----

----

| ·   |     pertain to the maintenance of records that, in reasonable detail, accurately reflect the transactions of the company; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |     provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements and footnote disclosures; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |     provide reasonable assurance that receipts and expenditures of the company are appropriately authorized by the company’s management and directors; and |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |     provide reasonable assurance regarding the prevention or timely detection of an unauthorized use, acquisition or disposition of assets that could have a material effect on the consolidated financial statements. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Kevin J. Clarke         | Brian Baarda                |
|-------------------------|-----------------------------|
| President and           | Vice-President, Finance     |
| Chief Executive Officer | and Chief Financial Officer |

----

----

----

|                                                                                                                                                          |   | As at December 31, |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|
|                                                                                                                                                          |   | 2010               |    |   | 2009 |   |
|                                                                                                                                                          |   |               |    |   |   |   |
| AssetsCurrent assets                                                                                                                                          |   |               |    |   |   |   |
| Cash and cash equivalents                                                                                                                                     |   | $                  | 95.4    |   |   | $ | 83.1 |   |
| Accounts receivable (note 8)                                                                                                                                  |   |               | 120.6   |   |   |   | 101.5 |   |
| Inventories (note 9)                                                                                                                                          |   |               | 139.9   |   |   |   | 178.3 |   |
| Prepaids and other (note 10)                                                                                                                                  |   |               | 27.7    |   |   |   | 25.2 |   |
|                                                                                                                                                          |   |               | 383.6   |   |   |   | 388.1 |   |
| Property, plant and equipment (note 11)                                                                                                                       |   |               | 1,285.6 |   |   |   | 1,664.7 |   |
| Other assets (note 12)                                                                                                                                        |   |               | 27.0    |   |   |   | 38.0 |   |
|                                                                                                                                                          |   | $                  | 1,696.2 |   |   | $ | 2,090.8 |   |
|                                                                                                                                                          |   |               |    |   |   |   |   |   |
| LiabilitiesCurrent liabilities                                                                                                                                |   |               |    |   |   |   |   |   |
| Accounts payable and accrued liabilities (note 13)                                                                                                            |   | $                  | 171.6   |   |   | $ | 173.3 |   |
| Current portion of long-term debt (note 14)                                                                                                                   |   |               | 27.0    |   |   |   | 1.0 |   |
|                                                                                                                                                          |   |               | 198.6   |   |   |   | 174.3 |   |
| Long-term debt (note 14)                                                                                                                                      |   |               | 783.9   |   |   |   | 774.6 |   |
| Employee future benefits (note 15)                                                                                                                            |   |               | 269.1   |   |   |   | 294.6 |   |
| Other long-term obligations (note 16)                                                                                                                         |   |               | 20.2    |   |   |   | 13.4 |   |
| Future income taxes (note 17)                                                                                                                                 |   |               | 11.4    |   |   |   | 22.8 |   |
| Deferred credits (note 18)                                                                                                                                    |   |               | 9.6     |   |   |   | 15.5 |   |
|                                                                                                                                                          |   |               | 1,292.8 |   |   |   | 1,295.2 |   |
|                                                                                                                                                          |   |               |    |   |   |   |   |   |
| Equity                                                                                                                                                        |   |               |    |   |   |   |   |   |
| Shareholders’ equity                                                                                                                                    |   |               |    |   |   |   |   |   |
| Common stock:  no par value; unlimited shares authorized; issued and outstanding: 381,753,490 shares (December 31, 2009 – 381,753,490 shares) |   |               | 1,035.0 |   |   |   | 1,035.0 |   |
| Preferred stock:par value determined at time of issue; authorized 100,000,000 shares; issued and outstanding: nil shares                                      |   |               | – |   |   |   | – |   |
| Additional paid-in capital                                                                                                                                    |   |               | 16.6    |   |   |   | 16.4 |   |
| Deficit                                                                                                                                                       |   |               | (582.0  | ) |   |   | (185.1 | ) |
| Accumulated other comprehensive loss (note 19)                                                                                                                |   |               | (46.1   | ) |   |   | (52.7 | ) |
|                                                                                                                                                          |   |               | 423.5   |   |   |   | 813.6 |   |
| Non-controlling interest (deficit) (note 6)                                                                                                                   |   |               | (20.1   | ) |   |   | (18.0 | ) |
|                                                                                                                                                          |   |               | 403.4   |   |   |   | 795.6 |   |
|                                                                                                                                                          |   | $                  | 1,696.2 |   |   | $ | 2,090.8 |   |

| On behalf of the Board: |               |
|-------------------------|--------------------|
|                    |               |
|                    |               |
|                    |               |
|                    |               |
|                    |               |
| Kevin J. Clarke         | Thomas S. Chambers |
| Director                | Director           |

----

|                                                                                                                           |   | Years ended December 31, |    |
|--------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                                                           |   | 2010                     |    |   | 2009 |   |   | 2008 |   |
| Sales                                                                                                                          |   | $                        | 1,228.6 |   |   | $ | 1,223.5 |   |   | $ | 1,866.7 |   |
|                                                                                                                           |   |                     |    |   |   |   |   |   |   |   |   |   |
| Operating expenses                                                                                                             |   |                     |    |   |   |   |   |   |   |   |   |   |
| Cost of sales, excluding depreciation and amortization                                                                         |   |                     | 1,113.6 |   |   |   | 1,037.6 |   |   |   | 1,611.8 |   |
| Depreciation and amortization                                                                                                  |   |                     | 119.3   |   |   |   | 146.6 |   |   |   | 165.8 |   |
| Selling, general and administrative                                                                                            |   |                     | 43.4    |   |   |   | 44.8 |   |   |   | 46.9 |   |
| Restructuring (note 20)                                                                                                        |   |                     | 25.3    |   |   |   | 17.9 |   |   |   | 30.1 |   |
| Impairment and other closure costs (note 5)                                                                                    |   |                     | 294.5   |   |   |   | 17.4 |   |   |   | 151.0 |   |
|                                                                                                                           |   |                     | 1,596.1 |   |   |   | 1,264.3 |   |   |   | 2,005.6 |   |
|                                                                                                                           |   |                     |    |   |   |   |   |   |   |   |   |   |
| Operating earnings (loss)                                                                                                      |   |                     | (367.5  | ) |   |   | (40.8 | ) |   |   | (138.9 | ) |
| Interest expense, net (note 21)                                                                                                |   |                     | (72.0   | ) |   |   | (69.3 | ) |   |   | (75.0 | ) |
| Gain on cancellation of long-term debt (note 14)                                                                               |   |                     | 0.6     |   |   |   | 30.7 |   |   |   | – |   |
| Foreign exchange gain (loss) on long-term debt                                                                                 |   |                     | 27.6    |   |   |   | 75.3 |   |   |   | (82.2 | ) |
| Other expense, net (note 22)                                                                                                   |   |                     | (3.2    | ) |   |   | (29.1 | ) |   |   | (13.6 | ) |
| Earnings (loss) before income taxes                                                                                            |   |                     | (414.5  | ) |   |   | (33.2 | ) |   |   | (309.7 | ) |
| Income tax recovery (note 17)                                                                                                  |   |                     | (16.3   | ) |   |   | (27.6 | ) |   |   | (90.7 | ) |
| Net earnings (loss)                                                                                                            |   |                     | (398.2  | ) |   |   | (5.6 | ) |   |   | (219.0 | ) |
| Net (earnings) loss attributable to non-controlling interest (note 6)                                                          |   |                     | 1.3     |   |   |   | 1.2 |   |   |   | (0.8 | ) |
| Net earnings (loss) attributable to the company                                                                                |   | $                        | (396.9  | ) |   | $ | (4.4 | ) |   | $ | (219.8 | ) |
|                                                                                                                           |   |                     |    |   |   |   |   |   |   |   |   |   |
| Basic and diluted net earnings (loss) per share attributable to the company’s common shareholders (note 23) (in dollars) |   | $                        | (1.04   | ) |   | $ | (0.01 | ) |   | $ | (0.65 | ) |
| Weighted average number of the company’s common shares outstanding (in millions)                                         |   |                     | 381.8   |   |   |   | 381.8 |   |   |   | 336.1 |   |

----

|                                                                                                                                                                 |   | Years ended December 31, |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                                                                                                                 |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
| Net earnings (loss)                                                                                                                                                  |   | $                        | (398.2 | ) |   | $ | (5.6 | ) |   | $ | (219.0 | ) |
|                                                                                                                                                                 |   |                     |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss), net of tax (expense) recovery:                                                                                                    |   |                     |   |   |   |   |   |   |   |   |   |   |
| Employee future benefits liability adjustment, net of taxes of ($3.9) million (2009 – $9.9 million; 2008 – ($8.1) million)                               |   |                     | 12.5   |   |   |   | (26.2 | ) |   |   | 22.8 |   |
| Reclassification of amortization of employee future benefits, net of taxes of ($1.1) million (2009 – ($2.5) million; 2008 – ($3.6) million)              |   |                     | 2.0    |   |   |   | 6.8 |   |   |   | 10.3 |   |
| Unrealized net gain (loss) on cash flow revenue hedges, net of taxes of ($1.6) million (2009 – ($6.0) million; 2008 – $11.1 million)                     |   |                     | 4.2    |   |   |   | 14.5 |   |   |   | (25.0 | ) |
| Reclassification of net (gain) loss on cash flow revenue hedges, net of taxes of $4.2 million (2009 – ($2.1) million; 2008 – $0.1 million)               |   |                     | (10.9  | ) |   |   | 4.8 |   |   |   | (0.2 | ) |
| Foreign currency translation adjustments, net of related hedging activities, net of taxes of ($0.9) million (2009 – ($4.4) million; 2008 – $4.6 million) |   |                     | (1.3   | ) |   |   | (5.6 | ) |   |   | 6.7 |   |
| Unrealized gain (loss) on interest rate hedges, net of taxes of ($0.1) million (2009 – $0.4 million)                                                           |   |                     | 0.2    |   |   |   | (1.2 | ) |   |   | – |   |
| Other comprehensive income (loss), net of taxes                                                                                                                      |   |                     | 6.7    |   |   |   | (6.9 | ) |   |   | 14.6 |   |
|                                                                                                                                                                 |   |                     |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                                                                                                    |   |                     | (391.5 | ) |   |   | (12.5 | ) |   |   | (204.4 | ) |
|                                                                                                                                                                 |   |                     |   |   |   |   |   |   |   |   |   |   |
| Comprehensive (income) loss attributable to non-controlling interest:                                                                                                |   |                     |   |   |   |   |   |   |   |   |   |   |
| Net (earnings) loss                                                                                                                                                  |   |                     | 1.3    |   |   |   | 1.2 |   |   |   | (0.8 | ) |
| Other comprehensive (income) loss, net of taxes of $nil (2009 – ($0.2) million; 2008 - nil)                                                                    |   |                     | (0.1   | ) |   |   | 0.6 |   |   |   | – |   |
| Comprehensive (income) loss attributable to non-controlling interest                                                                                                 |   |                     | 1.2    |   |   |   | 1.8 |   |   |   | (0.8 | ) |
| Comprehensive income (loss) attributable to the company                                                                                                              |   | $                        | (390.3 | ) |   | $ | (10.7 | ) |   | $ | (205.2 | ) |

----

|                                                                                                             |            | Equity attributable to the company |        |   |                      |   |    |                        |   |
|------------------------------------------------------------------------------------------------------------------|-----------------|------------------------------------|-------------|--------|---------------------------|--------|---------|-----------------------------|--------|
|                                                                                                             |            | Common stock                       |        |   | Additional paid-incapital |   |    | Retained earnings (deficit) |   |   | Accumulatedothercomprehensive income (loss) |   |   | Non-controlling interest(deficit) |   |   | Total |   |
|                                                                                                             | Number ofshares |                               |        |   |  $                   |   |
|                                                                                                             |            |                               |        |   |                      |   |    |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as at December 31, 2007                                                                                  |            |                               | 214,684,129 |   |                      | $      | 913.9   |                        |   | $ | 12.1 |   |   | $ | 39.1 |   |   | $ | (61.0 | ) |   | $ | (16.1 | ) |   | $ | 888.0 |   |
| Issue of common shares on    rights offering, net of share    issue costs (note 7) |            |                               | 167,069,361 |   |                      |   | 121.1   |                        |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | 121.1 |   |
| Stock option compensation expense                                                                                |            |                               | –     |   |                      |   | – |                        |   |   | 2.5 |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | 2.5 |   |
| Net earnings (loss)                                                                                              |            |                               | –     |   |                      |   | – |                        |   |   | – |   |   |   | (219.8 | ) |   |   | – |   |   |   | 0.8 |   |   |   | (219.0 | ) |
| Distributions to    non-controlling interest                                                      |            |                               | –     |   |                      |   | – |                        |   |   | – |   |   |   | – |   |   |   | – |   |   |   | (0.6 | ) |   |   | (0.6 | ) |
| Other comprehensive income    (loss), net of tax                                                  |            |                               | –     |   |                      |   | – |                        |   |   | – |   |   |   | – |   |   |   | 14.6 |   |   |   | – |   |   |   | 14.6 |   |
|                                                                                                             |            |                               |        |   |                      |   |    |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as at December 31, 2008                                                                                  |            |                               | 381,753,490 |   |                      | $      | 1,035.0 |                        |   | $ | 14.6 |   |   | $ | (180.7 | ) |   | $ | (46.4 | ) |   | $ | (15.9 | ) |   | $ | 806.6 |   |
| Stock option compensation expense                                                                                |            |                               | –     |   |                      |   | – |                        |   |   | 1.8 |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | 1.8 |   |
| Net earnings (loss)                                                                                              |            |                               | –     |   |                      |   | – |                        |   |   | – |   |   |   | (4.4 | ) |   |   | – |   |   |   | (1.2 | ) |   |   | (5.6 | ) |
| Distributions to    non-controlling interest                                                      |            |                               | –     |   |                      |   | – |                        |   |   | – |   |   |   | – |   |   |   | – |   |   |   | (0.3 | ) |   |   | (0.3 | ) |
| Other comprehensive income    (loss), net of tax                                                  |            |                               | –     |   |                      |   | – |                        |   |   | – |   |   |   | – |   |   |   | (6.3 | ) |   |   | (0.6 | ) |   |   | (6.9 | ) |
|                                                                                                             |            |                               |        |   |                      |   |    |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as at December 31, 2009                                                                                  |            |                               | 381,753,490 |   |                      | $      | 1,035.0 |                        |   | $ | 16.4 |   |   | $ | (185.1 | ) |   | $ | (52.7 | ) |   | $ | (18.0 | ) |   | $ | 795.6 |   |
| Stock option compensation expense                                                                                |            |                               | –     |   |                      |   | – |                        |   |   | 0.2 |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | 0.2 |   |
| Net earnings (loss)                                                                                              |            |                               | –     |   |                      |   | – |                        |   |   | – |   |   |   | (396.9 | ) |   |   | – |   |   |   | (1.3 | ) |   |   | (398.2 | ) |
| Distributions to    non-controlling interest                                                      |            |                               | –     |   |                      |   | – |                        |   |   | – |   |   |   | – |   |   |   | – |   |   |   | (0.9 | ) |   |   | (0.9 | ) |
| Other comprehensive income    (loss), net of tax                                                  |            |                               | –     |   |                      |   | – |                        |   |   | – |   |   |   | – |   |   |   | 6.6 |   |   |   | 0.1 |   |   |   | 6.7 |   |
| Balance as at December 31, 2010                                                                                  |            |                               | 381,753,490 |   |                      | $      | 1,035.0 |                        |   | $ | 16.6 |   |   | $ | (582.0 | ) |   | $ | (46.1 | ) |   | $ | (20.1 | ) |   | $ | 403.4 |   |

----

|                                                                  |   | Years ended December 31, |    |
|-----------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                  |   | 2010                     |    |   | 2009 |   |   | 2008 |   |
|                                                                  |   |                     |    |   |   |   |   |   |   |
| Cash flows provided (used) by:                                        |   |                     |    |   |   |   |   |   |   |
| Operations                                                            |   |                     |    |   |   |   |   |   |   |
| Net earnings (loss)                                                   |   | $                        | (398.2  | ) |   | $ | (5.6 | ) |   | $ | (219.0 | ) |
| Items not requiring (providing) cash                                  |   |                     |    |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                         |   |                     | 119.3   |   |   |   | 146.6 |   |   |   | 165.8 |   |
| Impairment and other closure costs (note 5)                           |   |                     | 294.5   |   |   |   | 17.4 |   |   |   | 151.0 |   |
| Future income taxes (note 17)                                         |   |                     | (16.1   | ) |   |   | (26.6 | ) |   |   | (92.4 | ) |
| Foreign exchange loss (gain) on long-term debt                        |   |                     | (27.6   | ) |   |   | (75.3 | ) |   |   | 82.2 |   |
| Gain on cancellation of long-term debt (note 14)                      |   |                     | (0.6    | ) |   |   | (30.7 | ) |   |   | – |   |
| Employee future benefits, expense over (under) cash contributions     |   |                     | (2.4    | ) |   |   | 4.3 |   |   |   | 2.9 |   |
| Decrease in other long-term obligations                               |   |                     | (4.2    | ) |   |   | (0.5 | ) |   |   | (5.1 | ) |
| Loss (gain) on disposal of property, plant and equipment              |   |                     | (7.2    | ) |   |   | 3.9 |   |   |   | (0.4 | ) |
| Other                                                                 |   |                     | 10.9    |   |   |   | 4.6 |   |   |   | (13.5 | ) |
| Changes in non-cash working capital                                   |   |                     |    |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                   |   |                     | (19.1   | ) |   |   | 120.2 |   |   |   | (7.0 | ) |
| Inventories                                                           |   |                     | 19.3    |   |   |   | 32.9 |   |   |   | 27.3 |   |
| Prepaids and other                                                    |   |                     | (2.4    | ) |   |   | 7.6 |   |   |   | 8.1 |   |
| Accounts payable and accrued liabilities                              |   |                     | (10.3   | ) |   |   | (95.2 | ) |   |   | (21.8 | ) |
| Cash flows provided (used) by operations                              |   |                     | (44.1   | ) |   |   | 103.6 |   |   |   | 78.1 |   |
|                                                                  |   |                     |    |   |   |   |   |   |   |   |   |   |
| Investing                                                             |   |                     |    |   |   |   |   |   |   |   |   |   |
| Acquisition of Snowflake newsprint mill (note 7)                      |   |                     | – |   |   |   | – |   |   |   | (172.2 | ) |
| Additions to property, plant and equipment                            |   |                     | (11.2   | ) |   |   | (11.5 | ) |   |   | (41.9 | ) |
| Proceeds from sale of property, plant and equipment                   |   |                     | 7.9     |   |   |   | 4.5 |   |   |   | 2.2 |   |
| Proceeds from termination of interest rate swaps                      |   |                     | – |   |   |   | – |   |   |   | 7.6 |   |
| Decrease (increase) in other assets                                   |   |                     | (1.2    | ) |   |   | 4.1 |   |   |   | (1.0 | ) |
| Cash flows used by investing activities                               |   |                     | (4.5    | ) |   |   | (2.9 | ) |   |   | (205.3 | ) |
|                                                                  |   |                     |    |   |   |   |   |   |   |   |   |   |
| Financing                                                             |   |                     |    |   |   |   |   |   |   |   |   |   |
| Issue of shares, net of share issue costs (note 7)                    |   |                     | – |   |   |   | – |   |   |   | 121.1 |   |
| Increase (decrease) in revolving loan and loan payable                |   |                     | (14.5   | ) |   |   | (45.6 | ) |   |   | 60.1 |   |
| Repayment of revolving operating loan                                 |   |                     | – |   |   |   | – |   |   |   | (47.1 | ) |
| Proceeds on issuance of Class B senior secured notes (note 14)        |   |                     | 98.4    |   |   |   | – |   |   |   | – |   |
| Note exchange costs (note 14)                                         |   |                     | (8.3    | ) |   |   | (2.2 | ) |   |   | – |   |
| Deferred financing costs (note 14)                                    |   |                     | (4.5    | ) |   |   | (0.9 | ) |   |   | (5.5 | ) |
| Repayment of non-recourse long-term debt                              |   |                     | – |   |   |   | (75.7 | ) |   |   | – |   |
| Proceeds from non-recourse long-term debt                             |   |                     | – |   |   |   | 95.0 |   |   |   | – |   |
| Proceeds on termination of debt foreign currency contracts            |   |                     | – |   |   |   | 34.7 |   |   |   | – |   |
| Settlement on purchase of senior notes (note 14)                      |   |                     | (9.2    | ) |   |   | (26.9 | ) |   |   | – |   |
| Increase (decrease) in other long-term debt                           |   |                     | (1.0    | ) |   |   | (1.0 | ) |   |   | 3.6 |   |
| Cash flows provided (used) by financing activities                    |   |                     | 60.9    |   |   |   | (22.6 | ) |   |   | 132.2 |   |
|                                                                  |   |                     |    |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents, increase in the year                       |   |                     | 12.3    |   |   |   | 78.1 |   |   |   | 5.0 |   |
| Cash and cash equivalents, beginning of year                          |   |                     | 83.1    |   |   |   | 5.0 |   |   |   | – |   |
| Cash and cash equivalents, end of year                                |   | $                        | 95.4    |   |   | $ | 83.1 |   |   | $ | 5.0 |   |
|                                                                  |   |                     |    |   |   |   |   |   |   |   |   |   |
| Supplemental disclosures:                                             |   |                     |    |   |   |   |   |   |   |   |   |   |
| Income taxes paid                                                     |   | $                        | 0.4     |   |   | $ | 0.5 |   |   | $ | 0.8 |   |
| Net interest paid                                                     |   |                     | 72.7    |   |   |   | 66.5 |   |   |   | 74.4 |   |
| Non-cash exchange of 8.625% senior notes                              |   |                     | (327.1  | ) |   |   | – |   |   |   | – |   |
| Non-cash issuance of 11.0% senior notes                               |   |                     | 287.2   |   |   |   | – |   |   |   | – |   |
| Non-cash difference in carrying value of senior notes on modification |   |                     | 39.9    |   |   |   | – |   |   |   | – |   |

