The following discussion and analysis presents the factors that had a material effect on our financial position as of September 30, 2009 and our results of operations for the three and nine months ended September 30, 2009 and 2008. You should read this discussion in conjunction with our consolidated financial statements and the notes to those consolidated financial statements included in our most recent Annual Report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.

In this report, unless the context requires otherwise, references to "we," "us," "our," "Neenah" or the "Company" are intended to mean Neenah Paper, Inc. and its consolidated subsidiaries. (Tabular amounts in millions, except as noted)

Executive Summary

Strategic Initiatives

During the previous three years, we completed several complementary initiatives as part of our strategy to transition to a premium fine paper and technical products company. In 2006, we sold 500,000 acres of woodlands in Nova Scotia, divested our Terrace Bay pulp operations and acquired the German technical and specialty paper business of FiberMark, Inc. In 2007, we purchased Fox Valley Corporation and its subsidiary, Fox River Paper Company, LLC (collectively, "Fox River"). In June 2008, Neenah Canada sold the Pictou Mill to Northern Pulp, which assumed responsibility for all of the assets and liabilities associated with the Pictou Mill. With the sale of the Pictou Mill, we no longer have any pulp manufacturing operations or supply agreements with Kimberly-Clark.

We currently own approximately 500,000 acres of woodlands in Nova Scotia, Canada (the "Woodlands") and believe it is probable that a sale of the Woodlands will occur within twelve months. We expect the sale of the Woodlands to result in a substantial gain. In conjunction with the sale of the Pictou Mill, we entered into a stumpage agreement (the "Stumpage Agreement") which allows Northern Pulp to harvest an average of approximately 400,000 metric tons of softwood timber annually from the Woodlands at market prices. An agreement to sell the Woodlands will be subject to the terms of the Stumpage Agreement. For the three and nine months ended September 30, 2009 and 2008, the results of the Pictou Mill and the Woodlands are reported as discontinued operations.

Results of Continuing Operations

For the three months ended September 30, 2009, consolidated net sales decreased approximately $35 million from the prior year period to $150.1 million. The decrease was primarily due to substantially lower volume as a result of reduced market demand related to continued global economic weakness.

Consolidated operating income of $10.7 million for the three months ended September 30, 2009 was $1.6 million unfavorable to the prior year period. Excluding a gain of approximately $3.6 million in the third quarter of 2008 primarily from the sale of fixed assets acquired in the acquisition of Fox River, consolidated operating income increased $2.0 million from the prior year primarily due to lower manufacturing input costs and reduced spending as a result of initiatives implemented to control operating costs. These favorable factors were only partially offset by lower volume and average net selling prices.

Results of Discontinued Operations

For the three months ended September 30, 2009, timber sales to Northern Pulp pursuant to the Stumpage Agreement resulted in net sales from discontinued operations of $1.2 million compared to net sales of $2.0 million in the prior year period. For the three months ended September 30, 2009, pre-tax income from discontinued operations was $1.0 million compared to earnings from discontinued operations of $2.4 million in the prior year period.

Results of Operations and Related Information

In this section, we discuss and analyze our net sales, operating income and other information relevant to an understanding of our results of operations for the three and nine months ended September 30, 2009 and 2008.

Analysis of Net Sales- Three and Nine Months Ended September 30, 2009 and 2008



The following table presents net sales by segment, expressed as a percentage of
total net sales:



                                   Three Months Ended September 30,       Nine Months Ended September 30,
                                      2009                 2008               2009                2008
Fine Paper                                    42 %                 44 %              45 %                45 %
Technical Products                            58 %                 56 %              55 %                55 %
Total                                        100 %                100 %             100 %               100 %

Commentary:



The following table presents our net sales by segment for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008:



                                                         Change in Net Sales Compared to Prior Period
                          Three Months Ended                                     Change Due To
                             September 30,                                           Average
                           2009         2008      Total Change        Volume        Net Price      Currency
Fine Paper              $     63.0    $    81.7   $       (18.7 )  $      (18.5 )  $      (0.2 )  $         -
Technical Products            87.1        103.9           (16.8 )         (10.3 )         (3.5 )         (3.0 )
Consolidated            $    150.1    $   185.6   $       (35.5 )  $      (28.8 )  $      (3.7 )  $      (3.0 )

Consolidated net sales for the three months ended September 30, 2009 were $35.5 million lower than the prior year period primarily due to reduced volume.

† Net sales in our fine paper business decreased $18.7 million or 23 percent primarily due to a 23 percent decrease in shipments. Lower sales volume reflected a large decline in market demand for premium uncoated free sheet papers. Average net selling prices were essentially unchanged from the prior year as the benefits of pricing actions implemented in 2008 were offset by a less favorable sales mix.

