UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 31, ~~2004~~2005

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

For the transition period from to

Commission File Number: 333-118844

THE NEWARK GROUP, INC.

(Exact name of registrant as specified in its charter)

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

20 Jackson Drive
Cranford, New Jersey		07016
(Address of principal executive office)		(Zip Code)

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

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

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

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

~~The~~Indicate ~~number~~by ofcheck ~~common~~mark ~~shares~~whether ~~outstanding~~the atregistrant ~~October~~is ~~31,~~a ~~2004~~shell ~~was~~company ~~3,857,206~~(as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of common shares outstanding at October 31, 2005 was 3,654,242.

INDEX

		Page
PART I –	FINANCIAL INFORMATION
PART I – FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Financial Statements:
	Consolidated Balance Sheets as of October 31, 2004 and April 30, 2004	1
	Consolidated Balance Sheets as of October 31, 2005 and April 30, 2005	1
	Consolidated Statements of Operations for the three and six months endedOctober 31, 2004 and 2003	2
	Consolidated Statements of Operations for the three and six months ended October 31, 2005 and 2004	2
	Consolidated Statements of Cash flows for the six months endedOctober 31, 2004 and 2003	3
	Consolidated Statements of Cash flows for the six months ended October 31, 2005 and 2004	3
	Consolidated Statements of Permanent Stockholders’ Equity for the year endedApril 30, 2004 and the six months ended October 31, 2004	4
	Consolidated Statement of Permanent Stockholders’ Equity for the six months ended October 31, 2005	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1213
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2224
Item 4.	Controls and Procedures	2324
Part II –	OTHER INFORMATION
Part II – OTHER INFORMATION
Item 1.	Legal Proceedings	2425
Item 2.	~~Changes~~Unregistered inSale of Equity Securities and Use of Proceeds	2425
Item 3.	Defaults Upon Senior Securities	2425
Item 4.	Submission of Matters to a Vote of Security-Holders	2425
Item 5.	Other Information	2425
Item 6.	Exhibits ~~and Reports on Form 8-K~~	25
	SIGNATURE
	SIGNATURES	26

THE NEWARK GROUP, INC. AND SUBSIDIARIES

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED BALANCE SHEETS - UNAUDITED

AS OF ~~OCTOBER~~ October 31, ~~2004~~2005 AND APRIL 30, ~~2004~~2005

(Dollars in Thousands, Except Share Data)

	October 31,2004			April 30,2004
	October 31,2005			April 30,2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	3,~~773~~490		$	2,~~003~~991
Marketable securities		—			45
Accounts receivable (less allowance for doubtful accounts of $5,990 and $6,356, respectively)		106,898			119,815
Accounts receivable (less allowance for doubtful accounts of $5,315 and $6,326, respectively)		116,799			115,221
Inventories		65,375			61,760
Inventories		57,315			53,379
Other current assets		16,192			3,840
Other current assets		11,945			13,893
Total current assets		191,955			188,406
Total current assets		189,832			184,541
RESTRICTED CASH		256			131
PROPERTY, PLANT AND EQUIPMENT – Net		~~330~~310,~~188~~357			~~333~~320,~~217~~947
GOODWILL		4745,~~093~~525			4547,~~353~~256
EQUITY INVESTMENTS IN AFFILIATES		16,357			14,513
LONG-TERM INVESTMENTS		16,734			16,776
OTHER ASSETS		2126,~~478~~223			2226,~~527~~568
ASSETS OF DISCONTINUED OPERATIONS		1,368			1,368
TOTAL ASSETS	$	591,050		$	600,084
TOTAL ASSETS	$	606,572		$	601,650
LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	7782,~~778~~023		$	85,~~040~~068
Current portion of long-term debt		3,641			3,147
Current maturities of debt		4,541			2,621
State and foreign taxes payable		1,416			395
Income taxes and other taxes payable		4,969			2,979
Accrued salaries and wages		1415,~~508~~334			1314,~~887~~183
Other accrued expenses		1311,~~967~~906			1813,~~989~~981
Total current liabilities		~~111~~118,~~310~~773			~~121~~118,~~458~~832
SENIOR DEBT		9076,~~039~~390			7679,~~445~~097
SUBORDINATED DEBT		~~175~~181,~~838~~561			~~176~~175,~~197~~599
DEFERRED INCOME TAXES		97,~~335~~736			105,~~068~~073
PENSION OBLIGATION		2228,~~667~~013			2227,~~268~~980
OTHER LIABILITIES		28,035			27,448
SWAP OBLIGATION		14,686			22,399
OTHER LIABILITIES OF DISCONTINUED OPERATIONS		94			138
OTHER LIABILITIES		6,222			6,435
MINORITY INTEREST		9287			8792
Total liabilities		~~437~~433,~~410~~468			~~434~~435,~~109~~507
TEMPORARY EQUITY - COMMON STOCK, SUBJECT TO PUT RIGHTS,(876,406 and 899,873 shares, respectively)		40,744			41,835
COMMITMENTS AND CONTINGENCIES (Note 7)
TEMPORARY EQUITY - COMMON STOCK, SUBJECT TO PUT RIGHTS, (668,442 and 866,442 shares, respectively)		30,708			38,418
PERMANENT STOCKHOLDERS’ EQUITY:
Common stock, $.01 per share stated value; authorized10,000,000 shares, issued and outstanding 6,000,000 shares		60			60
Common stock, $.01 per share stated value; authorized 10,000,000 shares, issued and outstanding 6,005,000 shares		60			60
Additional paid-in capital		~~249~~374			~~249~~374
Retained earnings		~~187~~195,~~662~~612			~~184~~190,~~951~~330
Accumulated other comprehensive loss		(79,~~765~~046	)		(812,~~858~~354	)
Treasury stock, 2,142,794 shares and 2,121,121 shares, respectively at cost		(51,788	)		(50,696	)
Treasury stock, 2,350,758 and 2,152,758 shares, respectively at cost		(60,126	)		(52,251	)
Total permanent stockholders’ equity		~~128~~126,~~418~~874			~~125~~126,~~706~~159
TOTAL LIABILITIES, TEMPORARY EQUITY AND PERMANENT STOCKHOLDERS’ EQUITY	$	~~606~~591,~~572~~050		$	~~601~~600,~~650~~084

See notes to consolidated financial statements

-1-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, ~~2004~~2005 AND ~~2003~~2004

(Dollars in Thousands)

	For the Three Months Ended						For the Six Months Ended
	October 31,2004			October 31,2003			October 31,2004			October 31,2003
	October 31, 2005			October 31, 2004			October 31, 2005			October 31, 2004
NET SALES	$	217,065		$	197,560		$	433,124		$	393,442
				(As Restated)						(As Restated)
COST OF SALES		189,219			171,050			377,057			337,934
NET SALES	$	217,898		$	217,065		$	442,341		$	433,124
Gross profit		27,846			26,510			56,067			55,508
COST OF SALES		193,881			189,034			393,012			376,478
Gross profit		24,017			28,031			49,329			56,646
OPERATING EXPENSES:
Selling, general and administrative		2019,~~636~~864			20,~~213~~636			4140,~~455~~003			4041,~~617~~455
Restructuring and impairments		~~128~~417			~~1,000~~128			1,~~078~~249			21,~~095~~078
Total operating expenses		20,~~764~~281			2120,~~213~~764			4241,~~533~~252			42,~~712~~533
OPERATING INCOME:		7,082			5,297			13,534			12,796
OPERATING INCOME		3,736			7,267			8,077			14,113
OTHER (EXPENSE) INCOME:
Interest expense		(6,~~243~~613	)		(36,~~903~~243	)		(12,~~403~~870	)		(712,~~513~~403	)
Interest income		2052			6620			4153			6641
Equity in income of investees		494			233			1,022			430
Equity in income of affiliates		434			494			1,012			1,022
Other income – net		15			164			290			408
Other (expense) income – net		(124	)		15			(426	)		290
Total other expense		(56,~~714~~251	)		(35,~~440~~714	)		(1112,~~050~~231	)		(611,~~609~~050	)
EARNINGS FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES		1,368			1,857			2,484			6,187
(LOSS) EARNINGS FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES		(2,515	)		1,553			(4,154	)		3,063
INCOME TAX EXPENSE		282			862			865			2,768
INCOME TAX (BENEFIT) EXPENSE		(1,276	)		356			(1,561	)		1,096
EARNINGS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		1,086			995			1,619			3,419
NET (LOSS) EARNINGS	$	(1,239	)	$	1,197		$	(2,593	)	$	1,967
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (NET OF TAX)		—			—			—			(1,765	)
NET EARNINGS	$	1,086		$	995		$	1,619		$	1,654

See notes to consolidated financial statements

-2-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

FOR THE SIX MONTHS ENDED OCTOBER 31, ~~2004~~2005 AND ~~2003~~2004

(Dollars in Thousands)

	For the Six Months Ended
	2005			2004
	October 31,2004			October 31,2003
				(As Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	1,619		$	1,654
Net (loss) earnings	$	(2,593	)	$	1,967
Adjustments to reconcile net earnings to net cash provided by operating activities:
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Cumulative effect of accounting change		—			1,765
Depreciation and amortization		17,278			16,051
Depreciation and amortization		16,051			14,874
Impairment of assets		393			82
Impairment of assets		82			—
Loss on sale of property, plant and equipment		225			168
Loss on sale of property, plant and equipment		168			14
Equity in income of affiliates		(1,012	)		(1,022	)
Equity in income of affiliates		(1,022	)		(430	)
Stock-based compensation expense		165			—
Loss due to hedge accounting		520			—
(Gain) loss due to hedge ineffectiveness		(210	)		520
Deferred income tax (benefit)/expense		(2,057	)		406
Proceeds from dividends paid by equity investments in affiliates		—			424
Changes in assets and liabilities excluding the effects of acquisitions:
Deferred income tax benefit		(3,261	)		(1,826	)
Decrease in accounts receivable		1,085			5,604
Changes in assets and liabilities:
Increase in inventories		(2,822	)		(3,174	)
Decrease in accounts receivable		10,408			1,085
Decrease in other current assets		2,410			2,392
Increase in inventories		(4,661	)		(3,401	)
Decrease in other assets		373			1,789
(Increase) decrease in other current assets		(1,732	)		2,410
Decrease in accounts payable and accrued expenses		(1,438	)		(9,193	)
(Increase) decrease in other assets		(792	)		373
Decrease in other liabilities		(4,889	)		(3,645	)
Increase (decrease) in accounts payable and accrued expenses		(1,162	)		(1,438	)
Net cash provided by operating activities		10,080			12,056
Decrease in other liabilities		(1,984	)		(4,889	)
Net cash provided by operating activities		11,062			10,504
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities		44—			—44
Purchase of equity method investments		—			(2,304	)
Capital expenditures		(8,870	)		(9,245	)
Business acquisitions		—			(515	)
Proceeds from sale of property, plant and equipment		1,084			67
Capital expenditures		(9,245	)		(13,483	)
Increase in restricted cash		(125	)		(125	)
Proceeds from dividends paid by equity investments		424			—
Net cash used in investing activities		(7,911	)		(9,259	)
Proceeds from sale of property, plant and equipment		67			95
Increase in restricted cash		(125	)		(63	)
Net cash used in investing activities		(8,835	)		(16,270	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt		(62,~~380~~174	)		(126,~~822~~380	)
Proceeds from long-term debt		~~19,025~~—			19,~~000~~025
Changes in cash overdraft		~~(10,550~~519	)		(610,~~036~~550	)
Purchase of treasury stock		~~(1,092~~—	)		(21,~~063~~092	)
Net cash provided by (used in) financing activities		1,003			(1,921	)
Net cash (used in) provided by financing activities		(1,655	)		1,003
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(~~478~~997	)		~~284~~(478	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,770			(5,851	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		499			1,770
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		2,~~003~~991			72,~~007~~003
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,~~773~~490		$	13,~~156~~773
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Cash paid during the period for:
Interest	$	12,~~876~~865		$	312,~~769~~876
Income Taxes:
Income Taxes	$	1,054		$	738
Paid	$	738		$	1,072
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:
(Refunded)		—		$	(257	)
Note issued in connection with stock repurchase	$	7,875		$	—

See notes to consolidated financial statements

-3-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED ~~STATEMENTS~~STATEMENT OF PERMANENT STOCKHOLDERS’ EQUITY - UNAUDITED

FOR THE ~~YEAR ENDED APRIL 30, 2004 AND THE~~ SIX MONTHS ENDED OCTOBER 31, ~~2004~~2005

(Dollars in Thousands)

	Total			AccumulatedOtherComprehensiveIncome (Loss)			TreasuryStock			RetainedEarnings			AdditionalPaid InCapital		CommonStock		TotalComprehensiveIncome
BALANCE APRIL 30, 2003	$	136,569		$	(12,152	)	$	(46,179	)	$	194,591		$	249	$	60
BALANCE APRIL 30, 2005	$	126,159		$	(12,354	)	$	(52,251	)	$	190,330		$	374	$	60
Net loss		(172,~~656~~593	)		—			—			(172,~~656~~593	)		—		—	$	(172,~~656~~593	)
Change in temporary equity subject to put rights		8,016			—			—			8,016			—		—		—
Other comprehensive income (loss), net of tax:
Unrealized losses on marketable securities available for sale (net of taxes of $4)		6			6			—			—			—		—		6
Foreign currency translation adjustments (net of taxes of $727)		(1,091	)		(1,091	)		—			—			—		—		(1,091	)
Foreign currency translation adjustments (net of taxes of $691)		1,037			1,037			—			—			—		—		1,037
Change in fair value of cash flow hedges (net of taxes of $2,933)		4,399			4,399			—			—			—		—		4,399
Minimum pension liability adjustments (net of taxes of $2,019)		3,029			3,029			—			—			—		—		3,029
Acquisition of treasury stock, at cost		—			—			(7,875	)		7,875			—		—		—
Change in fair value of cash flow hedges (net of taxes of $519)		(778	)		(778	)		—			—			—		—		(778	)
BALANCE OCTOBER 31, 2005	$	126,874		$	(9,046	)	$	(60,126	)	$	195,612		$	374	$	60	$	715
Purchase of treasury stock, at cost		(4,517	)		—			(4,517	)		—			—		—		—
BALANCE APRIL 30, 2004	$	125,706		$	(8,858	)	$	(50,696	)	$	184,951		$	249	$	60	$	(14,362	)
Net earnings		1,619			—			—			1,619			—		—	$	1,619
Change in temporary equity subject to put rights		1,092			—			—			1,092			—		—		—
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (net of taxes of $825)		1,238			1,238			—			—			—		—		1,238
Change in fair value of cash flow hedges (net of taxes of $97)		(145	)		(145	)		—			—			—		—		(145	)
Purchase of treasury stock, at cost		(1,092	)					(1,092	)		—			—		—		—
BALANCE OCTOBER 31, 2004	$	128,418		$	(7,765	)	$	(51,788	)	$	187,662		$	249	$	60	$	2,712

