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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

For the transition period from            to            

Commission File Number: 001-32240

NEENAH PAPER, INC.

(Exact name of registrant as specified in its charter)

(678) 566-6500

(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every

Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the

preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

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

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

As of April 30, 2010, there were approximately 14,710,000 shares of the Company’s common stock outstanding.

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Part I—FINANCIAL INFORMATION

Item 1.  Financial Statements

NEENAH PAPER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share and per share data)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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NEENAH PAPER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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NEENAH PAPER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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NEENAH PAPER, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions, except as noted)

Note 1.  Background and Basis of Presentation

Background

Neenah Paper, Inc. (“Neenah” or the “Company”), is a Delaware corporation incorporated in April 2004. The Company has two primary operations: its fine paper business and its technical products business.

The fine paper business is a leading producer of premium writing, text, cover and specialty papers used in corporate identity packages, corporate annual reports, invitations, personal stationery and high-end packaging for point of sale advertising. The technical products business is a leading international producer of transportation and other filter media, durable, saturated and coated substrates for a variety of end uses and nonwoven wall coverings.

In March 2010, the Company’s wholly owned subsidiary, Neenah Paper Company of Canada (“Neenah Canada”) sold approximately 475,000 acres of woodland assets in Nova Scotia (the “Woodlands”) to Northern Timber Nova Scotia Corporation, an affiliate of Northern Pulp Nova Scotia Corporation (collectively, “Northern Pulp”), for C$82.5 million ($78.6 million). The sale resulted in a pre-tax gain, net of fees and other transaction costs, of $74.1 million. The sale of the Woodlands resulted in the substantially complete liquidation of the Company’s investment in Neenah Canada.  In accordance with Accounting Standards Codification (“ASC”) Topic 830, Foreign Currency Matters (“ASC Topic 830”), $87.9 million of cumulative currency translation adjustments attributable to the Company’s Canadian subsidiaries have been reclassified into earnings and recognized as part of the gain on sale of the Woodlands. The transaction did not generate a cash tax liability because the tax basis for the Woodlands was approximately equal to the sale price. See Note 5, “Discontinued Operations.”

For the three months ended March 31, 2010, the results of operations, the gain on sale of the Woodlands ($74.1 million) and the reclassification of cumulative currency translation adjustments attributable to the Company’s Canadian subsidiaries into earnings ($87.9 million) are reported as discontinued operations in the condensed consolidated statements of operations. The results of operations of the Woodlands are reported as discontinued operations for the three months ended March 31, 2009.  See Note 5, “Discontinued Operations.”

Basis of Consolidation and Presentation

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Management believes that the disclosures made are adequate for a fair presentation of the Company’s results of operations, financial position and cash flows. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of operations, financial position and cash flows for the interim periods presented herein.  The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make extensive use of estimates and assumptions that affect the reported amounts and disclosures.  Actual results may vary from these estimates.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K.  The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.

The condensed consolidated financial statements of Neenah and its subsidiaries included herein are unaudited, except for the December 31, 2009 condensed consolidated balance sheet, which was derived from audited financial statements.  The condensed consolidated financial statements include the financial statements of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements.

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Earnings (Loss) per Share (“EPS”)

The Company computes basic earnings (loss) per share (“EPS”) in accordance with ASC Topic 260, Earnings Per Share (“ASC Topic 260”).   In accordance with ASC Topic 260, share-based awards with non-forfeitable dividends are classified as participating securities. In calculating basic earnings per share, this method requires net income to be reduced by the amount of dividends declared in the current period for each participating security and by the contractual amount of dividends or other participation payments that are paid or accumulated for the current period. Undistributed earnings for the period are allocated to participating securities based on the contractual participation rights of the security to share in those current earnings assuming all earnings for the period are distributed. Holders of restricted stock, restricted stock units (“RSUs”) and target performance unit awards (“Performance Units”) have contractual participation rights that are equivalent to those of common stockholders. Therefore, the Company allocates undistributed earnings to restricted stock, RSUs and common stockholders based on their respective average ownership percentages for the period.

