |       | 1                                           |       | —                                |       | 11,916                                    |       | (11,916          | )          | 1                                     |       |
| Additional  paid-in capital                              |       | 155,341                                     |       | 14,020                                |       | 43,823                                    |       | (57,843          | )          | 155,341                               |       |
| Retained  earnings (deficit)                             |       | (639,734                                    | )          | (52,878                               | )          | (32,488                                   | )          | 85,366           |       | (639,734                              | )          |
| Accumulated  other comprehensive loss                    |       | (16,668                                     | )          | 2,195                                 |       | (4,581                                    | )          | 2,386            |       | (16,668                               | )          |
| Total  stockholders’ equity (deficit)               |       | (278,707                                    | )          | (36,663                               | )          | 18,670                                    |       | 17,993           |       | (278,707                              | )          |
| TOTAL LIABILITIES AND STOCKOLDERS’ EQUITY (DEFICIT) |       | $                                           | 545,283    |                                  | $          | 59,429                                    |       | $                | 81,573     |                                  | $          | 17,993 |   | $ | 704,278 |   |

 

** **

**See notes to condensed consolidated financial statements.**

19

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**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING** BALANCE SHEET

**ASOF DECEMBER 31, 2006 (DOLLARS IN THOUSANDS) (UNAUDITED)**

** **
| ** **                                                | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| **ASSETS**                                                | ** ** | ** **                                  | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                            | ** ** |
| CURRENT ASSETS:                                           |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| Cash and cash equivalents                                 |       | $                                           | 7          |                                  | $          | 1,005                                     |       | $                | 3,187      |                                  | $          | — |   | $ | 4,199 |   |
| Receivables, net of allowances                            |       | 108,907                                     |       | 8,131                                 |       | 23,439                                    |       | —           |       | 140,477                               |       |
| Inventories                                               |       | 83,007                                      |       | 6,703                                 |       | 10,393                                    |       | —           |       | 100,103                               |       |
| Prepaid expenses and other                                |       | 3,698                                       |       | 445                                   |       | 3,136                                     |       | —           |       | 7,279                                 |       |
| Income taxes receivable, net                              |       | (792                                        | )          | 1,443                                 |       | 347                                       |       | —           |       | 998                                   |       |
| Deferred income taxes                                     |       | 13,452                                      |       | 2                                     |       | 300                                       |       | —           |       | 13,754                                |       |
| Total current assets                                      |       | 208,279                                     |       | 17,729                                |       | 40,802                                    |       | —           |       | 266,810                               |       |
| PLANT AND  EQUIPMENT, net                                 |       | 255,622                                     |       | 15,888                                |       | 32,933                                    |       | —           |       | 304,443                               |       |
| GOODWILL                                                  |       | 57,777                                      |       | 13,153                                |       | 1,327                                     |       | —           |       | 72,257                                |       |
| INTANGIBLE  ASSETS, net                                   |       | 2,498                                       |       | 9,873                                 |       | 18                                        |       | —           |       | 12,389                                |       |
| INVESTMENT IN  SUBSIDIARIES                               |       | (17,932                                     | )          | —                                |       | —                                    |       | 17,932           |       | —                                |       |
| OTHER ASSETS                                              |       | 18,905                                      |       | —                                |       | 2,953                                     |       | —           |       | 21,858                                |       |
| TOTAL ASSETS                                              |       | $                                           | 525,149    |                                  | $          | 56,643                                    |       | $                | 78,033     |                                  | $          | 17,932 |   | $ | 677,757 |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY (DEFICIT)**  |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| CURRENT  LIABILITIES:                                     |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| Current portion of long-term debt                         |       | $                                           | 895        |                                  | $          | —                                    |       | $                | 80         |                                  | $          | — |   | $ | 975 |   |
| Trade accounts payable                                    |       | 65,710                                      |       | 3,298                                 |       | 12,223                                    |       | —           |       | 81,231                                |       |
| Accrued liabilities                                       |       | 56,078                                      |       | 1,779                                 |       | 4,064                                     |       | —           |       | 61,921                                |       |
| Due to (from) affiliates                                  |       | (90,702                                     | )          | 65,746                                |       | 24,956                                    |       | —           |       | —                                |       |
| Total current liabilities                                 |       | 31,981                                      |       | 70,823                                |       | 41,323                                    |       | —           |       | 144,127                               |       |
| LONG-TERM DEBT,  net of current portion                   |       | 708,404                                     |       | 16,700                                |       | 11,552                                    |       | —           |       | 736,656                               |       |
| OTHER  LIABILITIES                                        |       | 25,636                                      |       | —                                |       | 3,810                                     |       | —           |       | 29,446                                |       |
| DEFERRED INCOME  TAXES                                    |       | 22,887                                      |       | 4,703                                 |       | 3,697                                     |       | —           |       | 31,287                                |       |
| Total Liabilities                                         |       | 788,908                                     |       | 92,226                                |       | 60,382                                    |       | —           |       | 941,516                               |       |
| STOCKHOLDERS’  EQUITY (DEFICIT):                     |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| Preferred stock                                           |       | 198,899                                     |       | —                                |       | —                                    |       | —           |       | 198,899                               |       |
| Common stock                                              |       | 1                                           |       | —                                |       | 11,916                                    |       | (11,916          | )          | 1                                     |       |
| Additional paid-in capital                                |       | 154,521                                     |       | 14,020                                |       | 43,822                                    |       | (57,842          | )          | 154,521                               |       |
| Retained earnings (deficit)                               |       | (598,934                                    | )          | (51,983                               | )          | (30,812                                   | )          | 82,795           |       | (598,934                              | )          |
| Accumulated other comprehensive loss                      |       | (18,246                                     | )          | 2,380                                 |       | (7,275                                    | )          | 4,895            |       | (18,246                               | )          |
| Total stockholders’ equity (deficit)                 |       | (263,759                                    | )          | (35,583                               | )          | 17,651                                    |       | 17,932           |       | (263,759                              | )          |
| TOTAL LIABILITIES AND  STOCKOLDERS’ EQUITY (DEFICIT) |       | $                                           | 525,149    |                                  | $          | 56,643                                    |       | $                | 78,033     |                                  | $          | 17,932 |   | $ | 677,757 |   |

 

#  

**See notes to condensed consolidated financial statements.**

20

----

 

**PLIANT CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING INCOME STATEMENTFOR THE THREE MONTHS ENDED JUNE 30, 2007 (IN THOUSANDS) (UNAUDITED)**
| ** **                          | ** ** | **Pliant**             | ** ** | **Combined**     | ** ** | **Combined**      | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **Corporation**        | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Pliant**       | ** ** |
| ** **                          | ** ** | **(Parent Only)** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Corporation**  | ** ** |
| NET SALES                           |       | $                      | 234,492    |             | $          | 16,474            |       | $                | 36,906     |             | $          | (10,836 | ) | $ | 277,036 |   |
| COST OF SALES                       |       | 204,022                |       | 15,302           |       | 32,930            |       | (10,836          | )          | 241,418          |       |
| GROSS PROFIT                        |       | 30,470                 |       | 1,172            |       | 3,976             |       | —           |       | 35,618           |       |
| OPERATING  EXPENSES                 |       | 16,234                 |       | 1,476            |       | 2,816             |       | —           |       | 20,526           |       |
| OPERATING INCOME                    |       | 14,236                 |       | (304             | )          | 1,160             |       | —           |       | 15,092           |       |
| INTEREST EXPENSE                    |       | (19,647                | )          | (147             | )          | (1,165            | )          | —           |       | (20,959          | )          |
| EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (3,023                 | )          | —           |       | —            |       | 3,023            |       | —           |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 3,231                  |       | (1,743           | )          | (1,526            | )          | —           |       | (38              | )          |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | (5,203                 | )          | (2,194           | )          | (1,531            | )          | 3,023            |       | (5,905           | )          |
| INCOME TAX  EXPENSE (BENEFIT)       |       | 407                    |       | (742             | )          | 40                |       | —           |       | (295             | )          |
| NET INCOME (LOSS)                   |       | $                      | (5,610     | )                | $          | (1,452            | )          | $                | (1,571     | )                | $          | 3,023 |   | $ | (5,610 | ) |

 

**See notes to condensed consolidated financial statements.**

 

21

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**PLIANT CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING INCOME STATEMENTFOR THE THREE MONTHS ENDED JUNE 30, 2006 (IN THOUSANDS) (UNAUDITED)**
| ** **                          | ** ** | **Pliant**             | ** ** | **Combined**     | ** ** | **Combined**      | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **Corporation**        | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Pliant**       | ** ** |
| ** **                          | ** ** | **(Parent Only)** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Corporation**  | ** ** |
| NET SALES                           |       | $                      | 241,697    |             | $          | 19,935            |       | $                | 36,869     |             | $          | (9,428 | ) | $ | 289,073 |   |
| COST OF SALES                       |       | 210,426                |       | 17,836           |       | 33,284            |       | (9,428           | )          | 252,118          |       |
| GROSS PROFIT                        |       | 31,271                 |       | 2,099            |       | 3,585             |       | —           |       | 36,955           |       |
| OPERATING  EXPENSES                 |       | 27,962                 |       | 543              |       | 1,916             |       | —           |       | 30,421           |       |
| OPERATING INCOME                    |       | 3,309                  |       | 1,556            |       | 1,669             |       | —           |       | 6,534            |       |
| INTEREST EXPENSE                    |       | (18,222                | )          | (743             | )          | (1,534            | )          | —           |       | (20,499          | )          |
| EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (2,656                 | )          | —           |       | —            |       | 2,656            |       | —           |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 3,671                  |       | (2,106           | )          | (1,576            | )          | —           |       | (11              | )          |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | (13,898                | )          | (1,293           | )          | (1,441            | )          | 2,656            |       | (13,976          | )          |
| INCOME TAX  EXPENSE                 |       | 91                     |       | (331             | )          | 253               |       | —           |       | 13               |       |
| NET INCOME (LOSS)                   |       | $                      | (13,989    | )                | $          | (962              | )          | $                | (1,694     | )                | $          | 2,656 |   | $ | (13,989 | ) |

 

See notes to condensed consolidated financialstatements.