----

|                                       |   | Year ended December 31, 2010 |    |
|--------------------------------------------|--------|------------------------------|---------|
|                                       |   | Specialtyprinting papers     |    |   | Newsprint |   |   | Pulp |   |   | Corporateadjustments |   |   | Consolidated |   |
|                                       |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales to external customers                |   | $                            | 700.1   |   |   | $ | 303.5 |   |   | $ | 225.0 |   |   | $ | – |   |   | $ | 1,228.6 |   |
| Inter-segment sales                        |   |                         | – |   |   |   | – |   |   |   | 23.4 |   |   |   | (23.4 | ) |   |   | – |   |
| Depreciation and amortization              |   |                         | 79.6    |   |   |   | 25.4 |   |   |   | 14.3 |   |   |   | – |   |   |   | 119.3 |   |
| Restructuring (note 20)                    |   |                         | 8.2     |   |   |   | 16.1 |   |   |   | 1.0 |   |   |   | – |   |   |   | 25.3 |   |
| Impairment and other closurecosts (note 5) |   |                         | 104.4   |   |   |   | 190.1 |   |   |   | – |   |   |   | – |   |   |   | 294.5 |   |
| Operating earnings (loss)                  |   |                         | (147.5  | ) |   |   | (243.7 | ) |   |   | 23.7 |   |   |   | – |   |   |   | (367.5 | ) |
| Total assets                               |   |                         | 1,046.0 |   |   |   | 450.6 |   |   |   | 185.1 |   |   |   | 14.5 |   |   |   | 1,696.2 |   |
| Additions to property, plant and equipment |   |                         | 9.1     |   |   |   | 1.8 |   |   |   | 0.3 |   |   |   | – |   |   |   | 11.2 |   |

|                                       |   | Year ended December 31, 2009 |    |
|--------------------------------------------|--------|------------------------------|---------|
|                                       |   | Specialtyprinting papers     |    |   | Newsprint |   |   | Pulp |   |   | Corporateadjustments |   |   | Consolidated |   |
|                                       |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales to external customers                |   | $                            | 832.3   |   |   | $ | 320.6 |   |   | $ | 70.6 |   |   | $ | – |   |   | $ | 1,223.5 |   |
| Inter-segment sales                        |   |                         | – |   |   |   | – |   |   |   | 13.4 |   |   |   | (13.4 | ) |   |   | – |   |
| Depreciation and amortization              |   |                         | 93.8    |   |   |   | 44.5 |   |   |   | 8.3 |   |   |   | – |   |   |   | 146.6 |   |
| Restructuring (note 20)                    |   |                         | 11.7    |   |   |   | 3.0 |   |   |   | 3.2 |   |   |   | – |   |   |   | 17.9 |   |
| Impairment (note 5)                        |   |                         | – |   |   |   | 17.4 |   |   |   | – |   |   |   | – |   |   |   | 17.4 |   |
| Operating earnings (loss)                  |   |                         | 41.1    |   |   |   | (70.3 | ) |   |   | (11.6 | ) |   |   | – |   |   |   | (40.8 | ) |
| Total assets                               |   |                         | 1,291.3 |   |   |   | 574.3 |   |   |   | 207.8 |   |   |   | 17.4 |   |   |   | 2,090.8 |   |
| Additions to property, plant and equipment |   |                         | 5.8     |   |   |   | 5.2 |   |   |   | 0.5 |   |   |   | – |   |   |   | 11.5 |   |

|                                       |   | Year ended December 31, 2008 |    |
|--------------------------------------------|--------|------------------------------|---------|
|                                       |   | Specialtyprinting papers     |    |   | Newsprint |   |   | Pulp |   |   | Corporateadjustments |   |   | Consolidated |   |
|                                       |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales to external customers                |   | $                            | 1,011.9 |   |   | $ | 465.8 |   |   | $ | 389.0 |   |   | $ | – |   |   | $ | 1,866.7 |   |
| Inter-segment sales                        |   |                         | – |   |   |   | – |   |   |   | 36.8 |   |   |   | (36.8 | ) |   |   | – |   |
| Depreciation and amortization              |   |                         | 100.6   |   |   |   | 37.3 |   |   |   | 27.9 |   |   |   | – |   |   |   | 165.8 |   |
| Restructuring (note 20)                    |   |                         | 10.6    |   |   |   | 4.1 |   |   |   | 15.4 |   |   |   | – |   |   |   | 30.1 |   |
| Impairment (note 5)                        |   |                         | 11.9    |   |   |   | 2.4 |   |   |   | 136.7 |   |   |   | – |   |   |   | 151.0 |   |
| Operating earnings (loss)                  |   |                         | 39.5    |   |   |   | 6.0 |   |   |   | (184.4 | ) |   |   | – |   |   |   | (138.9 | ) |
| Total assets                               |   |                         | 1,366.5 |   |   |   | 685.9 |   |   |   | 280.7 |   |   |   | 57.2 |   |   |   | 2,390.3 |   |
| Additions to property, plant and equipment |   |                         | 24.2    |   |   |   | 15.1 |   |   |   | 2.6 |   |   |   | – |   |   |   | 41.9 |   |

----

|                           |   | Year ended December 31, 2010 |   |
|--------------------------------|--------|------------------------------|--------|
| Sales by shipment destination: |   | Specialtyprinting papers     |   |   | Newsprint |   |   | Pulp |   |   | Total |   |
|                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Canada                         |   | $                            | 103.0  |   |   | $ | 35.1 |   |   | $ | 0.2 |   |   | $ | 138.3 |   |
| United States                  |   |                         | 513.0  |   |   |   | 177.2 |   |   |   | 0.9 |   |   |   | 691.1 |   |
| Asia and Australasia           |   |                         | 30.6   |   |   |   | 35.2 |   |   |   | 222.1 |   |   |   | 287.9 |   |
| Latin America                  |   |                         | 50.7   |   |   |   | 56.0 |   |   |   | – |   |   |   | 106.7 |   |
| Europe and other               |   |                         | 2.8    |   |   |   | – |   |   |   | 1.8 |   |   |   | 4.6 |   |
|                           |   | $                            | 700.1  |   |   | $ | 303.5 |   |   | $ | 225.0 |   |   | $ | 1,228.6 |   |

|                           |   | Year ended December 31, 2009 |   |
|--------------------------------|--------|------------------------------|--------|
| Sales by shipment destination: |   | Specialtyprinting papers     |   |   | Newsprint |   |   | Pulp |   |   | Total |   |
|                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Canada                         |   | $                            | 106.9  |   |   | $ | 40.3 |   |   | $ | 0.3 |   |   | $ | 147.5 |   |
| United States                  |   |                         | 656.6  |   |   |   | 189.9 |   |   |   | 3.1 |   |   |   | 849.6 |   |
| Asia and Australasia           |   |                         | 26.9   |   |   |   | 40.8 |   |   |   | 49.0 |   |   |   | 116.7 |   |
| Latin America                  |   |                         | 37.7   |   |   |   | 48.8 |   |   |   | 0.9 |   |   |   | 87.4 |   |
| Europe and other               |   |                         | 4.2    |   |   |   | 0.8 |   |   |   | 17.3 |   |   |   | 22.3 |   |
|                           |   | $                            | 832.3  |   |   | $ | 320.6 |   |   | $ | 70.6 |   |   | $ | 1,223.5 |   |

|                           |   | Year ended December 31, 2008 |    |
|--------------------------------|--------|------------------------------|---------|
| Sales by shipment destination: |   | Specialtyprinting papers     |    |   | Newsprint |   |   | Pulp |   |   | Total |   |
|                           |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Canada                         |   | $                            | 138.0   |   |   | $ | 58.8 |   |   | $ | 12.6 |   |   | $ | 209.4 |   |
| United States                  |   |                         | 774.3   |   |   |   | 262.7 |   |   |   | 50.8 |   |   |   | 1,087.8 |   |
| Asia and Australasia           |   |                         | 28.5    |   |   |   | 72.0 |   |   |   | 194.3 |   |   |   | 294.8 |   |
| Latin America                  |   |                         | 70.7    |   |   |   | 70.9 |   |   |   | 29.5 |   |   |   | 171.1 |   |
| Europe and other               |   |                         | 0.4     |   |   |   | 1.4 |   |   |   | 101.8 |   |   |   | 103.6 |   |
|                           |   | $                            | 1,011.9 |   |   | $ | 465.8 |   |   | $ | 389.0 |   |   | $ | 1,866.7 |   |

|                                                  |   | As at December 31, |    |
|-------------------------------------------------------|--------|--------------------|---------|
|                                                  |   | 2010               |    |   | 2009 |   |
| Property, plant and equipment by geographic location: |   |               |    |   |   |   |
| Canada                                                |   | $                  | 1,127.8 |   |   | $ | 1,492.8 |   |
| United States                                         |   |               | 157.8   |   |   |   | 171.9 |   |
|                                                  |   | $                  | 1,285.6 |   |   | $ | 1,664.7 |   |

----

|    |                                                                                  | Page   |
|---------|---------------------------------------------------------------------------------------|--------|
|    |                                                                                  |   |
| Note 1  | Nature of Operations                                                                  | 12     |
| Note 2  | Summary of Significant Accounting Policies                                            | 12     |
| Note 3  | Recently Implemented Accounting Standards                                             | 17     |
| Note 4  | Changes in Future Accounting Standards                                                | 17     |
| Note 5  | Measurement Uncertainty – Impairment of Long-lived Assets                       | 17     |
| Note 6  | Variable Interest Entities                                                            | 19     |
| Note 7  | Acquisition of Snowflake Recycle Newsprint Mill                                       | 20     |
| Note 8  | Accounts Receivable                                                                   | 21     |
| Note 9  | Inventories                                                                           | 22     |
| Note 10 | Prepaids and Other                                                                    | 22     |
| Note 11 | Property, Plant and Equipment                                                         | 22     |
| Note 12 | Other Assets                                                                          | 23     |
| Note 13 | Accounts Payable and Accrued Liabilities                                              | 23     |
| Note 14 | Long-term Debt                                                                        | 24     |
| Note 15 | Employee Future Benefits                                                              | 26     |
| Note 16 | Other Long-term Obligations                                                           | 33     |
| Note 17 | Income Taxes                                                                          | 33     |
| Note 18 | Deferred Credits                                                                      | 36     |
| Note 19 | Accumulated Other Comprehensive Income (Loss)                                         | 36     |
| Note 20 | Restructuring                                                                         | 37     |
| Note 21 | Interest Expense, Net                                                                 | 38     |
| Note 22 | Other Expense, Net                                                                    | 38     |
| Note 23 | Earnings Per Share                                                                    | 38     |
| Note 24 | Stock-based Compensation Plans                                                        | 39     |
| Note 25 | Fair Value Measurement                                                                | 41     |
| Note 26 | Financial Instruments                                                                 | 43     |
| Note 27 | Related Party Transactions                                                            | 46     |
| Note 28 | Commitments                                                                           | 47     |
| Note 29 | Guarantees and Indemnities                                                            | 47     |
| Note 30 | Contingent Liabilities                                                                | 48     |
| Note 31 | Subsequent Event                                                                      | 49     |
| Note 32 | Condensed Consolidating Financial Information                                         | 49     |
| Note 33 | Reconciliation of United States and Canadian Generally Accepted Accounting Principles | 58     |

----

| 1. | NATURE OF OPERATIONS |
|----|----------------------|

| Specialty printing papers | –      Manufacture and sale of mechanical specialty printing papers                                                                                                                                                          |
|---------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Newsprint                 | –      Manufacture and sale of newsprint                                                                                                                                                                                     |
| Pulp                      | –      Manufacture and sale of long-fibre Northern Bleached Softwood Kraft (“NBSK”) pulp.  Prior to November 18, 2008, pulp segment included manufacture of short-fibre NBSK pulp and white top linerboard. |

| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|----|--------------------------------------------|

|   | (a) | Basis of consolidation |
|--------|-----|------------------------|

|   | (b) | Variable interest entities |
|--------|-----|----------------------------|

|   | (c) | Use of estimates |
|--------|-----|------------------|

|   | The consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the year.  On an ongoing basis, management reviews its estimates, including those related to inventory obsolescence, estimated useful lives of assets, environmental and legal liabilities, impairment of long-lived assets, derivative financial instruments, pension and post-retirement benefits, bad debt and doubtful accounts, income taxes, restructuring costs, and commitment and contingencies, based on currently available information.  Actual amounts could differ from estimates. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (d) | Going concern |
|--------|-----|---------------|

|   | The company is required to assess its ability to continue as a going concern or whether substantial doubt exists as to the company’s ability to continue as a going concern into the foreseeable future.  The company has forecasted its cash flows for the next 12 months and believes that it has adequate liquidity in cash and available borrowings under its credit facilities to finance its operations without support from other parties over the next year.  The company has concluded that substantial doubt does not exist as to the company’s ability to continue as a going concern over the next fiscal year. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The company and the Canadian paper industry in general have been adversely affected by the economic downturn in the United States over the past two years and the trend away from certain paper products to electronic media.  The result has been overcapacity in the industry resulting in lower prices, higher costs due to production curtailments and a strong Canadian dollar which ultimately lowers revenues to the company.  The company has permanently shut capacity in order to balance supply with demand and has worked with key stakeholders including suppliers, unions and municipalities to lower costs.  The ability of the company to continue as a going concern in the long term will be dependent on the company’s ability to achieve profitable operations that are sustainable and on the company’s ability to renew long term debt and credit facilities as they become due.  Based on management’s future projections, the company expects its operations to be profitable in the future.  However, these projections include assumptions for pulp and paper demand and prices, the Canadian dollar, input costs and other economic factors, many of which are beyond the company’s control. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  (e) | Revenue recognition |
|--------|-----------|---------------------|

|   | The company recognizes revenues upon shipment when persuasive evidence of an arrangement exists, prices are fixed or determinable, title of ownership has transferred to the customer and collection is reasonably assured.  Sales are reported net of discounts, allowances and rebates. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (f) | Shipping and handling costs |
|--------|-----|-----------------------------|

|   | The company classifies shipping and handling costs to Cost of sales, excluding depreciation and amortization as incurred. |
|--------|---------------------------------------------------------------------------------------------------------------------------|

|   | (g) | Translation of foreign currencies |
|--------|-----|-----------------------------------|

|   | The majority of the company’s sales are denominated in foreign currencies, principally U.S. dollars (“US$”). Revenue and expense items denominated in foreign currencies are translated at exchange rates prevailing during the period.  Monetary assets and liabilities denominated in foreign currencies are translated at the period-end exchange rates.  Non-monetary assets and liabilities are translated at exchange rates in effect when the assets are acquired or the obligations are incurred.  Foreign exchange gains and losses are reflected in net earnings (loss) for the period. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The company has a foreign subsidiary that is considered to be self-contained and integrated within its foreign jurisdiction, and accordingly, uses the U.S. dollar as its functional currency.  The foreign exchange gains and losses arising from the translation of the foreign subsidiary’s accounts into Canadian dollars (“CDN$”) are reported as a component of other comprehensive income (loss), as discussed in note 19, Accumulated Other Comprehensive Income (Loss). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (h) | Derivative financial instruments |
|--------|-----|----------------------------------|