† Net sales in our technical products business decreased $16.8 million or 16 percent primarily due to a 10 percent decrease in shipments, as well as, lower average net selling prices and unfavorable currency effects. Lower sales volume reflected decreased market demand due to weaker economic conditions. While sales volumes for filtration, medical packaging and saturated label products did increase, this was more than offset by lower sales volumes in other product categories. Despite the unfavorable year-over-year volume comparison, volume has shown sequential improvement in the second and third quarters of 2009. Average net selling prices decreased as a result of a challenging pricing environment for our European business including the effect of a stronger Euro.

The following table presents our net sales by segment for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008:

                                                         Change in Net Sales Compared to Prior Period
                          Nine Months Ended                                      Change Due To
                            September 30,                                            Average
                           2009         2008     Total Change        Volume         Net Price      Currency
Fine Paper              $    189.1    $  263.2   $       (74.1 )  $       (79.2 )  $       5.1    $         -
Technical Products           230.3       322.5           (92.2 )          (74.3 )         (0.5 )        (17.4 )
Consolidated            $    419.4    $  585.7   $      (166.3 )  $      (153.5 )  $       4.6    $     (17.4 )

Consolidated net sales for the nine months ended September 30, 2009 were $166.3 million lower than the prior year period primarily due to reduced volume.

† Net sales in our fine paper business decreased $74.1 million or 28 percent primarily due to a 30 percent decrease in shipments. Lower sales volume reflected an unusually large decline in market demand for premium uncoated free sheet papers in the first nine months of 2009 due to weaker economic conditions. The effect of lower volume was only partly offset by higher average net selling prices resulting from the realization of price increases implemented in 2008.

† Net sales in our technical products business decreased $92.2 million or 29 percent primarily due to a 23 percent decrease in shipments and unfavorable currency effects. Despite higher sales volumes for medical packaging and saturated label products, lower sales volumes for most products reflected both decreased market demand due to weaker economic conditions and inventory destocking by customers. Unfavorable currency effects were primarily due to a strengthening of the U.S. dollar relative to the Euro. Average net selling prices were essentially unchanged from the prior year period.

The following table sets forth line items from our condensed consolidated statements of operations as a percentage of net sales for the periods indicated and is intended to provide a perspective of trends in our historical results:

                                      Three Months Ended
                                         September 30,          Nine Months Ended September 30,
                                      2009          2008           2009                 2008

Net sales                               100.0 %       100.0 %          100.0 %              100.0 %
Cost of products sold                    81.1          86.5             82.6                 85.0
Gross profit                             18.9          13.5             17.4                 15.0
Selling, general and
administrative expenses                  12.2           9.0             12.2                  9.4
Other income - net                       (0.1 )        (2.1 )           (0.2 )               (2.0 )
Restructuring costs                      (0.3 )           -              4.2                    -
Operating income                          7.1           6.6              1.2                  7.6
Interest expense-net                      3.6           3.4              3.9                  3.2
Income (loss) from continuing
operations before income taxes            3.5           3.2             (2.7 )                4.4
Provision (benefit) for income
taxes                                     1.2           0.5             (1.3 )                1.0
Income (loss) from continuing
operations                                2.3 %         2.7 %           (1.4 )%               3.4 %

Analysis of Operating Income-Three and Nine Months Ended September 30, 2009 and 2008

Commentary:



The following table presents our operating income (loss) by segment for the
three months ended September 30, 2009 compared to the three months ended
September 30, 2008:



                                                        Change in Operating Income (Loss) Compared to Prior Period
                     Three Months Ended                                        Change Due To
                       September 30,           Total                         Net         Material
                     2009          2008        Change      Volume (a)     Price (b)     Costs (c)      Currency     Other (d)
Fine Paper        $      9.6    $     11.1   $     (1.5 )  $      (3.4 )  $      0.6    $      3.6    $        -   $      (2.3 )
Technical
Products                 5.2           4.1          1.1           (3.3 )        (4.9 )         5.0          (0.2 )         4.5
Unallocated
corporate costs         (4.1 )        (2.9 )       (1.2 )            -             -             -             -          (1.2 )
Consolidated      $     10.7    $     12.3   $     (1.6 )  $      (6.7 )  $     (4.3 )  $      8.6    $     (0.2 ) $       1.0

Consolidated operating income of $10.7 million for the three months ended September 30, 2009 decreased $1.6 million compared to 2008. Excluding the gain of approximately $3.6 million in the third quarter of 2008 primarily from the sale of fixed assets acquired in the acquisition of Fox River, consolidated operating income increased $2.0 million from the prior year primarily due to lower manufacturing input costs and initiatives implemented to reduce spending partially offset by lower volume and unfavorable average net selling prices.