 

 

22

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**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING INCOME STATEMENT**

**FORTHE SIX MONTHS ENDED JUNE 30, 2007 (IN THOUSANDS) (UNAUDITED)**
|                                     | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| NET SALES                           |       | $                                           | 456,725    |                                  | $          | 32,670                                    |       | $                | 71,036     |                                  | $          | (23,003 | ) | $ | 537,428 |   |
| COST OF SALES                       |       | 395,954                                     |       | 30,423                                |       | 64,000                                    |       | (23,003          | )          | 467,374                               |       |
| GROSS PROFIT                        |       | 60,771                                      |       | 2,247                                 |       | 7,036                                     |       | —           |       | 70,054                                |       |
| OPERATING EXPENSES                  |       | 39,386                                      |       | 2,020                                 |       | 4,503                                     |       | —           |       | 45,909                                |       |
| OPERATING INCOME                    |       | 21,385                                      |       | 227                                   |       | 2,533                                     |       | —           |       | 24,145                                |       |
| INTEREST EXPENSE                    |       | (39,504                                     | )          | (294                                  | )          | (2,335                                    | )          | —           |       | (42,133                               | )          |
| EQUITY IN EARNINGS OF  SUBSIDIARIES |       | (3,028                                      | )          | —                                |       | —                                    |       | 3,028            |       | —                                |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 3,319                                       |       | (1,741                                | )          | (1,265                                    | )          | —           |       | 313                                   |       |
| INCOME (LOSS) BEFORE  INCOME TAXES  |       | (17,828                                     | )          | (1,808                                | )          | (1,067                                    | )          | 3,028            |       | (17,675                               | )          |
| INCOME TAX EXPENSE  (BENEFIT)       |       | 230                                         |       | (518                                  | )          | 671                                       |       | —           |       | 383                                   |       |
| NET INCOME (LOSS)                   |       | $                                           | (18,058    | )                                     | $          | (1,290                                    | )          | $                | (1,738     | )                                     | $          | 3,028 |   | $ | (18,058 | ) |

 

**See notes to condensed consolidated financial statements.**

23

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**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING INCOME STATEMENT**

**FORTHE SIX MONTHS ENDED JUNE 30, 2006 (IN THOUSANDS) (UNAUDITED)**
| ** **                          | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| NET SALES                           |       | $                                           | 494,736    |                                  | $          | 40,778                                    |       | $                | 73,010     |                                  | $          | (21,795 | ) | $ | 586,729 |   |
| COST OF SALES                       |       | 434,137                                     |       | 36,984                                |       | 66,099                                    |       | (21,795          | )          | 515,425                               |       |
| GROSS PROFIT                        |       | 60,599                                      |       | 3,794                                 |       | 6,911                                     |       | —           |       | 71,304                                |       |
| OPERATING EXPENSES                  |       | 99,644                                      |       | 1,093                                 |       | 3,647                                     |       | —           |       | 104,384                               |       |
| OPERATING INCOME                    |       | (39,045                                     | )          | 2,701                                 |       | 3,264                                     |       | —           |       | (33,080                               | )          |
| INTEREST EXPENSE                    |       | (36,218                                     | )          | (1,398                                | )          | (2,995                                    | )          | —           |       | (40,611                               | )          |
| EQUITY IN EARNINGS OF  SUBSIDIARIES |       | (2,835                                      | )          | —                                |       | —                                    |       | 2,835            |       | —                                |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 3,653                                       |       | (2,120                                | )          | (1,396                                    | )          | —           |       | 137                                   |       |
| INCOME (LOSS) BEFORE  INCOME TAXES  |       | (74,445                                     | )          | (817                                  | )          | (1,127                                    | )          | 2,835            |       | (73,554                               | )          |
| INCOME TAX EXPENSE                  |       | 351                                         |       | (110                                  | )          | 1,001                                     |       | —           |       | 1,242                                 |       |
| NET INCOME (LOSS)                   |       | $                                           | (74,796    | )                                     | $          | (707                                      | )          | $                | (2,128     | )                                     | $          | 2,835 |   | $ | (74,796 | ) |

 

**See notes to condensed consolidated financial statements.**

24

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**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOW**

**FORTHE SIX MONTHS ENDED JUNE 30, 2007 (IN THOUSANDS) (UNAUDITED)**
| ** **                                                    | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| CASH FLOW  PROVIDED BY (USED IN) OPERATING ACTIVITIES         |       | $                                           | 22,109     |                                  | $          | 6,122                                     |       | $                | 1,894      |                                  | $          | — |   | $ | 30,125 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                        |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| Proceeds from sale of assets                                  |       | —                                      |       | —                                |       | —                                    |       | —           |       | —                                |       |
| Capital expenditures for plant and equipment                  |       | (20,927                                     | )          | (1,566                                | )          | (1,548                                    | )          | —           |       | (24,041                               | )          |
| Net cash used in investing activities                         |       | (20,927                                     | )          | (1,566                                | )          | (1,548                                    | )          | —           |       | (24,041                               | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                        |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| Payment of financing fees                                     |       | (1,559                                      | )          | —                                |       | —                                    |       | —           |       | (1,559                                | )          |
| Repayment of capital leases and other, net                    |       | (255                                        | )          | —                                |       | (35                                       | )          | —           |       | (290                                  | )          |
| Proceeds from revolving debt                                  |       | (10,000                                     | )          | —                                |       | 10,000                                    |       | —           |       | —                                |       |
| Loans (to)/from affiliates                                    |       | 10,000                                      |       | —                                |       | (10,000                                   | )          | —           |       | —                                |       |
| Proceeds from issuance of preferred stock                     |       | 157                                         |       | —                                |       | —                                    |       | —           |       | 157                                   |       |
| Restricted cash deposits with trustee                         |       | (22,593                                     | )          | —                                |       | —                                    |       | —           |       | (22,593                               | )          |
| Issuance of senior subordinated notes                         |       | 24,000                                      |       | —                                |       | —                                    |       | —           |       | 24,000                                |       |
| Net cash provided by/(used in) financing activities           |       | (250                                        | )          | —                                |       | (35                                       | )          | —           |       | (285                                  | )          |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |       | (932                                        | )          | (2,087                                | )          | 1,712                                     |       | —           |       | (1,307                                | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS         |       | —                                      |       | 2,469                                 |       | 2,023                                     |       | —           |       | 4,492                                 |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF THE PERIOD           |       | 7                                           |       | 1,005                                 |       | 3,187                                     |       | —           |       | 4,199                                 |       |
| CASH AND CASH  EQUIVALENTS, END OF THE PERIOD                 |       | $                                           | 7          |                                  | $          | 3,474                                     |       | $                | 5,210      |                                  | $          | — |   | $ | 8,691 |   |

 

**See notes to condensed consolidated financial statements.**

25

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**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOW**

**FORTHE SIX MONTHS ENDED JUNE 30, 2006 (IN THOUSANDS) (UNAUDITED)**
| ** **                                                         | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| CASH FLOW  PROVIDED BY (USED IN) OPERATING ACTIVITIES         |       | $                                           | 40,713     |                                  | $          | 415                                       |       | $                | 1,637      |                                  | $          | — |   | $ | 42,765 |   |
| CASH FLOWS FROM   INVESTING ACTIVITIES:                       |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| Proceeds from sale of assets                                       |       | —                                      |       | —                                |       | —                                    |       | —           |       | —                                |       |
| Capital expenditures for plant and equipment                       |       | (17,101                                     | )          | (792                                  | )          | (471                                      | )          | —           |       | (18,364                               | )          |
| Net cash used in investing activities                              |       | (17,101                                     | )          | (792                                  | )          | (471                                      | )          | —           |       | (18,364                               | )          |
| CASH FLOWS FROM   FINANCING ACTIVITIES:                       |       |                                        |       |                                  |       |                                      |       |             |       |                                  |       |
| Payment of financing fees                                          |       | (1,652                                      | )          | —                                |       | —                                    |       | —           |       | (1,652                                | )          |
| Repayment of capital leases and other, net                         |       | (731                                        | )          | —                                |       | (215                                      | )          | —           |       | (946                                  | )          |
| Proceeds from revolving debt                                       |       | —                                      |       | —                                |       | —                                    |       | —           |       | —                                |       |
| Proceeds from issuance (repurchase) of preferred  stock            |       | —                                      |       | —                                |       | —                                    |       | —           |       | —                                |       |
| Net cash provided by/(used in) financing activities                |       | (2,383                                      | )          | —                                |       | (215                                      | )          | —           |       | (2,598                                | )          |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |       | (1,237                                      | )          | 20                                    |       | 335                                       |       | —           |       | (882                                  | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS              |       | 19,992                                      |       | (357                                  | )          | 1,286                                     |       | —           |       | 20,921                                |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF THE PERIOD                |       | 4,859                                       |       | 1,153                                 |       | 6,790                                     |       | —           |       | 12,802                                |       |
| CASH AND CASH  EQUIVALENTS, END OF THE PERIOD                      |       | $                                           | 24,851     |                                  | $          | 796                                       |       | $                | 8,076      |                                  | $          | — |   | $ | 33,723 |   |

 

**See notes to condensed consolidated financial statements.**

26

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**13.**                ISSUANCE OFSERIES M PREFERRED STOCK

**OnFebruary 20, 2007, the Company issued 8,000 shares of Series MPreferred Stock to certain employees pursuant to the Company’s Stock Plan.**

Upon receivingtheir awards in February 2007, participants purchased their shares ofSeries M Preferred Stock for $20 per share. The shares were issued for anaggregate purchase price of $160,000. At that time, the fair market value ofthe shares of Series M Preferred Stock (as determined by an appraisal byan independent appraisal firm), was $103 per share. Each participant made anelection under Section 83(b) of the Internal Revenue Code to pay taxat that time on the $83 difference between those amounts; and the Company paida bonus of approximately $138 per share (the tax-grossed-up amount of the $83difference) to each participant to enable the participant to pay such taxes.