See notes to consolidated financial statements

-4-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

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

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Principles of Consolidation – The Newark Group, Inc. and its wholly owned subsidiaries (the “Company”) is an integrated global producer of recycled paperboard and converted paperboard products, with significant manufacturing and converting operations in North America and Europe. The Company’s customers are global manufacturers and converters of paperboard. ~~The~~ accompanying unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments and accruals, as well as accounting changes considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements. Additionally, the preparation of these financial statements requires management to make estimates and assumptions that affect: a) the reported amounts of assets and liabilities, b) the disclosure of contingent assets and liabilities at the date of the financial statements; and, c) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~Operating~~The ~~results~~accompanying ~~for~~unaudited condensed consolidated financial statements of the ~~three~~Company have been prepared pursuant to the rules and ~~six-month~~regulations ~~periods~~of ~~ended~~the ~~October~~Securities 31and Exchange Commission for interim financial information. Accordingly, ~~2004~~they ~~are~~do not ~~necessarily~~include ~~indicative~~all of the ~~results~~information ~~that~~and ~~may~~footnotes berequired ~~expected~~by accounting principles generally accepted in the United States of America for complete financial statements. In the ~~year~~opinion ~~ended~~of ~~April~~management, 30all adjustments consisting of normal recurring adjustments and accruals, ~~2005~~as ~~due~~well as accounting changes considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements. Additionally, the preparation of these financial statements requires management to ~~seasonal~~make estimates and ~~other~~assumptions ~~factors.~~that Inaffect: a) ~~order~~the toreported ~~maintain~~amounts ~~consistency~~of assets and ~~comparability~~liabilities, ~~between~~b) ~~periods~~the ~~presented~~disclosure of contingent assets and liabilities at the date of the financial statements; and, ~~certain~~c) ~~prior~~the ~~period~~reported amounts ~~have~~of ~~been~~revenues ~~reclassified~~and toexpenses ~~conform~~during to the ~~current~~reporting period. ~~presentation~~Actual results could differ from those estimates. ~~These~~Operating ~~condensed~~results for the three and six-month periods ended October 31, 2005 are not necessarily indicative of the results that may be expected for the year ending April 30, 2006 due to seasonal and other factors. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and ~~related~~ notes ~~included~~thereto ~~in the Company’s S-4 filing~~ for the year ended April 30, ~~2004~~2005 ~~which~~included ~~was~~in ~~filed~~our ~~with~~annual ~~the SEC~~ report on ~~September~~Form ~~7, 2004~~10-K.

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

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

~~Cash~~Stock-based Compensation ~~and Cash Equivalents~~ – ~~Cash~~In ~~and~~accordance ~~cash~~with ~~equivalents~~SFAS ~~include cash~~No. 123 on“Accounting ~~hand,~~for ~~cash~~Stock inBased ~~banks~~Compensation,” ~~and~~the ~~short-term~~Company ~~investments~~accounts ~~with~~for ~~maturity~~employee ofstock ~~three~~options ~~months~~and orstock ~~less~~appreciation ~~from~~rights ~~date~~based ofupon ~~purchase.~~the ~~Cash~~fair ~~overdrafts~~value ~~are~~method ~~included~~of inaccounting ~~accounts~~for ~~payable~~equity instruments ~~and~~which ~~are~~results $0in ~~and~~the ~~$10,550~~recording as of ~~October~~compensation ~~31,~~expense ~~2004~~in ~~and~~the ~~2003,~~Company’s ~~respectively~~financial statements.

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash in banks and short-term investments with maturity of three months or less from date of purchase. Cash overdrafts are included in accounts payable and are $5,108 and $4,589 as of October 31, 2005 and April 30, 2005, respectively.

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

2.	INVENTORIES

	October 31, 2004		April 30,2004
Raw Materials	$	22,115	$	19,223
Finished Goods		32,835		33,280
Other Manufacturing Supplies		2,365		876
	$	57,315	$	53,379

Prior to November 1, 2004, the Company used the last-in, first-out (“LIFO”) method of costing inventory for most of its North American Operations, with the cost of the remaining inventories determined using the first-in, first-out (“FIFO”) method. Effective, November 1, 2004, the Company changed its method of accounting for its LIFO inventory to the FIFO method. Management believes the FIFO method is preferable because it provides a better matching of costs to revenues, provides a more meaningful presentation of the Company’s financial position by reflecting recent costs in the balance sheet, and provides a uniform costing method across the Company’s business segments. In accordance with accounting principles generally accepted in the United States of America, the prior

The LIFO reserve at October 31, 2004 and April 30, 2004 is $6,782 and $5,632, respectively. There was no liquidation of layers within the LIFO calculation for the period ended October 31, 2004.

-5-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

~~Inventories~~period ~~are~~consolidated ~~valued~~financial atstatements ~~the~~presented ~~lower of cost (last-~~in, ~~first-out~~this ~~(“LIFO”)~~Form ~~method) or market, except for $20,555 and $19,756 at October 31, 2004 and April 30, 2004 respectively, which are valued at the lower of cost (first~~10-~~in,~~Q ~~first-out~~have ~~(“FIFO”)~~been ~~method)~~restated orto ~~market.~~retroactively ~~Effective~~apply ~~May 1, 2003,~~ the ~~Company changed its method of calculating LIFO to an alternative~~FIFO method ~~under GAAP. Management believes the new method is preferable because it provides a more precise calculation. This change is recorded as a cumulative effect~~ of ~~a change in~~ accounting ~~principle~~as ~~and~~depicted ~~decreases earnings~~ in the ~~year~~following ~~ended~~table: ~~April 30, 2004 by $1,765 (net of taxes of $1,177).~~


	Three Months Ended October 31, 2004							Six Months Ended October 31, 2004
	As Reported		Adjustment			As Restated		As Reported		Adjustment			As Restated
Cost of Sales	$	189,219	$	(185	)	$	189,034	$	377,057	$	(579	)	$	376,478
Earnings from Continuing Operations	$	1,368	$	185		$	1,553	$	2,484	$	579		$	3,063
Net Income	$	1,086	$	111		$	1,197	$	1,619	$	348		$	1,967

Inventories	$	57,315	$	7,759		$	65,074	$	57,315	$	7,759		$	65,074

Inventories consist of the following:


	October 31, 2005		April 30, 2005
Raw Materials	$	23,013	$	22,629
Finished Goods		39,533		35,963
Other Manufacturing Supplies		2,829		3,168

	$	65,375	$	61,760

3.	LONG-TERM DEBT

	October 31,2004			April 30,2004
	October 31,2005				April 30,2005
Senior Subordinated Notes 9.75% (1)	$	175,000		$	~~175,000~~$	175,000
Three-Year Bank Credit Facility (2)		157,~~353~~841			~~4,595~~	9,009
Industrial Revenue Bonds (3)		7169,~~050~~310			~~72,415~~	70,780
Subordinated Notes		1,317			1,556
Subordinated Notes (4)		7,748				1,077
All other		62,~~798~~593			~~2,223~~	1,451
Total Debt		~~269~~262,~~518~~492			~~255,789~~	257,317
Less Current Portion		7(4,~~882~~541	)		~~3,147~~	(2,621	)
Long-Term Debt	$	~~261~~257,~~636~~951		$	~~252,642~~$	254,696

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

(2) The Company has ~~in place~~ a $150,000 senior secured credit facility with ten banks. Borrowing availability is subject to borrowing base requirements established by leverage ratios. In addition, the Company has the ability to issue up to $95,000 for letters of credit, usage of which reduces borrowing availability under the facility. Letters of credit can be issued to enhance industrial revenue bonds, guarantee unpaid claim reserves under insurance policies and/or to provide performance bonds and trade letters of credit. As of October 31, ~~2004~~2005 the Company has $8382,~~638~~761 in letters of credit obligations outstanding ($1170,~~350~~469 of which has been used to enhance security for the industrial revenue bonds), $157,~~353~~841 in loans outstanding and $5159,~~009~~398 of availability under the facility. The borrowings bear variable interest that is reset quarterly at a rate equal to, at the Company’s discretion, ~~either~~one of the following (1) Prime plus a spread of 1% to 2%, or (2) London Interbank Offered Rate (LIBOR) plus a spread of 2% to 3% ~~depending~~or on(3) ~~the~~Euro ~~type~~Interbank ofOffered ~~borrowing.~~Rate ~~The~~(EURIBOR) ~~rate~~plus a spread of ~~interest~~2% ~~(5.09~~to 3%. asThe ofcredit ~~October~~spread ~~31,~~on ~~2004)~~both LIBOR and EURIBOR borrowings is subject to ~~interest~~applicable ~~base~~credit spread requirements established by leverage ratios. The rate of interest as of October 31, 2005 is 4.88%. Outstanding letters of credit are subject to ana ~~annual~~ fee equal to the applicable ~~margin~~credit spread for LIBOR based loans. The undrawn portion of the facility is subject to a facility fee at an annual rate of 0.50%. This debt is classified in Senior Debt in the consolidated balance ~~sheet~~sheets.

(3) The industrial revenue bonds are comprised of ~~five issues~~: Mercer IRB of $21,~~000~~750, Mobile IRB of $54,~~365~~975, Natick IRB of $8040, Ohio IRB of $15,500, and Massachusetts ~~IRB~~IRBs of $4847,~~105~~045 as of October 31, ~~2004~~2005. These bonds are variable rate demand bonds with maturity dates ranging from July 2006 through July 2031 and where the interest rates range from 12.7770% to 46.75% and are reset every seven days. This debt is classified in Senior Debt in the consolidated balance ~~sheet~~sheets with a portion in Current ~~Portion~~Maturities of ~~Long Term~~ Debt.

The Company has certain financial covenants primarily relating to leverage and interest coverage. At October 31, 2004, the Company is in compliance with all covenants.

The Company has cross-currency interest rate swap agreements with two banks. These agreements have been designated as cash flow hedges against the existing intercompany loan to the Company’s European subsidiary. At October 31, 2004, the fair value of the swaps represented a liability of $21,141 versus a liability of $20,304 at April 30, 2004. The Company has recognized a charge of $266 within Other income - net, related to hedge ineffectiveness, during the six months ended October 31, 2004 versus no charge during the six months ended October 31, 2003.

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

-6-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

(4)

Pursuant to the July 5, 2005 “put” of Company common stock to the Company by its former Chairman and current Director (see Note 9), the Company issued a Subordinated note on August 10, 2005 for $7,875 to the former Chairman in exchange for the 198,000 shares of Company common stock owned by him. The note bears interest at the prime rate in effect from time to time, requires quarterly principal and interest payments and is due in July 2015. As of October 31, 2005, the remaining balance on the note is $6,910.

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

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

The Company has cross-currency interest rate swap agreements with two banks. These agreements have been designated as cash flow hedges against the existing intercompany loan to the Company’s European subsidiary. At October 31, 2005 and April 30, 2005, the fair value of the swaps represented a liability of $14,686 and $22,399, respectively, the decrease resulting from a scheduled principal payment and the affects of the change in foreign currency exchange rates. The Company has recognized income of $210 and a charge of $266 within Other (expense) income – net on the consolidated statements of operations, related to hedge ineffectiveness, during the six months ended October 31, 2005 and 2004, respectively.

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

4.	RETIREMENT PLANS

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

Pension Costs Three Months ended

Pension Costs Six Months ended

October 31,2004

October 31,2003

October 31,2004

October 31,2003

October 31,2005

October 31,2004

October 31,2005

October 31,2004

Service Cost

~~1,156~~998

1,~~033~~156

2,~~099~~160

12,~~886~~099

Interest Cost on Projected Benefit Obligation

1,~~642~~984

1,~~513~~642

3,~~108~~538

23,~~933~~108

Expected Return on Assets (Gain) Loss

(12,~~791~~481

)

(1,~~132~~791

)

(34,~~038~~000

)

(23,~~493~~038

)

Net Amortization

~~297~~575

~~651~~297

~~684~~917

~~773~~684

Net Pension Expense

1,~~304~~076

21,~~065~~304

2,~~853~~615

32,~~099~~853

The Company estimates a minimum cash contribution to its domestic pension plans of approximately $7,000 during fiscal year ending April 30, 2006, and has made a contribution of $1,~~375~~600 ~~for~~towards that total during the six months ended October 31, ~~2004~~2005. ~~The~~As ~~Company~~of October 31, ~~estimates~~2005, a77% ~~cash~~of ~~contribution~~the toplan’s ~~its~~assets ~~domestic~~were ~~pension~~in ~~plans~~equity ofinvestments, ~~approximately~~14% ~~$6,300~~in ~~during~~fixed-income ~~fiscal~~securities ~~year~~and ~~ending~~9% ~~April~~in 30commercial paper, ~~2005~~cash and other.

-7-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

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


	Pension Costs Three Months ended						Pension Costs Six Months ended
	October 31, 2005			October 31, 2004			October 31, 2005			October 31, 2004
Service Cost	$	47		$	32		$	95		$	63
Interest Cost on Projected Benefit Obligation		59			22			117			71
Expected Return on Assets (Gain) Loss		(54	)		(51	)		(107	)		(85	)
Net Amortization		—			12			—			12

Net Pension Expense	$	52		$	15		$	105		$	61

5.	RESTRUCTURING AND IMPAIRMENTS

For the Three Months Ended October 31, ~~2004~~2005 and ~~2003~~2004:

2006 Restructuring

Dismantling costs in the Paperboard segment relate to continued costs to exit two facilities closed in prior periods. The severance costs and asset impairment charges for the quarter relate to our mill in Natick, MA, the closing of which was announced in September 2005. Upon closure, there will be 58 severed employees, primarily representing the hourly workforce. The decision to close the mill was made based on the need for rationalization of capacity and the near-term requirement of significant capital investment at the facility which offered little or no return. The Converted Products segment incurred additional exit costs at two facilities closed in prior periods.

2005 Restructuring

The Paperboard segment showed net restructuring credits of $60. Actual expenses incurred of $350 were offset by $410 which was received from the sale of certain water/sewage discharge rights from a facility that was closed in prior years. Severance costs of $62 relate to the facility in Sunrise, FL which closed on July 15, 2004. Asset impairment charges of $32 and the majority of the $256 of actual dismantling charges were incurred at the facility in Stockton, CA.

The Converted Products segment incurred $188 of restructuring charges on three locations – Vancouver, WA, Stockton, CA, and Kountze, TX. Three other restructured locations in this segment incurred no charges for the period and are not expected to incur future charges.

2004 Restructuring

All restructuring charges were incurred in the Paperboard segment and related to the facility in Stockton, CA.