† Operating income for our fine paper business decreased $1.5 million from the prior year period. Excluding the gain of approximately $3.6 million in the third quarter of 2008 from the sale of certain Fox River assets, operating income for Fine Paper increased $2.1 million compared to the prior year primarily due to lower manufacturing input costs, principally for hardwood pulp and energy, lower operating and administrative spending due to cost reduction initiatives and higher average net selling prices due to the realization of price increases implemented in 2008. These favorable effects were partially offset by lower volume as a result of weaker economic conditions.

† Operating income for our technical products business increased $1.1 million from 2008 primarily due to lower manufacturing input costs, principally for pulp and latex and lower operating and administrative spending due to cost reduction initiatives. These favorable factors were partially offset by unfavorable average net selling prices and lower volume. We were unable to fully realize market price reductions for gas, coal and specialized pulp due to certain fixed price contracts for these input costs which generally extended through September 2009.

† Unallocated corporate expenses increased by $1.2 million compared to the prior period due to higher employee benefit cost, including non-cash stock-based compensation costs in 2009, and a favorable adjustment in 2008 related to a change in our paid time off policy.

The following table presents our operating income (loss) by segment for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008:

                                                         Change in Operating Income (Loss) Compared to Prior Period
                     Nine Months Ended                                          Change Due To
                       September 30,           Total                          Net         Material
                    2009          2008        Change       Volume (a)      Price (b)     Costs (c)      Currency    Other (d)(e)
Fine Paper        $     8.2    $     32.8   $     (24.6 )  $     (23.2 )  $       5.7    $     11.2    $        -   $       (18.3 )
Technical
Products                7.9          18.2         (10.3 )        (25.4 )         (2.6 )         8.2          (0.4 )           9.9
Unallocated
corporate costs       (11.0 )        (6.6 )        (4.4 )            -              -             -             -            (4.4 )
Consolidated      $     5.1    $     44.4   $     (39.3 )  $     (48.6 )  $       3.1    $     19.4    $     (0.4 ) $       (12.8 )

Consolidated operating income of $5.1 million for the nine months ended September 30, 2009 decreased $39.3 million compared to 2008 primarily due to lower volume and costs associated with the closure of the Ripon Mill. Excluding costs associated with closing the Ripon Mill of $17.6 million and gains of approximately $6.6 million and $4.3 million in 2008 from the sale of certain assets acquired in the acquisition of Fox River and the settlement of certain Terrace Bay postretirement benefits, respectively, consolidated operating income for the nine months ended September 30, 2009 decreased $10.8 million from the prior year due to lower volume and the under absorption of fixed manufacturing costs associated with reductions in paper machine operating schedules to control inventory. These unfavorable factors were only partially offset by lower manufacturing input costs, actions taken to reduce spending and higher average selling prices.

† Operating income for our fine paper business decreased $24.6 million compared to the prior year period. Excluding costs of $17.6 million associated with closing the Ripon Mill and the gain of approximately $6.6 million in 2008 from assets sales, operating income for our fine paper business decreased $0.4 million primarily due to lower volume as a result of weaker economic conditions and the under absorption of fixed manufacturing costs due to reduced paper machine utilization. The effects of lower volume and paper machine operating schedules, including the temporary idling of one paper machine, were largely offset by lower manufacturing input costs, principally for hardwood pulp, lower operating and administrative spending due to cost reduction initiatives and higher average net selling prices due to the realization of price increases implemented in 2008.

† Operating income for our technical products business decreased $10.3 million due to lower volume, the under absorption of fixed manufacturing costs due to reduced paper machine utilization and, to a lesser extent, unfavorable average net selling prices. These unfavorable factors were partially offset by lower manufacturing input costs, principally for pulp and latex and lower operating and administrative spending due to the implementation of cost reduction initiatives. We were unable to fully realize market price reductions for gas, coal and specialized pulp as a result of certain fixed price contracts for these input costs which generally expired in September 2009.

† Unallocated corporate expenses increased by $4.4 million. Unallocated corporate expense for the nine months ended September 30, 2008 included a non-cash gain of approximately $4.3 million related to the settlement of certain postretirement benefits we retained following the sale of our Terrace Bay pulp
mill. Excluding the effect of this gain, unallocated corporate expenses were essentially unchanged from the prior year.

Additional Statement of Operations Commentary:

† Selling, general and administrative ("SG&A") expense of $18.1 million for the three months ended September 30, 2009 increased $1.5 million from the prior year period primarily as a result of increased advertising expenditures related to the launch and relaunch of certain brands and higher employee benefit costs. For the three months ended September 30, 2009, SG&A expense as a percentage of net sales was approximately 12.2 percent and was 3.2 percentage points higher than the prior year period due to increased spending and the 19 percent decrease in net sales.