In addition, theCompany recognized the fair market value of $103 per share, less par value of$.01 per share, as additional paid in capital of approximately $824,000 and hasrecorded the cost of the tax-gross-up of $437,000 and the difference betweenfair market value and purchase price of $664,000 together as other operatingcosts in the accompanying condensed consolidated statement of operations.

On April 17, 2007we awarded certain participants rights to purchase an additional 220 shares ofSeries M Preferred Stock, also for $20 per share, after re-purchasing thoseadditional shares from a former named executive officer.

**14.**                GOODWILL

**Basedupon the 2006 annual impairment test, the Company determined that goodwill wasimpaired in our Specialty Films and Printed Products segments and recordedgoodwill write-downs totaling $110.0 million. The impairment charge recorded inthe financial statements was based on management’s preliminary estimates offair value of plant, property and equipment and intangible assets. The Companyis in the process of obtaining valuations and will record an adjustment to thecarrying value of goodwill in the Specialty Films segment if the valuationindicates an additional impairment exists in excess of the amount recorded inthe financial statements for the year ended December 31, 2006.**

ITEM 2.                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF                       OPERATIONS

 

The purpose of thissection is to discuss and analyze our consolidated financial condition,liquidity and capital resources and results of operations. This analysis shouldbe read in conjunction with Part II, Item 7 “Management’s Discussionand Analysis of Financial Condition and Results of Operations” in our AnnualReport on Form 10-K for the year ended December 31, 2006. Thissection contains certain forward-looking statements within the meaning offederal securities laws that involve risks and uncertainties, includingstatements regarding our plans, objectives, goals, strategies and financialperformance. Our actual results could differ materially from the resultsanticipated in these forward-looking statements as a result of factorsset forth under “Cautionary Statement for Forward-Looking Information”below and elsewhere in this report.

**General**

Wegenerate our revenues, earnings and cash flows from the sale of film andflexible packaging products throughout the world. We manufacture these productsat 22 facilities located on 20 sites in the United States, Australia, Canada,Germany and Mexico.

**Overview**

*Chapter11 Bankruptcy Proceedings and Reorganization*   TheCompany and ten of its subsidiaries filed for protection under the BankruptcyCode in January 2006. On June 19, 2006, the Company filed with theBankruptcy Court its Plan which was approved by the Bankruptcy Court onJune 23, 2006. On July 18, 2006, the 

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Company consummated its reorganization through aseries of transactions contemplated in the Plan and emerged from bankruptcy.

Wehave worked diligently in an effort to analyze each of the claims filed in ourChapter 11 cases, and have already made significant progress in reconcilingsuch claims with our books and records. Moreover, we have been steadily makingdistributions to the holders of many such claims, as well as to creditorsappearing in our schedules, and have filed objections to certain claims asnecessary. To date, we have filed seven omnibus objections to claims, resultingin a reduction to the claims register of more than 98 claims totaling more than$88.0 million, which were primarily claims made by equity holders who receiveddistributions of new securities according to the Company’s Plan. In addition,we have paid more than $47 million to satisfy contract cure amounts, vendortrade agreements, and other unsecured claims. We estimate that there areapproximately $2.0 million in non-litigation claims remaining for processing.See Note 2 to the Financial Statements for more detailed information on ouremergence from bankruptcy.

Werecorded sales of $277.0 million in the second quarter of 2007 compared tosales of $289.1 million in the second quarter of 2006. Second quarter 2007sales measured in pounds were 216.5 million, which represents a 1.3% decreasefrom the second quarter of 2006. Average sales price for the three months endedJune 30, 2007 was $1.279 per pound as compared to $1.318 per pound for thethree months ended June 30, 2006.

Totalsegment profit was $27.5 million for the second quarter of 2007, compared to$26.8 million for the second quarter of 2006. Segment profit reflects incomefrom continuing operations adjusted for interest expense, income taxes,depreciation, amortization, reorganization costs, and restructuring charges.The increase in segment profit of $0.7 million reflects the impact offavorable selling, general and administrative expenses and freight costsbetween years, partially offset by the impact of lower sales volumes and lowergross margins from compression between our average selling prices and rawmaterial costs.

**Raw Material Costs**

Theprimary raw materials used in the manufacture of most of our products arepolypropylene resin, polyethylene resin and PVC resin. The long-term prices ofthese materials are primarily a function of the price of crude oil and naturalgas. We have not historically hedged our exposure to raw material increases,but have moved more customers to programs which would allow us to pass throughcost increases in raw materials. Raw material costs as a percentage of saleswas approximately 56% in the second quarter of 2007 compared to 58% for thesecond quarter of 2006.

Thegap between the speed at which resin price changes are passed on to us and thetime at which we can pass these cost changes on to our customers has an impacton both our results of operations and our working capital needs. To the extentwe are not able to pass along price increases of raw materials, or to theextent any such price increases are delayed, our cost of goods sold wouldcontinue to increase and our gross profit and operating income wouldcorrespondingly decrease. Significant increases in raw material prices thatcannot be passed on to customers could have a material adverse effect on ourresults of operations and financial condition.

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**Results ofOperations**

Thefollowing table sets forth net sales, operating expenses, and operating income,and such amounts as a percentage of net sales, for the three and six monthsended June 30, 2007 and 2006 (dollars in millions).
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **$**                                               | ** ** | **% of  Sales**                              | ** ** | **$** | ** ** | **% of  Sales** | ** ** | **$** | ** ** | **% of  Sales** | ** ** | **$** | ** ** | **% of  Sales** | ** ** |
|                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Sales                            |       | $                                                   | 277.1      |                                              | 100.0      | % | $ | 289.1 |   | 100.0 | % | $ | 537.4 |   | 100.0 | % | $ | 586.7 |   | 100.0 | % |
| Cost of sales                        |       | 241.5                                               |       | 87.2                                              | %          | 252.1 |   | 87.2 | % | 467.4 |   | 87.0 | % | 515.4 |   | 87.8 | % |
| Gross profit                         |       | 35.6                                                |       | 12.8                                              | %          | 37.0 |   | 12.8 | % | 70.0 |   | 13.0 | % | 71.3 |   | 12.2 | % |
| Selling, general  and administrative |       | 16.5                                                |       | 5.9                                               | %          | 17.8 |   | 6.1 | % | 36.0 |   | 6.7 | % | 35.9 |   | 6.1 | % |
| Research and  development costs      |       | 3.1                                                 |       | 1.1                                               | %          | 2.3 |   | 0.8 | % | 6.2 |   | 1.2 | % | 4.6 |   | 0.8 | % |
| Restructuring  and other costs       |       | 0.5                                                 |       | 0.2                                               | %          | — |   | — | % | 1.9 |   | 0.3 | % | 0.1 |   | — | % |
| Reorganization  costs                |       | 0.4                                                 |       | 0.2                                               | %          | 10.3 |   | 3.6 | % | 0.7 |   | 0.1 | % | 63.8 |   | 10.9 | % |
| Other operating  costs               |       | —                                              |       | —                                            | %          | — |   | — | % | 1.1 |   | 0.2 | % | — |   | — | % |
| Total operating expenses             |       | 20.5                                                |       | 7.4                                               | %          | 30.4 |   | 10.5 | % | 45.9 |   | 8.5 | % | 104.4 |   | 17.8 | % |
| Operating income (loss)              |       | $                                                   | 15.1       |                                              | 5.4        | % | $ | 6.6 |   | 2.3 | % | $ | 24.1 |   | 4.5 | % | $ | (33.1 | ) | -5.6 | % |

 

**Three Months EndedJune 30, 2007 Compared with the Three Months Ended June 30, 2006**

*Net Sales*

Netsales decreased by $12.0 million, or 4.2%, to $277.1 million for the secondquarter of 2007 from $289.1 million for the three months ended June 30, 2006.The decrease resulted primarily from a 1.3% decrease in our sales volume and a2.9% decrease in our average selling prices reflecting reductions in rawmaterial prices. See “Operating Segment Review” below for a detailed discussionof sales volumes and selling prices by segment and division.

*Gross Profit*

Grossprofit decreased by $1.4 million, or 3.8% to $35.6 million for the secondquarter of 2007 due to lower sales volume offset in part by improved wasterates and the impact of the Company’s other cost containment initiatives. See “OperatingSegment Review” below for a detailed discussion of the margin variances bysegment.

*Selling, Generaland Administrative*

Selling,general and administrative expenses were $16.5 million for the second quarterof 2007, compared to $17.8 million for the second quarter of 2006. This decreaseof $1.3 million is primarily attributable to lower sales commissions and loweremployee bonus and pension related costs.

*Research andDevelopment Costs*

Researchand development costs were $3.1 million for the second quarter of 2007,compared to $2.3 million in the second quarter of 2006. This increase of $0.8million is primarily attributable to the expansion of the Company’s innovationprograms underway to deliver solutions to existing markets and allow us toaccess new markets.

*Restructuring andOther Costs*

Restructuring and othercosts of $0.5 million for the second quarter of 2007 relate primarily to thereorganization of our Canadian operations and includes severance and otherplant closing costs of $0.2 million associated with the closure of our Barrie,Ontario facility, $0.1 million of other plant closing costs associated 

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with the closure of our Langley, British Columbiafacility and $0.1 million associated with the restructuring of the Canadianmanagement and sales teams.

*ReorganizationCosts*

Reorganizationcosts were $0.4 million for the second quarter of 2007, compared to$10.3 million for the second quarter of 2006. Reorganization costs in thesecond quarter of 2007 included $0.4 million of legal and other professional  fees. Restructuring and other costs in thesecond quarter of 2006 included $10.3 million of legal and financial advisory fees incurred in connection with theCompany’s bankruptcy proceedings.

*Operating Income (Loss)*

Duringthe second quarter of 2007, the Company recorded operating income of $15.1million compared to an operating income of $6.6 million for the second quarterof 2006.