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

	Paperboard			ConvertedProducts		Total
October 31, 2005
Severance	$	146		$	—	$	146
Dismantling, Mothballing & Other		101			37		138
Asset Impairment		115			18		133
Total Charges	$	362		$	55	$	417
October 31, 2004
Severance	$	62		$	13	$	75
Dismantling, Mothballing & Other		(154	)		166		12
Asset Impairment		32			9		41
Total Charges	$	(60	)	$	188	$	128
October 31, 2003
Severance	$	26		$	—	$	26
Dismantling, Mothballing & Other		950			—		950
Asset Impairment		24			—		24
Total Charges	$	1,000		$	—	$	1,000

-78-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

For the Six Months Ended October 31, ~~2004~~2005 and ~~2003~~2004:

2006 Restructuring

The Paperboard segment incurred $236 of expenses related to the maintenance of three facilities closed in prior years. The remaining $261 in this segment are comprised of severance costs and asset impairment charges related to the announced closing of our Natick, MA facility. Within the Converted Products segment, the majority of both dismantling and impairment charges relate to a certain leased facility which ceased production operations in April 2004 but continued to be used for warehousing purposes. The $166 within corporate represents the loss on the sale of a previously restructured facility in Greenville, SC. Gross proceeds on the sale were $1,078.

2005 Restructuring

The Paperboard segment incurred severance costs of $76 from a facility in Sunrise, FL which closed on July 15, 2004 due to the fact that it had been operating at a loss for many months. This location also incurred $55 of costs to exit the property. The remaining restructuring charges of $452 were offset by $410 due to the sale of certain water/sewer discharge rights at a facility that was closed in prior years.

The Converted Products segment incurred restructuring charges on six locations – Vancouver, WA, Stockton, CA, Mira Loma, CA, Kountze, TX, Oshkosh, WI and Neenah, WI; restructuring charges are $905. With the exception of the Kountze, TX facility which was closed as a result of poor financial performance, the remaining locations in this segment were closed as a result of consolidation of operations. ~~Future costs in this segment are not expected to be significant.~~

2004 Restructuring

The Paperboard segment incurred restructuring charges of $2.1 for four locations, all of which were closed as a result of continued poor financial performance. The majority of the severance costs relate to the facility in Newark, NJ which closed on July 17, 2003. Impairment charges of $187 were incurred and primarily related to the Stockton, CA location which closed on March 10, 2003.

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

	Paperboard		ConvertedProducts		~~Total~~Corporate		Total
October 31, 2004
October 31, 2005
Severance	$	76146	$	~~137~~—	$	~~213~~—	$	146
Dismantling, Mothballing & Other		65236		~~724~~308		~~789~~166		710
Asset Impairment		32115		44278		76—		393
Total Charges	$	~~173~~497	$	~~905~~586	$	~~1,078~~166	$	1,249
October 31, 2003
October 31, 2004
Severance	$	~~680~~76	$	—137	$	~~680~~—	$	213
Dismantling, Mothballing & Other		~~1,228~~65		—724		~~1,228~~—		789
Asset Impairment		~~187~~32		—44		~~187~~—		76
Total Charges	$	~~2,095~~173	$	—905	$	~~2,095~~—	$	1,078

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

	Dismantling,Mothballing & OtherCosts			Severance andPayroll RelatedCosts			TotalProvision	~~TotalProvision~~
April 30, 2004 Accrual Balance	$	40		$	—			$	40
April 30, 2005 Accrual Balance	$	46		$	—		$	46
Restructuring Charges for the Six Months Ended October 31, 2004		789			213				1,002
Restructuring Charges for the Six Months Ended October 31, 2005		710			146			856
Amounts Paid Against Accruals		(772	)		(213	)			(985	)
Amounts Paid Against 2005 Accruals		(46	)		—			(46	)
October 31, 2004 Accrual Balance	$	57		$	—			$	57
Amounts Paid Against 2006 Accruals		(670	)		—			(670	)
October 31, 2005 Accrual Balance	$	40		$	146		$	186

-89-

~~THE~~The ~~NEWARK~~following ~~GROUP~~table summarizes restructuring and impairment costs by segment for those plans initiated since January 1, ~~INC~~2003 and accounted for under Statements of Accounting Standards No. 146, ~~AND~~“Accounting ~~SUBSIDIARIES~~for Costs Associated with Exit or Disposal Activities”:

6. SEGMENT INFORMATION


	Cumulative Costs as of April 30, 2005 (1)		Costs for the Six Months Ended October 31, 2005 (2)		Estimated Costs to Complete Initiatives as of October 31, 2005		Total Estimated Costs of Initiatives as of October 31, 2005
Paperboard	$	13,891	$	483	$	1,313	$	15,687
Converted Products		1,531		586		525		2,642

	$	15,422	$	1,069	$	1,838	$	18,329

(1)	Of the $15,422 in cumulative restructuring costs, $7,089 were non-cash charges related to asset impairment.

(2)	The total costs incurred in the six months ended October 31, 2005, $1,069, does not agree with the six month total charges of $1,249 from a prior table above since some of the costs are related to plans initiated prior to January 1, 2003.

6.	INCOME TAXES

In determining the Company’s consolidated tax rate, an annual effective rate is computed for each taxable jurisdiction.

During the six months ended October 31, 2005, the Company recorded a net increase to its valuation allowance of $292. An increase of $582, related to the expected non-realization of certain net operating losses in the State of Ohio, was recorded along with an additional increase of $743 for net operating losses which are expected to expire unused. These increases were offset by non-expiring state tax credits of $1,033 which, based on initial tax planning strategies, are expected to be realized. However, the Company continually evaluates and modifies strategies and the ultimate form of utilization of these tax credits may change.

Also during this period, the Company repatriated approximately $612 in dividends from its European subsidiary. Taxes for this repatriation were provided for at April 30, 2005 and this transaction reduced the Company’s deferred tax asset for the net operating loss by approximately $216.

7.	COMMITMENT AND CONTINGENCIES

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

8.	SEGMENT INFORMATION

The Company operates in principally three business segments.

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

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

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

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

~~Identifiable~~-10- ~~assets are accumulated by facility within each business segment.~~

-9-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

Identifiable assets are accumulated by facility within each business segment.

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

	For the Three Months Ended						For the Six Months Ended
	October 31, 2004			October 31, 2003			October 31, 2004			October 31, 2003
	October 31, 2005			October 31, 2004			October 31, 2005			October 31, 2004
				(As Restated)						(As Restated)
Sales (aggregate):
Paperboard	$	~~150~~148,~~306~~442		$	~~135~~150,~~307~~306		$	~~300~~302,~~521~~564		$	~~263~~300,~~750~~521
Converted Products		6970,~~167~~893			6469,~~493~~167			~~139~~142,~~221~~033			~~132~~139,~~166~~221
International		36,~~090~~915			3336,~~626~~090			7276,~~671~~097			7072,~~928~~671
Total:	$	~~255~~256,~~563~~250		$	~~233~~255,~~426~~563		$	~~512~~520,~~413~~694		$	~~466~~512,~~844~~413
Less sales (inter-segment):
Paperboard	$	(36,~~743~~487	)	$	(3436,~~375~~743	)	$	(7574,~~734~~483	)	$	(7075,~~471~~734	)
Converted Products		(1,~~779~~891	)		(1,~~424~~779	)		(3,~~624~~898	)		(23,~~864~~624	)
International		2426			~~(67~~24	)		6928			~~(67~~69	)
Total:	$	(38,~~498~~352	)	$	(3538,~~866~~498	)	$	(7978,~~289~~353	)	$	(7379,~~402~~289	)
Sales (external customers):
Paperboard	$	~~113~~111,~~563~~955		$	~~100~~113,~~932~~563		$	~~224~~228,~~787~~081		$	~~193~~224,~~279~~787
Converted Products		6769,~~388~~002			6367,~~069~~388			~~135~~138,~~597~~135			~~129~~135,~~302~~597
International		36,~~114~~941			3336,~~559~~114			7276,~~740~~125			7072,~~861~~740
Total:	$	217,~~065~~898		$	~~197~~217,~~560~~065		$	~~433~~442,~~124~~341		$	~~393~~433,~~442~~124
Operating Income:
Paperboard	$	94,~~127~~668		$	58,~~641~~745		$	1610,~~438~~820		$	1316,~~509~~588
Converted Products		(~~2,412~~657	)		(2,~~751~~276	)		(42,~~335~~281	)		(3,~~376~~906	)
International		43,~~782~~773			4,~~250~~782			87,~~724~~624			78,~~498~~724
Total Segment Operating Income:		117,~~497~~784			711,~~140~~251			2016,~~827~~163			1721,~~631~~406
Corporate Expense		4,~~415~~048			13,~~843~~984			78,~~293~~086			47,~~835~~293
Total Operating Income:		73,~~082~~736			57,~~297~~267			138,~~534~~077			1214,~~796~~113
Interest Expense		(6,~~243~~613	)		(36,~~903~~243	)		(12,~~403~~870	)		(712,~~513~~403	)
Interest Income		2052			6620			4153			6641
Equity in Income of Affiliates		~~494~~434			~~233~~494			1,~~022~~012			~~430~~1,022
Other Income, Net		15			164			290			408
Other (Expense) Income, Net		(124	)		15			(426	)		290
Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change		1,368			1,857			2,484			6,187
(Loss) Earnings from Continuing Operations Before Income Taxes		(2,515	)		1,553			(4,154	)		3,063
Income Tax Expense		282			862			865			2,768
Income Tax (Benefit) Expense		(1,276	)		356			(1,561	)		1,096
Earnings from Continuing Operations Before Cumulative Effect of Accounting Change	$	1,086		$	995		$	1,619		$	3,419
(Loss) Earnings from Continuing Operations	$	(1,239	)	$	1,197		$	(2,593	)	$	1,967
Depreciation and Amortization:
Paperboard	$	5,~~375~~720		$	5,~~291~~375		$	1011,~~660~~437		$	910,~~466~~660
Converted Products		1,~~135~~319			~~966~~1,135			2,~~206~~624			2,~~022~~206
International		1,~~121~~062			1,~~007~~121			2,~~072~~125			2,~~664~~072
Corporate		~~573~~545			~~423~~573			1,~~113~~092			~~722~~1,113
Total:	$	8,~~204~~646		$	78,~~687~~204		$	1617,~~051~~278		$	1416,~~874~~051
Purchases of Property, Plant and Equipment:
Paperboard	$	23,~~593~~940		$	42,~~963~~593		$	67,~~003~~071		$	76,~~523~~003
Converted Products		~~1,254~~710			1,~~311~~254			31,~~009~~030			43,~~858~~009
International		76185			~~305~~76			~~186~~629			~~1,017~~186
Corporate		32129			1332			47140			8547
Total:	$	34,~~955~~964		$	63,~~592~~955		$	98,~~245~~870		$	139,~~483~~245
							October 31, 2004			April 30, 2004
							October 31, 2005			April 30, 2005
Identifiable Assets:
Paperboard							$	~~338~~331,~~097~~776		$	~~336~~332,~~995~~259
Converted Products								~~101~~97,~~572~~206			~~101~~97,~~491~~479
International								~~140~~127,~~125~~364			~~131~~137,~~485~~606
Corporate								2634,~~778~~704			3132,~~679~~740
Total:							$	~~606~~591,~~572~~050		$	~~601~~600,~~650~~084

-1011-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

Geographic Regions

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

	October 31,2004		October 31,2003
	October 31,2005		October 31,2004
Sales to Unaffiliated Customers
United States	$	~~355~~361,~~874~~024	$	~~318~~355,~~866~~874
Europe		7276,~~740~~125		7072,~~861~~740
Canada		45,~~510~~192		34,~~715~~510
Total	$	~~433~~442,~~124~~341	$	~~393~~433,~~442~~124
	October 31,2004		April 30,2004
	October 31, 2005		April 30,2005
Net Property, Plant and Equipment, Goodwill and Intangibles
United States	$	~~309~~294,~~382~~468	$	~~315~~301,~~171~~979
Europe		6054,~~787~~229		5659,~~875~~452
Canada		7,~~133~~204		6,~~559~~793
Total	$	~~377~~355,~~302~~901	$	~~378~~368,~~605~~224

79. RELATED PARTY TRANSACTIONS

The Company leases its corporate headquarters located at 20 Jackson Drive, Cranford, New Jersey from Jackson Drive Corp., a corporation owned by two ~~directors~~Directors ~~and officers~~ of the Company. For each of the six -month periods ended October 31, ~~2004~~2005 and ~~2003~~2004, the amount paid to that company under the lease was $174 ~~in each year~~.

~~Pursuant~~On ~~to an agreement with one of its officers~~August 10, ~~dated May 1~~2005, ~~1980, as amended,~~ the ~~officer~~Company ~~may~~completed ~~require~~ the ~~Company~~purchase ~~to repurchase,~~from orits ~~the~~former ~~Company~~Chairman ~~may~~and ~~require~~current ~~him~~Director toof ~~sell to~~ the ~~Company~~198,000 ~~all~~shares of ~~its~~the Company’s common stock, owned by him. ~~upon~~On ~~his~~July 5, ~~termination~~2005, ofthis ~~employment~~director ~~and~~had ~~for~~exercised ahis ~~period~~right ~~three~~to ~~years~~“put” ~~thereafter.~~the ~~The~~subject ~~purchase~~stock ~~price~~to ~~will~~the beCompany ~~the~~pursuant ~~then~~to ~~value~~a ~~per~~May 1, ~~share~~1980 agreement, as ~~determined~~amended. ~~by the~~The ~~independent~~aggregate ~~appraiser~~purchase ~~engaged~~price tofor ~~determine~~ the ~~price~~stock atwas $7,875, which ~~the~~amount ~~Company~~is ~~purchases~~to ~~shares~~be ~~from~~paid ~~participants~~pursuant into ~~its~~a ~~employee~~Subordinated ~~stock~~Installment ~~ownership~~Promissory ~~plan.~~Note ~~The~~(the ~~purchase~~“Note”), ~~price~~with ~~will~~$788 beplus accrued interest paid ~~10%~~on ~~down~~August 18, 2005 and the balance bybeing adue ~~subordinated~~in ~~note,~~40 ~~with~~equal ~~interest~~and ~~at the~~consecutive ~~prime~~quarterly ~~rate~~installments, aswith interest, incommencing ~~effect~~on ~~from~~October 1, ~~time~~2005, toand ~~time~~continuing ~~during~~thereafter on the ~~10-year~~first ~~term~~day of the ~~note.~~months As of ~~October~~January, 31April, ~~2004~~July and ~~April~~October. ~~30,~~Interest ~~2004,~~will ~~there~~accrue ~~were~~on ~~198,000~~the ~~shares~~outstanding ~~subject~~principal tobalance ~~this~~of ~~agreement~~the ~~with~~Note aat ~~redemption~~the ~~value~~prime rate of ~~$9,205.~~interest ~~The~~as ~~Company~~in effect ~~classifies~~from ~~the redemption~~time ~~value,~~to ~~which~~time. ~~represents~~The ~~its~~obligation ~~maximum~~under ~~obligations,~~the Note is classified as ~~temporary~~Subordinated ~~equity~~Debt on the consolidated balance ~~sheet, with an offsetting amount to retained earnings~~sheets.