|   | The company uses derivative financial instruments in the management of foreign currency and price risk associated with its revenues, energy costs and long-term debt.  It also uses interest rate swaps to manage its net exposure to interest rate changes.  The company’s policy is to use derivatives for managing existing financial exposures and not for trading or speculative purposes.  The company accounts for its derivatives at fair value at each balance sheet date. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Effective January 1, 2010, the company changed its policy on the classification of foreign exchange gains and losses on the ineffective portion of its U.S. dollar revenue risk management instruments, on the portion that is excluded from the assessment of hedge effectiveness, and on the translation of working capital balances denominated in foreign currencies.  The respective foreign exchange gains and losses previously recognized in Sales are now recognized in Other expense, net.  In addition, the company also changed its policy on the classification of changes in the fair value of all commodity swap agreements not designated as hedges for accounting purposes that were previously recognized in Sales and Cost of sales, excluding depreciation and amortization.  The changes in the fair value related to these instruments are now recognized in Other expense, net.  The new policies adopted are considered preferable as they increase the transparency of the economic hedging activity.  These changes were applied retrospectively.  For the year ended December 31, 2009, the above changes resulted in an increase of $21.8 million to Sales and $2.1 million to Cost of sales, excluding depreciation and amortization, with an offsetting increase of $19.7 million to Other expense, net. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Effective April 1, 2010, the company no longer designates its U.S. dollar revenue risk management instruments as cash flow hedges for accounting purposes.  The effective portion of gains or losses accumulated as at March 31, 2010 on its previously designated U.S. dollar revenue risk management instruments are continuing to be recorded in the same income statement line items as the hedged item in Sales.  In a cash flow hedge, the changes in fair value of derivative financial instruments are recorded in Other comprehensive (income) loss.  These amounts are reclassified in the consolidated statement of earnings (loss) in the periods in which results are affected by the cash flows of the hedged item.  Any hedge ineffectiveness is recorded in the consolidated statement of earnings (loss) when incurred.  Prior to April 1, 2010, the company designated the hedge relationship and formally documented, at its inception, the particular risk management objective and strategy, the specific asset, liability or cash flow being hedged, as well as how effectiveness was assessed.  Risk management strategies and relationships were assessed on an ongoing basis to ensure each derivative instrument was effective in accomplishing the objective of offsetting either changes in the fair value or cash flow attributable to the exposure being hedged both at inception and over the term of the hedging relationship. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In a fair value hedge, hedging instruments are carried at fair value, with changes in fair value recognized in the consolidated statement of earnings (loss).  The changes in fair value of the hedged item attributable to the hedged risk is also recorded in the consolidated statement of earnings (loss) by way of a corresponding adjustment of the carrying amount of the hedged items recognized on the balance sheet. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In hedges of the foreign currency exposure of net investments in foreign subsidiaries that are self-contained and integrated within a particular country, gains and losses on translation are deferred in a separate component of shareholders’ equity to be recognized in net earnings upon sale or upon complete or substantially complete liquidation of the net investment in the foreign subsidiary. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Cash flows from derivative financial instruments are classified, in general, to “Operations” on the consolidated statement of cash flows consistent with the hedged transaction.  Cash flows resulting from termination of interest rate swaps are classified as "Investing activities." |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (i) | Cash and cash equivalents |
|--------|-----|---------------------------|

|   | Cash and cash equivalents include cash and short-term investments with original maturities of less than three months and are presented at fair value. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (j) | Inventories |
|--------|-----|-------------|

|   | Specialty printing papers, newsprint and pulp inventories are valued at the lower of three-month moving average cost or market.  Wood chips, pulp logs and other raw materials are valued at the lower of cost or market.  For raw materials to be used in the production of finished goods, market is determined on an as-converted-to-finished-goods basis.  Work-in-progress and operating and maintenance supplies and spare parts inventories are valued at cost.  Cost is defined as all costs that relate to bringing the inventory to its present condition and location under normal operating conditions and includes manufacturing costs, such as raw materials, labour and production overhead, and depreciation and amortization costs.  In addition, cost includes freight costs to move inventory offsite. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (k) | Repairs and maintenance costs |
|--------|-----|-------------------------------|

|   | Repairs and maintenance, including costs associated with planned major maintenance, are charged to Cost of sales, excluding depreciation and amortization as incurred. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (l) | Property, plant and equipment |
|--------|-----|-------------------------------|

|   | Property, plant and equipment are stated at cost, less accumulated depreciation and amortization, including asset impairment charges.  Interest costs for capital projects are capitalized.  Buildings, machinery and equipment are generally amortized on a straight-line basis at rates that reflect estimates of the economic lives of the assets.  The rates for major classes of assets based on the estimated remaining economic lives are: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Buildings                     | 2.5% − 5.0%   |   |
|--------|-------------------------------|---------------------|--------|
|   | Paper machinery and equipment | 5.0% – 10.0%  |   |
|   | Pulp machinery and equipment  | 10.0% – 20.0% |   |

|   | (m) | Impairment of long-lived assets |
|--------|-----|---------------------------------|

|   | (n) | Environmental costs |
|--------|-----|---------------------|

|   | (o) | Asset retirement obligations |
|--------|-----|------------------------------|

|   | (p) | Deferred financing costs |
|--------|-----|--------------------------|

|   | (q) | Stock-based compensation and other stock-based payments |
|--------|-----|---------------------------------------------------------|

|   | (r) | Income taxes |
|--------|-----|--------------|

|   | (s) | Deferred credits |
|--------|-----|------------------|

|   | (t) | Employee future benefits |
|--------|-----|--------------------------|

|   | – | the cost of benefits provided in exchange for employees’ services rendered during the year; |
|--------|---------|---------------------------------------------------------------------------------------------------|

|   | – | the interest cost of benefit obligations; |
|--------|---------|-------------------------------------------|

|   | – | the expected long-term return on plan assets based on the fair value for all asset classes; |
|--------|---------|---------------------------------------------------------------------------------------------|

|   | – | gains or losses on settlements or curtailments; |
|--------|---------|-------------------------------------------------|

|   | – | the straight-line amortization of prior service costs and plan amendments included in accumulated other comprehensive income (“AOCI”) over the expected average remaining service lifetime (“EARSL”) of employees who are active as of the date such costs are first recognized, unless all, or almost all, of the employees are no longer active, in which case such costs are amortized over the average remaining life expectancy of the former employees (amortized over five years for periods prior to December 31, 2008); and |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | – | the straight-line amortization of cumulative unrecognized net actuarial gains and losses in excess of 10% of the greater of the accrued benefit obligation and the fair value of plan assets at the beginning of the year over the EARSL of the active employees who are active as of the date such amounts are recognized, unless all, or almost all, of the employees are no longer active, in which case such costs are amortized over the average life expectancy of the former employees (amortized over five years for periods prior to December 31, 2008). |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (u) | Earnings per share |
|--------|-----|--------------------|

|   | Basic earnings (loss) per share is computed by dividing net earnings (loss) attributable to the company for the period by the weighted average number of company common shares outstanding during the reporting period.  Diluted earnings (loss) per share is computed using the treasury stock method.  When the effect of options and other securities convertible into common shares is anti-dilutive, including when the company has incurred a loss for the period, basic and diluted loss per share are the same. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (v) | Comparative figures |
|--------|-----|---------------------|

|   | Comparative figures disclosed in the consolidated financial statements have been reclassified to conform to the presentation adopted for the current year. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | RECENTLY IMPLEMENTED ACCOUNTING STANDARDS |
|----|-------------------------------------------|

| 4. | CHANGES IN FUTURE ACCOUNTING STANDARDS |
|----|----------------------------------------|

| 5. | MEASUREMENT UNCERTAINTY – IMPAIRMENT OF LONG-LIVED ASSETS |
|----|-----------------------------------------------------------------|

|   | (i) | determine whether the projected undiscounted future cash flows from operations exceed the net carrying amount of the assets as of the assessment date; and |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | if assets are determined to be impaired in step (i), then such impaired assets are written down to their fair value, determined principally by using discounted future cash flows expected from their use and eventual disposition. |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Property, plant and equipment                                                                                            |   | $      | 272.5  |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Operating and maintenance supplies and spare parts inventory (note 9)                                                    |   |   | 20.3   |   |
|                                                                                                                     |   |   | 292.8  |   |
| Less:    impairment previously recorded on paper assets (prior to announcement of permanent closure) |   |   | (12.0  | )      |
| Severances                                                                                                               |   |   | 9.7    |   |
| Other closure costs – operating lease at paper recycling operation                                                 |   |   | 13.7   |   |
| Total                                                                                                                    |   | $      | 304.2  |   |
| Classification in consolidated statement of earnings (loss):                                                             |   |   |   |   |
| Impairment and other closure costs                                                                                       |   | $      | 294.5  |   |
| Restructuring                                                                                                            |   |   | 9.7    |   |
|                                                                                                                     |   | $      | 304.2  |   |

| 6. | VARIABLE INTEREST ENTITIES |
|----|----------------------------|

| Years ended December 31,                               |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                   |   |   |   |   |   |   |   |   |   |
| Condensed statements of earnings (loss)                |   |   |   |   |   |   |   |   |   |
| Sales – affiliate 1                              |   | $      | 20.5   |   |   | $      | 16.7   |   |   | $ | 18.6 |   |
| Cost of sales, excluding depreciation and amortization |   |   | 6.5    |   |   |   | 6.3    |   |   |   | 4.9 |   |
| Depreciation and amortization                          |   |   | 7.4    |   |   |   | 3.2    |   |   |   | 3.2 |   |
|                                                   |   |   | 13.9   |   |   |   | 9.5    |   |   |   | 8.1 |   |
| Operating earnings                                     |   |   | 6.6    |   |   |   | 7.2    |   |   |   | 10.5 |   |
| Interest expense                                       |   |   | (8.8   | )      |   |   | (9.0   | )      |   |   | (7.7 | ) |
| Interest expense – affiliate 1                   |   |   | (2.1   | )      |   |   | (2.9   | )      |   |   | (2.7 | ) |
| Other expense, net                                     |   |   | 0.1    |   |   |   | 0.1    |   |   |   | 0.5 |   |
| Income tax recovery                                    |   |   | 1.6    |   |   |   | 2.2    |   |   |   | 1.0 |   |
|                                                   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                    |   |   | (2.6   | )      |   |   | (2.4   | )      |   |   | 1.6 |   |
| Other comprehensive income (loss)                      |   |   | 0.2    |   |   |   | (1.2   | )      |   |   | – |   |
| Total comprehensive income (loss) 2                    |   | $      | (2.4   | )      |   | $      | (3.6   | )      |   | $ | 1.6 |   |

----

| As at December 31,                       |   |   | 2010   |   |   | 2009   |   |
|------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                     |   |   |   |   |   |   |   |
| Condensed balance sheets                 |   |   |   |   |   |   |   |
| Current assets                           |   |   |   |   |   |   |   |
| Cash and cash equivalents                |   |   | $      | 3.4    |   |   | $      | 5.5 |   |
| Other                                    |   |   |   | 2.6    |   |   |   | 2.0 |   |
| Property, plant and equipment            |   |   |   | 108.1  |   |   |   | 112.8 |   |
|                                     |   |   | $      | 114.1  |   |   | $      | 120.3 |   |
|                                     |   |   |   |   |   |   |   |   |   |
| Current liabilities                      |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities |   |   | $      | 4.1    |   |   | $      | 5.5 |   |
| Long-term debt (note 14)                 |   |   |   | 113.8  |   |   |   | 112.9 |   |
| Long-term debt – affiliate 1       |   |   |   | 20.8   |   |   |   | 20.8 |   |
| Future income taxes                      | `      |   |   | 15.7   |   |   |   | 17.1 |   |
| Deficit 2                                |   |   |   | (40.3  | )      |   |   | (36.0 | ) |
|                                     |   |   | $      | 114.1  |   |   | $      | 120.3 |   |

| 1 | Balances with Catalyst Paper Corporation. |
|---|-------------------------------------------|

| 2 | 50% is included in the company’s non-controlling interest (deficit) balances. |
|---|-------------------------------------------------------------------------------------|

| 7. | ACQUISITION OF SNOWFLAKE RECYCLE NEWSPRINT MILL |
|----|-------------------------------------------------|

----

| Assets acquired                   |   |   |   |
|-----------------------------------|--------|--------|--------|
| Current assets                    |   | $      | 18.1   |   |
| Property, plant and equipment     |   |   | 172.1  |   |
| Other assets                      |   |   | 0.5    |   |
|                              |   |   | 190.7  |   |
| Liabilities assumed               |   |   |   |   |
| Current liabilities               |   |   | (18.1  | ) |
| Employee future benefits          |   |   | (0.4   | ) |
|                              |   |   |   |   |
| Fair value of net assets acquired |   | $      | 172.2  |   |
|                              |   |   |   |   |
| Consideration paid                |   |   |   |   |
| Cash, including transaction costs |   | $      | 172.2  |   |

| 8. | ACCOUNTS RECEIVABLE |
|----|---------------------|

|                                             |   | 2010   |   |   | 2009   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                             |   |   |   |   |   |   |   |   |
| Trade receivables                                |   | $      | 112.7  |   |   | $      | 98.7 |   |
| Less:  allowance for doubtful accounts |   |   | (3.0   | )      |   |   | (3.7 | ) |
|                                             |   |   | 109.7  |   |   |   | 95.0 |   |
| Sales taxes receivable                           |   |   | 5.7    |   |   |   | 2.3 |   |
| Other receivables                                |   |   | 5.2    |   |   |   | 4.2 |   |
|                                             |   | $      | 120.6  |   |   | $      | 101.5 |   |

----

| 9. | INVENTORIES |
|----|-------------|

|                                                        |   | 2010   |   |   | 2009   |   |
|-------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                        |   |   |   |   |   |   |
| Finished goods                                              |   |   |   |   |   |   |
| Specialty printing papers                                   |   | $      | 24.4   |   |   | $      | 19.7 |   |
| Newsprint                                                   |   |   | 5.7    |   |   |   | 11.5 |   |
| Pulp                                                        |   |   | 4.6    |   |   |   | 6.4 |   |
|                                                        |   |   |   |   |   |   |   |   |
| Total finished goods                                        |   |   | 34.7   |   |   |   | 37.6 |   |
| Work-in-progress                                            |   |   | 0.9    |   |   |   | 0.5 |   |
| Raw materials – wood chips, pulp logs and other       |   |   | 23.7   |   |   |   | 36.4 |   |
| Operating and maintenance supplies and spare parts (note 5) |   |   | 80.6   |   |   |   | 103.8 |   |
|                                                        |   | $      | 139.9  |   |   | $      | 178.3 |   |

| 10. | PREPAIDS AND OTHER |
|-----|--------------------|

|                                   |   | 2010   |   |   | 2009   |   |
|----------------------------------------|--------|--------|--------|--------|--------|--------|
|                                   |   |   |   |   |   |   |   |   |
| Property taxes, insurance and licences |   | $      | 2.3    |   |   | $      | 1.9 |   |
| Derivative financial instruments       |   |   | 8.0    |   |   |   | 15.9 |   |
| Future income tax assets (note 17)     |   |   | 14.3   |   |   |   | 4.8 |   |
| Other                                  |   |   | 3.1    |   |   |   | 2.6 |   |
|                                   |   | $      | 27.7   |   |   | $      | 25.2 |   |

| 11. | PROPERTY, PLANT AND EQUIPMENT |
|-----|-------------------------------|

|                                    |   | 2010   |    |
|-----------------------------------------|--------|--------|---------|
|                                    |   | Cost   |    |   | Accumulated depreciation,amortization and impairment |   |   | Net bookvalue |   |
|                                    |   |   |    |   |   |   |   |   |   |
| Buildings and land                      |   |   |    |   |   |   |   |   |   |
| Specialty printing papers and newsprint |   | $      | 583.0   |   |   | $ | 312.1 |   |   | $ | 270.9 |   |
| Pulp                                    |   |   | 100.5   |   |   |   | 89.4 |   |   |   | 11.1 |   |
|                                    |   |   |    |   |   |   |   |   |   |   |   |   |
| Machinery and equipment                 |   |   |    |   |   |   |   |   |   |   |   |   |
| Specialty printing papers and newsprint |   |   | 2,752.6 |   |   |   | 1,856.2 |   |   |   | 896.4 |   |
| Pulp                                    |   |   | 781.6   |   |   |   | 674.4 |   |   |   | 107.2 |   |
|                                    |   | $      | 4,217.7 |   |   | $ | 2,932.1 |   |   | $ | 1,285.6 |   |

----

|                                    |   | 2009   |    |
|-----------------------------------------|--------|--------|---------|
|                                    |   | Cost   |    |   | Accumulated depreciation,amortization and impairment |   |   | Net bookvalue |   |
|                                    |   |   |    |   |   |   |   |   |   |
| Buildings and land                      |   |   |    |   |   |   |   |   |   |
| Specialty printing papers and newsprint |   | $      | 585.7   |   |   | $ | 292.8 |   |   | $ | 292.9 |   |
| Pulp                                    |   |   | 100.9   |   |   |   | 88.4 |   |   |   | 12.5 |   |
|                                    |   |   |    |   |   |   |   |   |   |   |   |   |
| Machinery and equipment                 |   |   |    |   |   |   |   |   |   |   |   |   |
| Specialty printing papers and newsprint |   |   | 2,756.6 |   |   |   | 1,528.8 |   |   |   | 1,227.8 |   |
| Pulp                                    |   |   | 782.3   |   |   |   | 650.8 |   |   |   | 131.5 |   |
|                                    |   | $      | 4,225.5 |   |   | $ | 2,560.8 |   |   | $ | 1,664.7 |   |

| 12. | OTHER ASSETS |
|-----|--------------|

|                                                 |   | 2010   |    |   | 2009   |   |
|------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                 |   |   |    |   |   |   |   |   |
| Deferred financing costs                             |   | $      | 13.0    |   |   | $      | 10.7 |   |
| Deferred charges and other                           |   |   | 10.7    |   |   |   | 9.6 |   |
| Derivative financial instruments                     |   |   | 3.1     |   |   |   | 3.1 |   |
| Accrued benefit asset – pension plan (note 15) |   |   | 0.2     |   |   |   | 0.2 |   |
| Future income tax assets (note 17)                   |   |   | – |   |   |   | 14.4 |   |
|                                                 |   | $      | 27.0    |   |   | $      | 38.0 |   |

| 13. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
|-----|------------------------------------------|

|                                                                             |   | 2010   |   |   | 2009   |   |
|----------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                                             |   |   |   |   |   |   |   |   |
| Trade payables                                                                   |   | $      | 87.3   |   |   | $      | 83.2 |   |
| Accrued payroll and related liabilities                                          |   |   | 35.4   |   |   |   | 34.7 |   |
| Accrued interest                                                                 |   |   | 11.1   |   |   |   | 10.8 |   |
| Accrued benefit obligation – pension plan (note 15)                        |   |   | 11.7   |   |   |   | 6.7 |   |
| Accrued benefit obligation – other employee future benefit plans (note 15) |   |   | 6.9    |   |   |   | 7.3 |   |
| Property taxes in arrears and related penalties                                  |   |   | 4.4    |   |   |   | 15.1 |   |
| Restructuring (note 20)                                                          |   |   | 3.1    |   |   |   | 5.2 |   |
| Lease obligation – paper recycling – current portion (note 5)        |   |   | 2.7    |   |   |   | – |   |
| Payables related to capital projects                                             |   |   | 1.5    |   |   |   | 2.3 |   |
| Other                                                                            |   |   | 7.5    |   |   |   | 8.0 |   |
|                                                                             |   | $      | 171.6  |   |   | $      | 173.3 |   |