*Interest Expense*

Interestexpense on current and long-term debt increased by $0.5 million to$21.0 million for the second quarter of 2007, from $20.5 million for thesecond quarter of 2006. This increase is primarily attributable to  increased payment-in-kind interest on our2004 Amended Notes and interest on capital leases, offset in part by a decreasein interest on our revolving credit facilities.

Interestexpense associated with dividends and accretion of the original issue discounton the Company’s previously outstanding Series A Preferred Stock pursuantto SFAS 150, was discontinued, effective January 3, 2006.

*Income Tax Expense*

Incometax expense for the second quarter of 2007 reflected a benefit of $0.3 millionon pretax losses of $5.9 million, compared to income tax expense of lessthan $0.1 million on pretax losses of $14.0 million for the same period in2006. Income tax benefits related to net operating losses in the United Stateswere offset by a valuation allowance as the realization of these tax benefitsis not certain. The income tax expense in the statements of operationsprimarily reflects foreign income taxes.

**Six Months Ended June 30, 2007Compared with the Six Months Ended June 30, 2006**

*NetSales*

Net salesdecreased by $49.3 million, or 8.4%, to $537.4 million for the six months endedJune 30, 2007 from $586.7 million for the six months ended June 30,2006. The decrease was primarily due to a 6.1% decrease in our average sellingprice resulting primarily from decreases in our raw material prices and a 2.4%decrease in sales volume.  See “Operating Segment Review” below for adetailed discussion of sales volumes and selling prices by segment anddivision.

*GrossProfit*

Gross profitdecreased by $1.3 million to $70.0 million for six months ended June 30,2007, from $71.3 million for the six months ended June 30, 2006. Thisdecrease is due to lower sales volume along with higher factory overhead costsbetween years, including $1.7 million of incremental depreciation, and $0.5million of incremental labor and other direct manufacturing costs, offset by$1.5 million in lower freight costs.  See “Operating Segment Review” belowfor a detailed discussion of the margin variances by segment.

*Selling,General and Administrative Costs*

Selling, generaland administrative costs were $36.0 million for the six months endedJune 30, 2007, compared to $35.9 million for the first six months of 2006.

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*Research and Development Costs*

Research anddevelopment costs were $6.2 million for the six months ended June 30,2007, compared to $4.6 million for the six months ended June 30, 2006.This increase of $1.6 million is primarily attributable to the Company’s governmentcontracts and innovation programs underway to deliver solutions to existingmarkets and allow us to access new markets.

*Restructuringand Other Costs*

Restructuring andother costs were $1.9 million for the six months ended June 30, 2007, comparedto $0.1 million for the six months ended June 30, 2006 relate primarily to thereorganization of our Canadian operations and include severance cost of $0.2million associated with the closure of our Barrie, Ontario facility, $0.1million of other plant closing costs in both Barrie and Langley BritishColumbia facilities and $1.3 million associated with restructuring of ourCanadian management and sales teams.

*Reorganization Costs*

Reorganizationcosts were $0.7 million for the six months ended June 30, 2007, compared to$63.8 million for the six months ended June 30, 2006. Reorganization costs in2007 include legal and other professional fees while these costs in 2006included the write-off of $15.8 million of unamortized capitalized financingfees associated with the issuance of our 13% Senior Subordinated Notes due 2010(2000/2002 Notes) and our Amended and Restated Credit Agreement, $5.9 millionin unamortized original issue discount, net of premiums, associated with theissuance of our 2000/2002 Notes and $24.6 million associated with the issuanceof our Series A Preferred Stock and $17.6 million of legal and financialadvisory fees incurred in connection with the Company’s bankruptcy proceedings.

*Other Operating Costs*

Other operatingcosts for 2007 included $1.1 million of costs associated with the issuance ofthe Company’s Series M Preferred Stock pursuant to the Company’s Plan ofReorganization.

*OperatingIncome (Loss)*

During the sixmonths ended June 30, 2007, the Company recorded operating income of $24.1million, compared to an operating loss of $33.1 million for the six monthsended June 30, 2006.

*InterestExpense*

Interest expenseon current and long-term debt was $42.1 million for the six months ended June30, 2007, compared to $40.3 million for the six months ended June 30, 2006.This increase of $1.8 million between periods is primarily due to increasedpayment-in-kind interest on our 2004 Amended Notes and increased interest oncapital leases, partially offset by lower interest on our revolving creditfacilities and amortization of capitalized financing fees.

Interest expenseassociated with dividends and accretion of original issue discounts on theCompany’s Series A Preferred Stock was discontinued effective January 3, 2006.

*OtherIncome (Expense)*

Other income was$0.3 million for the six months ended June 30, 2007, compared to otherexpense of less than $0.1 million June 30, 2006. The other income for thesix months ended June 30, 2007 included interest income, transaction gainsand other insignificant amounts.

#  

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*IncomeTax Expense*

Incometax expense for the six months ended June 30, 2007 was $0.4 million onpretax losses from continuing operations of $17.7 million as compared to $1.2million on pretax losses from continuing operations of $73.6 million for thesame period in 2006. Income tax benefits related to net operating losses in theUnited States were offset by a valuation allowance as the realization of thesetax benefits is not certain. Therefore, the income tax expense in thestatements of operations primarily reflects foreign income taxes.

**Operating SegmentReview**

*General*

Weevaluate the performance of our operating segments based on net sales(excluding inter-company sales) and segment profit. The segment profit reflectsincome from continuing operations adjusted for interest expense, income taxes,depreciation, amortization, reorganization, restructuring and other costs andother non-cash charges (principally the impairment of goodwill,intangible assets and fixed assets). For more information on our operatingsegments, including a reconciliation of segment profit to income before taxes,see Note 9 to the condensed consolidated financial statements included in thisreport.

Wehave four operating segments: Engineered Films, Industrial Films, SpecialtyFilms and Printed Products. During 2006, the Company reorganized its SpecialtyProducts Group and separated it into the two operating segments of SpecialtyFilms and Printed Products. In addition, the Company combined its priorPerformance Films segment with its Engineered Films segment. Segmentinformation in this report for 2006 has been reclassified to reflect thisreorganization.

Summaryof segment information (in millions of dollars):
| ** **                            | ** ** | **Engineered  Films** | ** ** | **Industrial  Films** | ** ** | **Specialty  Films** | ** ** | **Printed  Products** | ** ** | **Corporate /  Other** | ** ** | **Total**  | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|----------------------|------------|-----------------------|------------|-----------------------------|------------|------------|------------|
| **Three months ended June 30,  2007** | ** ** |                  | ** ** | ** **            |       | ** **           | ** ** |                  | ** ** | ** **                  |       | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Total net sales                       |       |                  | $          | 89.3                  |       |                 | $          | 78.2                  |       |                        | $          | 49.3       |       |   | $ | 56.2 |   |   | $ | 4.0 |   | $ | 277.0 |   |
| Segment profit                        |       |                  | 13.3       |                  |       | 9.0                  |       |                  | 6.1        |                        |       | 3.6        |       |   | (4.5 | ) | 27.5 |   |
|                                  |       |                  |       |                  |       |                 |       |                  |       |                        |       |       |       |   |   |   |   |   |
| **Three months ended June 30, 2006**  | ** ** |                  | ** ** | ** **            |       | ** **           | ** ** |                  | ** ** | ** **                  |       | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Total net sales                       |       |                  | $          | 96.9                  |       |                 | $          | 80.7                  |       |                        | $          | 49.1       |       |   | $ | 60.6 |   |   | $ | 1.8 |   | $ | 289.1 |   |
| Segment profit                        |       |                  | 14.2       |                  |       | 6.7                  |       |                  | 6.1        |                        |       | 6.9        |       |   | (7.1 | ) | 26.8 |   |
| ** **                            | ** ** |                  | ** ** | ** **            |       | ** **           | ** ** |                  | ** ** | ** **                  |       | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| **Six months ended June 30, 2007**    | ** ** |                  | ** ** | ** **            |       | ** **           | ** ** |                  | ** ** | ** **                  |       | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Total net sales                       |       |                  | $          | 173.1                 |       |                 | $          | 151.4                 |       |                        | $          | 97.3       |       |   | $ | 107.5 |   |   | $ | 8.1 |   | $ | 537.4 |   |
| Segment profit                        |       |                  | 26.7       |                  |       | 17.1                 |       |                  | 12.1       |                        |       | 7.5        |       |   | (12.2 | ) | 51.2 |   |
|                                  |       |                  |       |                  |       |                 |       |                  |       |                        |       |       |       |   |   |   |   |   |
| **Six months ended June 30, 2006**    | ** ** |                  | ** ** | ** **            |       | ** **           | ** ** |                  | ** ** | ** **                  |       | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Total net sales                       |       |                  | $          | 200.2                 |       |                 | $          | 158.8                 |       |                        | $          | 104.2      |       |   | $ | 119.7 |   |   | $ | 3.8 |   | $ | 586.7 |   |
| Segment profit                        |       |                  | 26.9       |                  |       | 14.2                 |       |                  | 13.2       |                        |       | 10.4       |       |   | (13.8 | ) | 50.9 |   |

 

**Three months endedJune 30, 2007 compared with the three months ended June 30, 2006**

*Engineered Films*

*Net Sales.*   Netsales in Engineered Films decreased by $7.6 million, or 7.8%, to $89.3 millionfor the quarter ended June 30, 2007 from $96.9 million for the second quarterof 2006. This change was due to a decrease in average selling prices of 5.4%,principally due to raw material price decreases and a 2.7% reduction in salesvolume, primarily in our industrial film markets.

*Segment profit.*   TheEngineered Films segment profit was $13.3 million for the quarter ended June30, 2007, as compared to $14.2 million for the same period in 2006. This $0.9million decrease in segment profit was primarily due to a $0.9 million impactof lower sales volume and $0.2 million unfavorable mix of customer sales offsetin part by $0.3 million reduction in waste and $0.1 million favorablemanufacturing costs.