ASC Topic 260 also requires companies with participating securities to calculate diluted earnings per share using the “Two-Class” method. The “Two-Class” method requires the denominator to include the weighted average participating securities along with the additional share equivalents from the assumed conversion of stock options calculated using the “Treasury Stock” method, subject to the anti-dilution provisions of ASC Topic 260.

Diluted EPS was calculated to give effect to all potentially dilutive common shares using the “Treasury Stock” method. Outstanding stock options, stock appreciation rights (“SARS”), RSUs and Performance Units represent the only potentially dilutive non-participating security effects on the Company’s weighted-average shares.  For the three months ended March 31, 2010 and 2009 approximately 1,620,000 and 1,790,000 potentially dilutive stock-based compensation awards, respectively, were excluded from the computation of dilutive common shares because the exercise price of such options exceeded the average market price of the Company’s common stock for the period the options were outstanding.  In addition, as a result of the loss from continuing operations for the three months ended March 31, 2009, approximately 40,000 incremental shares resulting from the assumed vesting of potentially dilutive securities were excluded from the diluted earnings per share calculation, as the effect would have been anti-dilutive.

The following table presents the computation of basic and diluted EPS (dollars in millions except per share amounts, shares in thousands):

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(a)   In accordance with ASC Topic 260, for the three months ended March 31, 2009 undistributed losses have been entirely allocated to common stockholders due to the fact that the holders of participating securities are not contractually obligated to share in the losses of the Company.

Note 2.  Accounting Standard Changes

As of March 31, 2010, no amendments to the ASC had been issued that will have or are reasonably likely to have a material effect on the Company’s financial position, results of operations or cash flows.

Note 3.  Comprehensive Income (Loss)

Comprehensive income (loss) includes, in addition to net income (loss), gains and losses recorded directly into stockholders’ equity on the condensed consolidated balance sheet. These gains and losses are referred to as other comprehensive income items. Accumulated other comprehensive income (loss) consists of foreign currency translation gains and (losses) and adjustments related to pensions and other postretirement benefits. The Company does not provide income taxes for foreign currency translation adjustments related to indefinite investments in international subsidiaries.  The sale of the Woodlands resulted in the substantially complete liquidation of the Company’s investment in Neenah Canada.  In accordance with ASC Topic 830, $87.9 million of cumulative currency translation adjustments attributable to the Company’s Canadian subsidiaries have been reclassified into earnings and recognized as part of the gain on sale of the Woodlands. There were no tax consequences related to the repatriation of funds from the sale of the Woodlands.  As of March 31, 2010 and December 31, 2009, accumulated other comprehensive income (loss) was $(8.7) million and $91.5 million, respectively.

The following table presents the components of comprehensive income (loss):

Note 4.  Closure of the Ripon Mill

In May 2009, the Company permanently closed its fine paper mill located in Ripon, California (the “Ripon Mill”).  The Ripon Mill had one paper machine with an annual capacity of approximately 35,000 tons.  For the year ended December 31, 2009, the closure resulted in a pre-tax charge of $17.1 million.  The charge was comprised of approximately $5.8 million in non-cash charges primarily for losses related to the carrying value of property, plant and equipment, a curtailment loss of $0.8 million related to postretirement benefit plans in which employees of the Ripon Mill participated and cash payments for contract terminations and severance and other employee costs of approximately $10.5 million.  The Company paid approximately $6.5 million of such costs in 2009.

As of March 31, 2010, the remaining long-lived assets of the Ripon Mill, primarily composed of land and buildings, are classified as Assets held for sale on the condensed consolidated balance sheet.  The Company believes that the sale of such assets will be completed within 12 months. Assets held for sale are valued at the lower of cost or fair value less cost to sell. The assets of the Ripon Mill are reported at their aggregate historical cost of $6.2 million.