| 14. | LONG-TERM DEBT |
|-----|----------------|

| Recourse                                                                                                                 |   | 2010   |    |   | 2009   |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                                                                                     |   |   |    |   |   |   |   |   |
| Senior notes, 8.625% due June 2011 (US$26.0 million; December 31, 2009 – US$354.2 million)                         |   | $      | 25.9    |   |   | $      | 371.6 |   |
| Senior notes, 7.375% due March 2014 (US$250.0 million;December 31, 2009 – US$250.0 million)                        |   |   | 251.6   |   |   |   | 265.4 |   |
| Senior secured notes, 11.0% due December 2016 (US$280.4 million)                                                         |   |   | 278.9   |   |   |   | – |   |
| Modification – difference in carrying value of 8.625% and 11.0% senior secured notes (US$38.3 million) on exchange |   |   | 36.2    |   |   |   | – |   |
| Class B senior secured notes, 11.0% due December 2016 (US$110.0 million)                                                 |   |   | 94.3    |   |   |   | – |   |
|                                                                                                                     |   |   | 686.9   |   |   |   | 637.0 |   |
| Revolving asset-based loan facility of up to $330.0 million due August 2013                                              |   |   | – |   |   |   | 14.5 |   |
| Capital lease obligations                                                                                                |   |   | 10.2    |   |   |   | 11.2 |   |
|                                                                                                                     |   |   | 697.1   |   |   |   | 662.7 |   |
| Non-recourse (note 6)                                                                                                    |   |   |    |   |   |   |   |   |
| First mortgage bonds, 6.447% due July 2016                                                                               |   |   | 95.0    |   |   |   | 94.1 |   |
| Subordinated promissory notes                                                                                            |   |   | 18.8    |   |   |   | 18.8 |   |
|                                                                                                                     |   |   | 113.8   |   |   |   | 112.9 |   |
|                                                                                                                     |   |   |    |   |   |   |   |   |
| Total debt                                                                                                               |   |   | 810.9   |   |   |   | 775.6 |   |
| Less:  current portion                                                                                         |   |   | (27.0   | )      |   |   | (1.0 | ) |
| Total long-term debt                                                                                                     |   | $      | 783.9   |   |   | $      | 774.6 |   |

|       |   |         |    |   |                    |   |
|------------|--------|--------------|---------|--------|-------------------------|--------|
|       |   | Recoursedebt |    |   | Non-recoursedebt (PREI) |   |
|       |   |         |    |   |                    |   |   |   |
| 2011       |   | $            | 26.9    |   |                    | $      | – |   |
| 2012       |   |         | 4.0     |   |                    |   | – |   |
| 2013       |   |         | 3.8     |   |                    |   | – |   |
| 2014       |   |         | 250.0   |   |                    |   | – |   |
| 2015       |   |         | – |   |                    |   | – |   |
| Thereafter |   |         | 388.3   |   |                    |   | 113.8 |   |
|       |   | $            | 673.0   |   |                    | $      | 113.8 |   |

|         |   | December 31, 2010 |   |   | December 31, 2009 |   |
|--------------|--------|-------------------|--------|--------|-------------------|--------|
|         |   | CarryingValue     |   |   | FairValue         |   |   | CarryingValue |   |   | FairValue |   |
|         |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Recourse     |   | $                 | 697.1  |   |              | $      | 585.5 |   |   | $ | 662.7 |   |   | $ | 472.3 |   |
| Non-recourse |   |              | 113.8  |   |              |   | 120.1 |   |   |   | 112.9 |   |   |   | 113.8 |   |

| 15. | EMPLOYEE FUTURE BENEFITS |
|-----|--------------------------|

| Pension benefit plans                                               |   | 2010   |    |   | 2009   |   |   | 2008   |   |
|---------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|
|                                                                |   |   |    |   |   |   |   |   |   |
| Defined benefit plan                                                |   |   |    |   |   |   |   |   |   |
| Service cost for the year                                           |   | $      | 2.1     |   |   | $      | 3.3    |   |   | $ | 5.2 |   |
| Interest cost                                                       |   |   | 20.5    |   |   |   | 22.2   |   |   |   | 19.3 |   |
| Expected return on assets                                           |   |   | (16.2   | )      |   |   | (15.4  | )      |   |   | (19.3 | ) |
| Recognition of restructuring program (note 20)                      |   |   | – |   |   |   | 5.6    |   |   |   | 7.5 |   |
| Amortization of unrecognized items:                                 |   |   |    |   |   |   |   |   |   |   |   |   |
| Actuarial (gains) losses                                            |   |   | 6.3     |   |   |   | 3.7    |   |   |   | (0.2 | ) |
| Prior service costs                                                 |   |   | 0.4     |   |   |   | 0.5    |   |   |   | 5.1 |   |
| Transition asset                                                    |   |   | – |   |   |   | 0.3    |   |   |   | – |   |
|                                                                |   |   | 13.1    |   |   |   | 20.2   |   |   |   | 17.6 |   |
| Defined contribution plan                                           |   |   |    |   |   |   |   |   |   |   |   |   |
| Service cost for the year                                           |   |   | 3.5     |   |   |   | 5.2    |   |   |   | 5.5 |   |
| Multi-employer industry-wide pension plan service cost for the year |   |   | 9.8     |   |   |   | 10.7   |   |   |   | 15.5 |   |
| Net periodic benefit cost for pension benefit plans                 |   | $      | 26.4    |   |   | $      | 36.1   |   |   | $ | 38.6 |   |

| Other benefit plans                               |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost for the year                         |   | $      | 2.0    |   |   | $      | 2.3    |   |   | $ | 4.6 |   |
| Interest cost                                     |   |   | 10.0   |   |   |   | 11.2   |   |   |   | 11.5 |   |
| Amortization of unrecognized items:               |   |   |   |   |   |   |   |   |   |   |   |   |
| Actuarial (gains) losses                          |   |   | 0.2    |   |   |   | (0.7   | )      |   |   | 1.8 |   |
| Prior service credits                             |   |   | (3.6   | )      |   |   | (0.2   | )      |   |   | (0.2 | ) |
| Net periodic benefit cost for other benefit plans |   | $      | 8.6    |   |   | $      | 12.6   |   |   | $ | 17.7 |   |

----

|                                                           |   | Pension benefit plans |    |   | Other benefit plans |   |
|----------------------------------------------------------------|--------|-----------------------|---------|--------|---------------------|--------|
|                                                           |   | 2010                  |    |   | 2009                |   |   | 2010 |   |   | 2009 |   |
|                                                           |   |                  |    |   |                |   |   |   |   |   |   |   |
| Change in benefit obligation                                   |   |                  |    |   |                |   |   |   |   |   |   |   |
| Projected benefit obligation at beginning of year              |   | $                     | 360.7   |   |                | $      | 334.3 |   |   | $ | 189.3 |   |   | $ | 163.7 |   |
| Service cost for the year                                      |   |                  | 2.1     |   |                |   | 3.3 |   |   |   | 2.0 |   |   |   | 2.3 |   |
| Interest cost                                                  |   |                  | 20.5    |   |                |   | 22.2 |   |   |   | 10.0 |   |   |   | 11.2 |   |
| Employee contributions                                         |   |                  | 0.1     |   |                |   | 0.3 |   |   |   | – |   |   |   | – |   |
| Transfers in from other plans                                  |   |                  | – |   |                |   | 0.2 |   |   |   | – |   |   |   | – |   |
| Benefit payments                                               |   |                  | (34.5   | )      |                |   | (32.5 | ) |   |   | (7.9 | ) |   |   | (7.3 | ) |
| Recognition of restructuring program (note 20)                 |   |                  | – |   |                |   | 5.6 |   |   |   | – |   |   |   | – |   |
| Prior service (credits) costs                                  |   |                  | – |   |                |   | – |   |   |   | (21.3 | ) |   |   | (17.2 | ) |
| Curtailment gain recognized                                    |   |                  | (2.0    | )      |                |   | (0.5 | ) |   |   | (7.7 | ) |   |   | – |   |
| Actuarial losses (gains) and other adjustments                 |   |                  | 32.5    |   |                |   | 27.8 |   |   |   | (9.9 | ) |   |   | 36.6 |   |
| Projected benefit obligation at end of year                    |   | $                     | 379.4   |   |                | $      | 360.7 |   |   | $ | 154.5 |   |   | $ | 189.3 |   |
|                                                           |   |                  |    |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Change in plan assets                                          |   |                  |    |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Fair value of defined benefit plan assets at beginning of year |   | $                     | 241.6   |   |                | $      | 220.6 |   |   | $ | – |   |   | $ | – |   |
| Actual return on plan assets                                   |   |                  | 25.3    |   |                |   | 32.3 |   |   |   | – |   |   |   | – |   |
| Employee contributions                                         |   |                  | 0.1     |   |                |   | 0.3 |   |   |   | – |   |   |   | – |   |
| Company contributions                                          |   |                  | 14.3    |   |                |   | 21.4 |   |   |   | 7.9 |   |   |   | 7.3 |   |
| Other                                                          |   |                  | (0.4    | )      |                |   | (0.5 | ) |   |   | – |   |   |   | – |   |
| Benefit payments                                               |   |                  | (34.5   | )      |                |   | (32.5 | ) |   |   | (7.9 | ) |   |   | (7.3 | ) |
| Fair value of assets at end of year                            |   | $                     | 246.4   |   |                | $      | 241.6 |   |   | $ | – |   |   | $ | – |   |

|                                        |   | Pension benefit plans |   |   | Other benefit plans |   |
|---------------------------------------------|--------|-----------------------|--------|--------|---------------------|--------|
|                                        |   | 2010                  |   |   | 2009                |   |   | 2010 |   |   | 2009 |   |
|                                        |   |                  |   |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Projected benefit obligation at end of year |   | $                     | 379.4  |   |                | $      | 360.7 |   |   | $ | 154.5 |   |   | $ | 189.3 |   |
| Fair value of plan assets at end of year    |   |                  | 246.4  |   |                |   | 241.6 |   |   |   | – |   |   |   | – |   |
| Funded status                               |   | $                     | (133.0 | )      |                | $      | (119.1 | ) |   | $ | (154.5 | ) |   | $ | (189.3 | ) |

|                                               |   | Pension benefit plans |   |   | Other benefit plans |   |
|----------------------------------------------------|--------|-----------------------|--------|--------|---------------------|--------|
|                                               |   | 2010                  |   |   | 2009                |   |   | 2010 |   |   | 2009 |   |
|                                               |   |                  |   |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Other assets (note 12)                             |   | $                     | 0.2    |   |                | $      | 0.2 |   |   | $ | – |   |   | $ | – |   |
| Accounts payable and accrued liabilities (note 13) |   |                  | (11.7  | )      |                |   | (6.7 | ) |   |   | (6.9 | ) |   |   | (7.3 | ) |
| Employee future benefits                           |   |                  | (121.5 | )      |                |   | (112.6 | ) |   |   | (147.6 | ) |   |   | (182.0 | ) |
|                                               |   | $                     | (133.0 | )      |                | $      | (119.1 | ) |   | $ | (154.5 | ) |   | $ | (189.3 | ) |

----

|                                          |   | Pension benefit plans |   |   | Other benefit plans |   |
|-----------------------------------------------|--------|-----------------------|--------|--------|---------------------|--------|
|                                          |   | 2010                  |   |   | 2009                |   |   | 2010 |   |   | 2009 |   |
|                                          |   |                  |   |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Prior year service credits (costs)            |   | $                     | (2.6   | )      |                | $      | (3.1 | ) |   | $ | 22.6 |   |   | $ | 12.0 |   |
| Accumulated gain (loss)                       |   |                  | (68.0  | )      |                |   | (60.1 | ) |   |   | 1.6 |   |   |   | (9.7 | ) |
| Accumulated other comprehensive income (loss) |   | $                     | (70.6  | )      |                | $      | (63.2 | ) |   | $ | 24.2 |   |   | $ | 2.3 |   |

|                                                       |   | Pension benefit plans |   |   | Other benefit plans |   |
|------------------------------------------------------------|--------|-----------------------|--------|--------|---------------------|--------|
|                                                       |   | 2010                  |   |   | 2009                |   |   | 2010 |   |   | 2009 |   |
|                                                       |   |                  |   |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Amortization of employee future benefits                   |   | $                     | 6.3    |   |                | $      | 10.1 |   |   | $ | (3.4 | ) |   | $ | (0.8 | ) |
| Net gain (loss)                                            |   |                  | (21.9  | )      |                |   | (16.2 | ) |   |   | 38.5 |   |   |   | (19.9 | ) |
| Net amount recognized in other comprehensive income (loss) |   | $                     | (15.6  | )      |                | $      | (6.1 | ) |   | $ | 35.1 |   |   | $ | (20.7 | ) |

|        |   | Pension benefit plans |   |   | Other benefit plans |   |
|-------------|--------|-----------------------|--------|--------|---------------------|--------|
|        |   |                  |   |   |                |   |   |   |
| 2011        |   | $                     | 41.3   |   |                | $      | 7.1 |   |
| 2012        |   |                  | 30.2   |   |                |   | 7.5 |   |
| 2013        |   |                  | 29.6   |   |                |   | 7.9 |   |
| 2014        |   |                  | 29.4   |   |                |   | 8.3 |   |
| 2015        |   |                  | 29.1   |   |                |   | 8.7 |   |
| 2016 - 2020 |   |                  | 138.3  |   |                |   | 51.0 |   |

----

| Plan assets at December 31, |   | 2010   |   |   | 2009   |   |
|-----------------------------|--------|--------|--------|--------|--------|--------|
|                        |   |   |   |   |   |   |   |   |
| Equity securities           |   |   | 61.9   | %      |   |   | 60.8 | % |
| Fixed income securities     |   |   | 38.1   | %      |   |   | 39.2 | % |
| Total                       |   |   | 100.0  | %      |   |   | 100.0 | % |

|                             |   |   |   |   | Fair value hierarchy |   |
|----------------------------------|--------|--------|--------|--------|----------------------|--------|
| As at December 31, 2010          |   | Total  |   |   | Level 1              |   |   | Level 2 |   |   | Level 3 |   |
|                             |   |   |   |   |                 |   |   |   |   |   |   |   |
| Asset category                   |   |   |   |   |                 |   |   |   |   |   |   |   |
| Cash and cash equivalents        |   | $      | 2.7    |   |                 | $      | 2.7 |   |   | $ | – |   |   | $ | – |   |
| Equity securities:               |   |   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Global equity pooled funds1      |   |   | 96.5   |   |                 |   | – |   |   |   | 96.5 |   |   |   | – |   |
| Canadian equity pooled funds2    |   |   | 50.1   |   |                 |   | – |   |   |   | 50.1 |   |   |   | – |   |
| U.S. equity pooled funds3        |   |   | 3.3    |   |                 |   | – |   |   |   | 3.3 |   |   |   | – |   |
| Balanced equity pooled funds4    |   |   | 0.5    |   |                 |   | – |   |   |   | 0.5 |   |   |   | – |   |
| Fixed income securities:         |   |   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Canadian long bond pooled funds5 |   |   | 45.3   |   |                 |   | – |   |   |   | 45.3 |   |   |   | – |   |
| Canadian bond pooled funds5      |   |   | 45.3   |   |                 |   | – |   |   |   | 45.3 |   |   |   | – |   |
| U.S. bond pooled funds6          |   |   | 2.1    |   |                 |   | – |   |   |   | 2.1 |   |   |   | – |   |
| Forward currency contracts7      |   |   | 0.6    |   |                 |   | – |   |   |   | 0.6 |   |   |   | – |   |
| Total                            |   | $      | 246.4  |   |                 | $      | 2.7 |   |   | $ | 243.7 |   |   | $ | – |   |

----

|                             |   |   |   |   | Fair value hierarchy |   |
|----------------------------------|--------|--------|--------|--------|----------------------|--------|
| December 31, 2009                |   | Total  |   |   | Level 1              |   |   | Level 2 |   |   | Level 3 |   |
|                             |   |   |   |   |                 |   |   |   |   |   |   |   |
| Asset category                   |   |   |   |   |                 |   |   |   |   |   |   |   |
| Cash and cash equivalents        |   | $      | 2.7    |   |                 | $      | 2.7 |   |   | $ | – |   |   | $ | – |   |
| Equity securities:               |   |   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Global equity pooled funds1      |   |   | 94.5   |   |                 |   | – |   |   |   | 94.5 |   |   |   | – |   |
| Canadian equity pooled funds2    |   |   | 46.5   |   |                 |   | – |   |   |   | 46.5 |   |   |   | – |   |
| U.S. equity pooled funds3        |   |   | 3.2    |   |                 |   | – |   |   |   | 3.2 |   |   |   | – |   |
| Balanced equity pooled funds4    |   |   | 0.5    |   |                 |   | – |   |   |   | 0.5 |   |   |   | – |   |
| Fixed income securities:         |   |   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Canadian long bond pooled funds5 |   |   | 45.1   |   |                 |   | – |   |   |   | 45.1 |   |   |   | – |   |
| Canadian bond pooled funds5      |   |   | 45.4   |   |                 |   | – |   |   |   | 45.4 |   |   |   | – |   |
| U.S. bond pooled funds6          |   |   | 2.3    |   |                 |   | – |   |   |   | 2.3 |   |   |   | – |   |
| Forward currency contracts7      |   |   | 1.4    |   |                 |   | – |   |   |   | 1.4 |   |   |   | – |   |
| Total                            |   | $      | 241.6  |   |                 | $      | 2.7 |   |   | $ | 238.9 |   |   | $ | – |   |

| 1 | This category includes investments in pooled funds that aim to achieve long-term capital growth by investing primarily in equity securities of companies that may be located anywhere in the world, excluding Canada.  Fund performance is benchmarked against the MSCI World excluding Canada (Cdn$) Index. |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2 | This category includes investments in pooled funds that invest in well-diversified portfolios of equity securities of Canadian companies.  Fund performance is benchmarked against the S&P/TSX Capped Composite Index. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3 | This category includes investments in pooled funds that invest in well-diversified portfolios of equity securities of U.S. companies, $2.5 million (2009 – $2.5 million) of which is invested in pooled funds that primarily invest in equity securities of U.S. large-capitalization companies, and $0.8 million (2009 – $0.7 million) of which is invested in pooled funds that primarily invest in equity securities of U.S. small- and medium-capitalization companies.  The former fund is benchmarked against the S&P 500 Index, and the latter is benchmarked against the Russell 2000 Index. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4 | This category includes investments in pooled funds that invest in a well-diversified, balanced portfolio of Canadian common stocks, bonds, and money market securities.  The fund also holds a portion of its assets in foreign common stock.  Fund performance is benchmarked against a customized index consisting of: 35% S&P/TSX Capped Composite Total Return Index, 25% Morgan Stanley Capital International World (Developed Markets) Index excluding Canada, 35% DEX Universe Bond Index and 5% DEX 30-Day T-Bill Index. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5 | This category includes investments in pooled funds that invest in a well-diversified portfolio of fixed income securities issued primarily by Canadian governments and corporations.  The duration range of the fund is +/- one year of the benchmark’s duration.  Fund performance for Canadian bond pooled funds and Canadian long bond pooled funds is benchmarked against the DEX Universe Bond Index and DEX Long-Term Bond Index, respectively. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 6 | This category includes an investment in a pooled fund that invests in a well-diversified portfolio of fixed income securities, issued primarily by U.S. governments and corporations with a weighted average effective maturity of the portfolio of 7.48 years.  Fund performance is benchmarked against the Barclays Capital Government/Credit Bond Index. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 7 | This category includes foreign currency forward contracts to partially hedge investments in equity and fixed income securities denominated in foreign currencies. |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                | 2010                                  |   | 2009                                  |
|-----------------------------------------------------|---------------------------------------|--------|---------------------------------------|
|                                                |                                  |   |                                  |
| Benefit obligations at December 31,                 |                                  |   |                                  |
| Discount rate                                       | 5.00%                                 |   | 6.00%                                 |
| Rate of compensation increase                       | 2.00%                                 |   | 2.00%                                 |
|                                                |                                  |   |                                  |
| Net benefit cost for year ended December 31,        |                                  |   |                                  |
| Discount rate                                       | 6.00%                                 |   | 7.00%                                 |
| Rate of compensation increase                       | 2.00%                                 |   | 2.50%                                 |
| Expected rate of return on plan assets              | 7.00%                                 |   | 7.00%                                 |
|                                                |                                  |   |                                  |
| Assumed health care cost trend rate at December 31, |                                  |   |                                  |
| Extended health benefits                            |                                  |   |                                  |
| Initial health care cost trend rate                 | 6.50%                                 |   | 7.00%                                 |
| Annual rate of decline in trend rate                | 0.50%                                 |   | 0.50%                                 |
| Ultimate health care cost trend rate                | 4.50%                                 |   | 4.50%                                 |
|                                                |                                  |   |                                  |
| Dental benefits                                     |                                  |   |                                  |
| Dental care cost trend rate                         | 3.00%                                 |   | 3.50%                                 |
|                                                |                                  |   |                                  |
| Medical services plan benefits                      |                                  |   |                                  |
| Premium trend rate                             | 6.00% in 2010 to 20124.50% thereafter |   | 6.00% in 2010 to 20124.50% thereafter |