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*Industrial Films*

*Net Sales.*   Thenet sales of our Industrial Films segment decreased by $2.5 million, or 3.1%,to $78.2 million for the quarter ended June 30, 2007 from $80.7 millionfor the quarter ended June 30, 2006. This decrease is primarily due to adecrease in sales volume of 2.6%, primarily in the stretch films markets and a0.5% decrease in average selling prices.

*Segment Profit.*   TheIndustrial Films segment profit was $9.0 million for the quarter ended June30, 2007, as compared to $6.7 million for the same period in 2006. This$2.3 million improvement in segment profit was primarily due to  lower raw material costs, excellent operationalefficiencies in manufacturing waste and favorable selling general andadministrative costs offset by unfavorable price mix in our PVC markets.

*Specialty Films*

*Net Sales.*  Net sales in our Specialty Films segment increased $0.2 million, or 0.4%, to$49.3 million for the quarter ended June 30, 2007 from $49.1 million for thequarter ended June 30, 2006. This increase was due to an increase in salesvolume of 2.6%, primarily in our personal care markets, partially offset by adecrease in our average selling prices of 2.1% because of lower raw materialcosts.

*Segment*Profit.**   TheSpecialty Films segment profit was $6.1 million for the quarter ended June 30,2007, as compared to $6.1 million for the quarter ended June 30, 2006. Favorablesales volume and price mix were offset by higher waste and production relatedcosts.

*Printed Products*

*Net Sales.*   Netsales of our Printed Products segment decreased $4.4 million or 7.3% to $56.2million for the quarter ended June 30, 2007 from $60.6 million for the quarterended June 30, 2006. This decrease was due primarily to a reduction in averageselling prices because of lower raw material costs and a sales mix impact, assales volume remained constant between periods. Sales opportunities weresomewhat constrained due to the transition of Langley production assets toother facilities.

*Segment Profit.*   ThePrinted Products segment profit was $3.6 million for the quarter ended June 30,2007, as compared to $6.9 million for the quarter ended June 30, 2006. This$3.3 million decline is primarily due to lower gross margins from compressionbetween our average selling prices and average raw material costs tocontractual customers.

*Corporate/Other*

Corporate/Otherincludes our corporate headquarters and our research and development facilityin Newport News, Virginia. Unallocated corporate expenses decreased by $2.6million to $4.5 million for the quarter ended June 30, 2007, from $7.1 millionfor the quarter ended June 30, 2006. This decrease was primarily due to areduction in employee bonus and pension related costs.  Higher research and development costs of $1.3million attributed to our innovation programs and government contract work areoffset by additional government contract billings and gross margin fromcommercialized sales.

**Six months endedJune 30, 2007 compared with the six months ended June 30, 2006**

*Engineered Films*

*Net Sales.*   Netsales in Engineered Films decreased by $27.1 million, or 13.5%, to $173.1million for the six months ended June 30, 2007 from $200.2 million for the sixmonths ended June 30, 2006. This change was due to a decrease in averageselling prices of 8.9%, principally due to raw material price decreases and a5.1% reduction in sales volume, primarily in converter and industrial filmmarkets.

*Segment Profit.*   TheEngineered Films segment profit was $26.7 million for the six months ended June30, 2007, as compared to $26.9 million for the same period in 2006. This $0.2million decrease in segment profit was primarily due to a $3.0 millionunfavorable impact of lower sales volume offset in part by a $1.4 millionreduction in waste and $1.4 million in favorable manufacturing costs.

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*Industrial Films*

*Net Sales.*   Thenet sales of our Industrial Films segment decreased by $7.4 million, or 4.7%,to $151.4 million for the six months ended June 30, 2007 from $158.8million for the six months ended June 30, 2006. This decrease is primarily dueto a 5.8% decrease in average selling prices offset in part by an increase insales volume of 1.3%, primarily in our stretch films markets.

*Segment Profit.*   TheIndustrial Films segment profit was $17.1 million for the six months ended June30, 2007, as compared to $14.2 million for the same period in 2006. This$2.9 million improvement in segment profit was primarily due to increased salesvolume and favorable manufacturing and selling general and administrative costsoffset by unfavorable price mix in our PVC markets.

*Specialty Films*

*Net Sales.*  Net sales in our Specialty Films segment decreased $6.9 million, or 6.6%, to$97.3 million for the six months ended June 30, 2007 from $104.2 million forthe six months ended June 30, 2006. This decrease was due to lower sales volumeof 3.9% in our low gel and medical markets because of Asian competition and adecrease in our average selling prices of 2.9% because of lower raw materialcosts.

*Segment Profit.*   TheSpecialty Films segment profit was $12.1million for the six months ended June30, 2007, compared to $13.2 million for the same period in 2006. This $1.1million decline includes a favorable sales mix offset by $1.0 millionunfavorable volume impact and $0.9 million in manufacturing and selling,general and administrative costs increases.

*Printed Products*

*Net Sales.*   Netsales of our Printed Products segment decreased $12.2 million or 10.2% to$107.5 million for the six months ended June 30, 2007 from $119.7 million forthe six months ended June 30, 2006. This decrease was due primarily to areduction in average selling prices of 7.3% caused by lower raw material costs,in addition to a change in market mix and a decrease in volume of 3.1%, largelyin the bakery and tortilla markets with offsets in printed shrink and personalcare tissue towel overwrap. Sales opportunities were somewhat constrained dueto the transition of Langley production assets to other facilities.

*Segment Profit.*   ThePrinted Products segment profit was $7.5 million for the six months ended June30, 2007, as compared to $10.4 million for the same period in 2006. This $2.9million decrease includes $0.8 million due to lower volume and $3.0 million ofunfavorable price/mix, offset by $0.9 million in cost improvements.

*Corporate/Other*

Corporate/Otherincludes our corporate headquarters and our research and development facilityin Newport News, Virginia. Unallocated corporate expenses decreased by $1.6million to $12.2 million for the six months ended June 30, 2007, from $13.8million for the six months ended June 30, 2006. This decrease was primarily dueto a reduction in employee bonus and pension related costs, as increasedbillings on government contracts offset higher research and development costsof $1.3 million.

**Liquidity andCapital Resources**

*Sources of Capital*

Ourprincipal sources of funds have been cash generated by our operations andborrowings under our revolving credit facilities. In addition, we have raisedfunds through the issuance of the 2000/2002 Notes, the 2003 Notes, the 2004Notes and the sale of shares of our Series A Preferred Stock.

As ofJune 30, 2007 our outstanding long-term debt consisted of $113.6 million inborrowings under our Revolving Credit Facilities, $321.0 million under ourAmended 2004 Notes, $7.8 million under our 2004 Notes, $250.0 millionunder our 2003 Notes, $55.1 million under our 2006 Subordinated Notes, $24.0million under our 2007 Notes and $13.5 million in capital leases.

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*Current Revolving Credit Facilities*

OnJuly 18, 2006, we entered into the Revolving Credit Facilities. TheRevolving Credit Facilities provide up to $200 million of total commitments,subject to the borrowing base described below and a required minimum availabilityamount of at least $10 million. The Working Capital Credit Agreement includes a$20 million letter of credit sub-facility, with letters of credit reducingavailability thereunder, and each of the Revolving Credit Facilities includessub-limits for loans to certain of our foreign subsidiaries which are borrowersunder the Revolving Credit Facilities. The Revolving Credit Facilities werefunded on July 18, 2006, and replaced our prior credit facilities. Theyare secured by a first priority security interest in substantially all of theCompany’s and certain of its subsidiaries’ assets, although the administrativeagent has a second priority security interest only in certain of the Company’sand its subsidiaries’ assets consistent with the terms of an intercreditorarrangement with certain bondholders of the Company, which intercreditorarrangement is a carry-over from our prior credit arrangements.

The RevolvingCredit Facilities will mature on July 18, 2011. The interest rates for allloans other than those made to our German subsidiary range from, in the case ofalternate base rate loans, the alternate base rate (either prime rate or .50%over the Federal Funds Rate) plus 1.75% to the alternate base rate plus 2.00%and, in the case of eurodollar loans, LIBOR plus 2.75% to LIBOR plus 3.00%, ineach case depending on the amount of available credit. The interest rates forloans made in connection with the loans to our German subsidiary are, in thecase of alternate base rate loans, the alternate base rate plus 5.00% and, inthe case of eurodollar loans, LIBOR plus 6.00%. The commitment fee for theunused portion of the Revolving Credit Facilities is 0.375% per annum.

The borrowing baseunder the Working Capital Credit Agreement is based on specified percentages ofthe Company’s and certain of its subsidiaries’ eligible accounts receivable,finished goods inventory, work in process and raw material inventory minuscertain reserves. The borrowing base under the Fixed Asset Credit Agreement isbased on specified percentages of the Company’s and certain of its subsidiaries’eligible real estate valued at market value plus the net orderly liquidationvalue of eligible machinery and equipment minus certain reserves.

The RevolvingCredit Facilities contain covenants that will limit our ability, subject tocertain exceptions, to, among other things, incur or guarantee additionalindebtedness, issue preferred stock or become liable in respect of anyobligation to purchase or redeem stock, create liens, merge or consolidate withother companies, change lines of business, make certain types of investments,sell assets, enter into certain sale and lease-back and swap transactions, paydividends on or repurchase stock, make distributions with respect to certaindebt obligations, enter into transactions with affiliates, restrict dividendsor other payments from our subsidiaries, modify corporate and certain materialdebt documents, cancel certain debt, or change its fiscal year or accountingpolicies.

The RevolvingCredit Facilities also require the Company to comply with a fixed chargecoverage ratio of 1.00 to 1.00 for the first year of the facility and of 1.10to 1.00 thereafter; provided, that such coverage ratio shall only apply duringperiods in which the amount of availability is and remains less than$20,000,000 for a specified number of days. Once the amount of availabilityincreases and remains above $20,000,000 for a specified number of days, suchcoverage ratio becomes inapplicable. In addition, the amount of availabilityunder the Revolving Credit Facilities must not be less than $10,000,000 at anytime. The loans will automatically become immediately due and payable withoutnotice upon the occurrence of an event of default involving insolvency orbankruptcy of the Company or any of its subsidiaries. In addition, upon theoccurrence and during the continuation of any other event of default under theRevolving Credit Facilities, by notice given to the Company, the administrativeagent may, and if directed by the Required Lenders (as defined in the RevolvingCredit Facilities) must, terminate the commitments and/or declare alloutstanding loans to be immediately due and payable.