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The Company accounted for the costs associated with the closure of the Ripon Mill in accordance with ASC Topic 420, Exit or Disposal Cost Obligations.  As of March 31, 2010, approximately $1.7 million in severance benefits had been paid to 96 former employees of the Ripon Mill and severance benefits of approximately $0.1 million due to one former employee of the Ripon Mill remained unpaid.  For the three months ended March 31, 2010, the Company made contract termination payments related to the closure of the Ripon Mill of approximately $3.1 million that became due and payable upon the sale of the Woodlands. The following table presents the status of such closure costs as of March 31, 2010:

Note 5.  Discontinued Operations

In March 2010, Neenah Canada sold the Woodlands to Northern Pulp, for C$82.5 million ($78.6 million). The sale resulted in a pre-tax gain, net of fees and other transaction costs, of $74.1 million. The sale of the Woodlands resulted in the substantially complete liquidation of the Company’s investment in Neenah Canada.  In accordance with ASC Topic 830, $87.9 million of cumulative currency translation adjustments attributable to the Company’s Canadian subsidiaries have been reclassified into earnings and recognized as part of the gain on sale of the Woodlands. The sale of the Woodlands represented the cessation of the Company’s operating activities in Canada; however, the Company will have certain continuing post-employment benefit obligations related to its Canadian operations.  The transaction did not generate a cash tax liability because the tax basis for the Woodlands was approximately equal to the sale price.

Proceeds from the sale were used to repay in full $40 million of outstanding term loan borrowings (the “Term Loan”) and repay approximately $26 million in outstanding revolving loans which reduced the balance of such outstanding loans under the Company’s bank credit agreement (the “Bank Credit Agreement”) to zero. In addition, the Company made approximately $3.1 million in contract termination payments related to the closure of the Ripon Mill that became due and payable upon the sale of the Woodlands.

In June 2008, Neenah Canada sold the Pictou Mill to Northern Pulp. Pursuant to the terms of the transaction, Northern Pulp assumed all of the assets and liabilities associated with the Pictou Mill, as well as existing customer contracts, supply agreements, labor agreements and pension obligations.

In conjunction with the sale of the Pictou Mill, the Company entered into a stumpage agreement (the “Stumpage Agreement”) which allowed Northern Pulp to harvest an average of approximately 400,000 metric tons of softwood timber annually from the Woodlands. Northern Pulp agreed to pay substantially all costs associated with maintaining the Woodlands and harvesting the timber.  The Stumpage Agreement was terminated in March 2010 in conjunction with the sale of the Woodlands.  For the three months ended March 31, 2010 and 2009, the Company recognized revenue of approximately $1.4 million and $0.8 million, respectively, related to timber sales pursuant to the Stumpage Agreement.

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The results of operations of the Woodlands and the gain on sale of the Woodlands are reported as discontinued operations in the condensed consolidated statements of operations for each period presented. The following table summarizes the results of discontinued operations:

(a)   Represent timber sales pursuant to the Stumpage Agreement.

(b)   The reclassification of cumulative foreign currency translation gains had no tax consequences.

Note 6. Supplemental Balance Sheet Data

The following presents inventories by major class:

The FIFO values of total inventories valued on the LIFO method were $59.9 million and $58.2 million at March 31, 2010 and December 31, 2009, respectively.

The following table presents the components of Assets Held for Sale on the condensed consolidated balance sheet.

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Note 7. Debt

Long-term debt consisted of the following:

Senior Unsecured Notes

In November 2004, the Company completed an underwritten offering of ten-year senior unsecured notes (the “Senior Notes”) at an aggregate face amount of $225 million. The Senior Notes bear interest at a rate of 7.375 percent, payable May 15 and November 15 of each year and mature on November 15, 2014. The Senior Notes are fully and unconditionally guaranteed by all of the Company’s subsidiaries, with the exception of Neenah Germany.