The paperboard mills in our International segment purchased approximately $4,379 and $4,934 of raw material from affiliated entities accounted for as equity method investments during the six-~~11-~~month periods ended October 31, 2005 and 2004, respectively.

The International segment also recorded sales of approximately $1,064 and $830 to two affiliated entities accounted for as equity method investments during the six-month periods ended October 31, 2005 and 2004, respectively.

The Company paid approximately $2,533 and $2,506 to Integrated Paper Recyclers, LLC, an affiliated entity accounted for as an equity method investment, primarily for hauling services of recyclable material during the six-month periods ended October 31, 2005 and 2004, respectively.

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THE NEWARK GROUP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following discussion of operations and financial condition of The Newark Group should be read in conjunction with the financial statements and notes thereto included in this Quarterly Report on Form 10-Q and on the Annual Report on Form 10-K dated April 30, 2005.

This report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by use of terms such as “may,” “will,” “should,” “plan,” “expect,” “anticipate,” “estimate,” and similar words, although some forward-looking statements are expressed differently. Forward-looking statements represent our management’s judgment regarding future events. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. All statements other than statements of historical fact included in this report regarding our financial position, business strategy, products, plans, or objectives for future operations are forward-looking statements. We cannot guarantee the accuracy of the forward-looking statements, and you should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including the statements under “Risk Factors” and “Critical Accounting Policies” detailed in our ~~annual~~Annual ~~report~~Report on Form 10-K for the year ended April 30, ~~2004~~2005. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

The Newark Group is an integrated producer of 100% recycled paperboard and paperboard products with leading market positions in North America and Europe. We primarily manufacture folding carton (predominately uncoated), core board and industrial converting grades of paperboard, and are among the largest producers of these grades in North America. We are also a leading producer of laminated products and graphicboard in North America and Europe as well as a major producer of tubes, cores and allied products in North America. We supply our products to the paper, packaging, stationery, book printing, construction, plastic film, furniture, and game industries. In addition, we are engaged in the collection, trading and processing of recovered paper in North America and believe that we are among the five largest participants in this industry. ~~We have more than 8,000 customers worldwide and our relationships with our top 70 customers, as measured by sales, average in excess of 17 years.~~ No single customer accounted for more than 32.8% of our sales in ~~the~~our fiscal year ended April 30, ~~2004~~ 2005.

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

For the fiscal year ended April 30, ~~2004~~2005, the Paperboard segment represented 5152% of our total sales, the Converted Products segment represented 3130% of our total sales and the International segment represented 18% of our total sales.

Our fiscal year ends April 30. All references to years, quarters or other periods in this section refer to fiscal years, quarters or periods whether or not specifically indicated. ~~If a period is referred to as “Month, day and year,” reference is to that specific period. For example, the three months and six months ended October 31, 2004 are contained within fiscal 2005.~~ Most percentages and dollar amounts have been rounded to aid presentation. As a result, all such figures are approximations.

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

Sales volumes are also impacted by the highly competitive environment in which we operate. This competition, combined with the business slowdown that began ~~approximately~~during ~~three~~fiscal ~~years~~year ~~ago~~2000, resulted in decreased industry capacity utilization rates, which for us hit a low of 89% in fiscal 2002. As a result, we initiated a mill capacity rationalization program which led to the closures of five paperboard mills: ~~the~~between ~~Gardiner, Maine facility in~~ October 2001; ~~the Lawrence, Massachusetts facility in September 2002; the Middletown, Ohio facility in October 2002; the Stockton, California facility in March 2003;~~ and ~~the Newark, New Jersey facility in~~ July 2003. Combined, these five closures resulted in a capacity reduction of approximately 300,000 tons per ~~annum~~year, which led to approximately $30.0 million per year of overhead savings and loss avoidance. As a result of these closures, and a shift of business to other mills, our paperboard mills’ capacity ~~(other~~utilization ~~than~~rates were 95% for the ~~Fitchburg~~six-month ~~mill’s)~~period ~~capacity~~ended ~~utilization~~October 31, ~~rates~~2005, ~~rebounded~~despite ~~from~~our aloss ~~low~~of approximately four machine days of ~~89%~~production in ~~2002~~our tosoutheastern ~~approximately~~US ~~97%~~mill during a two-day shutdown in ~~2004.~~the ~~Capacity~~quarter ~~utilization~~ended ~~(other~~July 31, ~~than~~2005 due to Hurricane Dennis and the ~~Fitchburg~~loss ~~mill’s)~~of ~~was~~another ~~98%~~sixteen ~~and~~machine ~~97%~~days ~~for~~at the ~~six~~same ~~months and~~mill ~~three~~during ~~months~~the quarter ended October 31, ~~2004,~~2005 ~~respectively~~due to Hurricane Katrina. Additionally, in September 2005, we announced the closure of our Natick,

-1213-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

~~Recovered~~MA ~~paper is our most significant raw material~~mill. ~~Historically,~~This ~~the~~will ~~cost~~reduce ofoverall ~~recovered~~production ~~paper~~capacity ~~has~~by ~~fluctuated significantly due to market and industry conditions. For example~~48,000 ~~our~~tons ~~average North American recovered paper cost~~ per ~~ton of paperboard produced declined from $101 per ton in 2001 to $75 per ton in 2002~~annum, athough ~~decrease~~we ofexpect ~~26%, before increasing by 36%~~ to ~~$102~~transfer ~~per~~nearly ~~ton~~all intons ~~2003.~~currently ~~Fiscal~~produced ~~2004~~at ~~saw~~Natick ~~a slight reduction of 3%~~ to ~~$99~~our ~~per~~other ~~ton~~mills. ~~Recovered~~This ~~paper~~closure ~~prices~~is ~~increased~~expected into ~~our~~result ~~fourth quarter ended April 30, 2004 and pricing has remained at the elevated levels, resulting~~ in anapproximately ~~average of~~ $~~117~~3.0 ~~and~~million ~~$116~~ per ~~ton~~year ofin ~~paperboard produced~~fixed-cost ~~for the six months and three months ended October 31, 2004, respectively~~savings.

WeRecovered ~~attempt~~paper tois ~~raise~~ our ~~selling~~most ~~prices~~significant ~~in response to increases in~~ raw material ~~costs~~. ~~However~~Historically, ~~we are not always able to pass~~ the ~~full~~cost ~~amount~~ of ~~these~~recovered ~~costs~~paper ~~through~~has tofluctuated ~~our~~significantly ~~customers~~due onto amarket ~~timely basis, if at all,~~ and asindustry aconditions. ~~result~~For example, ~~cannot maintain~~ our ~~operating~~average ~~margins~~North inAmerican ~~the~~recovered ~~face~~paper ~~of meaningful~~ cost ~~increases.~~per Weton ~~experience a reduction in margin during periods~~ of ~~recovered~~paperboard ~~paper~~produced ~~price~~declined ~~increases~~from ~~due~~$101 toper ~~customary~~ton ~~time lags~~ in ~~implementing~~fiscal ~~our~~2001 ~~price increases~~ to ~~our~~$75 ~~customers.~~per ~~Even~~ton ~~if we~~in ~~are~~fiscal ~~able~~2002, toa ~~recover~~decrease ~~future~~of ~~cost increases~~26%, ~~our~~before ~~operating~~increasing ~~margins~~by ~~and~~35% ~~results~~to of$102 ~~operations~~per ~~still~~ton ~~will~~in befiscal ~~materially~~2003. ~~and~~Fiscal ~~adversely~~2004 saw ~~affected~~a byslight ~~time~~reduction ~~delays in the implementation~~ of ~~price~~3% ~~increases.~~to ~~Price~~$99 ~~increases~~per ~~for~~ton ~~sales~~though ~~from~~recovered ~~our~~paper ~~Paperboard~~prices ~~and Converted~~increased ~~Products~~by ~~segments~~$17 ~~were~~per ~~announced~~ton, ~~commencing~~or ~~in April 2004~~17%, ~~with~~to a$116 ~~second~~per ~~price~~ton ~~increase announced commencing~~ in ~~late~~fiscal ~~September, 2004~~2005. ~~Since~~For ~~these~~the ~~announcements,~~six-month weperiod ~~have~~ended ~~realized~~October 31, an2005, ~~increase~~recovered ofpaper ~~approximately~~prices decreased $353 per ton ~~for~~from ~~sales~~the average offiscal ~~our paperboard~~2005 ~~and~~prices, ~~approximately~~to $25113 per ton, ~~for~~and ~~sales~~$3 ofper ~~our~~ton ~~converted~~when ~~products~~compared into the second quarter ~~ended~~of ~~October~~fiscal ~~31, 2004~~2005.

Energy, which consists of electricity and fuel used to generate steam for use in the paper making process, is also a significant manufacturing cost for us. The average energy cost in our North American mill system has increased substantially in recent years, averaging approximately $6873, $~~58,~~68 ~~$66,~~ and $6658 per ton of paperboard produced in ~~2004,~~fiscal ~~2003~~years 2005, ~~2002~~2004 and ~~2001~~2003, respectively, as compared to $43 per ton in 2000. ~~These~~This ~~increases~~increase ~~have~~ primarily ~~been~~is due to overall increases in natural gas, fuel oil and electricity prices. ~~For the three and six months ended October 31, 2004, average energy cost per ton of paperboard produced remained at $68 per ton.~~ We expect that ~~future~~prices ~~energy cost~~ may continue to rise in response to conditions in the Middle East, natural gas shortages in the United States, ~~other~~and other economic conditions, and the related uncertainties regarding the outcome and implications of such events. Our operating margins are adversely affected when energy costs increase;, notwithstanding that, we attempt to manage fluctuations in our energy costs by utilizing financial hedges and purchasing forward contracts for a portion of our energy needs. Despite our hedging efforts, our average energy cost per ton for the current fiscal quarter ended October 31, 2005 was $83, an increase of 31% when compared to the same fiscal quarter of 2005. During the second quarter ended October 31, 2005, in an effort to offset the increased fuel costs, we announced a fuel surcharge on our finished products across our North American segments that will be in place until a certain natural gas indexed price hits a predetermined level. The benefits of this surcharge only began to be realized during the last month of the quarter, and as a result, the full impact on our results of operations has not yet been realized.

~~Results~~We attempt to raise our selling prices in response to increases in raw material and energy costs. However, we are not always able to pass the full amount of ~~Operations~~these costs through to our customers on a timely basis, if at all, and as a result, cannot maintain our operating margins in the face of meaningful cost increases. We experience a reduction in margin during periods of recovered paper cost increases due to customary time lags in implementing our price increases to our customers. Even if we are able to recover future cost increases, our operating margins and results of operations still will be materially and adversely affected by time delays in the implementation of price increases. Price increases for sales from our Paperboard and Converted Products segments were announced commencing in April 2004, with a second price increase announced in September 2004.

~~The~~Our ~~following~~Results ~~table~~of ~~sets~~Operations ~~out our segmented financial and operating information for the periods indicated.~~

	Three months endedOctober 31,						Six months endedOctober 31,
	2004			2003			2004			2003
Net Sales
Paperboard	$	113,563		$	100,932		$	224,787		$	193,279
Converted Products		67,388			63,069			135,597			129,302
International		36,114			33,559			72,740			70,861
Total	$	217,065		$	197,560		$	433,124		$	393,442
Operating Income (loss)
Paperboard	$	9,127		$	5,641		$	16,438		$	13,509
Converted Products		(2,412	)		(2,751	)		(4,335	)		(3,376	)
International		4,782			4,250			8,724			7,498
Corporate		(4,415	)		(1,843	)		(7,293	)		(4,835	)
Total	$	7,082		$	5,297		$	13,534		$	12,796

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

-13-


	Three Months Ended October 31,				Six Months Ended October 31,
(in thousands)	2005		2004		2005		2004
			(As Restated)				(As Restated)
Net Sales
Paperboard	$	111,955	$	113,563	$	228,081	$	224,787
Converted Products		69,002		67,388		138,135		135,597
International		36,941		36,114		76,125		72,740

Total	$	217,898	$	217,065	$	442,341	$	433,124

Cost of Sales
Paperboard	$	98,678	$	96,368	$	200,533	$	191,202
Converted Products		64,571		64,106		129,739		128,006
International		30,632		28,089		62,740		57,031
Corporate		—		471		—		239

Total	$	193,881	$	189,034	$	393,012	$	376,478

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THE NEWARK GROUP, INC. AND SUBSIDIARIES


	Three Months Ended October 31						Six Months Ended October 31
	2005			2004			2005			2004
				(As Restated)						(As Restated)
SG&A
Paperboard	$	8,246		$	8,511		$	16,231		$	16,824
Converted Products		5,033			5,370			10,091			10,592
International		2,536			3,243			5,761			6,985
Corporate		4,049			3,512			7,920			7,054

Total	$	19,864		$	20,636		$	40,003		$	41,455

Restructuring
Paperboard	$	362		$	(60	)	$	497		$	173
Converted Products		55			188			586			905
Corporate		—			—			166			—

Total	$	417		$	128		$	1,249		$	1,078

Operating Income (Loss)
Paperboard	$	4,668		$	8,745		$	10,820		$	16,588
Converted Products		(657	)		(2,276	)		(2,281	)		(3,906	)
International		3,773			4,782			7,624			8,724
Corporate		(4,048	)		(3,984	)		(8,086	)		(7,293	)

Total	$	3,736		$	7,267		$	8,077		$	14,113

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

	Three Months endedOctober 31,				Six Months endedOctober 31,
	Three Months ended October 31,				Six Months ended October 31,
	2004		2003		2004		2003
	2005		2004		2005		2004
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	8789.20		8687.61		8788.18		8586.9
Selling, general and administration expenses	9.51		109.25		9.60		109.36
Restructuring and impairments	0.12		0.51		0.23		0.52
Operating income	31.37		23.73		3.1.8		3.3
Interest expense	23.90		2.09		2.9		12.9
Income tax expense	(0.16	)	0.42		(0.24	)	0.73
Cumulative effect of accounting change (net of tax)	—		—		—		(0.4	)
Net earnings	(0.6	)	0.6		(0.6	)	0.5
Net earnings	0.5		0.5		0.4		0.4

~~Six~~Results ~~Months~~of ~~Ended October 31, 2004~~Operations ~~Compared to Six Months Ended October 31, 2003~~

~~Net~~Six ~~Sales:~~Months ~~Net~~Ended ~~sales for the six months ended~~ October 31, ~~2004~~2005 ~~increased~~Compared ~~10%~~ to ~~$433.1~~Six ~~million~~Months ~~from $393.4 million for the six months ended~~ Ended October 31, ~~2003.~~2004 While we experienced increased net sales in all three of our business segments, the largest increase was in our Paperboard segment where net sales were up $31.5 million, or 16%, due to a 12% increase in average sales price and a 4% increase in volume.