The WorkingCapital Credit Agreement is secured by a first-priority security interest insubstantially all our inventory, receivables and deposit accounts, capitalstock of, or other equity interests in, our existing and future domesticsubsidiaries and first-tier foreign subsidiaries, investment property andcertain other assets of the 

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Company and its subsidiaries and a second-prioritysecurity interest in fixed assets of the Company and its subsidiaries party tothe Working Capital Credit Agreement. The Fixed Asset Credit Agreement issecured by a first-priority security interest in the fixed assets of certainforeign subsidiaries of the Company and a second-priority security interest incapital stock of the fixed asset borrowers and their subsidiaries.

*On June14, 2007, the Company and/or certain of its subsidiaries entered into AmendmentNo. 2 to the Working Capital Credit Agreement to allow for the incurrence of indebtedness under the 2007 SubordinatedNote Indenture, discussed in detail below, including payment of regularlyscheduled interest with respect to such indebtedness, in replacement ofindebtedness under the 2006 Subordinated Note Indenture.*

As of June 30,2007, we had borrowings of $113.6 million and availability of $63.7 millionunder the Revolving Credit Facilities.

*2007 Subordinated Notes*

On June 14, 2007,the Company entered into the 2007 Subordinated Note Indenture among theCompany, the 2007 Subordinated Note Guarantors and the 2007 Subordinated Note Trusteewith respect to the issuance on such date of the Company’s 2007 SubordinatedNotes in an aggregate principal amount of $24,000,000. The 2007 SubordinatedNote Indenture provides that interest will accrue on the 2007 SubordinatedNotes from the date of issuance at the rate of 18% per annum until maturity onJuly 15, 2012 and will be payable semi-annually on each January 15 and July 15,commencing July 15, 2007, to holders of record of the 2007 Subordinated Noteson the immediately preceding January 1 or July 1. Pursuant to the 2007Subordinated Note Indenture, the Company may redeem the 2007 Subordinated Notesin whole or in part at the applicable redemption price, which in each of thefirst four years is equal to a de-escalating premium over par, plus accrued andunpaid interest to the redemption date, as set forth in the 2007 SubordinatedNotes. The 2007 Subordinated Note Indenture provides the holders of the 2007Subordinated Notes with the right to require the Company to repurchase the 2007Subordinated Notes at a repurchase price equal to the then applicableredemption price plus accrued and unpaid interest upon a change of control ofthe Company (as defined in the 2007 Subordinated Note Indenture). The 2007Subordinated Note Indenture does not provide for a sinking fund with respect tothe 2007 Subordinated Notes. The 2007 Subordinated Note Indenture contains customaryprovisions that may result in an event of default, after notice and expirationof a cure period in certain circumstances, and acceleration of the indebtednessthereunder, including failure to timely pay principal and interest on the 2007Subordinated Notes or comply with the covenants set forth in the NewSubordinated Note Indenture. The Bank of New York Trust Company, N.A. also actsas trustee with respect to the Company’s 2006 Subordinated Notes (as definedbelow).

In connection witha private offering of the 2007 Subordinated Notes, the Company entered into aPurchase Agreement on June 14, 2007 with the purchasers of the 2007Subordinated Notes, pursuant to which, among other things, the Company agreedto sell to the purchasers, and the purchasers agreed to purchase from theCompany, the 2007 Subordinated Notes. One of the purchasers, UBS Willow Fund,LLC, has disclosed on a Schedule 13G filed December 31, 2006 that, togetherwith its affiliates, it may be deemed to be the beneficial owner of in excessof 10% of the Company’s Series AA Preferred Stock. In addition, another of thepurchasers, Goldman, Sachs & Co., performs investment banking services forthe Company and acted as placement agent in connection with the 2007Subordinated Notes.

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**The2007 Subordinated Note Indenture contains various covenants including, amongother things, covenants limiting the incurrence of indebtedness and restrictingcertain payments, limiting restrictions on the ability of subsidiaries to makedistributions to the Company, limiting sales of assets and subsidiary stock andthe entry into affiliate transactions, as well as provisions governing mergerand change of control transactions. The Company may be required under certaincircumstances to offer to repurchase 2007 Subordinated Notes with the proceedsof certain asset sales. Upon a change of control transaction, holders of 2007Subordinated Notes may require the Company (subject to certain exceptions) torepurchase 2007 Subordinated Notes at a purchase price equal to 101% of theprincipal amount plus accrued and unpaid interest. The 2007 Subordinated Noteswill automatically become due and payable without notice upon the occurrence ofan event of default involving insolvency or bankruptcy of the Company orcertain of its subsidiaries. In addition, upon the occurrence and during thecontinuation of any other event of default under the 2007 Subordinated NoteIndenture, by notice given to the Company, the 2007 Subordinated Note Trusteeor holders of at least 25% in principal amount of the 2007 Subordinated Notesmay declare the principal of and accrued and unpaid interest on all the 2007Subordinated Notes to be immediately due and payable.**

*2006 Subordinated Notes*

On July 18,2006, the Company entered into the 2006 Subordinated Note Indenture among theCompany, the 2006 Subordinated Note Guarantors and the2006 Subordinated Note Trustee, with respect to the issuance on such dateof the 2006 Subordinated Notes in an aggregate principal amount of $34,967,000.

Pursuant to SFAS15,*Accounting for Debtors and Creditors forTrouble Debt Restructuring*, the 2006 Subordinated Notes wererecorded at aggregate principal plus interest to maturity of $20.1 million or atotal of $55.1 million. The 2006 Subordinated Note Indenture provides thatinterest will accrue on the 2006 Subordinated Notes from the date of issuanceat the rate of 13% per annum until maturity on July 15, 2010 and will bepayable semi-annually on the 2006 Subordinated Notes on each January 15and July 15, commencing January 15, 2007, to holders of record on theimmediately preceding January 1 or July 1. The 2006 SubordinatedNotes were scheduled to accrue payment-in-kind interest with respect to thefirst two interest payment dates and then accrue semi-annual cash pay interestwith respect to the interest payment dates thereafter. However, the 2006Subordinated Notes were  subject to theCompany’s right, which was exercised on June 14, 2007, to refinance the 2006Subordinated Notes during the first year after issuance by tendering to theholders of all the 2006 Subordinated Notes cash in an amount equal to(i) $20,000,000 plus (ii) interest accrued at a rate of 13% per annumfrom the date of issuance through the date of payment on a principal amount of$20,000,000 minus (iii) any interest previously paid in cash on the 2006Subordinated Notes.

On June 14, 2007,the 2006 Subordinated Note Trustee, issued, on behalf of the Company, a noticeto the holders of the 2006 Subordinated Notes stating that, on July 16, 2007,the Redemption Date, as defined above, the entire $39,620,102 aggregateprincipal amount of 2006 Subordinated Notes outstanding on the Redemption Datewill be redeemed. In accordance with the 2006 Subordinated Note Indenture, theaggregate redemption price for the 2006 Subordinated Notes is $20,000,000 plusaccrued interest thereon from July 18, 2006 through the Redemption Date in theamount of $2,592,777.78. The Company has deposited with the 2006 SubordinatedNote Trustee, in its capacity as paying agent under the 2006 Subordinated NoteIndenture, funds provided solely from the issuance of the 2007 SubordinatedNotes sufficient to redeem the 2006 Subordinated Notes and the 2006Subordinated Note Trustee has acknowledged satisfaction and discharge of the2006 Subordinated Note Indenture. These deposited funds are separatelydisclosed as restricted cash on the Company’s accompanying CondensedConsolidated Balance Sheet as of June 30, 2007. On or about July, 16, 2007, the2006 Subordinated Notes were redeemed for an aggregate principal and interestamount of $22,592,777.78 and the difference between this amount and thecarrying value of $55,100,884, or $32,508,107, has been recognized as a gain onextinguishment of debt in the third quarter of 2007.

*Amended 2004 Notes*

The Amended 2004 Notesaccreted from the date of issuance through July 18, 2006 at the rate of 11 5/8%,compounded semi-annually on each June 15 and December 15. Inconnection with the Plan of Reorganization, the Company entered into the FirstSupplemental Indenture dated July 18, 2006 amending the Amended and 

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Restated Indenture to increase the interest rate by..225% per annum with respect to the Amended 2004 Notes, which additionalinterest will accrue as payment-in-kind interest. As a result, on July 18,2006, the interest rate on the Amended 2004 Notes was increased to 11.85% perannum. The Amended 2004 Notes are secured on a first-priority basis by asecurity interest in our real property, fixtures, equipment, intellectualproperty and other assets other than the Second-Priority Collateral (the “First-PriorityNote Collateral”) and on a second-priority basis by a security interest insubstantially all our inventory, receivables and deposit accounts, 100% of thecapital stock of, or other equity interests in existing and future domesticsubsidiaries and foreign subsidiaries that are note guarantors, 65% of thecapital stock of, or other equity interests in existing and future first-tier foreignsubsidiaries, investment property and certain other assets of the Company andthe note guarantors (the “Second-Priority Note Collateral”). The Amended 2004Notes are guaranteed by our existing and future domestic restrictedsubsidiaries and certain foreign subsidiaries.

TheAmended 2004 Notes mature on June 15, 2009. On or after June 15,2007, we may redeem some or all of the Amended 2004 Notes at the followingredemption prices (expressed as percentages of the sum of the principal amount,plus accrued and unpaid interest); 111.625% if redeemed prior to June 15,2007; 108.719% if redeemed prior to December 15, 2007; 105.813% ifredeemed prior to June 15, 2008; 102.906% if redeemed prior toDecember 15, 2008; and 100.000% if redeemed on or before June 15,2009.