Amended and Restated Secured Revolving Credit Facility

In November, 2009, the Company amended and restated its Bank Credit Agreement.  As amended, the Bank Credit Agreement consisted of a $100 million senior, secured revolving credit facility (the “Revolver”) and (ii) a $40 million senior secured Term Loan. The Bank Credit Agreement terminates on November 30, 2013.  In March 2010, the Company used proceeds from the sale of the Woodlands to repay in full $40 million of outstanding Term Loan borrowings and repay approximately $26 million in outstanding revolving loans which reduced the balance of such outstanding loans under the Bank Credit Agreement to zero. As of March 31, 2010, approximately $9.5 million of proceeds from the sale of the Woodlands was restricted under the terms of the Bank Credit Agreement. Such restricted cash may be used for any purpose not specifically prohibited by the Bank Credit Agreement. The Company expects such restricted cash to be fully utilized during the second quarter of 2010. For the three months ended March 31, 2010, the Company recognized within interest expense approximately $0.3 million of costs to write-off deferred financing costs associated with the Term Loan.

As of March 31, 2010, the Company had no outstanding Revolver borrowings and $90.3 million of borrowing availability under the Revolver.  Borrowing availability under the Revolver is reduced by outstanding letters of credit and certain other items.  As of March 31, 2010, the Company had approximately $1.5 million of letters of credit and other items outstanding which reduced availability.  The Company’s borrowing availability will be reduced by approximately $9.1 million upon the sale of the remaining assets of the Ripon Mill. As of December 31, 2009, the Company had $27.9 million in outstanding Revolver borrowings at a weighted-average interest rate of 4.6 percent per annum.

As of March 31, 2010, the Company had no Term Loan borrowings outstanding. As of December 31, 2009, the Company had $40.0 million in outstanding Term Loan borrowings at a weighted-average interest rate of 4.5 percent per annum.

The Bank Credit Agreement contains events of default customary for financings of this type, including failure to pay principal or interest, materially false representations or warranties, failure to observe covenants and other terms of the Bank Credit Agreement, cross-defaults to certain other indebtedness, bankruptcy, insolvency, various ERISA violations, the incurrence of material judgments and changes in control.

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The Bank Credit Agreement contains covenants with which the Company must comply during the term of the agreement.  Among other things, such covenants restrict the Company’s ability to incur certain additional debt, make specified restricted payments, including dividends, and capital expenditures, authorize or issue capital stock, enter into transactions with affiliates, consolidate or merge with or acquire another business, sell certain of its assets, or dissolve or wind up.  In addition, the terms of the Bank Credit Agreement require the Company to achieve and maintain compliance with a fixed charge coverage ratio if availability under the Bank Credit Agreement is less than $20 million. At March 31, 2010, the Company was in compliance with all covenants.

Other Debt

In December 2006, Neenah Germany entered into a 10-year agreement with HypoVereinsbank and IKB Deutsche Industriebank AG to provide €10.0 million of project financing for the construction of a saturator (the “German Loan Agreement”). As of March 31, 2010, €8.8 million ($11.8 million, based on exchange rates at March 31, 2010) was outstanding under the German Loan Agreement.

Neenah Germany has a revolving line of credit (the “German Line of Credit”) with HypoVereinsbank that provides for borrowings of up to €15 million for general corporate purposes. The German Line of Credit is secured by the domestic accounts receivable of Neenah Germany. As of March 31, 2010 and December 31, 2009, the weighted-average interest rate on outstanding German Line of Credit borrowings was 4.0 percent per annum and 4.1 percent per annum, respectively.  As of March 31, 2010, €7.3 million ($9.9 million, based on exchange rates at March 31, 2010) was outstanding under the German Line of Credit and €7.7 million ($10.3 million, based on exchange rates at March 31, 2010) of credit was available.  In November 2009, Neenah Germany extended the termination date for the German Line of Credit to November 30, 2010.

Neenah Germany’s ability to pay dividends or transfer funds to the Company is limited under the terms of the German Line of Credit, to not exceed certain limits defined in the agreement without lender approval or repayment of the amount outstanding under the line, which was $ €7.3 million ($9.9 million, based on exchange rates at March 31, 2010) at March 31, 2010.  In addition, the terms of the German Line of Credit require Neenah Germany to maintain a ratio of stockholder’s equity to total assets equal to or greater than 45 percent.  The Company was in compliance with all provisions of the German Line of Credit as of March 31, 2010.