~~Cost~~Overview of Sales: Cost of sales increased 12% to $377.1 million during the six months ended October 31, 2004 from $337.9 million in the comparable period in 2003. The increase was due primarily to increased recovered paper costs which were up 36% versus prior year, as well as an overall volume increase of 4% in our Paperboard segment.

~~SG&A:~~Net ~~SG&A increased 2% to $41~~Sales.5 ~~million~~Net ~~during~~sales for the six months ended October 31, ~~2004~~2005 ~~from~~were $40442.63 million, 2% greater than $433.1 million in the ~~comparable~~ same six-month ~~months~~period of ~~2003~~the prior year. This increase is apredominantly ~~function~~the result of ~~foreign~~the ~~exchange~~realization ~~translation~~of inpreviously ~~the~~announced ~~International~~price ~~segment~~increases asin ~~the~~our ~~USD/Euro~~North ~~rate~~American ~~averaged~~segments, ~~$1.22~~a 17% increase in ~~the~~foreign converting ~~current~~sales ~~period~~volume ~~versus~~and $a 1~~.15~~% increase in ~~the~~foreign ~~prior~~converting sales price.

~~Restructuring~~Cost ~~and~~of ~~Impairments:~~Sales. InCost of sales for the six months ended October 31, ~~2004,~~2005 ~~we recorded~~increased ~~restructuring~~4% ~~charges~~to of$393.0 from $1376.15 million, ~~84%~~during ofthe ~~which~~six ~~related~~months toended ~~closures~~October 31, in2004. ~~our~~This ~~Converted~~increase ~~Products~~was ~~segment.~~driven Inby ~~the~~increases ~~comparable~~in ~~period~~both ~~ended~~energy ~~October~~and freight 31costs, ~~2003~~which increased 21% and 11%, werespectively, ~~recorded~~or aapproximately $28.12 million ~~restructuring~~and ~~charge~~$5.0 ~~related~~million, ~~to our closures in our Paperboard segment~~respectively.

~~Operating~~SG&A. ~~Income:~~SG&A ~~Operating~~decreased ~~income~~4% ~~for~~in the six~~-month~~ ~~period~~months ended October 31, ~~2004~~2005 isto $1340.50 million, anas ~~increase~~compared ofto $041.75 million, orin ~~6%, from~~ the six~~-month~~ ~~period~~months ended October 31, ~~2003~~2004. This ~~increase~~improvement isresulted ~~predominantly~~from ~~due~~the torecovery ~~decreases~~of debts that had been written off in ~~restructuring~~prior ~~costs~~periods in ~~the~~our ~~Paperboard~~International segment. and a lower provision for bad debts in our North American segments, as well as our continued focus on cost reduction initiatives.

~~Paperboard~~-15-

Net sales in the Paperboard segment increased by $31.5 million, or 16%, to $224.8 million for the six months ended October 31, 2004, compared to $193.3 million in the six months ended October 31, 2003. This increase was due to a 4% increase in sales volume and a 12% increase in average sales price.

Operating income for the Paperboard segment increased by $2.9 million or 22%, to $16.4 million for the six months ended October 31, 2004 compared to $13.5 million for the comparable period in 2003. Operating income as a percentage of net sales was 7% for both periods. The increase in operating income in 2004 is a result of a $1.9 million reduction in restructuring costs to $0.2 million in 2004 from $2.1 million 2003. We closed our recovered paper operation in Sunrise, Florida in July 2004 and our Newark, New Jersey paperboard mill in July 2003. Additionally, improved performance at the Fitchburg facility, as well as the 4% increase in sales volume and the 12% increase in paperboard sales prices referred to above, served to offset increased raw material prices and energy cost increases. Overall energy costs increased $2.7 million, or 8%, versus prior year, as a result of increased energy prices coupled with an increased number of operating days at the Fitchburg mill in the six-month period ended October 31, 2004 compared to the same period in 2003. The Fitchburg mill incurred an operating loss of $2.7 million for the six-month period ended October 31, 2004, which includes $4.2 million of non-cash depreciation charges. This compares to the operating loss for the six-month period ended October 31, 2003 of $4.8 million, of which $3.2 million were non-cash depreciation charges.

-14-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

~~Overall~~Restructuring ~~cost~~and Impairments. We recorded restructuring charges of ~~sales~~$1.2 ~~for~~million during the six-month ~~months~~period ended October 31, 2005 ~~2004~~as ~~increased~~compared ~~18%,~~to or $291.1 million, toduring ~~$191.4~~the ~~million~~six-month inperiod ~~2004~~ended ~~from~~October 31, ~~$162~~2004.~~3 million~~ inCurrent ~~2003.~~year ~~The~~expenses ~~higher~~include ~~cost~~on-going ofcosts ~~sales~~related ~~is due primarily~~ to ~~the~~previously ~~increased~~shut ~~volume,~~down aoperations ~~36% increase~~ in ~~the~~our ~~cost~~Converted ofProducts ~~recovered paper,~~ and ~~the~~Paperboard 8%segments, ~~energy~~costs ~~cost~~for ~~increase.~~the pending ~~Energy~~shut-down ~~cost~~of ~~per~~our ~~ton~~Natick, ofMA ~~paperboard~~mill, ~~produced~~and ~~was~~a uploss 3%on in the ~~six-month~~sale ~~period~~of ~~ending October~~a ~~31,~~previously ~~2004~~restructured ~~versus~~facility ~~prior~~sold ~~year.~~in ~~Additionally,~~June ~~freight costs increased $0~~2005.6 ~~million,~~Included orin ~~2%,~~the charges for the ~~current~~ six~~-month~~ ~~period~~months asended ~~compared~~October 31, to2005 ~~the~~are ~~six~~non-~~month~~cash ~~period~~impairment acharges ~~year~~of ~~ago~~$0.1 ~~This~~million ~~increase was primarily due~~ related to ~~increased~~our ~~volume~~Natick, ofMA ~~shipments.~~mill ~~Mill capacity utilization (excluding Fitchburg) was 98%~~ and ~~97%~~$0.3 million for the ~~six-month~~impairment ~~periods~~of ~~ended~~a ~~October~~facility ~~31,~~in ~~2004~~our ~~and~~Converted ~~2003,~~Products ~~respectively~~segment. ~~Including Fitchburg, utilization was 96% for six-month periods ended October 31, 2004 and 2003, respectively.~~

~~Restructuring~~Operating ~~costs decreased $1~~Income.9 ~~million~~Operating toincome ~~$0.2~~was ~~million~~43% inlower during the six-month ~~months~~ period ended October 31, ~~2004~~2005 ~~from~~when ~~$2.1~~compared ~~million~~to the ~~same~~six-month period ~~last~~ended ~~year.~~October 31, ~~This~~2004, isor ~~a result of a general reduction of restructuring expenses as well as a~~ $08.41 million ~~offset~~compared to ~~the actual expenses incurred which resulted from the sale of water/sewer discharge rights for a facility closed in prior years. SG&A increased 9%,~~ $114.4 1 million, ~~to $16~~respectively.8 inThis ~~the~~decrease ~~six~~is ~~months~~mainly ~~ended~~the ~~October~~result ~~31,~~of ~~2004~~the ~~from~~increased ~~$15.4~~energy ~~million~~costs ~~for~~and ~~the~~freight ~~same period in 2003~~costs.

Paperboard

Net sales in the Paperboard segment increased by $3.3 million, or 2%, to $228.1 million for the six months ended October 31, 2005 compared to $224.8 million in the six months ended October 31, 2004. This increase resulted primarily from the realization of previously announced price increases on our paperboard products, as well as a 1% increase in the volume of recovered paper we sell to third parties offset by a 6% decrease in the per ton price of such recovered paper.

Overall cost of sales increased $9.3 million, or 5%, from $191.2 million in the six months ended October 31, 2004 to $200.5 million in the current six-month period. Energy and freight cost increases are primarily responsible for the growth in cost of sales, increasing 22%, or $7.7 million, and 12%, or $4.2 million, respectively, when comparing the six months ended October 31, 2005 and 2004, respectively. These increases were offset by a 1% decline in the overall cost of recovered paper purchased.

Restructuring costs increased $0.3 million to $0.5 million in the six-month period ended October 31, 2005 from $0.2 million during the same period of 2004. The charges incurred during the current fiscal year represent continued costs to exit previously shut down locations as well as new charges for the announced upcoming closure of the Natick, MA plant, and include $0.1 million of non-cash impairment of fixed assets.

Our mill utilization rates decreased to 95% during the six months ended October 31, 2005 as compared to 96% in the six months ended October 31, 2004, as result of our Mobile, AL mill losing 20 machine days as a result of Hurricanes Dennis and Katrina.

SG&A decreased 4% from $16.8 million in the six-month period ended October 31, 2004 to $16.2 million in the same period of 2005, primarily the result of a lower provision for bad debts and overall cost reduction initiatives.

Operating Income for the Paperboard segment decreased 35%, from $16.6 million in the period ended October 31, 2004 to $10.8 million in the period ended October 31, 2005, primarily due to the increased energy and freight costs.

Converted Products

Net sales in the Converted Products segment increased by $62.35 million, or 52%, to $~~135~~138.6 1 million for the six-month ~~months~~period ended October 31, ~~2004~~2005 compared to $~~129~~135.36 million for the ~~same~~six-month period inended ~~2003~~October 31, 2004. ~~The~~This increase ~~was~~is ~~primarily~~mainly due to ~~higher~~a ~~sales volume of approximately 3~~5%. Weincrease ~~also~~in ~~realized an average~~ sales price ~~increase~~resulting offrom ~~approximately~~previously ~~3% for~~announced ~~the~~price ~~six-month~~increases ~~period~~on ~~ending~~our ~~October~~converted ~~31,~~products ~~2004~~offset ~~versus~~by ~~the~~a ~~same~~4% ~~period~~decrease ~~last~~in ~~year~~volume.

~~Operating~~Cost ~~loss~~of ~~for~~sales ~~the Converted Products segment~~ increased $01.97 million, or 281%, ~~to a loss of $4.3 million~~ in the six-month ~~months~~period ended October 31, ~~2004~~2005 aswhen compared to ~~a loss of $3.4 million in~~ the six-month ~~months~~period ended October 31, ~~2003~~2004. This ~~variance~~increase is ~~primarily due to~~ the ~~fact~~result ~~that we closed our Kountze, Texas plant and our Stockton, California plants in the quarter ended July 31, 2004, which contributed to restructuring charges~~ of ~~$0.9~~higher ~~million. There were no restructuring~~ costs ~~in the Converted Products segment in 2003. Cost~~ of ~~sales~~chemicals ~~increased~~and bypackaging ~~$6.3 million~~supplies, oras ~~5%,~~well toas ~~$128.4~~five ~~million~~additional inmonths ~~2004 compared to $122.1 million in 2003. This increase is primarily due to a 7% increase in unit paperboard raw material costs. Cost~~ of ~~sales~~ asoperation aat ~~percent~~our ofNSP ~~sales remained constant during the current six~~start-~~month~~up ~~period~~facility ~~compared~~which tobegan ~~the~~production ~~same~~in ~~period~~October ~~prior year~~2004.

~~SG&A~~Restructuring ~~expenses~~costs were ~~consistent~~$0.6 ~~during~~million in the ~~current~~six months ended October 31, 2005, a $0.3 million decrease from $0.9 million in the six~~-month~~ ~~period~~months ~~when~~ended ~~compared~~October 31, 2004. Current year charges reflect continued costs to exit restructured facilities. Prior year costs included charges for the closing of two plants which were closed in the six months ended October 31, 2004. Included in total restructuring costs in the six months ended October 31, 2005 and 2004 are non-~~month~~cash ~~period~~impairment acharges ~~year~~of ~~ago~~$0.4 million and $0.1 million, respectively.

SG&A decreased 5% from $10.6 million in the six months ended October 31, 2004 to $10.1 million in the six months ended October 31, 2005 due primarily to the continuation of cost reduction initiatives.

-16-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

Operating loss improved $1.6 million from a loss of $3.9 million in the six months ended October 31, 2004 to a loss of $2.3 million in the six months ended October 31, 2005. This improvement is the result of the increased sales price realization and cost reduction initiatives.

International

Net sales in the International segment increased by $13.94 million, or 35%, to $7276.71 million ~~for~~in the six months ended October 31, ~~2004~~2005 compared to $7072.97 million ~~for~~in the six~~-month~~ ~~period~~months ~~ending~~ended October 31, ~~2003.~~2004 ~~This increase is~~ due ~~primarily~~ to ~~currency~~a 17% ~~fluctuations~~increase asin ~~the~~converting ~~exchange~~volumes ~~rate~~and ~~for~~a ~~the current six-month period is $~~1~~.22~~% ~~USD/Euro~~increase asin ~~compared~~converting tosales ~~$1.15~~price ~~USD/Euro~~(excluding ~~for~~ the ~~same~~effects ~~period~~of ~~last year.~~foreign ~~Excluding~~ currency ~~fluctuations,~~exchange ~~sales were down 5% primarily due to lower average pricing for the products we sell. Competitive pressures across our product lines resulted in this lower pricing~~rates), ~~though~~which ~~this~~more ~~was~~than ~~somewhat~~offset ~~mitigated~~a ~~by volume being up~~ 1% inmill ~~the~~volume ~~mills and 9% in the converting plants~~decrease.

~~Operating~~Cost ~~income~~of ~~for~~ sales in the International segment was $862.7 million in the six~~-month~~ ~~period~~months ended October 31, ~~2004~~2005 ~~versus~~as compared to $757.50 million ~~in 2003, a 16% increase. Excluding currency fluctuations, operating income was up 9%~~ for the six months ended October 31, 2004 over the same period in 2003. Operating income as a percentage of net sales increased to 12% in 2004 from 11% in 2003. The main contributors to this improvement were the increased volume as well as continued efficiency improvements in our converting plants, ~~particularly~~ ~~our~~an ~~plant~~increase ~~in the Netherlands. Cost~~ of ~~Sales decreased~~ $05.37 million, or 110%~~, versus prior year~~. Excluding ~~currency~~the ~~fluctuations,~~effects ~~cost~~ of ~~sales~~foreign ~~decreased~~currency ~~8.0%~~exchange inrates, ~~2004~~this ~~versus~~increase ~~2003,~~is ~~with~~ the ~~variance~~result ~~resulting~~of ~~from~~an ~~a 52~~8% ~~decrease~~overall inincrease ~~depreciation~~in freight costs and aan 918% ~~decrease~~increase in ~~recovered~~energy ~~paper~~ costs ~~at our European mills~~. ~~SG&A~~Approximately ~~increased $1.0 million, or 16~~50%, ~~for~~of the ~~six~~energy ~~months~~cost ~~ended~~increase ~~October~~is ~~31,~~attributable ~~2004~~to ~~when~~a ~~compared~~malfunction toof the ~~same~~turbine ~~period~~at inSan ~~2003,~~Andrés ~~again~~and ~~primarily~~is ~~due~~in ~~to currency fluctuations. Excluding currency fluctuations, SG&A increased slightly by 2% during~~ the ~~current~~process ~~six-month~~of ~~period~~being ~~as compared to the same period last year~~repaired.