*2004 Notes*

The2004 Notes mature on June 15, 2009 and are secured by a first-prioritysecurity interest in the First-Priority Note Collateral and a second-prioritysecurity interest in the Second-Priority Note Collateral. The 2004 Notes areguaranteed by our existing and future domestic restricted subsidiaries andcertain foreign subsidiaries.

The 2004 Notes accretedat the rate of 11 1/8% from the date of issuance until July 18, 2006,on which date the interest rate was increased by .225% to 11.35% in accordancewith the Plan. The 2004 Notes accreted at the rate of 11.35% untilDecember 15, 2006 to an aggregate principal amount of $1,000.88 per $1,000stated principal amount. Commencing on December 15, 2006, interest on the2004 Notes accrues at the rate of 11.35% with such incremental interest rateincrease of .225% accruing as payment-in-kind interest and the remaining 11 1/8%payable in cash semiannually on June 15 and December 15, commencingon June 15, 2007. The 2004 Notes mature on June 15, 2009.

On or afterJune 15, 2007, the Company may redeem some or all of the 2004 Notes at thefollowing redemption prices (expressed as percentages of the sum of theprincipal amount plus accrued and unpaid interest):  105.563% if redeemedprior to June 15, 2008; 102.781% if redeemed on or after June 15,2008 and prior to June 15, 2009; and 100.00% if redeemed on June 15,2009.

*2003 Notes*

The 2003 Notes accruedinterest from the date of issuance through maturity at the rate of 11 1/8%.The 2003 Notes mature on September 1, 2009 and interest is payable in cashsemiannually on each March 1 and September 1. The 2003 Notes rank equally with ourexisting and future senior debt and rank senior to our existing and futuresubordinated indebtedness, including the 2006 Subordinated Notes and 2007Subordinated Notes. The 2003Notes are secured by a second priority security interest in both the FirstPriority Note Collateral and the Second Priority Note Collateral. The 2003Notes are guaranteed by some of our subsidiaries.

On or after June 1, 2007,we may redeem some or all of the 2003 Notes at the following redemption prices(expressed as a percentage of principal amount), plus accrued and unpaidinterest: 105.563% if redeemed prior to June 1, 2008; 102.781% if redeemedprior to June 1, 2009; and 100% if redeemed on or after June 1, 2009.

#  

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*PreferredStock*

We have 335,592 of$1,000 per share stated value of Series AA Preferred Stock outstanding asof June 30, 2007, which accrues dividends at the rate of 13% per annum. TheSeries AA Preferred Stock is convertible into our Common Stock. If theSeries AA Preferred Stock has not been redeemed or repurchased byJuly 18, 2011, the holders of at least 40% of the outstanding shares ofSeries AA Preferred Stock shall have the right to cause all of theoutstanding class of Series AA Preferred Stock to be converted into anumber of shares of Common Stock equal to 99.9% of the number of fully dilutedshares of Common Stock after giving effect to such conversion (excludingshares, if any, of Common Stock issued to stockholders of the other party to amerger qualifying for the “Merger Exception” as defined in our Amended andRestated Certificate of Incorporation). On August 1, 2007, the Company’sSeries AA Preferred Stock began to be quoted on the OTCBB.

Inaddition, we have 8,000 shares of Series M Preferred Stock with a parvalue of $.01 per share outstanding. During 2006, we adopted the Plan ofReorganization, pursuant to which each participant with shares of Series MPreferred Stock participates in the enterprise value of our Company upon a “liquidationevent” or upon an 80% “redemption” of the Series AA Preferred Stock orupon a public offering, to the extent the proceeds exceed $224.8 million. Aparticipant’s restricted Series M Preferred Stock vests monthly over a 36month period; or upon a liquidation event, redemption, or public offering; orupon certain terminations of employment within a limited period before anaccelerated vesting event.

*Net Cash Providedby/Used in Operating Activities*

Netcash provided by operating activities was $30.1 million for the six monthsended June 30, 2007, compared to $42.8 million for the same period in 2006.This $12.7 million decrease between years reflects $12.3 million incrementalearnings from operations before non-cash charges, offset by lower workingcapital reductions and other improvements of $25.0 million.  Net working capital requirements for the sixmonths ended June 30, 2007 decreased $3.3 million and reflect improvements of$5.7 million in receivables, $12.7 million in accounts payable, $1.8 million inprepaid expenses which were partially offset by reductions in accruedliabilities of $14.4 million and increases in inventories of $2.5 million.During the first six months of 2007, the Company made a semi-annual bondpayment of $13.9 million and paid out its fiscal 2006 incentive plans of $6.8million and $3.4 million in annual vendor rebate program accrued as of yearend. Payments for comparable items were not made during the first six months of2006 in accordance with the applicable provisions of the Bankruptcy Code.During the first six months of 2006, net working capital requirements decreased$32.7 million and included working capital improvements of $30.0 million due toaccounts payable and accrued liabilities attributable to reinstatement ofcredit terms, $6.5 million reduction in other assets due to write-offs ofcapitalized financing costs and reductions in prepaid expenses, inventory andincome taxes payable of $1.0 million, $0.6 million and $0.5 million,respectively, partially offset by increases in accounts receivable of $5.8million.

*Net Cash Used inInvesting Activities*

Netcash used in investing activities increased $5.6 million to $24.0 million forthe six months ended June 30, 2007, from $18.4 million for the six months endedJune 30, 2006 due to increased capital expenditures.

*Net Cash Providedby/Used in Financing Activities*

Netcash used in financing activities was $0.3 million for the six months endedJune 30, 2007, compared to $2.6 million for the six months ended June 30,2006.  Activity for the six months endedJune 30, 2007, includes $24.0 million of proceeds from the issuance of  the Company’s 2007 Subordinated Notes, $0.2million in proceeds from sale of the Company’s Series M Preferred Stock, offsetby $22.6 million in cash deposited with a trustee for the repurchase of theCompany’s outstanding 2006 Subordinated Notes, $1.6 million of payments offinancing fees and $0.3 million in payments of capital leases. Activity for thefirst six months of 2006 included $1.6 million payment of arrangement fees andother costs associated with our DIP revolving credit facility and $0.9 millionof repayments of capital leases.

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***Liquidity***

As ofJune 30, 2007, we had $113.6 million of borrowings under our $200 millionRevolving Credit Facilities, and $63.7 million of availability subject to ourborrowing base limitations and $5.5 million in outstanding letters of credit.

As ofJune 30, 2007, we had $8.7 million in cash and cash equivalents, of which $2.2million is a compensating balance associated with our Canadian operationsborrowings under our Revolving Credit Facilities. In addition, a portion of ourcash and cash equivalents are held by our other foreign subsidiaries.

TheCompany expects that cash flows from operating activities and availableborrowings under our Revolving Credit Facilities of up to $200 million willprovide sufficient cash flow to operate our business, to make expected capitalexpenditures and to meet foreseeable liquidity requirements.  However, our ability to borrow under ourRevolving Credit Facilities at any time may be subject to the borrowing base ineffect at that time. Our ability to make borrowings under our Revolving CreditFacilities will also be conditioned upon our compliance with other covenants inthese agreements, including financial covenants that apply when our borrowingsexceed certain amounts. In addition, the terms of our indentures currentlylimit the amount we may borrow under our Revolving Credit Facilities.

*CapitalExpenditures*

Ourtotal capital expenditures were approximately $34 million in 2005,$41 million in 2006 and are expected to continue to increase in 2007.These expenditures are focused on projects to lower operating costs, addcapacity for high value products, expand research and development programs, andbring new innovative products to market.

*RawMaterial Costs*

Changes in rawmaterial costs can significantly affect the amount of cash provided by ouroperating activities, which can affect our liquidity. Over the past two years,we have experienced a period of extreme uncertainty with respect to resinsupplies and prices. High crude oil and natural gas pricing, have had asignificant impact on the price and supply of resins. During the same period,many major suppliers of resin have announced price increases to cover theirincreases in feedstock costs. While the prices of our products generallyfluctuate with the prices of resins, certain of our customers have contractsthat limit our ability to pass the full cost of higher resin pricing through toour customers immediately. Further, competitive conditions in our industry maymake it difficult for us to sufficiently increase our selling prices for allcustomers to reflect the full impact of increases in raw material costs. Ifthis period of high resin pricing continues, we may be unable to pass on theentire effect of the price increases to our customers, which would adverselyaffect our profitability and working capital. In addition, further increases incrude oil and natural gas prices could make it difficult for us to obtain anadequate supply of resin from manufacturers affected by these factors.

**ContractualObligations**

***There have been no material changes in our contractualobligations and commercial commitments since December 31, 2006 arising outsideof the ordinary course of business.***

**CautionaryStatement for Forward-Looking Information**

Some of the statementsset forth in this report including, but not limited to, those under the heading“Management’s Discussion and Analysis of Financial Condition and Results ofOperation,” are in “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995. These statements relate toanalyses and other information that is based on forecasts of future results andestimates of amounts not yet determinable. These statements also relate to ourfuture prospects, developments and business strategies. These forward-lookingstatements are identified by their use of terms and phrases such as“anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,”“plan,” “predict,” “project,” “will” and similar terms

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and phrases, including references to assumptions.These forward-looking statements are not historical facts but instead representonly expectations, estimates and projections regarding future events. Thesestatements are not guarantees of future performance and involve known andunknown risks, uncertainties and other factors that are difficult to predictand may cause actual results to be materially different. These factors include,but are not limited to, the following:

·     general economic and business conditions,particularly an economic downturn;

·     continuing losses and charges againstearnings resulting from restructuring or the impairment of assets;

·     industry trends;

·     risks of high leverage and any increases inour leverage;

·     interest rate increases;

·     changes in our ownership structure;

·     changes in the Company’s composition ofoperating segments;

·     raw material costs and availability,particularly resin;

·     the timing and extent to which we passthrough resin cost changes to our customers;

·     the loss of any of our key suppliers;

·     changes in credit terms from our suppliers;

·     competition;

·     the loss of any of our major customers;

·     changes in demand for our products;

·     new technologies;

·     changes in distribution channels orcompetitive conditions in the markets or countries where we operate;

·     costs of integrating any futureacquisitions;

·     loss of our intellectual property rights;

·     foreign currency fluctuations and devaluationsand political instability in our foreign markets;

·     changes in our business strategy ordevelopment plans;

·     availability, terms and deployment ofcapital;

·     availability of qualified personnel;

·     labor relations and work stoppages;

·     increasesin the cost of compliance with laws and regulations, including environmentallaws and   regulations; and

·     other risks and uncertainties listed ordescribed from time to time in reports we periodically file with the SEC.