Note 8.  Pension and Other Postretirement Benefits

Pension Plans

Substantially all active employees of the Company’s U.S. paper operations participate in defined benefit pension plans and/or defined contribution retirement plans. Neenah Germany has defined benefit plans designed to provide a monthly pension upon retirement for substantially all its employees in Germany.  In addition, the Company maintains a supplemental defined benefit pension plan (the “SERP”) which is a non-qualified defined benefit plan. The Company provides benefits under the SERP to the extent necessary to fulfill the intent of its defined benefit retirement plans without regard to the limitations set by the Internal Revenue Code on qualified defined benefit plans.

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The following table presents the components of net periodic benefit cost:

Components of Net Periodic Benefit Cost

(a)     The expected return on plan assets is determined by multiplying the fair value of plan assets at the prior year-end (adjusted for estimated current year cash benefit payments and contributions) by the expected long-term rate of return.

The Company expects to make aggregate contributions to defined benefit pension trusts and pay benefits for unfunded defined benefit pension plans of approximately $14 million (based on exchange rates at March 31, 2010) in calendar 2010.  For the three months March 31, 2010, the Company made approximately $4.5 million of such payments.

Note 9.  Stock Compensation Plan

The Company reserved 3,500,000 shares of $0.01 par value common stock (“Common Stock”) for issuance under the 2004 Omnibus Stock and Incentive Plan (the “Omnibus Plan”).  As of March 31, 2010, approximately 1,810,000 shares of Common Stock were reserved for future issuance under the Omnibus Plan. As of March 31, 2010, the number of shares available for future issuance was not reduced by outstanding SARs because the closing market price for the Company’s common stock was less than the exercise price of all outstanding SARs. The Company accounts for stock-based compensation pursuant to the fair value recognition provisions of ASC Topic 718, Compensation—Stock Compensation (“ASC Topic 718”).

Valuation and Expense Information

Substantially all stock-based compensation expense is recorded in selling, general and administrative expenses on the condensed consolidated statements of operations.  The following table summarizes stock-based compensation expense and related income tax benefits.

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The following table summarizes total compensation costs related to the Company’s equity awards and amounts recognized in the three months ended March 31, 2010.

(a)   The fair value of current year stock option and restricted stock awards includes $0.1 million and $0.2 million, respectively, related to a change in the Company’s estimate of forfeitures for awards granted in prior years.

Stock Options

For the three months ended March 31, 2010, the Company awarded nonqualified stock options to Long-Term Incentive Plan (the “LTIP”) participants to purchase approximately 190,850 shares of common stock (subject to forfeiture due to termination of employment and other conditions). For the three months ended March 31, 2010, the weighted-average exercise price of such nonqualified stock option awards was $13.38 per share. The weighted-average grant date fair value for stock options granted during the three months ended March 31, 2010 was $5.57 per share and was estimated using the Black-Scholes option valuation model with the following assumptions:

For the three months ended March 31, 2010, the aggregate pre-tax intrinsic value of stock options exercised was approximately $30 thousand.  No stock options were exercised during the three months ended March 31, 2009. The aggregate intrinsic value of approximately 1,495,000 stock options that were exercisable at March 31, 2010 was $1.1 million. The aggregate intrinsic value of approximately 1,365,000 stock options that were exercisable at December 31, 2009 was $0.1 million.

The aggregate grant date fair value of approximately 170,000 stock options and SARs that vested during the three months ended March 31, 2010, was $0.8 million. As of March 31, 2010, certain participants met age and service requirements that allowed their stock options to qualify for accelerated vesting upon retirement. As of March 31, 2010, LTIP participants held options to purchase 260,000 shares of common stock that would have been exercisable if they had retired as of such date. The aggregate grant date fair value of options subject to accelerated vesting was $1.0 million. Stock options subject to accelerated vesting for expense recognition become exercisable according to the contract terms of the stock -based awards.

As of March 31, 2010, the aggregate intrinsic value of 2,400,000 stock options and SARs that were vested or expected to vest was $5.7 million.  The weighted-average grant date fair value of such stock options was $8.15 per share. As of December 31, 2009, the weighted-average grant date fair value and aggregate intrinsic value of 2,250,000 stock options that were vested or expected to vest was $8.41 per share and $4.1 million, respectively.