† For the three months ended September 30, 2009 and 2008, we incurred net interest expense of $5.4 million and $6.3 million, respectively. The decrease in net interest expense was due to lower average borrowings and lower average interest rates.

† For the three months ended September 30, 2009, we recorded a provision for income taxes of $1.9 million compared to a provision for income taxes of $1.0 million in the prior year period. As a result, our effective income tax rates for the three months ended September 30, 2009 and 2008 was approximately 36 percent and 17 percent, respectively. Our income tax provision for the three months ended September 30, 2009, includes approximately $0.4 of interest expense related to proposed IRS adjustments for audit examinations of prior year income tax returns. Excluding such interest expense and certain other adjustments for the three months ended September 30, 2009, our effective income tax rate was approximately 17 percent. For the three months ended September 30, 2009 and 2008, the variance in our effective income tax rate from the U.S. federal statutory rate of 35 percent was primarily due to the benefits of our corporate structure and the level, the mix of pre-tax income from tax jurisdictions with different marginal tax rates.

Liquidity and Capital Resources



                                           Nine Months Ended September 30,
                                              2009                  2008
Net cash flow provided by (used in):
Operating activities                   $             54.4      $           0.2
Investing activities:
Capital expenditures                                 (6.0 )              (23.6 )
Other investing activities                            0.1                  0.3
Total                                                (5.9 )              (23.3 )

Financing activities                                (46.4 )               29.5

Operating Cash Flow Commentary:

† Cash provided by operating activities of $54.4 million for the nine months ended September 30, 2009 was $54.2 million favorable to cash provided by operating activities of $0.2 million in the prior year period. The favorable comparison to the prior year was due to a decrease in our investments in working capital in the current year, including the receipt of a refund of U.S. income taxes and payments related to the closure of the Ripon Mill versus an increase in our investment in working capital in 2008.

† For the nine months ended September 30, 2009, we received approximately $10.9 million in refunds of U.S. income taxes. As of September 30, 2009, we had more than $100 million of U.S. federal and state net operating losses that may be carried forward to offset future taxable income through 2028. As a result of certain proposed IRS adjustments related to audit examinations of prior year income tax returns, we expect to make income tax payments in the fourth quarter of 2009 and the first quarter of 2010 of approximately $6.2 million and $1.0 million, respectively.

† For the nine months ended September 30, 2009, we made severance and contract termination payments of approximately $6.5 million related to the closure of the Ripon Mill. In addition, we expect to make future contract termination payments of approximately $4 million in 2010.

† For the nine months September 30, 2009, we made aggregate contributions to pension trusts and payments of pension benefits for unfunded pension plans of approximately $7.9 million. We expect to make total contributions to pension trusts and payments of pension benefits for unfunded pension plans of approximately $11 million (based on exchange rates at September 30, 2009) in calendar 2009.

Investing Commentary:

† For the nine months ended September 30, 2009, cash used in investing activities was $5.9 million, a decrease of $17.4 million versus the prior year period. The reduction in cash used for investing activities was due to a decrease of $17.6 million in capital spending. We have aggregate planned capital expenditures for 2009 of approximately $10 million. We believe that the level of our capital spending for 2009 is consistent with current economic conditions and will allow us to maintain the efficiency and cost effectiveness of our manufacturing assets. The level of our capital expenditures for the next 12 months is not expected to have a material adverse effect on our financial condition, results of operations or liquidity.

Financing Commentary:

† Our liquidity requirements are provided by cash generated from operations, short- and long-term borrowings and proceeds from asset sales. Availability under our revolving credit facility varies over time depending on the value of our inventory, receivables and various capital assets. As of September 30, 2009, we had $69.3 million outstanding under our Revolver, outstanding letters of credit of $1.0 million and $62.5 million of available credit. In addition, we have €7.0 million ($10.2 million, based on exchanges rates at September 30, 2009) of available credit under our German Line of Credit.

† For the nine months ended September 30, 2009, net repayments on our Revolver and our German Line of Credit were $31.8 million and $5.5 million, respectively. In addition, we repaid $3.8 million on the Term Loan and $0.8 million on the German Loan Agreement.

† We paid aggregate cash dividends of $0.30 per share or approximately $4.4 million and $4.5 million for the nine months ended September 30, 2009 and 2008, respectively.

† For the nine months ended September 30, 2009, cash and cash equivalents increased $2.1 million.

† For the nine months ended September 30, 2008, we paid approximately $9.4 million to purchase shares of common stock in connection with a reverse/forward split of issued and outstanding shares of common stock.

† Our required debt payments through September 30, 2010 are $17.0 million. Such payments include required amortization payments on our Term Loan and German Loan Agreement of approximately $3.4 million and $1.9 million, respectively, and $11.7 million on our evergreen German Line of Credit which we expect to renew in November 2009.

. . .