|                                      |   | Other benefit plans |   |
|-------------------------------------------|--------|---------------------|--------|
|                                      |   | Increase            |   |   | Decrease |   |
|                                      |   |                |   |   |   |   |   |   |
| Total of service and interest cost        |   | $                   | 2.4    |   |   | $ | (2.0 | ) |
| Accrued benefit obligation at December 31 |   |                | 17.6   |   |   |   | (15.4 | ) |

| 16. | OTHER LONG-TERM OBLIGATIONS |
|-----|-----------------------------|

|                                                                |   | 2010   |   |   | 2009   |   |
|---------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                                |   |   |   |   |   |   |   |   |
| Restructuring (note 20)                                             |   | $      | 0.2    |   |   | $      | 1.6 |   |
| Environmental and remedial                                          |   |   | 7.7    |   |   |   | 7.6 |   |
| Lease obligation – paper recycling – long term (note 5) |   |   | 8.9    |   |   |   | – |   |
| Other                                                               |   |   | 3.4    |   |   |   | 4.2 |   |
|                                                                |   | $      | 20.2   |   |   | $      | 13.4 |   |

| 17. | INCOME TAXES |
|-----|--------------|

|                                |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|-------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Canada                              |   | $      | (399.9 | )      |   | $      | 1.2    |   |   | $ | (349.7 | ) |
| United States                       |   |   | (30.1  | )      |   |   | (22.8  | )      |   |   | (11.7 | ) |
| Other                               |   |   | 15.5   |   |   |   | (11.6  | )      |   |   | 51.7 |   |
| Earnings (loss) before income taxes |   | $      | (414.5 | )      |   | $      | (33.2  | )      |   | $ | (309.7 | ) |

----

|           |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|----------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|           |   |   |    |   |   |   |    |   |   |
| Canada:        |   |   |    |   |   |   |    |   |   |
| Current        |   | $      | 0.2     |   |   | $      | (0.2    | )      |   | $ | 0.3 |   |
| Future         |   |   | (31.6   | )      |   |   | (17.4   | )      |   |   | (91.8 | ) |
|           |   |   | (31.4   | )      |   |   | (17.6   | )      |   |   | (91.5 | ) |
| United States: |   |   |    |   |   |   |    |   |   |   |   |   |
| Current        |   |   | (0.5    | )      |   |   | (0.9    | )      |   |   | 1.3 |   |
| Future         |   |   | 15.5    |   |   |   | (9.2    | )      |   |   | (0.6 | ) |
|           |   |   | 15.0    |   |   |   | (10.1   | )      |   |   | 0.7 |   |
| Other:         |   |   |    |   |   |   |    |   |   |   |   |   |
| Current        |   |   | 0.1     |   |   |   | 0.1     |   |   |   | 0.1 |   |
| Future         |   |   | – |   |   |   | – |   |   |   | – |   |
|           |   |   | 0.1     |   |   |   | 0.1     |   |   |   | 0.1 |   |
| Total:         |   |   |    |   |   |   |    |   |   |   |   |   |
| Current        |   |   | (0.2    | )      |   |   | (1.0    | )      |   |   | 1.7 |   |
| Future         |   |   | (16.1   | )      |   |   | (26.6   | )      |   |   | (92.4 | ) |
|           |   | $      | (16.3   | )      |   | $      | (27.6   | )      |   | $ | (90.7 | ) |

|                                                                             |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|----------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax recovery at Canadian statutory income tax rates                       |   | $      | (118.2 | )      |   |   | 28.5   | %      |   | $ | (9.9 | ) |   |   | 30.0 | % |   | $ | (96.0 | ) |   |   | 31.0 | % |
| Increase (decrease) in income taxes for:                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-taxable income and expenses                                                  |   |   | (3.2   | )      |   |   | 0.8    |   |   |   | (13.6 | ) |   |   | 40.9 |   |   |   | 13.0 |   |   |   | (4.2 | ) |
| Difference in foreign tax rate                                                   |   |   | (4.3   | )      |   |   | 1.0    |   |   |   | (7.5 | ) |   |   | 22.6 |   |   |   | (4.3 | ) |   |   | 1.4 |   |
| Release of future income taxes related to reduction in corporateincome tax rates |   |   | 13.8   |   |   |   | (3.3   | )      |   |   | 8.6 |   |   |   | (25.9 | ) |   |   | (5.8 | ) |   |   | 1.9 |   |
| Change in the future income tax estimate                                         |   |   | 0.3    |   |   |   | (0.1   | )      |   |   | (4.5 | ) |   |   | 13.5 |   |   |   | – |   |   |   | – |   |
| Change in valuation allowance                                                    |   |   | 98.3   |   |   |   | (23.7  | )      |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Adjustment to deferred credits                                                   |   |   | (5.9   | )      |   |   | 1.4    |   |   |   | (2.7 | ) |   |   | 8.1 |   |   |   | (2.7 | ) |   |   | 0.9 |   |
| Other                                                                            |   |   | 2.9    |   |   |   | (0.7   | )      |   |   | 2.0 |   |   |   | (6.1 | ) |   |   | 5.1 |   |   |   | (1.7 | ) |
| Income tax recovery                                                              |   | $      | (16.3  | )      |   |   | 3.9    | %      |   | $ | (27.6 | ) |   |   | 83.1 | % |   | $ | (90.7 | ) |   |   | 29.3 | % |

----

|                                                                    |   | 2010   |    |   | 2009   |   |
|-------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                                    |   |   |    |   |   |   |
| Future income tax assets                                                |   |   |    |   |   |   |
| Non-capital losses and temporary differences related to working capital |   | $      | 10.9    |   |   | $      | 14.2 |   |
| Employee future benefits                                                |   |   | 3.4     |   |   |   | 6.9 |   |
|                                                                    |   |   | 14.3    |   |   |   | 21.1 |   |
| Valuation allowance                                                     |   |   | – |   |   |   | (1.9 | ) |
|                                                                    |   | $      | 14.3    |   |   | $      | 19.2 |   |
|                                                                    |   |   |    |   |   |   |   |   |
| Classification:                                                         |   |   |    |   |   |   |   |   |
| Prepaids and other (note 10)                                            |   | $      | 14.3    |   |   | $      | 4.8 |   |
| Other assets (note 12)                                                  |   |   | – |   |   |   | 14.4 |   |
|                                                                    |   | $      | 14.3    |   |   | $      | 19.2 |   |

|                            |   | 2010   |   |   | 2009   |   |
|---------------------------------|--------|--------|--------|--------|--------|--------|
|                            |   |   |   |   |   |   |
| Future income tax liabilities   |   |   |   |   |   |   |
| Property, plant and equipment   |   | $      | 28.9   |   |   | $      | 127.9 |   |
| Non-capital loss carry-forwards |   |   | (46.2  | )      |   |   | (59.7 | ) |
| Employee future benefits        |   |   | (69.8  | )      |   |   | (71.8 | ) |
| Other                           |   |   | (4.5   | )      |   |   | 23.6 |   |
|                            |   |   | (91.6  | )      |   |   | 20.0 |   |
| Valuation allowance             |   |   | 103.0  |   |   |   | 2.8 |   |
|                            |   | $      | 11.4   |   |   | $      | 22.8 |   |

----

|                                                   |   | 2010   |    |   | 2009   |   |
|--------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                   |   |   |    |   |   |   |   |   |
| Unrecognized tax benefits, beginning of year           |   | $      | 11.6    |   |   | $      | 11.7 |   |
| Increases – tax positions taken in prior periods |   |   | – |   |   |   | 2.7 |   |
| Decreases – tax positions taken in prior periods |   |   | (6.0    | )      |   |   | (2.7 | ) |
| Current period tax positions                           |   |   | 0.3     |   |   |   | – |   |
| Settlements and lapse of statute of limitations        |   |   | – |   |   |   | – |   |
| Decrease resulting from tax rate reduction             |   |   | – |   |   |   | (0.1 | ) |
| Unrecognized tax benefits, end of year                 |   | $      | 5.9     |   |   | $      | 11.6 |   |

| 18. | DEFERRED CREDITS |
|-----|------------------|

|                                                              |   | 2010   |    |   | 2009   |   |
|-------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                              |   |   |    |   |   |   |   |   |
| Balance, beginning of year                                        |   | $      | 15.5    |   |   | $      | 18.6 |   |
| Adjustment related to utilization of acquired tax losses          |   |   | (5.9    | )      |   |   | (2.7 | ) |
| Adjustment resulting from reduction in corporate income tax rates |   |   | – |   |   |   | (0.4 | ) |
| Balance, end of year                                              |   | $      | 9.6     |   |   | $      | 15.5 |   |

| 19. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
|-----|-----------------------------------------------|

|                                                                          |   | 2010   |   |   | 2009   |   |
|-------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                                          |   |   |   |   |   |   |   |   |
| Unrecognized pension and other post-retirement benefit costs                  |   | $      | (46.4  | )      |   | $      | (60.9 | ) |
| Unrecognized gains on cash flow revenue hedges                                |   |   | 1.0    |   |   |   | 7.7 |   |
| Foreign currency translation adjustments, net of related hedging activities 1 |   |   | (0.2   | )      |   |   | 1.1 |   |
| Unrecognized loss on interest rate hedges                                     |   |   | (0.5   | )      |   |   | (0.6 | ) |
|                                                                          |   | $      | (46.1  | )      |   | $      | (52.7 | ) |

| 1 | The accumulated net adjustment is comprised of non-taxable translation loss of $2.6 million (2009 – $5.2 million gain) and a net revaluation of long-term debt designated as a net investment hedge of $2.4 million gain (2009 – $4.1 million loss), net of tax of $0.6 million expense (2009 – $0.3 million recovery). |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 20. | RESTRUCTURING |
|-----|---------------|

|                                                                          |   | 2010   |    |   | 2009   |   |
|-------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                                          |   |   |    |   |   |   |   |   |
| Balance, beginning of year                                                    |   | $      | 6.8     |   |   | $      | 16.3 |   |
| Expensed in year                                                              |   |   | 25.3    |   |   |   | 17.9 |   |
| Disbursements                                                                 |   |   | (28.8   | )      |   |   | (22.3 | ) |
| Other non-cash items                                                          |   |   | – |   |   |   | 0.5 |   |
|                                                                          |   |   | 3.3     |   |   |   | 12.4 |   |
| Less:    portion related to employee future benefits (note 15) |   |   | – |   |   |   | (5.6 | ) |
| Balance, end of year                                                          |   | $      | 3.3     |   |   | $      | 6.8 |   |
| Classification:                                                               |   |   |    |   |   |   |   |   |
| Accounts payable and accrued liabilities (note 13)                            |   | $      | 3.1     |   |   | $      | 5.2 |   |
| Other long-term obligations (note 16)                                         |   |   | 0.2     |   |   |   | 1.6 |   |
|                                                                          |   | $      | 3.3     |   |   | $      | 6.8 |   |

|                       |   | 2010   |   |   | 2009   |   |
|----------------------------|--------|--------|--------|--------|--------|--------|
|                       |   |   |   |   |   |   |   |   |
| 2008 and prior initiatives |   | $      | 0.6    |   |   | $      | 4.1 |   |
| 2009 initiatives           |   |   | 0.7    |   |   |   | 2.7 |   |
| 2010 initiatives           |   |   | 2.0    |   |   |   | – |   |
|                       |   | $      | 3.3    |   |   | $      | 6.8 |   |

| 21. | INTEREST EXPENSE, NET |
|-----|-----------------------|

|                                  |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|---------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|                                  |   |   |    |   |   |   |    |   |   |   |   |   |
| Interest on long-term debt            |   | $      | 71.5    |   |   | $      | 68.8    |   |   | $ | 78.0 |   |
| Fixed-to-floating interest rate swaps |   |   | – |   |   |   | – |   |   |   | (2.9 | ) |
| Other                                 |   |   | 0.9     |   |   |   | 0.6     |   |   |   | 0.3 |   |
|                                  |   |   | 72.4    |   |   |   | 69.4    |   |   |   | 75.4 |   |
| Interest income                       |   |   | (0.4    | )      |   |   | (0.1    | )      |   |   | (0.3 | ) |
| Capitalized interest                  |   |   | – |   |   |   | – |   |   |   | (0.1 | ) |
|                                  |   | $      | 72.0    |   |   | $      | 69.3    |   |   | $ | 75.0 |   |

| 22. | OTHER EXPENSE, NET |
|-----|--------------------|

|                                                           |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|----------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|                                                           |   |   |    |   |   |   |    |   |   |   |   |   |
| Fee related to bond exchange                                   |   | $      | 8.3     |   |   | $      | 2.2     |   |   | $ | – |   |
| Loss (gain) on derivative financial instruments                |   |   | 3.6     |   |   |   | (8.7    | )      |   |   | 45.5 |   |
| Foreign exchange loss (gain) on working capital balances       |   |   | (1.5    | )      |   |   | 28.4    |   |   |   | (27.0 | ) |
| Loss (gain) on disposal of property, plant and equipment       |   |   | (7.2    | )      |   |   | 3.9     |   |   |   | (0.4 | ) |
| Island cogeneration arbitration settlement                     |   |   | – |   |   |   | 1.4     |   |   |   | – |   |
| Penalty and interest on disputed property taxes                |   |   | 0.6     |   |   |   | 1.4     |   |   |   | – |   |
| Foreign exchange loss (gain) on hedge of net investment        |   |   | – |   |   |   | – |   |   |   | (2.4 | ) |
| Termination fee on closure of corrugating machine at Snowflake |   |   | – |   |   |   | – |   |   |   | (2.0 | ) |
| Other                                                          |   |   | (0.6    | )      |   |   | 0.5     |   |   |   | (0.1 | ) |
|                                                           |   | $      | 3.2     |   |   | $      | 29.1    |   |   | $ | 13.6 |   |

| 23. | EARNINGS PER SHARE |
|-----|--------------------|

|                                                                                                             |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|                                                                                                             |   |   |    |   |   |   |    |   |   |   |   |   |
| Net earnings (loss) attributable to the company                                                                  |   | $      | (396.9  | )      |   | $      | (4.4    | )      |   | $ | (219.8 | ) |
| Weighted average shares used in computation of basic earnings per share (in millions)                            |   |   | 381.8   |   |   |   | 381.8   |   |   |   | 336.1 |   |
| Weighted average shares from assumed conversion of dilutive options (in millions)                                |   |   | – |   |   |   | – |   |   |   | – |   |
| Weighted average shares used in computation of diluted earnings per share (in millions)                          |   |   | 381.8   |   |   |   | 381.8   |   |   |   | 336.1 |   |
| Basic and diluted earnings (loss) per share attributable to the company’s common shareholders (in dollars) |   | $      | (1.04   | )      |   | $      | (0.01   | )      |   | $ | (0.65 | ) |

| 24. | STOCK-BASED COMPENSATION PLANS |
|-----|--------------------------------|

|   | (a) | Details of stock-based compensation expense: |
|--------|-----|----------------------------------------------|

|                   |   | 2010   |    |   | 2009   |   |   | 2008   |   |
|------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|
|                   |   |   |    |   |   |   |   |   |   |   |   |   |
| Stock option awards    |   | $      | 0.2     |   |   | $      | 0.6    |   |   | $ | 1.0 |   |
| Restricted share units |   |   | 0.3     |   |   |   | 1.2    |   |   |   | 1.5 |   |
| Deferred share units   |   |   | – |   |   |   | 0.5    |   |   |   | 0.2 |   |
|                   |   | $      | 0.5     |   |   | $      | 2.3    |   |   | $ | 2.7 |   |

|   | (b) | Stock option plans |
|--------|-----|--------------------|

|                                               |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|----------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk-free interest rate                            |   |   | 2.5    | %      |   |   | 3.0    | %      |   |   | 3.8 | % |
| Annual dividends per share                         |   | Nil    |   |   | Nil    |   |   | Nil    |   |
| Expected stock price volatility                    |   |   | 70     | %      |   |   | 45     | %      |   |   | 40.0 | % |
| Expected option life (in years)                    |   |   | 10.0   |   |   |   | 10.0   |   |   |   | 8.5 |   |
| Average fair value of options granted (in dollars) |   | $      | 0.06   |   |   | $      | 0.16   |   |   | $ | 0.51 |   |

|   | The risk-free interest rate was based on a zero-coupon Government of Canada bond with a remaining term approximately equivalent to the expected life of the stock option.  The company estimated the annual dividends per share, expected stock price volatility and expected option life based on historical experience. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Changes in the number of options outstanding during the years ended December 31 were as follows: |
|--------|--------------------------------------------------------------------------------------------------|