SG&A in the International segment decreased 18%, or $1.2 million, in the six months ended October 31, 2005 when compared to the six months ended October 31, 2004. This improvement is primarily the result of the recovery of bad debts that had been written off in prior periods.

Operating income for the International segment was $7.6 million in the six months ended October 31, 2005, 13% lower than the $8.7 million for the six months ended October 31, 2004. This decrease in operating income is primarily the result of the increased energy and freight costs offset by converting volume and overall sales price increases.

Corporate

~~During~~Unallocated ~~the~~corporate ~~six-month~~expense ~~period~~increased ~~ended~~by ~~October~~$0.8 ~~31,~~million ~~2004,~~to ~~we recognized a~~ $28.51 million ~~increase~~ in ~~unallocated corporate expense versus~~ the ~~same~~first ~~period~~six months inof ~~2003,~~fiscal of2006. ~~which~~This ~~80%~~increase ~~was~~is primarily the result of ~~expenses relating to~~ increased ~~LIFO~~ ~~reserves~~professional fees.

~~-15-~~Other (Expense)/Income

Interest expense increased from $12.4 million in the six months ended October 31, 2004 to $12.9 million in the six months ended October 31, 2005, primarily due to higher interest rates on our variable rate debt. Average outstanding borrowings decreased from $262.7 million during the period ended October 31, 2004 to $259.9 million during the period ended October 31, 2005.

Excluding Interest expense, Other income - net decreased from income of $1.4 million in the six months ended October 31, 2005 to income of $0.6 million in the six months ended October 31, 2005. This decrease in Other Income is primarily due to unfavorable swings in foreign currency exchange rates.

Income Tax (Benefit) Expense

In determining our consolidated tax rate, we compute an annual effective rate for each taxable jurisdiction.

During the six months ended October 31, 2005, we recorded a net increase to our valuation allowance of $292. An increase of $582, related to the expected non-realization of certain net operating losses in the State of Ohio, was recorded along with an additional increase of $743 for net operating losses which are expected to expire unused. These increases were offset by non-expiring state tax credits of $1,033 which, based on initial tax planning strategies, are expected to be realized. However, we continually evaluate and modify strategies and the ultimate form of utilization of these tax credits may change.

Also during this period, we repatriated approximately $612 in dividends from our European subsidiary. Taxes for this repatriation were provided for at April 30, 2005 and this transaction reduced our deferred tax asset for the net operating loss by approximately $216.

-17-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

Other (Expense)/Income

Interest expense increased $4.9 million to $12.4 million in the six months ended October 31, 2004 from $7.5 million in the six months ended October 31, 2003. This is a direct result of a higher interest rate on our 9.75% $175 million senior subordinated notes versus the lower interest rate debt replaced by the notes. The blended average interest rates, including non-cash amortization charges, were approximately 9% and 6% for the six months ended October 31, 2004 and 2003, respectively. Average outstanding borrowings increased to $262.7 million in 2004 as compared to $237.4 million in 2003

Excluding interest expense, other income increased to $1.4 million for the six months ended October 31, 2004, as compared to $0.9 million in the same period of the prior year. This was primarily due to the increased earnings of our investments in unconsolidated entities, which were up to $1.0 million during the six months ended October 31, 2004 from $0.4 million in the respective period of 2003.

Income Tax Expense

Income tax expense decreased $1.9 million, or 69%, to $0.9 million in the six months ended October 31, 2004 from $2.8 million in the six months ended October 31, 2003. Effective tax rates are 35% and 45% in 2004 and 2003, respectively. The decrease in the effective tax rate is primarily a result of tax benefits for the domestic companies.

Cumulative Effect of Accounting Change

In fiscal year 2004, we changed our method of calculating LIFO to an alternative method under GAAP. Management believes the new LIFO method is preferable because it provides a more accurate calculation than the prior LIFO method. This resulted in a net loss of $1.8 million (net of tax benefit of $1.2 million) in our six months ended October 31, 2003. Management is further evaluating LIFO as to its preferability for inventory costing.

Net Income

In summary, ~~for~~our ~~the six~~net ~~months ended October 31~~income, ~~2004,~~which ~~net earnings~~ decreased 2%from orincome ~~$0.1~~of ~~million to~~ $12.60 million ~~from $1.7 million~~ in the six~~-month~~ ~~period~~months ended October 31, ~~2003.~~2004 ~~This~~to ~~fluctuation~~a isnet ~~the~~loss ~~result~~ of ~~several~~$2.6 ~~significant~~million ~~offsetting~~in ~~factors:~~the ~~although~~six ~~overall~~months ~~sales~~ended ~~increased~~October 31, ~~10%~~2005, ~~while~~was ~~restructuring~~adversely ~~and~~affected ~~income~~by ~~tax~~the ~~expenses~~continued ~~decreased~~increase ~~49%~~in ~~and~~worldwide ~~69%,~~energy ~~respectively,~~and ~~interest~~freight ~~expense,~~costs ~~cost~~which ofmore ~~sales~~than ~~and~~offset ~~SG&A~~the ~~expenses~~realization ~~increased~~of ~~65%,~~previously ~~12%,~~announced ~~and~~price ~~2%, respectively~~increases.

Three Months Ended October 31, ~~2004~~2005 Compared to Three Months Ended October 31, ~~2003~~ 2004

Overview

Net Sales:. ~~For~~Net ~~the~~sales ~~three~~for ~~months~~the quarter ended October 31, ~~2004,~~2005 ~~net~~were ~~sales~~$217.9 ~~increased 10% to~~million, $~~217~~0.18 million ~~from~~greater than $~~197~~217.61 million ~~for~~in the ~~three~~quarter ~~months~~ ended October 31, ~~2003~~2004. This increase ~~was~~is ~~driven~~predominantly bythe ~~sales~~result ~~price increases~~ of ~~12%~~the inrealization ~~our~~of ~~Paperboard~~prior ~~segment~~announced ~~and~~price ~~6% in our Converted Products segment, volume~~ increases ~~of 2%~~ in ~~both~~ our ~~Paperboard~~ ~~segment~~North ~~and~~American ~~Converted~~segments ~~Products segment,~~ and an 818% increase in ~~our~~foreign converting ~~International~~sales ~~segment as a result of a 4%~~ volume ~~increase and the weakening USD~~.

Cost of Sales:. Cost of sales for the ~~three months~~ quarter ended October 31, ~~2004~~2005 increased 113% ~~mainly~~to ~~due~~$193.9 tomillion afrom ~~39%~~$189.0 million during the quarter ended October 31, 2004. This increase was driven by increases in ~~recovered~~both ~~paper~~energy and freight costs, inwhich ~~our~~increased ~~Paperboard~~32% and 10%, or $5.9 million and ~~segment~~$2.4 ~~along~~million, ~~with~~respectively, which more than offset a 79% ~~increase~~decline in ~~energy~~overall recovered paper costs.

SG&A:. ~~For~~SG&A decreased 4% in the ~~three~~ ~~months~~quarter ended October 31, 2005 to $19.9 million as compared to $20.6 million in the quarter ended October 31, 2004. ~~SG&A~~This ~~increased~~improvement 2%resulted ~~over~~from the ~~same~~collection of ~~period~~certain ~~last~~debts ~~year~~that had been deemed uncollectible in our International segment and a lower provision for bad debts in our North American segments, as well as our continued focus on cost containment.

Restructuring and Impairments:. InWe ~~the~~recorded ~~three~~restructuring ~~months~~charges of $0.4 million during the quarter ended October 31, ~~2004,~~2005 weas ~~recorded~~compared ~~restructuring~~to ~~charges of~~ $0.1 million during the quarter ended October 31, ~~which~~2004. ~~includes~~Current ~~credits~~quarter ~~from~~expenses ~~the~~include ~~sale~~on-going ofcosts ~~certain~~related ~~water/sewer~~to ~~discharge~~previously ~~rights from~~shut adown ~~facility~~operations in ~~the~~our ~~Paperboard~~Converted ~~segment~~Products ~~which~~and Paperboard ~~was~~segments ~~closed~~as inwell ~~prior~~as ~~years.~~new Incharges for the ~~comparable~~announced ~~period~~upcoming ~~ended~~closure ~~October~~of ~~31,~~the ~~2003~~Natick, weMA ~~recorded a $1~~plant.0 ~~million~~Current restructuring ~~charge~~costs ~~related~~include tonon-cash ~~closures~~impairment inon ~~our~~the ~~Paperboard~~assets ~~segment~~of the Natick, MA mill of $0.1 million.

Operating Income:. Operating income ~~for~~was ~~the~~49% ~~three-month~~lower ~~period~~during ~~ended~~the ~~October~~quarter ended October 31, ~~2004~~ ~~was~~2005 ~~$7.1~~as ~~million,~~compared ~~which~~to ~~reflects~~the anquarter ~~increase~~ended ofOctober 31, $12004.8 ~~million,~~Current orquarter ~~34%, from the same period last year.~~ Operating income ~~improved~~was ~~across~~$3.7 ~~all~~million ~~three~~compared ~~business~~to ~~segments~~$7.3 ~~Sales volume increased~~ in ~~all~~the ~~three~~same ~~segments~~quarter ~~with~~last ~~both Paperboard and Converted Products increasing 2% and International increasing 5%~~year. ~~Sales~~This ~~prices~~decrease ~~were~~is upmainly ~~12%~~the inresult ~~our~~of ~~Paperboard~~the ~~segment~~increased ~~and~~energy ~~6% in our Converted Products segment~~ and wefreight costs ~~experienced~~which amore ~~$0.9~~than ~~million~~offset ~~overall~~the ~~decrease~~realization ~~in restructuring costs. All~~ of ~~these~~previously ~~factors served~~announced toprice ~~more~~increases ~~than~~and ~~offset~~the ~~increased~~reduction ~~raw material costs incurred~~ in ~~both~~the ~~our~~cost ~~Converted~~of ~~Products~~recovered ~~and Paperboard segments~~paper.

~~-16-~~Paperboard

Net sales in the Paperboard segment decreased 1%, or $1.6 million, in the quarter ended October 31, 2005 when compared to the quarter ended October 31, 2004, the result of a 1% decrease in volume.

Overall cost of sales increased $2.3 million, or 2%, from $96.4 million in the quarter ended October 31, 2004 to $98.7 million in the quarter ended October 31, 2005. Energy and freight cost escalation are primarily responsible for the growth in cost of sales, 30% or $5.2 million, and 11% or $1.9 million, respectively, when compared to the quarter ended October 31, 2004. These increases were offset by a 9% decline in the overall cost of recovered paper costs.

Restructuring costs were $0.4 million in the quarter ended October 31, 2005 compared to ($0.1) million during the quarter ended October 31, 2004. The charges incurred during the current quarter represent continued costs to exit previously shut down locations as well as new charges for the announced upcoming closure of the Natick, MA plant, and include $0.1 million of non-cash impairment on fixed assets.

Our mill utilization rates declined to 94% during the quarter ended October 31, 2005 as compared to 95% in the quarter ended October 31, 2004. This decrease is the result of the hurricanes that plagued the Gulf Coast this three-month period causing a loss of 16 machine days at our Mobile, AL mill.

SG&A decreased 3% from $8.5 million in the quarter ended October 31, 2004 to $8.2 million in the quarter ended October 31, 2005 primarily due to a decrease in the provision for bad debts.

Operating income for the Paperboard segment decreased 47%, from $8.7 million to $4.7 million, in the quarters ended October 31, 2004 and 2005, respectively, primarily due to the increased energy and freight costs referred to above which was partially offset by the decrease in overall recovered paper costs.

-18-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

Paperboard

Net sales for the three months ended October 31, 2004 increased 13% to $113.6, compared to $100.9 for the three months ended October 31, 2003. This increase resulted from a 12% increase in overall average sales prices for the quarter as well as a 2% increase in volume.

For the three months ended October 31, 2004, operating income for the Paperboard segment increased by 62%, or $3.5 million, from $5.6 million in the prior year to $9.1 million. This increase was due to a variety of factors, including the increased volume referred to above, the realization of our recently announced paperboard price increases, improved performance at our Fitchburg mill, and reduced restructuring charges. Paperboard prices were up $29 per ton for the quarter versus prior year’s quarter, which more than offset the $22 per ton increase in recovered paper costs per ton of paperboard produced. Fitchburg continued to demonstrate efficiency improvements which resulted in an operating loss of $1.3 million in the current quarter as compared to $2.7 million in the same quarter last year. Included in the operating losses for the quarters ended October 31, 2004 and 2003 are non-cash depreciation charges of $2.1 million and $1.9 million, respectively. We also experienced a decrease in restructuring costs of $1.0 million during the three months ended October 31, 2004. This is a result of a general reduction of restructuring expenses as well as a $0.4 million offset to the actual expenses incurred which resulted from the sale of water/sewer discharge rights for a facility closed in prior years.

For the three-month period ended October 31, 2004, cost of sales increased $9.1 million, or 10%, from the same three-month period in 2003. This increase is primarily due to a 39% increase in recovered paper costs, along with a 7% increase in energy costs. Energy costs rose from $16.2 million in 2003 to $17.3 million in the three-month period ended October 31, 2004. Mill capacity utilization (excluding Fitchburg) was 97% for each of the quarters ended October 31, 2004 and October 31, 2003. Including Fitchburg, utilization was 95% and 94% for quarters ended October 31, 2004 and 2003, respectively.

SG&A increased approximately $1.1 million, or 16%, to $8.5 million for the three-month period ended October 31, 2004 as compared to $7.4 million for the respective period in 2003. This increase is primarily due to some minor increases in many areas, including employee-related costs.

Converted Products

~~For~~Net sales in the ~~three~~Converted ~~months~~Products ~~ended~~segment ~~October~~were 312%, ~~2004,~~or ~~net sales increased~~ $41.36 million, orhigher ~~7%,~~when tocomparing ~~$67.4~~the ~~million~~quarter ~~compared~~ended toOctober 31, ~~$63.1~~2005 ~~million~~to in the ~~same~~quarter ~~period~~ended ~~last year~~October 31, 2004. This ~~increase~~ improvement is ~~primarily~~mainly due to a 6% increase in sales price ~~which~~for ~~was~~our converted products, realized from ~~our~~previously ~~price increase~~ announced inprice ~~April 2004. Additionally~~increases, weoffset ~~experienced~~by a 25% ~~increase~~decrease in ~~sales~~ volume ~~during the period~~.