As of March 31, 2010, the Company has approximately 920,000 unvested stock options with a weighted-average grant date fair value of $4.04 per share. As of December 31, 2009, approximately 905,000 unvested stock options were outstanding with a weighted-average grant date fair value of $3.85 per share.

Performance Units

During the three months ended March 31, 2010, the Company granted target awards of 183,500 Performance Units to LTIP participants. The measurement period for the Performance Units is January 1, 2010 through December 31, 2010. Common Stock equal to between 40 percent and 200 percent of the Performance Unit target will be awarded based on the Company’s return on invested capital, revenue growth for the Technical Products segment, the level of cash flow for the Fine Paper segment and total return to shareholders relative to a peer group of companies and the Russell 2000® Value small cap index. The weighted-average grant date fair value for the Performance Units was $25.36 per share. Compensation cost is recognized pro rata over the vesting period.

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Note 10.  Goodwill and Other Intangible Assets

The following table presents changes in the carrying amount of goodwill for the three months ended March 31, 2010.  All such goodwill is reported in the Technical Products segment.

The following table presents the gross carrying amount of intangible assets and the related accumulated amortization for intangible assets subject to amortization.

Note 11.  Contingencies and Legal Matters

Litigation

The Company is involved in certain legal actions and claims arising in the ordinary course of business. While the outcome of these legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claim which is pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

Indemnifications

Pursuant to a Distribution Agreement, an Employee Matters Agreement and a Tax Sharing Agreement, the Company has agreed to indemnify Kimberly-Clark Corporation for certain liabilities or risks related to the spin-off. Many of the potential indemnification liabilities under these agreements are unknown, remote or highly contingent. Furthermore, even in the event that an indemnification claim is asserted, liability for indemnification is subject to determination under the terms of the applicable agreement. For these reasons, the Company is unable to estimate the maximum potential amount of the possible future liability under the indemnity provisions of these agreements. However, the Company accrues for any potentially indemnifiable liability or risk under these agreements for which it believes a future payment is probable and a range of loss can be reasonably estimated. As of March 31, 2010, management believes the Company’s liability under such indemnification obligations was not material to the condensed consolidated financial statements.

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Note 12.  Business Segment Information

The Company reports its operations in two segments: Fine Paper and Technical Products. The fine paper business is a producer of premium writing, text, cover and specialty papers. The technical products business is an international producer of filtration media, durable, saturated and coated substrates for a variety of end uses; and nonwoven wall coverings.  Each segment employs different technologies and marketing strategies.  Disclosure of segment information is on the same basis that management uses internally for evaluating segment performance and allocating resources.  Transactions between segments are executed at market prices and such transactions are eliminated in consolidation. The costs of shared services, and other administrative functions managed on a common basis, are allocated to the segments based on usage, where possible, or other factors based on the nature of the activity.  General corporate expenses that do not directly support the operations of the business segments are shown as Unallocated corporate costs.

The following table summarizes the net sales, operating income (loss) and total assets for each of the Company’s business segments.

Note 13.  Condensed Consolidating Financial Information

Neenah Paper Company of Canada, Neenah Paper Michigan, Inc. and Neenah Paper Sales, Inc. (the “Guarantor Subsidiaries”) guarantee the Company’s Senior Notes. The Guarantor Subsidiaries are 100 percent owned by the Company and all guarantees are full and unconditional.  The following condensed consolidating financial information is presented in lieu of consolidated financial statements for the Guarantor Subsidiaries as of March 31, 2010 and December 31, 2009 and for the three months ended March 31, 2010 and 2009.  Certain deferred tax assets presented in the Guarantor Subsidiaries column as of December 31, 2009 were presented in the Neenah Paper, Inc. column as of March 31, 2010 as such assets will ultimately be realized by Neenah Paper, Inc. due to the substantially complete liquidation of Neenah Canada.

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2010

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2009

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CONDENSED CONSOLIDATING BALANCE SHEET

As of March 31, 2010