Wemay also make additional forward-looking statements from time to time.All such subsequent forward-looking statements, whether written or oral, by usor on our behalf, are also expressly qualified by these cautionary statements.All forward-looking statements, including, without limitation, management’sexamination of historical operating trends, are based upon our currentexpectations and various assumptions. Our expectations, beliefs and projectionsare expressed in good faith and we believe there is a reasonable basis forthem. But, there can be no assurance that management’s expectations, beliefsand projections will result or be achieved. All forward-looking statementsapply only as of the date made. We undertake no obligation to publicly updateor revise forward-looking statements which may be made to reflect events orcircumstances after the date made or to reflect the occurrence of unanticipatedevents.

Ourrisks are more specifically described in Part I, Item 1A “Risk Factors” in theCompany’s Annual Report on Form 10-K for the year endedDecember 31, 2006. If one or more of these risks or uncertaintiesmaterialize, or if underlying assumptions prove incorrect, our actual resultsmay vary materially from those expected, estimated or projected.

**ITEM3.**                    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The discussion belowdescribes changes in our market risks since December 31, 2006. For additionalinformation regarding our exposure to certain market risks, see Part II, Item7A “Quantitative and Qualitative Disclosures About Market Risk” in the Company’sAnnual Report on Form 10-K for year ending December 31, 2006.

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Weare exposed to various interest rate and resin price risks that arise in thenormal course of business. We regularly evaluate the advisability of enteringinto interest rate hedging agreements to manage interest rate market risks andcommodity hedging agreements to manage resin market risks. However, significantincreases in interest rates or the price of resins could adversely affect our operatingmargins, results of operations and ability to service our indebtedness.

OurRevolving Credit Facility is at a variable rate of interest. An increase of 1%in interest rates would result in an additional $1.1 million of annual interestexpense based on our Revolving Credit Facility balance of $113.6 million as ofJune 30, 2007.

Ourraw material costs are comprised primarily of resins. Our resin costs comprisedapproximately 65% of our total manufacturing costs. Market risk arises fromchanges in resin costs. Although the average selling prices of our productsgenerally increase or decrease as the cost of resins increases or decreases,the impact of a change in resin prices is more immediately reflected in our rawmaterial costs than in our selling prices. In prior years, we entered intocommodity collar agreements to manage resin market risks. At June 30, 2007, wedid not have any commodity collar agreements outstanding. Prices for resindropped dramatically during the fourth quarter of 2006 and may continue tofluctuate, however, we currently expect such prices to increase in the secondhalf of 2007.

Fluctuationsin exchange rates may also adversely affect our financial results. Thefunctional currencies for our foreign subsidiaries are the local currency. As aresult, certain of our assets and liabilities, including certain bank accounts,accounts receivable and accounts payable, exist in non U.S. dollar-denominatedcurrencies, which are sensitive to foreign currency exchange rate fluctuations.

We enter into certaintransactions denominated in foreign currencies but, because of the relativelysmall size of each individual currency exposure, we have not ordinarilyemployed hedging techniques designed to mitigate foreign currency exposures.Gains and losses from these transactions are immaterial and are reflected inthe results of operations.

We are exposed to creditlosses in the event of nonperformance by the counterparty to a financialinstrument to which we are a party. We anticipate, however, that each of thecounterparties to the financial instruments to which we are a party will beable to fully satisfy its obligations under the contract.

**ITEM4.**                    CONTROLSAND PROCEDURES

**Evaluation ofDisclosure Controls and Procedures**

Theeffectiveness of our or any system of disclosure controls and procedures issubject to certain limitations, including the exercise of judgment indesigning, implementing and evaluating the controls and procedures, theassumptions used in identifying the likelihood of future events, and theinability to eliminate misconduct completely. As a result, there can be noassurance that our disclosure controls and procedures will detect all errors orfraud. By their nature, our or any system of disclosure controls and procedurescan provide only reasonable assurance regarding management’s controlobjectives.

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated the designand operation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, orthe “Exchange Act”) as of June 30, 2007. On the basis of this review, ourmanagement, including our Chief Executive Officer and Chief Financial Officer,concluded that our disclosure controls and procedures are designed, and areeffective, to give reasonable assurance that the information required to bedisclosed by us in reports that we file under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in therules and forms of the SEC and to ensure that information required to bedisclosed in the reports filed or submitted under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, in a manner that allows timely decisionsregarding required disclosure.

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**Changes inInternal Controls**

Managementhas evaluated, with the participation of our principal executive officer andour principal financial officer, changes in the Company’s internal controlsover financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of theExchange Act) during the second quarter of 2007.

Therewere no changes in our internal controls over financial reporting that occurredduring the quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal controls over financial reporting.

#  

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**PART II.   OTHERINFORMATION**

**ITEM1.   LEGAL PROCEEDINGS**

As previously disclosedin the Company’s Annual Report on Form 10-K for the year ended December 31,2006, the Company filed a patent infringement complaint against MSC Marketing& Technology, Inc., d/b/a Sigma Stretch Films and Atlantis Plastics, Inc onMay 19, 2004, Case No. 04-C-3509 (N.D. Ill.). The Company sells a patentedplastic film that is used to wrap pallet loads. The patent infringement lawsuitwas filed to protect the Company’s exclusive right to this film’s patentedfeatures, which provide the Company’s product with advantages in this industry.During the second quarter of 2007, the Company has agreed to a settlement ofthe lawsuit with MSC Marketing & Technology, Inc. and with Atlantis Plastics,Inc., in which each will pay a fee to license the patent from the Company.

**ITEM1A.   RISK FACTORS**

There have been nomaterial changes to the risk factors as disclosed in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006.

**ITEM2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**ITEM3.   DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

**None.**

**ITEM5.   OTHER INFORMATION HOLDERS**

None.

**ITEM6.**                    EXHIBITS

The exhibits listed on the accompanying Index toExhibits are filed or incorporated by reference as a part of this report andsuch Index to Exhibits is incorporated herein by reference.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                             |     | PLIANT CORPORATION                            |
|-----------------------------|----------|-----------------------------------------------|
|                        |     |                                          |
|                        |     |                                          |
|                        |     | /s/ Joseph  J. Kwederis                  |
|                        |     | JOSEPH J. KWEDERIS                            |
|                        | * * | *Chief Financial Officer*                     |
|                        | * * | *(Authorized Signatory and*                   |
|                        | * * | *Principal Financial and Accounting Officer)* |
| Date: August  14, 2007 |     |                                          |

 

** **

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**INDEX TO EXHIBITS**
| 4.1     |   | Indenture, dated as of June 14, 2007, among Pliant  Corporation, certain subsidiaries of Pliant Corporation, as guarantors, and  The Bank of New York Trust Company, N.A., as trustee (incorporated  by reference to Exhibit 4.1 to the Current Report on Form 8-K  filed by Pliant Corporation on June 15, 2007).                                                                                                                                                                                   |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1    |   | Purchase Agreement, dated as of June 14, 2007, among  Pliant Corporation, certain subsidiaries of Pliant Corporation and Goldman,  Sachs & Co. and UBS Willow Fund, LLC, as purchasers (incorporated  by reference to Exhibit 10.1 to the Current Report on Form 8-K  filed by Pliant Corporation on June 15, 2007).                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2    |   | Amendment No. 2 to the Working Capital Credit  Agreement, dated as of June 14, 2007, among Pliant Corporation, the  subsidiary borrowers party thereto, the lenders party thereto, and Merrill  Lynch Bank USA, as administrative agent (incorporated by reference to  Exhibit 10.2 to the Current Report on Form 8-K filed by Pliant  Corporation on June 15, 2007).                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3    |   | Amendment No. 2 to the Fixed Asset Credit Agreement,  dated as of June 14, 2007, among Pliant Corporation Pty Ltd., Pliant  Corporation of Canada Ltd., Pliant Film Products GmbH, Aspen Industrial,  S.A., de C.V., Jacinto Mexico, S.A. de C.V. and Pliant de Mexico, S.A. de  C.V., the lenders party thereto, and Merrill Lynch Bank USA, as  administrative agent (incorporated by reference to Exhibit 10.3 to  the Current Report on Form 8-K filed by Pliant Corporation on  June 15, 2007). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4(a) |   | Form of Restricted Stock Agreement pursuant to  Pliant Corporation 2006 Restricted Stock Incentive Plan, dated February 20,  2007 (incorporated by reference to Exhibit 10.1(a) to the Quarterly  Report on Form 10-Q filed by Pliant Corporation on May 15, 2007).                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4(b) |   | Schedule of Purchasers (incorporated  by reference to Exhibit 10.1(b) to the Quarterly Report on  Form 10-Q filed by Pliant Corporation on May 15, 2007).                                                                                                                                                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5(a) |   | Form of Restricted Stock Agreement pursuant to  Pliant Corporation 2006 Restricted Stock Incentive Plan, dated April 17, 2007  (incorporated by reference to Exhibit 10.2(a) to the Quarterly  Report on Form 10-Q filed by Pliant Corporation on May 15, 2007).                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5(b) |   | Schedule of Purchasers (incorporated  by reference to Exhibit 10.2(b) to the Quarterly Report on  Form 10-Q filed by Pliant Corporation on May 15, 2007).                                                                                                                                                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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 furnished  pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.2    |   | Certification of Chief Financial Officer furnished  pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                 |

 

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