|                 |   | 2010              |      |   | 2009                                       |   |    | 2008              |   |
|----------------------|--------|-------------------|-----------|--------|--------------------------------------------|--------|---------|-------------------|--------|
|                 |   | Number of options |      |   | Weighted averageexercise price(in dollars) |   |    | Number of options |   |   | Weighted averageexercise price(in dollars) |   |   | Number of options |   |   | Weighted averageexercise price(in dollars) |   |
|                 |   |              |      |   |                                       |   |    |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of year    |   |              | 2,973,551 |   |                                       | $      | 2.72    |              |   |   | 5,843,984 |   |   | $ | 2.42 |   |   |   | 3,964,024 |   |   | $ | 3.43 |   |
| Granted              |   |              | 5,080,647 |   |                                       |   | 0.13    |              |   |   | 204,000 |   |   |   | 0.40 |   |   |   | 2,691,891 |   |   |   | 1.23 |   |
| Exercised            |   |              | –   |   |                                       |   | – |              |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Forfeited            |   |              | –   |   |                                       |   | – |              |   |   | (336,534 | ) |   |   | 2.51 |   |   |   | (811,931 | ) |   |   | 3.42 |   |
| Expired or cancelled |   |              | (472,505  | )      |                                       |   | 2.37    |              |   |   | (2,737,899 | ) |   |   | 1.93 |   |   |   | – |   |   |   | – |   |
| End of year          |   |              | 7,581,693 |   |                                       |   | 1.00    |              |   |   | 2,973,551 |   |   |   | 2.72 |   |   |   | 5,843,984 |   |   |   | 2.42 |   |

|   | The following table summarizes information about stock options outstanding and exercisable at December 31, 2010: |
|--------|------------------------------------------------------------------------------------------------------------------|

|                    |          |   | Options outstanding |   |      | Options exercisable                            |   |
|-------------------------|---------------|--------|---------------------|--------|-----------|------------------------------------------------|--------|
| Range ofexercise prices |          |   | Number of options   |   |      | Weighted average remaining option life (years) |   |   | Weighted average range of exercise price (in dollars) |   |   | Number of options |   |   | Weighted average range of exercise price (in dollars) |   |   | Accelerated price(in dollars) |   |
|                    |          |   |                |   |      |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                    | $0.13 - $0.80 |   |                |   | 5,236,647 |                                           |   |   | 9.6 |   |   | $ | 0.13 |   |   |   | 60,000 |   |   | $ | 0.40 |   |   | $ | – |   |
|                    | $1.15 - $1.95 |   |                |   | 790,917   |                                           |   |   | 7.1 |   |   |   | 1.36 |   |   |   | 573,945 |   |   |   | 1.36 |   |   |   | – |   |
|                    | $3.06 - $3.30 |   |                |   | 355,129   |                                           |   |   | 4.3 |   |   |   | 3.15 |   |   |   | 355,129 |   |   |   | 3.15 |   |   |   | 2.14 |   |
|                    | $3.31 - $3.77 |   |                |   | 680,500   |                                           |   |   | 4.5 |   |   |   | 3.53 |   |   |   | 680,500 |   |   |   | 3.53 |   |   |   | 5.05 |   |
|                    | $4.39 - $4.57 |   |                |   | 518,500   |                                           |   |   | 4.0 |   |   |   | 4.44 |   |   |   | 518,500 |   |   |   | 4.44 |   |   |   | 4.40 |   |
|                    |          |   |                |   | 7,581,693 |                                           |   |   | 8.2 |   |   | $ | 1.00 |   |   |   | 2,188,074 |   |   | $ | 3.03 |   |   | $ | 2.96 |   |

|   | The aggregate intrinsic value of options outstanding and currently exercisable as at December 31, 2010 is $nil per option. |
|--------|----------------------------------------------------------------------------------------------------------------------------|

|   | (c) | Restricted share units |
|--------|-----|------------------------|

|                 |   | Numberof shares |       |   | Weighted average fairvalue at grant date(in dollars) |   |
|----------------------|--------|-----------------|------------|--------|------------------------------------------------------|--------|
|                 |   |            |       |   |                                                 |   |   |   |
| Beginning of year    |   |            | 1,177,257  |   |                                                 | $      | 2.43 |   |
| Granted              |   |            | 3,150,000  |   |                                                 |   | 0.09 |   |
| Vested/exercised     |   |            | (1,001,216 | )      |                                                 |   | 2.67 |   |
| Expired or cancelled |   |            | (31,195    | )      |                                                 |   | 1.04 |   |
| End of year          |   |            | 3,294,846  |   |                                                 | $      | 0.13 |   |

|   | (d) | Deferred share unit plan |
|--------|-----|--------------------------|

|   | The company has established a deferred share unit (“DSU”) plan for its directors.  Under the terms of this plan, directors may elect to receive their annual cash remuneration in DSUs, cash or a combination thereof.  Each DSU initially has a value equivalent to the company’s weighted average share price on the TSX during the 10 consecutive trading days prior to the issuance date of the DSU.  A director’s DSU account is credited with dividend equivalents in the form of additional DSUs when dividends are paid on common shares.  A director may elect the date of redemption by filing an irrevocable written election with the company no later than December 15 of the calendar year commencing immediately after the director’s termination date.  The value will be paid by the company as a lump sum in cash, equal to the fair value of the notional underlying common shares plus accrued dividend equivalents at that date, after deduction of applicable taxes and other source deductions required to be withheld.  Liabilities related to this plan are recorded in Accounts payable and accrued liabilities.  As at December 31, 2010, 484,963 DSUs were outstanding under this plan (2009 – 1,018,106) and approximately $0.1 million was payable (2009 – $0.2 million). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 25. | FAIR VALUE MEASUREMENT |
|-----|------------------------|

| Level 1 | Quoted prices in active markets for identical assets or liabilities.                                                                                                                                                                                                                                                                                       |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Level 2 | Observable inputs other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3 | Inputs that are generally unobservable and are supported by little or no market activity and that are significant to the fair value determination of the assets or liabilities.                                                                                                                                                                            |

----

|                |   | 2010   |   |   | 2009   |   |    | Fair valuehierarchy |   | Balance sheet classification |
|---------------------|--------|--------|--------|--------|--------|--------|---------|---------------------|--------|------------------------------|
|                |   |   |   |   |   |   |    |                |   |                         |
| Assets              |   |   |   |   |   |   |    |                |   |                         |
| Currency contracts  |   | $      | 7.9    |   |   | $      | 2.3     |                |   |                         | 2 |  1 |         Prepaids and other |
| Currency contracts  |   |   | 3.1    |   |   |   | – |                |   |                         | 2 |  1 |         Other assets |
| Commodity contracts |   |   | 0.1    |   |   |   | – |                |   |                         | 2 |  2 |         Prepaids and other |
|                |   | $      | 11.1   |   |   | $      | 2.3     |                |   |                         |   |   |   |
|                |   |   |   |   |   |   |    |                |   |                         |   |   |   |
| Liabilities         |   |   |   |   |   |   |    |                |   |                         |   |   |   |
| Commodity contracts |   | $      | 0.1    |   |   | $      | – |                |   |                         | 2 |  2 |         Accounts payable and accrued liabilities |

| 1 | The fair value of forward currency contracts is measured using the discounted difference between contractual rates and market future rates.  Interest rates, forward market rates, and volatility are used as inputs for such valuation techniques.  The company incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s non-performance risk in the fair value measurements. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2 | The fair value of commodity swap contracts is measured using the discounted difference between contractual rates and market rates.  The fair value of natural gas commodity options is measured using techniques derived from the Black-Scholes pricing model.  The company incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s non-performance risk in the fair value measurements. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                    |   | Gain (loss) recognized inAOCI 1 |   |   | (Gain) loss reclassifiedfrom AOCI 1 |   | Classification onstatement of earnings (loss)reclassified from AOCI 1 |   | Gain (loss) recognizedin income 2 |   |
|-------------------------------------------------------------------------|--------|---------------------------------|--------|--------|-------------------------------------|--------|-----------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                    |   | 2010                            |   |   | 2009                                |   |                                                                  | 2010   |                              |   | 2009 |   |   |   | 2010 |   |   | 2009 |   |
|                                                                    |   |                            |   |   |                                |   |                                                                  |   |                              |   |   |   |   |   |   |   |   |   |   |
| Derivatives designated as cash flow hedges                              |   |                            |   |   |                                |   |                                                                  |   |                              |   |   |   |   |   |   |   |   |   |   |
| Currency contracts                                                      |   | $                               | 4.2    |   |                                | $      | 14.5                                                                  |   |                              | $      | (10.9 | ) |   | $ | 4.8 |   | Other expense, net |   | $ | (1.8 | ) |   | $ | 0.4 |   |
|                                                                    |   |                            |   |   |                                |   |                                                                  |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt designated as hedges of    net investment |   | $                               | 4.8    |   |                                | $      | 24.9                                                                  |   |                              | $      | 1.5 |   |   | $ | 1.0 |   | Foreign exchange gain(loss) on long-term debt |   | $ | – |   |   | $ | – |   |

----

|                |   | Gain (loss)recognized in income |   | Classification on statementof earnings (loss) |
|---------------------|--------|---------------------------------|--------|-----------------------------------------------|
|                |   | 2010                            |   |                                          | 2009 |   |   |
|                |   |                            |   |                                          |   |   |   |   |   |
| Interest rate swaps |   | $                               | 0.8    |                                          |   | $ | 0.7 |   |         Interest expense, net (1) |

| (1)    The portion of the gain (loss) that relates to the foreign exchange portion of the contract is included in Foreign exchange gain (loss) on long-term debt and is equal to $nil for December 31, 2010 (2009 – $nil). |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                     |   | Gain (loss)recognized in income |    | Classification on statementof earnings (loss) |
|--------------------------------------------------------------------------|--------|---------------------------------|---------|-----------------------------------------------|
|                                                                     |   | 2010                            |    |                                          | 2009 |   |   |
|                                                                     |   |                            |    |                                          |   |   |   |   |   |
| Currency contracts related to revenue hedges                             |   | $                               | (1.2    | )                                             |   | $ | 6.6 |   | Other expense, net |
| Currency contracts related to debt hedges                                |   |                            | – |                                          |   |   | (0.4 | ) | Foreign exchange gain (loss) on long-term debt |
| Commodity swap contracts related to pulp and newsprint hedges            |   |                            | (0.2    | )                                             |   |   | 2.1 |   | Other expense, net |
| Commodity swap contracts related to natural gas and old newspaper hedges |   |                            | (0.5    | )                                             |   |   | (0.4 | ) | Other expense, net |
|                                                                     |   | $                               | (1.9    | )                                             |   | $ | 7.9 |   |   |

| 26. | FINANCIAL INSTRUMENTS |
|-----|-----------------------|

|   | Financial instruments of the company consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and long-term debt.  Financial instruments of the company also include derivatives which the company uses to reduce its exposure to currency and price risk associated with its revenues, energy costs and long-term debt. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The company has exposure to risk from its financial instruments, specifically credit risk, market risk (including currency, price and interest rate risk) and liquidity risk. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (i) | Credit Risk |
|--------|-----|-------------|

----

|                                                |   | 2010   |   |   | 2009   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Trade receivables, gross                            |   |   |   |   |   |   |
| Current                                             |   | $      | 106.0  |   |   | $      | 89.0 |   |
| Past due 1-30 days                                  |   |   | 4.7    |   |   |   | 7.3 |   |
| Past due 31-90 days                                 |   |   | 1.4    |   |   |   | 1.0 |   |
| Past due over 90 days                               |   |   | 0.6    |   |   |   | 1.4 |   |
|                                                |   |   | 112.7  |   |   |   | 98.7 |   |
| Allowance for doubtful accounts                     |   |   | (3.0   | )      |   |   | (3.7 | ) |
| Trade receivables, net                              |   |   | 109.7  |   |   |   | 95.0 |   |
| Other receivables, including sales tax recoverables |   |   | 10.9   |   |   |   | 6.5 |   |
| Accounts receivable (note 8)                        |   | $      | 120.6  |   |   | $      | 101.5 |   |

|                             |   | 2010   |    |   | 2009   |   |
|----------------------------------|--------|--------|---------|--------|--------|--------|
|                             |   |   |    |   |   |   |   |   |
| Balance, beginning of year       |   | $      | 3.7     |   |   | $      | 3.2 |   |
| Increase (decrease) in provision |   |   | (0.7    | )      |   |   | 1.2 |   |
| Utilized in the year             |   |   | – |   |   |   | (0.7 | ) |
| Balance, end of year (note 8)    |   | $      | 3.0     |   |   | $      | 3.7 |   |

|   | (ii) | Market risk |
|--------|------|-------------|

|                                                             |                        |   |                   |   |   |                                 |   |    |                                 |   |
|-----------------------------------------------------------------------|-----------------------------|--------|------------------------|--------|--------|--------------------------------------|--------|---------|--------------------------------------|--------|
|                                                                  |                        |   |                   |   |   | Effect from increasein rate or price |   |    | Effect from decreasein rate or price |   |
| As at December 31, 2010                                               | Currency andnotional amount |   | Change in rateor price |   |   | Netearnings (loss)                   |   |    | Other comprehensive income           |   |   | Netearnings (loss) |   |   | Other comprehensive income (loss) |   |
|                                                                  |                        |   |                   |   |   |                                 |   |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue hedges–    currency risk (US$/CDN$) | US$321                      |   |                   | 5      | %      |                                 |   | 8.5     |                                 |   |   | – |   |   |   | (7.0 | ) |   |   | – |   |
| –    price risk (commodities)               | US$  10           |   |                   | 5      | %      |                                 |   | (0.4    | )                                    |   |   | – |   |   |   | 0.4 |   |   |   | – |   |
|                                                                  |                        |   |                   |   |   |                                 |   |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas hedges                                            |                        |   |                   |   |   |                                 |   |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| –    price risk (commodities)               | CDN$  3           |   |                   | 5      | %      |                                 |   | – |                                 |   |   | – |   |   |   | – |   |   |   | – |   |

|   | (iii) | Liquidity risk |
|--------|-------|----------------|

|   | Liquidity risk is the risk that the company will not be able to meet its financial obligations as they fall due.  The company’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due over the next 12 to 24 months, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the company’s reputation. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The company’s principal cash requirements are for interest payments on its debt, capital expenditures and working capital needs.  The company uses its operating cash flows, ABL Facility and cash balances to maintain its liquidity.  Internal forecasts are regularly prepared that include earnings, capital expenditures, cash flows, cash or revolver drawings, and sensitivities for major assumptions.  The internal forecasts include borrowing base availability and covenant compliance.  The company also monitors the maturities of its long-term debt and assesses refinancing costs and risks in deciding when to refinance debt in advance of its maturity. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (b) | Revenue risk management instruments |
|--------|-----|-------------------------------------|

|   | Foreign currency options and forward contracts outstanding to sell U.S. dollars were as follows: |
|--------|--------------------------------------------------------------------------------------------------|

|                    | Options           |   |   |                 |   |
|-------------------------|-------------------|--------|--------|----------------------|--------|
|                    | Purchased US$ put |   |   | Sold US$ call        |   |   | Forward contracts |   |
| Term                    | US$millions       |   |   | Average rateUS$/CDN$ |   |   | US$millions |   |   | Average rateUS$/CDN$ |   |   | US$millions |   |   | Average rateUS$/CDN$ |   |
|                    |              |   |   |                 |
| As at December 31, 2010 |              |   |   |                 |
| 0 to 12 months          |              | $      | 253    |                 |   |   | 0.9878 |   |   | $ | 249 |   |   |   | 0.8953 |   |   | $ | 13 |   |   |   | 0.9761 |   |
| 13 to 24 months         |              |   | 55     |                 |   |   | 0.9898 |   |   |   | 5 |   |   |   | 0.8786 |   |   |   | – |   |   |   | – |   |
|                    |              | $      | 308    |                 |   |   | 0.9882 |   |   | $ | 254 |   |   |   | 0.8949 |   |   | $ | 13 |   |   |   | 0.9761 |   |
|                    |              |   |   |                 |   |   |   |   |   |
| As at December 31, 2009 |              |   |   |                 |   |   |   |   |   |
| 0 to 12 months          |              | $      | 270    |                 |   |   | 0.9319 |   |   | $ | 241 |   |   |   | 0.8281 |   |   | $ | 27 |   |   |   | 0.8729 |   |
| 13 to 24 months         |              |   | 69     |                 |   |   | 0.9590 |   |   |   | 53 |   |   |   | 0.8370 |   |   |   | – |   |   |   | – |   |
|                    |              | $      | 339    |                 |   |   | 0.9373 |   |   | $ | 294 |   |   |   | 0.8297 |   |   | $ | 27 |   |   |   | 0.8729 |   |

|   | The company no longer designates its U.S. dollar revenue risk management instruments as cash flow hedges for accounting purposes effective April 1, 2010 (note 2).  For cash flow hedges that were in place as at March 31, 2010, the effective portion of changes in the fair value accumulated as at December 31, 2010 have been deferred and recorded in Accumulated other comprehensive loss.  When the hedge item is recorded in earnings, the corresponding gain or loss on the hedge will be reclassified from Accumulated other comprehensive loss to Sales.  At December 31, 2010, instruments having a notional principal of US$321 million are marked to market, where the related gains and losses are recognized as Other expense, net, except for the portion still deferred in Accumulated other comprehensive loss.  At year-end exchange rates, the net amount the company would receive to settle the above contracts and options is $11.0 million (December 31, 2009 – $19.0 million). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | At December 31, 2010, commodity swap agreements are outstanding to fix the sales price of 12,000 metric tonnes of NBSK pulp within the next 12 months.  These contracts are not designated as hedging instruments for accounting purposes and are reported at their fair value, which was negative $0.1 million at the end of the year (December 31, 2009 – $nil). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | Cost risk management instruments |
|--------|-----|----------------------------------|

|   | At December 31, 2010, the company was party to commodity options to hedge the purchase price of natural gas for 0.7 million gigajoules (“GJ”) within the next 15 months at rates averaging $3.96 per GJ.  These instruments were not designated as hedging instruments for accounting purposes and were reported at fair value in Prepaids and other on the consolidated balance sheet.  Changes in fair value was recognized in Other expense, net.  At period-end contract rates, the fair value of these contracts was $0.1 million (December 31, 2009 – $nil). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (d) | Long-term debt risk management instruments |
|--------|-----|--------------------------------------------|

|   | The company had no forward foreign currency contracts or options to acquire U.S. dollars at December 31, 2010 (December 31, 2009 – $nil) held for the purposes of managing exposure to foreign exchange rate fluctuations on the company’s long-term debt. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (e) | Interest rate swaps |
|--------|-----|---------------------|

|   | The company had no fixed-to-floating interest rate swaps outstanding at December 31, 2010. |
|--------|--------------------------------------------------------------------------------------------|

| 27. | RELATED PARTY TRANSACTIONS |
|-----|----------------------------|

| 28. | COMMITMENTS |
|-----|-------------|

|   | The company has entered into operating leases for property, plant and equipment.  The minimum future payments under various operating leases in each of the years ended December 31 are as follows: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|             |   |    |   |   |
|------------------|--------|---------|--------|--------|
| 2011             |   |  $ | 9.4    |   |
| 2012             |   |    | 7.1    |   |
| 2013             |   |    | 6.2    |   |
| 2014             |   |    | 5.2    |   |
| 2015             |   |    | 3.9    |   |
| Subsequent years |   |    | 21.1   |   |
|             |   | $       | 52.9   |   |