~~Operating~~Cost ~~loss~~of ~~for~~sales ~~the~~increased ~~quarter ended October 31~~1%, ~~2004~~or ~~decreased 12% to a loss of~~ $20.45 million ~~from~~, ato ~~loss of~~ $264.86 million, ~~for~~when comparing the ~~quarter~~quarters ended October 31, ~~2003~~2005 and 2004. This increase ~~decrease~~ is ~~largely~~partly the result of ~~the~~two ~~increase~~additional inmonths ~~sales~~of ~~price~~operation ~~which~~at ~~more~~our ~~than~~NSP ~~offset~~start-up afacility ~~corresponding~~which 7%began ~~increase~~production in ~~unit paperboard raw material costs. Cost of sales was $64.2 million for the quarter ended~~ October 312004, ~~2004~~ as ~~compared~~well toas ~~$60.7~~increased ~~million in the same quarter a year ago. This $3.5 million, or 6%, increase is primarily due to the increase in unit paperboard raw material~~ costs. ~~Cost~~ of ~~sales~~chemicals asand apackaging ~~percentage of sales improved to 95% for the current quarter as compared to 96% for the same period prior year~~supplies.

~~SG&A~~Restructuring ~~increased~~costs were $0.31 million, orin 5%the quarter ended October 31, to2005, a $50.4 1 million ~~during~~decrease ~~the~~from ~~current quarter as compared to~~ $50.12 million in the ~~comparable~~ quarter ofended ~~2003~~October 31, 2004. ~~This~~Expenses ~~increase~~in iseach ~~primarily~~of ~~the~~these ~~result~~quarters ofrepresent ~~increases~~on-going incharges ~~employee-related costs~~relating to prior closures.

SG&A decreased 6% from $5.4 million in the quarter ended October 31, 2004 to $5.0 million in the quarter ended October 31, 2005 due primarily to cost reduction initiatives.

Operating loss for the Converted Products segment improved $1.6 million when comparing the quarters ended October 31, 2005 and 2004, respectively, from $2.3 million to $0.7 million. This improvement is the result of the realization of previously announced price increases as well as continued cost reduction initiatives.

International

~~For~~Net ~~the~~sales ~~three-month~~in ~~period~~the ~~ended~~International ~~October~~segment ~~31,~~improved ~~2004~~2%, ~~net~~or ~~sales were~~ $360.18 million, ~~up 8%, or~~ to $236.69 million ~~from~~in the ~~three-month~~quarter ~~period~~ ended October 31, ~~2003.~~2005 ~~This~~compared ~~increase is due~~ to ~~exchange rate changes - USD/Euro rates were~~ $136.~~23 and $~~1~~.14~~ ~~for~~million ~~the~~in ~~three-month periods ended October 31, 2004 and 2003, respectively. Excluding currency fluctuations, sales for~~ the ~~quarter~~same ~~decreased approximately 2% from the second~~ quarter oflast ~~2003.~~year ~~This~~primarily ~~decrease is~~ due to aan 518% ~~overall~~increase ~~decrease~~ in ~~selling~~converting ~~prices~~volumes. ~~which~~The ~~slightly~~converting ~~offset~~volume ~~a 4%~~ increase inwas ~~mill~~offset ~~sales~~by ~~volume and~~ a 63% ~~increase~~decrease in converting sales ~~volume~~price, ~~from~~primarily ~~the~~due ~~three~~to ~~month~~product ~~period of 2003~~mix.

~~For~~Cost ~~the~~of ~~three-month~~sales ~~period ended~~in ~~October~~the ~~31,~~International segment ~~2004,~~was ~~operating income increased 13%, or~~ $030.56 million, ~~from~~ the ~~same~~quarter ~~period~~ended ~~last~~October 31, ~~year.~~2005 ~~Operating~~as ~~Income~~compared ~~was~~to $428.81 million ~~versus~~in ~~$4.3 million for~~ the ~~prior year’s~~ quarter. ~~Excluding~~ended ~~currency~~October 31, ~~fluctuations~~2004, ~~operating~~an ~~income~~increase ~~was up~~of 4%$2.5 ~~for~~million, ~~the~~or ~~current quarter versus the prior year’s quarter~~9%. This ~~improvement~~increase ~~was~~is ~~mainly~~the ~~due~~result toof ~~lower~~a ~~recovered~~22% ~~paper~~increase ~~costs~~ in ~~our~~energy ~~two mills~~costs, ~~lower~~60% ~~paperboard~~of which ~~costs~~is inattributable ~~our~~to ~~converting~~the ~~plants~~turbine ~~and~~malfunction ~~continued~~at ~~performance~~San ~~improvements in our Netherlands converting plant~~Andrés, ~~all~~as ofwell ~~which,~~as ~~combined,~~21% ~~more~~and ~~than~~14% ~~offset~~increases ~~the decrease~~ in ~~selling~~board ~~prices.~~and ~~SG&A~~freight costs ~~in our European operations were up $0.5 million~~, ~~or 16%, due to currency fluctuations~~respectively.

~~-17-~~SG&A in the International segment showed a $0.7 million, or 22%, improvement in the quarter ended October 31, 2005 when compared to the quarter ended October 31, 2004, or $2.5 million compared to $3.2 million, respectively. This improvement is primarily the result of the recovery of bad debts that had been written off in prior periods.

~~Table~~Operating income for the International segment was $3.8 million in the quarter ended October 31, 2005, 21% lower than the $4.8 million reported in the quarter ended October 31, 2004. This decrease in operating income is the result of ~~Contents~~the increased energy, freight and board costs discussed above.

THE NEWARK GROUP, INC. AND SUBSIDIARIES

Corporate

~~During~~Unallocated ~~the~~corporate ~~three~~expense ~~month~~remained ~~period~~constant ~~ended~~at ~~October 31, 2004, we recognized a~~ $24.60 million ~~increase~~for ~~over~~each of the ~~same~~quarters ~~period~~ended ~~from last year in unallocated corporate expense~~October 31, ~~primarily~~ ~~relating~~2005 ~~to an increase in the LIFO reserve along with general increases in professional~~ and ~~legal fees~~2004.

Other (Expense)/Income

Interest expense increased from $26.32 million in the ~~three~~quarter ~~months~~ ended October 31, 2004 ~~from the same time period of 2003,~~ to $6.26 million. ~~This~~in ~~is a result of~~ the ~~higher interest~~quarter ~~rate~~ended onOctober 31, ~~our 9.75% $175 million senior subordinated notes versus the lower interest rate debt replaced by the notes~~2005, asprimarily ~~well~~due asto ~~overall~~ higher ~~outstanding balances. The blended average~~ interest rates, ~~including~~on ~~non-cash~~our ~~amortization~~variable ~~charges, were~~rate ~~approximately 9% and 6% for the three months ended October 31, 2004 and 2003, respectively~~debt. Average outstanding borrowings ~~increased~~decreased to$3.2 million, from $265.9 million ~~in 2004 as compared~~ to $~~248~~262.37 million ~~in 2003~~.

Excluding ~~interest~~Interest expense, ~~other~~Other income ~~remained~~- atnet decreased from income of $0.5 million ~~during~~in the ~~three month~~ ~~periods~~quarter ended October 31, 2004 ~~and~~to ~~2003~~income of $0.4 million in the quarter ended October 31, 2005. This decrease in Other Income is primarily due to unfavorable swings in foreign currency exchange rates.

~~Income~~-19- ~~Tax Expense~~

Income tax expense decreased 67%, or $0.6 million, in the three months ended October 31, 2004 to $0.3 million. Effective tax rates are 21% and 46% in 2004 and 2003 respectively. The decrease in the effective tax rate is primarily a result of tax benefits in our domestic companies.

Net Income

In summary, for the three months ended October 31, 2004, net earnings were $1.1 million, an increase of 9%, or $0.1 million, compared to $1.0 million in the three months ended October 31, 2003. This variance is primarily the result of a 10% increase in sales, an 87% decrease in restructuring charges and a 67% decrease in income taxes, all of which more than offset a 60% increase in interest costs.

Liquidity and Capital Resources

Liquidity Sources and Risks

Our primary sources of liquidity are cash from operations and borrowings under our credit facilities described below. Downturns in operations can significantly affect our ability to generate cash. Some of the factors that can affect our operating results and liquidity are discussed further under the caption “Risk Factors” contained in our annual report for the year ended April 30, 2004. In the six months ended October 31, 2004, we generated $10.1 million in cash from operations, which represents a $2.0 million decrease versus the same period in 2003. We believe that our existing cash and liquidity position will be strengthened by shutdowns in our Paperboard and Converted Products segments, improving pricing dynamics, and continued diligence related to our cost control programs which have improved our utilization rates and decreased expenses. However, no assurance can be given that these recent improvements in our mill utilization rates or cost control efforts will continue.

Our $150 million senior secured credit facility, with the principal sum of $99.0 million outstanding ($15.4 million of borrowings and $83.6 million of letters of credit) at October 31, 2004, is due on March 15, 2007. While we believe that cash from operations and availability under our credit facility will provide us with sufficient liquidity for the foreseeable future, the availability of borrowings from our credit facility is governed by our compliance with certain financial covenants, including an interest coverage test, a maximum level of capital expenditures and certain leverage ratios. The facility also imposes limits on acquisitions of new debt and advances to and investments in affiliates. In addition, we may not declare or pay any cash dividends. We were in compliance with the covenants under our credit facility as of October 31, 2004.

-18-

THE NEWARK GROUP, INC. AND SUBSIDIARIES

Income Tax (Benefit) Expense

In determining our consolidated tax rate, we compute an annual effective rate for each taxable jurisdiction.

During the quarter ended October 31, 2005, we recorded a $0.3 million net reduction to our valuation allowance. An increase in the allowance of $0.7 million, for net operating losses expected to expire unused, was offset by non-expiring state tax credits of $1.0 million which, based on initial tax planning strategies, are expected to be realized. However, we continually evaluate and modify strategies and the ultimate form of utilization of these tax credits may change.

Additionally during this quarter, we repatriated approximately $0.6 million as dividends from our European subsidiary. Taxes for this repatriation were provided for at April 30, 2005 and this transaction reduced our deferred tax asset for the net operating loss by approximately $0.2 million.

Net Income

In summary, our net income decreased from income of $1.2 million in the quarter ended October 31, 2004 to a net loss of $1.2 million in the quarter ended October 31, 2005. Net income was adversely affected by the continued increase in energy and freight costs.

Liquidity Requirements

Operations: . Our current cash requirements for operations consist primarily of expenditures to maintain our mills and plants, to meet operating lease ~~payments~~obligations, to meet obligations to our lenders, and to finance working capital requirements and other operating activities. We fund our current cash requirements with cash provided by operations and borrowings under our senior credit facility. We believe that these sources are sufficient to meet the current and anticipated cash requirements of our operations.

~~Capital~~As ~~Expenditures:~~discussed ~~Capital~~in ~~expenditures~~our ~~were~~Annual Report on Form 10-K for the year ended April 30, 2005, we have provided income taxes of $9.2.3 million for the repatriation of $6.4 million of foreign earnings in the form of dividends. During the six months ended October 31, ~~2004~~2005, ~~which~~we ~~was~~repatriated a total of $47.23 million, ~~less~~only ~~than~~$0.6 million of which was in the ~~same~~form ~~six-month~~of ~~period~~a dividend and therefore taxable in the ~~prior~~United ~~year~~States. WeThis dotransaction ~~not~~reduced ~~expect~~our ~~capital expenditures~~deferred totax ~~exceed~~asset ~~$20 million~~ for the ~~fiscal~~net ~~year~~operating ~~ended~~loss ~~April~~by ~~2005~~approximately $0.2 million.

Capital Expenditures. Our total capital expenditures were $8.9 million and $9.2 million in the first six months of fiscal 2006 and 2005, respectively of which $0.4 million and $0.9 million, respectively, were spent on the Fitchburg mill. Through October 31, 2005, we have made capital expenditures of approximately $177.2 million on the Fitchburg mill. We expect our total fiscal 2006 capital expenditures to be under $25.0 million.

Borrowings

At October 31, ~~2004~~2005, total debt (consisting of current maturities of debt, our senior credit facility, and other long-term debt, as reported on our consolidated balance sheets) was as follows (in millions):

	October 31, 2004
	October 31, 2005
Senior revolving credit facility (1)	$	15.4
Senior revolving credit facility(1)	$	7.8
9 3/4% Senior Subordinated Notes due 2014		175.0
Industrial Revenue Bonds		7169.03
Other		8.1
Other(2)		10.4
Total debt	$	~~269~~262.5

(1) Excludes letters of credit issued to enhance security for the IRBs and ~~worker~~workers’s compensation claims.

In(2) ~~March~~Pursuant ~~2004,~~to wethe ~~entered~~July ~~into~~5, a2005 ~~three-year,~~“put” ~~senior~~of ~~secured~~Company ~~revolving~~common ~~credit~~stock ~~facility~~to ~~with~~the ~~Wachovia~~Company ~~Bank,~~by ~~National~~its ~~Association,~~former asChairman ~~Agent. The~~and ~~facility~~current isDirector in(see ~~the~~Note ~~aggregate~~9 ~~principal~~to ~~amount~~the ofaccompanying ~~$150~~consolidated ~~million~~financial statements), ~~with~~the upCompany toissued ~~$95~~a ~~million~~subordinated ~~available~~note ~~for~~on ~~the~~August ~~issuance~~10, of2005 ~~letters~~for ~~of credit~~$7.9 ~~Letters~~million ofto ~~credit~~the ~~are~~former ~~needed,~~Chairman in ~~part~~exchange for the 198,000 asshares ~~security~~of ~~for~~Company ~~our~~common ~~industrial~~stock ~~revenue~~owned ~~bonds~~by him. AsThe ofnote ~~October~~bears ~~31,~~interest ~~2004, we~~at ~~had~~the ~~approximately~~prime ~~$83.6~~rate ~~million~~in ofeffect ~~letters~~from oftime ~~credit~~to ~~outstanding~~time, torequires ~~secure~~quarterly ~~our~~principal ~~industrial~~and ~~revenue~~interest ~~bonds~~payments and ~~liability~~is ~~insurance~~due ~~claims~~in ~~and~~July ~~$15~~2015.4 ~~million~~As of ~~other~~October ~~borrowings~~31, ~~outstanding~~2005, ~~under~~ the ~~facility,~~remaining ~~leaving~~balance uson ~~with~~the ~~availability~~note ~~of approximately~~is $516.09 million ~~under the revolver~~.

~~In March 2004, we completed an offering of $175 million of 9.75% senior subordinated notes with a maturity date of March 12, 2014 (the “Notes”). We will pay interest semi~~-~~annually~~20- on March 15 and September 15 of each year; our first interest payment was made on September 15, 2004. We cannot redeem the Notes before March 15, 2009, except as described below. On or after that date, we may redeem them at specified prices. However, on or before March 15, 2007, we may redeem up to 35% of the original principal amount of the Notes at 109.75% of their face amount, plus accrued interest, with money we raise from certain public equity offerings. The Notes rank junior in right of payment to all of our existing and future senior debt and equal in right of payment with all of our existing and future senior subordinated debt. The Notes are not guaranteed by any of our subsidiaries, and therefore are effectively subordinated to all liabilities of our subsidiaries. If we experience certain changes of control, we must offer to purchase the Notes at 101% of their face amount, plus accrued interest.