| 29. | GUARANTEES AND INDEMNITIES |
|-----|----------------------------|

|   | (a) | The company sold a portion of its operations in June 2001.  In this regard, the company provided a 10 year environmental indemnity with a maximum liability to the company of $12.5 million.  This liability has subsequently been reduced by expenditures related to certain decommissioning projects.  The company provided a tax indemnity, which continues while the relevant tax years of the indemnified parties remain open to audit. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | In connection with the acquisition of the company’s paper recycling operation in December 2003, the company provided an indemnity in respect of the shares that were issued to the vendors as part of the purchase price.  The company does not expect any significant claims with respect to this indemnity.  The company has also provided indemnities with respect to general environmental matters under its lease of the land and buildings.  The company has agreed to indemnify the landlord for all costs, claims and damages related to any release by the company of any hazardous substances on the property or the breach by the company of its environmental covenants under the lease or any environmental laws.  This indemnity is indefinite and survives after the lease is terminated.  The company is not liable for pre-existing environmental conditions. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | The company has entered into a building lease agreement whereby it has agreed to continue making the prescribed lease payments directly to the financial institution holding the mortgage on the building in the event the lessor is no longer able to meet its contractual obligations (note 6).  As at December 31, 2010, the value of the mortgage was $6.4 million (2009 – $7.9 million).  This agreement does not increase the company’s liability beyond the obligation under the building lease. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 30. | CONTINGENT LIABILITIES |
|-----|------------------------|

|   | (a) | Claim for Return of Payments Made to Quebecor World (USA) |
|--------|-----|-----------------------------------------------------------|

|   | (b) | Claim for Certain Post-Retirement Benefits |
|--------|-----|--------------------------------------------|

|   | (c) | Short-term Incentive Plan Benefit Claim |
|--------|-----|-----------------------------------------|

| 31. | SUBSEQUENT EVENT |
|-----|------------------|

| 32. | CONDENSED CONSOLIDATING FINANCIAL INFORMATION |
|-----|-----------------------------------------------|

----

|                                          |   | Catalyst PaperCorporation |    |   | Subsidiary guarantors |   |    | Subsidiarynon-guarantors |   |   | Eliminatingentries |   |   | Consolidated Catalyst Paper Corporation |     |
|-----------------------------------------------|--------|---------------------------|---------|--------|-----------------------|--------|---------|--------------------------|--------|--------|--------------------|--------|--------|-----------------------------------------|----------|
|                                          |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |
| Assets                                        |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |
| Current assets                                |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |
| Cash and cash equivalents                     |   | $                         | 66.6    |   |                  | $      | 25.0    |                     |   | $      | 3.8                |   |   | $                                       | –  |   |   | $ | 95.4 |   |
| Accounts receivable                           |   |                      | 1.1     |   |                  |   | 119.2   |                     |   |   | 0.3                |   |   |                                    | –  |   |   |   | 120.6 |   |
| Inventories                                   |   |                      | – |   |                  |   | 139.9   |                     |   |   | –            |   |   |                                    | –  |   |   |   | 139.9 |   |
| Prepaids and other                            |   |                      | 16.9    |   |                  |   | 10.3    |                     |   |   | 0.5                |   |   |                                    | –  |   |   |   | 27.7 |   |
|                                          |   |                      | 84.6    |   |                  |   | 294.4   |                     |   |   | 4.6                |   |   |                                    | –  |   |   |   | 383.6 |   |
| Property, plant and equipment                 |   |                      | 781.1   |   |                  |   | 395.1   |                     |   |   | 109.4              |   |   |                                    | –  |   |   |   | 1,285.6 |   |
| Advances to related companies                 |   |                      | 290.4   |   |                  |   | 366.5   |                     |   |   | 1.1                |   |   |                                    | (658.0   | ) |   |   | – |   |
| Investments in related companies              |   |                      | 364.7   |   |                  |   | – |                     |   |   | –            |   |   |                                    | (364.7   | ) |   |   | – |   |
| Other assets                                  |   |                      | 24.4    |   |                  |   | 47.3    |                     |   |   | –            |   |   |                                    | (44.7    | ) |   |   | 27.0 |   |
|                                          |   | $                         | 1,545.2 |   |                  | $      | 1,103.3 |                     |   | $      | 115.1              |   |   | $                                       | (1,067.4 | ) |   | $ | 1,696.2 |   |
|                                          |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Liabilities                                   |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Current liabilities                           |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Accounts payable and accrued liabilities      |   | $                         | 21.3    |   |                  | $      | 145.9   |                     |   | $      | 4.4                |   |   | $                                       | –  |   |   | $ | 171.6 |   |
| Current portion of long-term debt             |   |                      | 26.8    |   |                  |   | 0.2     |                     |   |   | –            |   |   |                                    | –  |   |   |   | 27.0 |   |
|                                          |   |                      | 48.1    |   |                  |   | 146.1   |                     |   |   | 4.4                |   |   |                                    | –  |   |   |   | 198.6 |   |
| Long-term debt                                |   |                      | 670.9   |   |                  |   | 0.1     |                     |   |   | 112.9              |   |   |                                    | –  |   |   |   | 783.9 |   |
| Advances from related companies               |   |                      | 347.4   |   |                  |   | 287.8   |                     |   |   | 22.8               |   |   |                                    | (658.0   | ) |   |   | – |   |
| Employee future benefits                      |   |                      | 16.7    |   |                  |   | 252.4   |                     |   |   | –            |   |   |                                    | –  |   |   |   | 269.1 |   |
| Other long-term obligations                   |   |                      | 8.7     |   |                  |   | 11.5    |                     |   |   | –            |   |   |                                    | –  |   |   |   | 20.2 |   |
| Future income taxes                           |   |                      | 40.4    |   |                  |   | – |                     |   |   | 15.7               |   |   |                                    | (44.7    | ) |   |   | 11.4 |   |
| Deferred credits                              |   |                      | 9.6     |   |                  |   | – |                     |   |   | –            |   |   |                                    | –  |   |   |   | 9.6 |   |
|                                          |   |                      | 1,141.8 |   |                  |   | 697.9   |                     |   |   | 155.8              |   |   |                                    | (702.7   | ) |   |   | 1,292.8 |   |
|                                          |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Equity                                        |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Shareholders’ equity                    |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Common stock                                  |   |                      | 1,035.0 |   |                  |   | 622.5   |                     |   |   | (32.1              | )      |   |                                    | (590.4   | ) |   |   | 1,035.0 |   |
| Additional paid-in capital                    |   |                      | 16.6    |   |                  |   | 212.5   |                     |   |   | 4.7                |   |   |                                    | (217.2   | ) |   |   | 16.6 |   |
| Retained earnings (deficit)                   |   |                      | (582.0  | )      |                  |   | (374.4  | )                        |   |   | (12.3              | )      |   |                                    | 386.7    |   |   |   | (582.0 | ) |
| Accumulated other comprehensive income (loss) |   |                      | (46.1   | )      |                  |   | (55.2   | )                        |   |   | (1.0               | )      |   |                                    | 56.2     |   |   |   | (46.1 | ) |
|                                          |   |                      | 423.5   |   |                  |   | 405.4   |                     |   |   | (40.7              | )      |   |                                    | (364.7   | ) |   |   | 423.5 |   |
| Non-controlling interest (deficit)            |   |                      | (20.1   | )      |                  |   | – |                     |   |   | –            |   |   |                                    | –  |   |   |   | (20.1 | ) |
|                                          |   |                      | 403.4   |   |                  |   | 405.4   |                     |   |   | (40.7              | )      |   |                                    | (364.7   | ) |   |   | 403.4 |   |
|                                          |   | $                         | 1,545.2 |   |                  | $      | 1,103.3 |                     |   | $      | 115.1              |   |   | $                                       | (1,067.4 | ) |   | $ | 1,696.2 |   |

----

|                                                                 |   | Catalyst PaperCorporation |    |   | Subsidiary guarantors |   |    | Subsidiarynon-guarantors |   |   | Eliminatingentries |   |   | Consolidated Catalyst Paper Corporation |    |
|----------------------------------------------------------------------|--------|---------------------------|---------|--------|-----------------------|--------|---------|--------------------------|--------|--------|--------------------|--------|--------|-----------------------------------------|---------|
| Sales                                                                |   | $                         | – |   |                  | $      | 1,228.7 |                     |   | $      | 20.4               |   |   | $                                       | (20.5   | ) |   | $ | 1,228.6 |   |
|                                                                 |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Operating expenses                                                   |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Cost of sales, excluding depreciation and amortization               |   |                      | 29.1    |   |                  |   | 1,098.5 |                     |   |   | 6.5                |   |   |                                    | (20.5   | ) |   |   | 1,113.6 |   |
| Depreciation and amortization                                        |   |                      | 69.5    |   |                  |   | 42.4    |                     |   |   | 7.4                |   |   |                                    | – |   |   |   | 119.3 |   |
| Selling, general and administrative                                  |   |                      | 22.6    |   |                  |   | 20.8    |                     |   |   | –            |   |   |                                    | – |   |   |   | 43.4 |   |
| Restructuring                                                        |   |                      | – |   |                  |   | 25.3    |                     |   |   | –            |   |   |                                    | – |   |   |   | 25.3 |   |
| Impairment                                                           |   |                      | 232.8   |   |                  |   | 61.7    |                     |   |   | –            |   |   |                                    | – |   |   |   | 294.5 |   |
|                                                                 |   |                      | 354.0   |   |                  |   | 1,248.7 |                     |   |   | 13.9               |   |   |                                    | (20.5   | ) |   |   | 1,596.1 |   |
|                                                                 |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Operating earnings (loss)                                            |   |                      | (354.0  | )      |                  |   | (20.0   | )                        |   |   | 6.5                |   |   |                                    | – |   |   |   | (367.5 | ) |
| Interest income (expense), net                                       |   |                      | (32.7   | )      |                  |   | (28.5   | )                        |   |   | (10.8              | )      |   |                                    | – |   |   |   | (72.0 | ) |
| Foreign exchange gain (loss) on long-term debt                       |   |                      | 27.6    |   |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | 27.6 |   |
| Gain on cancellation of long-term debt                               |   |                      | 0.6     |   |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | 0.6 |   |
| Equity earnings in Partnership                                       |   |                      | 37.0    |   |                  |   | – |                     |   |   | –            |   |   |                                    | (37.0   | ) |   |   | – |   |
| Other income (expense), net                                          |   |                      | (12.0   | )      |                  |   | 8.9     |                     |   |   | (0.1               | )      |   |                                    | – |   |   |   | (3.2 | ) |
| Earnings (loss) before income taxes                                  |   |                      | (333.5  | )      |                  |   | (39.6   | )                        |   |   | (4.4               | )      |   |                                    | (37.0   | ) |   |   | (414.5 | ) |
| Income tax expense (recovery)                                        |   |                      | (13.3   | )      |                  |   | (1.4    | )                        |   |   | (1.6               | )      |   |                                    | – |   |   |   | (16.3 | ) |
| Net earnings (loss)                                                  |   |                      | (320.2  | )      |                  |   | (38.2   | )                        |   |   | (2.8               | )      |   |                                    | (37.0   | ) |   |   | (398.2 | ) |
| Net (earnings) loss attributable to non-controlling interest         |   |                      | 1.3     |   |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | 1.3 |   |
| Net earnings (loss) before equity in earnings (loss) of subsidiaries |   |                      | (318.9  | )      |                  |   | (38.2   | )                        |   |   | (2.8               | )      |   |                                    | (37.0   | ) |   |   | (396.9 | ) |
| Equity in earnings (loss) of subsidiaries                            |   |                      | 78.0    |   |                  |   | – |                     |   |   | –            |   |   |                                    | 78.0    |   |   |   | – |   |
| Net earnings (loss) attributable to the company                      |   | $                         | (396.9  | )      |                  | $      | (38.2   | )                        |   | $      | (2.8               | )      |   | $                                       | 41.0    |   |   | $ | (396.9 | ) |

----

|                                                       |   | Catalyst PaperCorporation |    |   | Subsidiary guarantors |   |    | Subsidiarynon-guarantors |   |   | Eliminatingentries |   |   | Consolidated Catalyst Paper Corporation |    |
|------------------------------------------------------------|--------|---------------------------|---------|--------|-----------------------|--------|---------|--------------------------|--------|--------|--------------------|--------|--------|-----------------------------------------|---------|
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |
| Cash flows provided (used) by:                             |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |
| Operations                                                 |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |
| Cash flows provided (used) by operations                   |   | $                         | (153.9  | )      |                  | $      | 66.1    |                     |   | $      | 2.7                |   |   | $                                       | 41.0    |   |   | $ | (44.1 | ) |
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Investing                                                  |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Additions to property, plant and equipment                 |   |                      | (2.9    | )      |                  |   | (6.3    | )                        |   |   | (2.0               | )      |   |                                    | – |   |   |   | (11.2 | ) |
| Proceeds from sale of property, plant and equipment        |   |                      | 0.4     |   |                  |   | 7.5     |                     |   |   | –            |   |   |                                    | – |   |   |   | 7.9 |   |
| Decrease (increase) in other assets                        |   |                      | (1.7    | )      |                  |   | 0.5     |                     |   |   | –            |   |   |                                    | – |   |   |   | (1.2 | ) |
| Cash flows provided (used) by operations                   |   |                      | (4.2    | )      |                  |   | 1.7     |                     |   |   | (2.0               | )      |   |                                    | – |   |   |   | (4.5 | ) |
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Financing                                                  |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Increase (decrease) in advances to related companies       |   |                      | 99.5    |   |                  |   | 41.5    |                     |   |   | 0.5                |   |   |                                    | (141.5  | ) |   |   | – |   |
| Increase (decrease) in long-term obligations               |   |                      | – |   |                  |   | 1.5     |                     |   |   | (1.5               | )      |   |                                    | – |   |   |   | – |   |
| Proceeds from (repayment of) long-term debt                |   |                      | – |   |                  |   | (1.0    | )                        |   |   | –            |   |   |                                    | – |   |   |   | (1.0 | ) |
| Proceeds from long-term debt                               |   |                      | 98.4    |   |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | 98.4 |   |
| Settlement on purchase of debt securities                  |   |                      | (9.2    | )      |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | (9.2 | ) |
| Dividends received (paid)                                  |   |                      | – |   |                  |   | (12.6   | )                        |   |   | –            |   |   |                                    | 12.6    |   |   |   | – |   |
| Distribution received (paid)                               |   |                      | – |   |                  |   | (85.7   | )                        |   |   | (1.8               | )      |   |                                    | 87.5    |   |   |   | – |   |
| Repayment of revolving operating loan                      |   |                      | (14.5   | )      |                  |   | 14.5    |                     |   |   | –            |   |   |                                    | – |   |   |   | – |   |
| Proceeds on termination of debt hedges                     |   |                      | (8.3    | )      |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | (8.3 | ) |
| Increase (decrease) in revolving loan                      |   |                      | – |   |                  |   | (14.9   | )                        |   |   | –            |   |   |                                    | 0.4     |   |   |   | (14.5 | ) |
| Deferred financing costs                                   |   |                      | (4.5    | )      |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | (4.5 | ) |
|                                                       |   |                      | 161.4   |   |                  |   | (56.7   | )                        |   |   | (2.8               | )      |   |                                    | (41.0   | ) |   |   | 60.9 |   |
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Cash and cash equivalents, increase (decrease) in the year |   |                      | 3.3     |   |                  |   | 11.1    |                     |   |   | (2.1               | )      |   |                                    | – |   |   |   | 12.3 |   |
| Cash and cash equivalents, beginning of year               |   |                      | 63.3    |   |                  |   | 13.9    |                     |   |   | 5.9                |   |   |                                    | – |   |   |   | 83.1 |   |
| Cash and cash equivalents, end of year                     |   | $                         | 66.6    |   |                  | $      | 25.0    |                     |   | $      | 3.8                |   |   | $                                       | – |   |   | $ | 95.4 |   |

----

|                                          |   | Catalyst PaperCorporation |    |   | Subsidiary guarantors |   |    | Subsidiarynon-guarantors |   |   | Eliminatingentries |   |   | Consolidated Catalyst Paper Corporation |     |
|-----------------------------------------------|--------|---------------------------|---------|--------|-----------------------|--------|---------|--------------------------|--------|--------|--------------------|--------|--------|-----------------------------------------|----------|
|                                          |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |
| Assets                                        |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |
| Current assets                                |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |
| Cash and cash equivalents                     |   | $                         | 63.3    |   |                  | $      | 13.9    |                     |   | $      | 5.9                |   |   | $                                       | –  |   |   | $ | 83.1 |   |
| Accounts receivable                           |   |                      | 0.2     |   |                  |   | 101.1   |                     |   |   | 0.2                |   |   |                                    | –  |   |   |   | 101.5 |   |
| Inventories                                   |   |                      | – |   |                  |   | 178.3   |                     |   |   | –            |   |   |                                    | –  |   |   |   | 178.3 |   |
| Prepaids and other                            |   |                      | 13.9    |   |                  |   | 10.9    |                     |   |   | 0.4                |   |   |                                    | –  |   |   |   | 25.2 |   |
|                                          |   |                      | 77.4    |   |                  |   | 304.2   |                     |   |   | 6.5                |   |   |                                    | –  |   |   |   | 388.1 |   |
| Property, plant and equipment                 |   |                      | 1,085.2 |   |                  |   | 464.7   |                     |   |   | 114.8              |   |   |                                    | –  |   |   |   | 1,664.7 |   |
| Advances to related companies                 |   |                      | 173.3   |   |                  |   | 388.6   |                     |   |   | 1.8                |   |   |                                    | (563.7   | ) |   |   | – |   |
| Investments in related companies              |   |                      | 596.0   |   |                  |   | – |                     |   |   | –            |   |   |                                    | (596.0   | ) |   |   | – |   |
| Other assets                                  |   |                      | 22.8    |   |                  |   | 51.4    |                     |   |   | –            |   |   |                                    | (36.2    | ) |   |   | 38.0 |   |
|                                          |   | $                         | 1,954.7 |   |                  | $      | 1,208.9 |                     |   | $      | 123.1              |   |   | $                                       | (1,195.9 | ) |   | $ | 2,090.8 |   |
|                                          |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Liabilities                                   |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Current liabilities                           |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Accounts payable and accrued liabilities      |   | $                         | 29.2    |   |                  | $      | 139.4   |                     |   | $      | 4.7                |   |   | $                                       | –  |   |   | $ | 173.3 |   |
| Current portion of long-term debt             |   |                      | 0.9     |   |                  |   | 0.1     |                     |   |   | –            |   |   |                                    | –  |   |   |   | 1.0 |   |
|                                          |   |                      | 30.1    |   |                  |   | 139.5   |                     |   |   | 4.7                |   |   |                                    | –  |   |   |   | 174.3 |   |
| Long-term debt                                |   |                      | 647.9   |   |                  |   | 13.8    |                     |   |   | 112.9              |   |   |                                    | –  |   |   |   | 774.6 |   |
| Advances from related companies               |   |                      | 388.6   |   |                  |   | 152.1   |                     |   |   | 23.0               |   |   |                                    | (563.7   | ) |   |   | – |   |
| Employee future benefits                      |   |                      | 26.4    |   |                  |   | 268.2   |                     |   |   | –            |   |   |                                    | –  |   |   |   | 294.6 |   |
| Other long-term obligations                   |   |                      | 8.7     |   |                  |   | 3.2     |                     |   |   | 1.5                |   |   |                                    | –  |   |   |   | 13.4 |   |
| Future income taxes                           |   |                      | 41.9    |   |                  |   | – |                     |   |   | 17.1               |   |   |                                    | (36.2    | ) |   |   | 22.8 |   |
| Deferred credits                              |   |                      | 15.5    |   |                  |   | – |                     |   |   | –            |   |   |                                    | –  |   |   |   | 15.5 |   |
|                                          |   |                      | 1,159.1 |   |                  |   | 576.8   |                     |   |   | 159.2              |   |   |                                    | (599.9   | ) |   |   | 1,295.2 |   |
|                                          |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Equity                                        |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Shareholders’ equity                    |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |     |   |   |   |   |   |
| Common stock                                  |   |                      | 1,035.0 |   |                  |   | 678.0   |                     |   |   | (32.1              | )      |   |                                    | (645.9   | ) |   |   | 1,035.0 |   |
| Additional paid-in capital                    |   |                      | 16.4    |   |                  |   | 228.2   |                     |   |   | 4.7                |   |   |                                    | (232.9   | ) |   |   | 16.4 |   |
| Retained earnings (deficit)                   |   |                      | (185.1  | )      |                  |   | (221.5  | )                        |   |   | (7.5               | )      |   |                                    | 229.0    |   |   |   | (185.1 | ) |
| Accumulated other comprehensive income (loss) |   |                      | (52.7   | )      |                  |   | (52.6   | )                        |   |   | (1.2               | )      |   |                                    | 53.8     |   |   |   | (52.7 | ) |
|                                          |   |                      | 813.6   |   |                  |   | 632.1   |                     |   |   | (36.1              | )      |   |                                    | (596.0   | ) |   |   | 813.6 |   |
| Non-controlling interest (deficit)            |   |                      | (18.0   | )      |                  |   | – |                     |   |   | –            |   |   |                                    | –  |   |   |   | (18.0 | ) |
|                                          |   |                      | 795.6   |   |                  |   | 632.1   |                     |   |   | (36.1              | )      |   |                                    | (596.0   | ) |   |   | 795.6 |   |
|                                          |   | $                         | 1,954.7 |   |                  | $      | 1,208.9 |                     |   | $      | 123.1              |   |   | $                                       | (1,195.9 | ) |   | $ | 2,090.8 |   |