We are also party to a series of cross currency rate swap transactions with two members of our existing bank group (the “2001 Swaps”). The 2001 Swaps have been designated as hedges against the existing inter-company loan to our European subsidiary and effectively converted approximately $53.0 million, together with the corresponding US Dollar denominated fixed rate interest payment obligations, into Euro denominated fixed rate obligations. These swaps have an aggregate outstanding balance of €44.6 million at October 31, 2004. The fair value of the 2001 Swaps represents a liability of $21.1 million and $20.3 million at October 31, 2004 and April 30, 2004, respectively.

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THE NEWARK GROUP, INC. AND SUBSIDIARIES

In March 2004, we entered into a three-year, senior secured revolving credit facility with Wachovia Bank, National Association, as Agent. The facility is in the aggregate principal amount of $150.0 million, with up to $95.0 million available for the issuance of letters of credit. Letters of credit are issued, in part, as security for our industrial revenue bonds. As of October 31, 2005, we had approximately $82.8 million of letters of credit outstanding to secure our industrial revenue bonds and liability insurance claims and $7.8 million of other borrowings outstanding under the facility, leaving us with availability of approximately $59.4 million under the revolver.

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

Effective May 1, 2006, pursuant to the senior secured revolving credit facility, our current interest coverage test will increase from the ratio of 2.0:1 to a ratio of 2.25:1. This will require, on each measurement date, that our Adjusted EBITDA, as defined in the credit facility agreement, be greater than 2.25 times our cash interest expense. At October 31, 2005, our actual interest coverage ratio was 2.1:1.

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

We are also parties to a series of cross-currency rate swap transactions with members of our existing bank group (the “2001 Swaps”). The 2001 Swaps have been designated as hedges against the existing inter-company loan to our European subsidiary. At October 31, 2005 the fair value of the 2001 Swaps represented a liability of $14.7 million.

Additionally, in our effort to manage costs, we have entered into several energy price hedges. At October 31, 2005 the fair value of these hedges was an asset of $6.3 million.

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

Year Ending April 30,	Total
2005 (1)	$	1.4
2006 (1)	$	1.0
2006		2.5
2007 (2)		12.4
2007 (2)		18.3
2008		2.9
2008		6.4
2009		2.9
2009		2.1
2010		3.0
Thereafter		~~238~~240.83
	$	269.5

(1) Represents remaining obligations for the fiscal year ended April 30, ~~2005~~2006.

(2) Includes $157.48 ~~outstanding~~million due under ~~the senior secured~~ revolving credit facility.

Cash Flow

Net cash provided by operating activities

In the six months ended October 31, ~~2004~~2005 and ~~2003~~2004, we generated cash from operating activities of $1011.1 million and $1210.15 million, respectively. ~~The~~This ~~difference is primarily related to the sum of net earnings and depreciation showing an increase of~~ $10.16 million increase in ~~the~~cash ~~current~~generated ~~year~~from ~~versus~~operations ~~the~~is ~~past~~mainly ~~year~~the asresult ~~well~~of ~~as cash management~~lower ~~initiatives~~accounts ~~that~~receivable, ~~began in August 2003~~ which ~~did~~was ~~not~~offset ~~have~~by ahigher ~~full~~prepaid ~~impact~~expense onand ~~the~~other ~~results~~receivable ~~for the six months ended October 31~~balances, ~~2003.~~as ~~Increased~~well ~~focus~~as ~~continues~~decreased onearnings ~~the~~resulting ~~collection of cash~~ from ~~our customers, with monthly discussions at~~ the ~~senior management~~higher ~~level~~energy ~~of the major customers beyond terms,~~ and ~~extending~~freight ~~all payment terms with non-contract vendors~~costs.

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THE NEWARK GROUP, INC. AND SUBSIDIARIES

Net cash used in investing activities

In the six~~-month~~ ~~periods~~months ended October 31, ~~2004~~2005 and ~~2003~~2004, we used $87.89 million and $169.3 million inof cash, respectively, in investing activities. The overall reduction compared to last year iswas due primarily to ~~lower capital expenditures in 2004 (~~$91.20 million more in ~~2004~~proceeds ~~versus~~from ~~$13.5~~the ~~million~~sale inof ~~2003)~~property, plant and anequipment ~~equity~~as ~~method~~well ~~investment~~as of $20.34 million ~~made~~less byof ~~our~~capital ~~International segment in the six months ended October 31, 2003~~expenditures.

Net cash ~~provided by (~~used in) financing activities

In the six-month ~~months~~period ended October 31, ~~2004,~~2005 we ~~provided~~used cash ~~from~~in financing activities of $1.07 million ~~and~~while ~~used~~in ~~cash~~the ~~from~~six-month period ended October 31, 2004, financing activities provided cash of ($1.9)0 million. This increased use of cash is primarily due to the fact that in the current six-month ~~months~~period, ~~ended~~we ~~October~~had ~~31,~~net ~~2003,~~repayments ~~respectively.~~of ~~The~~long-term ~~difference~~debt isof ~~primarily~~$2.2 ~~related~~million toas acompared ~~change~~to innet ~~our~~borrowings ~~cash~~of ~~overdrafts~~long-term debt of ($1012.6) million in ~~2004~~the assame ~~compared~~period tolast (year. This $614.0) 8 million innegative ~~2003~~effect ~~which~~on isfinancing ~~offset~~cash byflows ~~reduced~~was ~~debt~~offset ~~payments~~by ofan $611.40 million ~~and~~decrease $1in cash overdrafts.0 ~~million~~Additionally, ofthere ~~reduced~~were no cash purchases of treasury stock in the six-month period ended October 31, 2005 as compared to $1.1 million of purchases in the six-month period ended October 31, 2004.

Seasonality

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

Inflation

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

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THE NEWARK GROUP, INC. AND SUBSIDIARIES

Critical Accounting Policies

Our accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting matters which are both very important to the portrayal of our financial condition and results and which require some of management’s most difficult, subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which, in management’s judgment, could change in a manner that would materially affect management’s future estimates with respect to such matters and, accordingly, could cause future reported financial condition and results to differ materially from the financial condition and results reported based on management’s current estimates. Changes in these estimates are recorded when better information is known. There have been no material changes in our critical accounting policies during the six-month period ended October 31, ~~2004~~2005.

Pension

Our defined benefit pension plans are accounted for in accordance with SFAS No. 87, “Employers’ Accounting for Pensions.” The determination of pension obligations and expense is dependent upon our selection of certain assumptions, the most significant of which are the expected long-term rate of return on plan assets and the discount rates used to discount plan liabilities. Our assumptions are described in Note 1012 to our Annual Report on Form 10-K for the ~~annual~~year ~~report~~ended April 30, 2005. The assumption for the long-term rate of return on plan assets is determined based on historical results of the portfolio and management’s expectation of the current economic environment. Effective May 1, ~~2002~~2003, this rate of return was ~~reduced to~~ 8.75% ~~from 9~~.~~50%.~~ At April 30, ~~2003~~2004, the discount rate was reduced from 76.2550% to 6.5025% and subsequently reduced to 65.2570% on April 30, ~~2004~~2005. A 1.0% change in this discount rate would create an impact to the statement of operations of approximately $1.0 million. This discount rate is based upon the demographics of the plan participants as well as benchmarking certain indices, e.g. Citigroup High Grade Credit Index as well as Aa- and Aaa-Rated Corporate Bonds. Pension expense was $2.6 ~~million in 2002, $4~~.12 million in ~~2003~~2004, $65.23 million in ~~2004~~ 2005 and is ~~estimated~~expected to be ~~approximately~~ $64.38 million in ~~2005~~2006.

~~Goodwill~~ -22-

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

Accounts Receivable

Our policy with respect to trade and notes receivables is to maintain an adequate allowance or reserve for doubtful accounts for estimated losses from the inability of our customer to make required payments. For specific accounts for which we have information that the customer may be unable to meet its financial obligation, whether or not a bankruptcy is involved, a provision is recorded at time of occurrence (e.g. in 2004, we incurred a bad debt write-off of $3.2 million for a long-standing customer who did file for Chapter 11 protection on July 13, 2004). For all other accounts, percentages are applied to all receivables based up the age of the specific invoices. The older invoices (e.g., all amounts greater than 90 days) receive a larger percentage of allowance, based upon management’s best estimate. Another percentage, based upon management’s best estimate, is applied to the remaining receivable balance. A total reserve is calculated in this manner and is compared to historical experience. A 1.0% movement of our total receivables into the greater than 90 day aging would result in an increase to the reserve of $125,000. If the financial condition of our customers were to deteriorate and result in an inability for them to make their payments, additional allowances may be required.

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THE NEWARK GROUP, INC. AND SUBSIDIARIES

Goodwill

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

Accounts Receivable

Our policy with respect to trade and notes receivables is to maintain an adequate allowance or reserve for doubtful accounts for estimated losses from the inability of our customers to make required payments. For specific accounts for which we have information that the customer may be unable to meet its financial obligation, whether or not a bankruptcy is involved, a provision is recorded at time of occurrence. For all other accounts, percentages are applied to all receivables based up the age of the specific invoices. The older invoices (e.g., all amounts greater than 90 days) receive a larger percentage of allowance, based upon management’s best estimate. Another percentage, based upon management’s best estimate, is applied to the remaining receivable balance. A total reserve is calculated in this manner and is compared to historical experience. If collections were to slow by seven days, there would be an increase in this reserve of $0.2 million. If the financial condition of our customers were to deteriorate and result in an inability for them to make their payments, additional allowances may be required.

Income Taxes

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

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

Impairment of Long-Lived Assets

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

•

Significant operating losses;

•

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

•

Assets that are idled; and

•

Assets that are likely to be divested.

The impairment review requires management to estimate future undiscounted cash flows associated with an asset or asset group expected to result from the use and eventual disposition of the asset or asset group. Estimating future cash flows requires management to make judgments regarding future economic conditions, product demand and pricing. Although we believe our estimates are appropriate, significant differences in the actual performance of the asset or asset group may materially affect our asset values and results of operations. An impairment loss shall be recognized if the carrying amount of the long-lived asset or asset group exceeds fair value as determined by the sum of the undiscounted cash flows. For additional information, see Note 168 to our Annual Report on Form 10-K for the ~~annual~~year ~~report~~ended April 30, 2005.

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THE NEWARK GROUP, INC. AND SUBSIDIARIES

Item 3. Qualitative And Quantitative Disclosure About Market Risk

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

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

Commodity Prices: The markets for our recovered paper products, particularly Old Corrugated Containers (“OCC”), are highly cyclical and affected by ~~such~~ such factors as global economic conditions, demand for paper, municipal recycling programs, changes in industry production capacity and inventory levels. These factors all have a significant impact on ~~selling~~costs ~~prices~~ and our profitability. We estimate that a 10% increase in the purchase price of recovered paper consumed, with no corresponding increase in the prices of finished products, would have approximately a ($1011.05) million effect on our operating income in ~~2005~~fiscal 2006, although this would be slightly mitigated by our sale of recovered paper to third party customers.

Energy prices are also highly cyclical. We estimate that a 10% increase in our energy costs with no corresponding increase in the prices of finished products would have approximately a ($69.85) million effect on our operating income in ~~2005~~fiscal 2006. We utilize derivative financial instruments in an attempt to partially hedge our energy price risk byon ~~buying forward contracts for~~ some of our future energy requirements.

Interest Rates/Cross -Currency Interest Rate Swaps: We have cross-currency interest rate swap agreements with two banks as described above. The 2001 Swaps have been designated as hedges against the existing intercompany loan to our European subsidiary. At October 31, ~~2004~~2005, the fair value of the 2001 Swaps represented a liability of $2114.17 million and the ~~result~~results of hedge ineffectiveness related to these swap agreements during the six months ended October 31, ~~2004~~2005 ~~was~~and ~~$0.3~~2004 ~~million. There~~ were noa ~~charges~~gain ~~recognized~~of ~~for~~$0.2 ~~ineffectiveness~~and in$0.3 ~~the~~million, ~~comparable period in the prior year~~respectively. We do not expect a material amount to be reclassified from other comprehensive income to earnings to offset recognition of gains and losses on the intercompany loan in the next twelve months.

~~-22-~~We could be exposed to future changes in interest rates. Our senior secured revolving credit facility bears interest at a variable rate, as do our industrial revenue bonds. Interest rate changes impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant. We estimate that if interest rates were to increase by 10%, it would have approximately a ($0.3) million effect on net earnings.

THE NEWARK GROUP, INC. AND SUBSIDIARIES

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

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

Item 4. Controls and Procedures.

(a) Disclosure controls and procedures.

AsDuring of the ~~end~~first ofsix ~~the~~months ~~period~~of ~~covered by this~~fiscal ~~Quarterly Report on Form 10-Q~~2006, ~~we carried out an evaluation, with the participation of~~ our management, including ~~our~~the ~~Chief~~principal ~~Executive~~executive ~~Officer~~officer and ~~Chief~~principal ~~Financial~~financial ~~Officer~~officer, ofevaluated ~~the effectiveness of~~ our disclosure controls and procedures ~~pursuant~~(as ~~to Securities~~defined ~~Exchange~~in ~~Act~~Rules ~~Rule~~ 13a-15.(e) ~~Based~~and ~~upon~~15d-15(e) ~~that~~under ~~evaluation,~~the ~~our~~Securities ~~Chief~~Exchange ~~Executive~~Act ~~Officer~~of 1934) related to the recording, processing, summarization and ~~Chief~~reporting ~~Financial~~of ~~Officer~~information ~~concluded~~in our reports that ~~our~~we file with the SEC. These disclosure controls and procedures ~~are~~have ~~effective~~been indesigned ~~ensuring~~to ensure that material information ~~required~~relating to beus, ~~disclosed~~including byour ussubsidiaries, inis ~~the~~made ~~reports~~known ~~that~~to weour ~~file~~management, orincluding ~~submit~~these ~~under~~officers, ~~the~~by ~~Securities~~other ~~Exchange~~of ~~Act~~our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

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

~~There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10~~-Q24- ~~relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.~~

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THE NEWARK GROUP, INC. AND SUBSIDIARIES

(b) Changes in internal controls over financial reporting.

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

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. ~~CHANGES~~UNREGISTERED INSALE OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

(a) None

(b) None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ~~ON FORM 8-K~~

(a)		Exhibits:
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)		Reports on Form 8-K:
		None

(a) Exhibits:

-24-


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

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

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

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

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SIGNATURES

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

	THE NEWARK GROUP, INC.
Date: December 10, 2004
Date: December 14, 2005
	By:	/s/ Robert H. Mullen
		Robert H. Mullen
		Chief Executive Officer and President
		Chief Executive Officer, President and
		Chairman of the Board
		(Principal Executive Officer)
Date: December 10, 2004
Date: December 14, 2005
	By:	/s/ Joseph E. Byrne
		Joseph E. Byrne
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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