----

|                                                                 |   | Catalyst PaperCorporation |    |   | Subsidiary guarantors |   |    | Subsidiarynon-guarantors |   |   | Eliminatingentries |   |   | Consolidated Catalyst Paper Corporation |    |
|----------------------------------------------------------------------|--------|---------------------------|---------|--------|-----------------------|--------|---------|--------------------------|--------|--------|--------------------|--------|--------|-----------------------------------------|---------|
| Sales                                                                |   | $                         | – |   |                  | $      | 1,225.4 |                     |   | $      | 16.7               |   |   | $                                       | (18.6   | ) |   | $ | 1,223.5 |   |
|                                                                 |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Operating expenses                                                   |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Cost of sales, excluding depreciation and amortization               |   |                      | 26.4    |   |                  |   | 1,023.5 |                     |   |   | 6.3                |   |   |                                    | (18.6   | ) |   |   | 1,037.6 |   |
| Depreciation and amortization                                        |   |                      | 125.0   |   |                  |   | 18.4    |                     |   |   | 3.2                |   |   |                                    | – |   |   |   | 146.6 |   |
| Selling, general and administrative                                  |   |                      | 24.2    |   |                  |   | 20.6    |                     |   |   | –            |   |   |                                    | – |   |   |   | 44.8 |   |
| Restructuring                                                        |   |                      | – |   |                  |   | 17.9    |                     |   |   | –            |   |   |                                    | – |   |   |   | 17.9 |   |
| Impairment and other closure costs                                   |   |                      | – |   |                  |   | 17.4    |                     |   |   | –            |   |   |                                    | – |   |   |   | 17.4 |   |
|                                                                 |   |                      | 175.6   |   |                  |   | 1,097.8 |                     |   |   | 9.5                |   |   |                                    | (18.6   | ) |   |   | 1,264.3 |   |
|                                                                 |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Operating earnings (loss)                                            |   |                      | (175.6  | )      |                  |   | 127.6   |                     |   |   | 7.2                |   |   |                                    | – |   |   |   | (40.8 | ) |
| Interest expense, net                                                |   |                      | (37.8   | )      |                  |   | (19.6   | )                        |   |   | (11.9              | )      |   |                                    | – |   |   |   | (69.3 | ) |
| Gain on cancellation of long-term debt                               |   |                      | – |   |                  |   | 30.7    |                     |   |   | –            |   |   |                                    | – |   |   |   | 30.7 |   |
| Foreign exchange gain on long-term debt                              |   |                      | 74.9    |   |                  |   | 0.4     |                     |   |   | –            |   |   |                                    | – |   |   |   | 75.3 |   |
| Equity earnings in Partnership                                       |   |                      | 108.5   |   |                  |   | – |                     |   |   | –            |   |   |                                    | (108.5  | ) |   |   | – |   |
| Other income (expense), net                                          |   |                      | 26.9    |   |                  |   | (56.1   | )                        |   |   | 0.1                |   |   |                                    | – |   |   |   | (29.1 | ) |
| Earnings (loss) before income taxes                                  |   |                      | (3.1    | )      |                  |   | 83.0    |                     |   |   | (4.6               | )      |   |                                    | (108.5  | ) |   |   | (33.2 | ) |
| Income tax recovery                                                  |   |                      | (12.2   | )      |                  |   | (13.2   | )                        |   |   | (2.2               | )      |   |                                    | – |   |   |   | (27.6 | ) |
| Net earnings (loss)                                                  |   |                      | 9.1     |   |                  |   | 96.2    |                     |   |   | (2.4               | )      |   |                                    | (108.5  | ) |   |   | (5.6 | ) |
| Net (earnings) loss attributable to non-controlling interest         |   |                      | 1.2     |   |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | 1.2 |   |
| Net earnings (loss) before equity in earnings (loss) of subsidiaries |   |                      | 10.3    |   |                  |   | 96.2    |                     |   |   | (2.4               | )      |   |                                    | (108.5  | ) |   |   | (4.4 | ) |
| Equity in earnings (loss) of subsidiaries                            |   |                      | (14.7   | )      |                  |   | – |                     |   |   | –            |   |   |                                    | 14.7    |   |   |   | – |   |
| Net earnings (loss) attributable to the company                      |   | $                         | (4.4    | )      |                  | $      | 96.2    |                     |   | $      | (2.4               | )      |   | $                                       | (93.8   | ) |   | $ | (4.4 | ) |

----

|                                                       |   | Catalyst PaperCorporation |    |   | Subsidiary guarantors |   |    | Subsidiarynon-guarantors |   |   | Eliminatingentries |   |   | Consolidated Catalyst Paper Corporation |    |
|------------------------------------------------------------|--------|---------------------------|---------|--------|-----------------------|--------|---------|--------------------------|--------|--------|--------------------|--------|--------|-----------------------------------------|---------|
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |
| Cash flows provided (used) by:                             |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |
| Operations                                                 |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |
| Cash flows provided (used) by operations                   |   | $                         | (38.3   | )      |                  | $      | 242.9   |                     |   | $      | (7.2               | )      |   | $                                       | (93.8   | ) |   | $ | 103.6 |   |
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Investing                                                  |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Additions to property, plant and equipment                 |   |                      | (1.7    | )      |                  |   | (9.3    | )                        |   |   | (0.5               | )      |   |                                    | – |   |   |   | (11.5 | ) |
| Proceeds from sale of property, plant and equipment        |   |                      | 2.1     |   |                  |   | 2.4     |                     |   |   | –            |   |   |                                    | – |   |   |   | 4.5 |   |
| Decrease (increase) in other assets                        |   |                      | (9.3    | )      |                  |   | 13.4    |                     |   |   | –            |   |   |                                    | – |   |   |   | 4.1 |   |
| Cash flows provided (used) by investing activities         |   |                      | (8.9    | )      |                  |   | 6.5     |                     |   |   | (0.5               | )      |   |                                    | – |   |   |   | (2.9 | ) |
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Financing                                                  |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Decrease in revolving loan and loan payable                |   |                      | (2.1    | )      |                  |   | (43.2   | )                        |   |   | –            |   |   |                                    | (0.3    | ) |   |   | (45.6 | ) |
| Repayment of long-term debt                                |   |                      | – |   |                  |   | – |                     |   |   | (75.7              | )      |   |                                    | – |   |   |   | (75.7 | ) |
| Proceeds from long-term debt                               |   |                      | – |   |                  |   | – |                     |   |   | 95.0               |   |   |                                    | – |   |   |   | 95.0 |   |
| Proceeds on termination of debt foreign currency contracts |   |                      | 34.7    |   |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | 34.7 |   |
| Settlement on purchase of debt securities                  |   |                      | (26.9   | )      |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | (26.9 | ) |
| Note exchange costs                                        |   |                      | (2.2    | )      |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | (2.2 | ) |
| Deferred financing costs                                   |   |                      | 1.1     |   |                  |   | (1.1    | )                        |   |   | (0.9               | )      |   |                                    | – |   |   |   | (0.9 | ) |
| Decrease in other long-term debt                           |   |                      | (0.8    | )      |                  |   | (0.2    | )                        |   |   | –            |   |   |                                    | – |   |   |   | (1.0 | ) |
| Increase (decrease) in advances to related companies       |   |                      | (178.5  | )      |                  |   | 88.4    |                     |   |   | (6.6               | )      |   |                                    | 96.7    |   |   |   | – |   |
| Dividends received (paid)                                  |   |                      | 26.1    |   |                  |   | (26.1   | )                        |   |   | –            |   |   |                                    | – |   |   |   | – |   |
| Distribution received (paid)                               |   |                      | 259.1   |   |                  |   | (258.5  | )                        |   |   | (0.6               | )      |   |                                    | – |   |   |   | – |   |
| Cash flows provided (used) by financing activities         |   |                      | 110.5   |   |                  |   | (240.7  | )                        |   |   | 11.2               |   |   |                                    | 96.4    |   |   |   | (22.6 | ) |
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Cash and cash equivalents, increase in the year            |   |                      | 63.3    |   |                  |   | 8.7     |                     |   |   | 3.5                |   |   |                                    | 2.6     |   |   |   | 78.1 |   |
| Cash and cash equivalents, beginning of year               |   |                      | – |   |                  |   | 5.2     |                     |   |   | 2.4                |   |   |                                    | (2.6    | ) |   |   | 5.0 |   |
| Cash and cash equivalents, end of year                     |   | $                         | 63.3    |   |                  | $      | 13.9    |                     |   | $      | 5.9                |   |   | $                                       | – |   |   | $ | 83.1 |   |

----

|                                                                 |   | Catalyst PaperCorporation |    |   | Subsidiary guarantors |   |    | Subsidiarynon-guarantors |   |   | Eliminatingentries |   |   | Consolidated Catalyst Paper Corporation |    |
|----------------------------------------------------------------------|--------|---------------------------|---------|--------|-----------------------|--------|---------|--------------------------|--------|--------|--------------------|--------|--------|-----------------------------------------|---------|
| Sales                                                                |   | $                         | – |   |                  | $      | 1,866.7 |                     |   | $      | 18.6               |   |   | $                                       | (18.6   | ) |   | $ | 1,866.7 |   |
|                                                                 |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Operating expenses                                                   |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Cost of sales, excluding depreciation and amortization               |   |                      | 32.7    |   |                  |   | 1,592.8 |                     |   |   | 4.9                |   |   |                                    | (18.6   | ) |   |   | 1,611.8 |   |
| Depreciation and amortization                                        |   |                      | 122.8   |   |                  |   | 39.8    |                     |   |   | 3.2                |   |   |                                    | – |   |   |   | 165.8 |   |
| Selling, general and administrative                                  |   |                      | 24.2    |   |                  |   | 22.4    |                     |   |   | 0.3                |   |   |                                    | – |   |   |   | 46.9 |   |
| Restructuring                                                        |   |                      | – |   |                  |   | 30.1    |                     |   |   | –            |   |   |                                    | – |   |   |   | 30.1 |   |
| Impairment and other closure costs                                   |   |                      | – |   |                  |   | 151.0   |                     |   |   | –            |   |   |                                    | – |   |   |   | 151.0 |   |
|                                                                 |   |                      | 179.7   |   |                  |   | 1,836.1 |                     |   |   | 8.4                |   |   |                                    | (18.6   | ) |   |   | 2,005.6 |   |
|                                                                 |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Operating earnings (loss)                                            |   |                      | (179.7  | )      |                  |   | 30.6    |                     |   |   | 10.2               |   |   |                                    | – |   |   |   | (138.9 | ) |
| Interest expense, net                                                |   |                      | (36.4   | )      |                  |   | (28.2   | )                        |   |   | (10.4              | )      |   |                                    | – |   |   |   | (75.0 | ) |
| Foreign exchange loss on long-term debt                              |   |                      | (81.5   | )      |                  |   | (0.7    | )                        |   |   | –            |   |   |                                    | – |   |   |   | (82.2 | ) |
| Equity earnings in Partnership                                       |   |                      | 116.8   |   |                  |   | – |                     |   |   | –            |   |   |                                    | (116.8  | ) |   |   | – |   |
| Other income, net                                                    |   |                      | 2.9     |   |                  |   | (17.0   | )                        |   |   | 0.5                |   |   |                                    | – |   |   |   | (13.6 | ) |
| Earnings (loss) before income taxes                                  |   |                      | (177.9  | )      |                  |   | (15.3   | )                        |   |   | 0.3                |   |   |                                    | (116.8  | ) |   |   | (309.7 | ) |
| Income tax recovery                                                  |   |                      | (60.1   | )      |                  |   | (29.7   | )                        |   |   | (0.9               | )      |   |                                    | – |   |   |   | (90.7 | ) |
| Net earnings (loss)                                                  |   |                      | (117.8  | )      |                  |   | 14.4    |                     |   |   | 1.2                |   |   |                                    | (116.8  | ) |   |   | (219.0 | ) |
| Net (earnings) loss attributable to non-controlling interest         |   |                      | (0.8    | )      |                  |   | – |                     |   |   | –            |   |   |                                    | – |   |   |   | (0.8 | ) |
| Net earnings (loss) before equity in earnings (loss) of subsidiaries |   |                      | (118.6  | )      |                  |   | 14.4    |                     |   |   | 1.2                |   |   |                                    | (116.8  | ) |   |   | (219.8 | ) |
| Equity in earnings (loss) of subsidiaries                            |   |                      | (101.2  | )      |                  |   | – |                     |   |   | –            |   |   |                                    | 101.2   |   |   |   | – |   |
| Net earnings (loss) attributable to the company                      |   | $                         | (219.8  | )      |                  | $      | 14.4    |                     |   | $      | 1.2                |   |   | $                                       | (15.6   | ) |   | $ | (219.8 | ) |

----

|                                                       |   | Catalyst PaperCorporation |    |   | Subsidiary guarantors |   |    | Subsidiarynon-guarantors |   |   | Eliminatingentries |   |   | Consolidated Catalyst Paper Corporation |    |
|------------------------------------------------------------|--------|---------------------------|---------|--------|-----------------------|--------|---------|--------------------------|--------|--------|--------------------|--------|--------|-----------------------------------------|---------|
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |
| Cash flows provided (used) by:                             |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |
| Operations                                                 |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |
| Cash flows provided by operations                          |   | $                         | 41.8    |   |                  | $      | 49.8    |                     |   | $      | 2.1                |   |   | $                                       | (15.6   | ) |   | $ | 78.1 |   |
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Investing                                                  |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Acquisition of Snowflake newsprint mill                    |   |                      | – |   |                  |   | (172.2  | )                        |   |   | –            |   |   |                                    | – |   |   |   | (172.2 | ) |
| Additions to property, plant and equipment                 |   |                      | (22.1   | )      |                  |   | (19.1   | )                        |   |   | (0.7               | )      |   |                                    | – |   |   |   | (41.9 | ) |
| Proceeds from sale of property, plant and equipment        |   |                      | – |   |                  |   | 2.2     |                     |   |   | –            |   |   |                                    | – |   |   |   | 2.2 |   |
| Proceeds from termination of interest rate swaps           |   |                      | – |   |                  |   | 7.6     |                     |   |   | –            |   |   |                                    | – |   |   |   | 7.6 |   |
| Decrease (increase) in other assets                        |   |                      | 0.5     |   |                  |   | (1.5    | )                        |   |   | –            |   |   |                                    | – |   |   |   | (1.0 | ) |
| Investment in related companies                            |   |                      | (180.9  | )      |                  |   | – |                     |   |   | –            |   |   |                                    | 180.9   |   |   |   | – |   |
| Cash flows used by investing activities                    |   |                      | (202.5  | )      |                  |   | (183.0  | )                        |   |   | (0.7               | )      |   |                                    | 180.9   |   |   |   | (205.3 | ) |
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Financing                                                  |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Issue of shares, net of share issue costs                  |   |                      | 121.1   |   |                  |   | 180.9   |                     |   |   | –            |   |   |                                    | (180.9  | ) |   |   | 121.1 |   |
| Increase in revolving loan                                 |   |                      | 31.0    |   |                  |   | 31.7    |                     |   |   | –            |   |   |                                    | (2.6    | ) |   |   | 60.1 |   |
| Repayment of revolving operating loan                      |   |                      | (1.3    | )      |                  |   | (45.8   | )                        |   |   | –            |   |   |                                    | – |   |   |   | (47.1 | ) |
| Deferred financing costs                                   |   |                      | (5.1    | )      |                  |   | (0.4    | )                        |   |   | –            |   |   |                                    | – |   |   |   | (5.5 | ) |
| Increase (decrease) in other long-term debt                |   |                      | 2.9     |   |                  |   | 1.2     |                     |   |   | (0.5               | )      |   |                                    | – |   |   |   | 3.6 |   |
| Increase (decrease) in advances to related companies       |   |                      | (236.5  | )      |                  |   | 218.2   |                     |   |   | (0.5               | )      |   |                                    | 18.8    |   |   |   | – |   |
| Dividends received (paid)                                  |   |                      | 5.7     |   |                  |   | (5.7    | )                        |   |   | –            |   |   |                                    | – |   |   |   | – |   |
| Distribution received (paid)                               |   |                      | 229.6   |   |                  |   | (228.4  | )                        |   |   | (1.2               | )      |   |                                    | – |   |   |   | – |   |
| Share redemption                                           |   |                      | 13.3    |   |                  |   | (13.3   | )                        |   |   | –            |   |   |                                    | – |   |   |   | – |   |
| Cash flows provided (used) by financing activities         |   |                      | 160.7   |   |                  |   | 138.4   |                     |   |   | (2.2               | )      |   |                                    | (164.7  | ) |   |   | 132.2 |   |
|                                                       |   |                      |    |   |                  |   |    |                     |   |   |               |   |   |                                    |    |   |   |   |   |   |
| Cash and cash equivalents, increase (decrease) in the year |   |                      | – |   |                  |   | 5.2     |                     |   |   | (0.8               | )      |   |                                    | 0.6     |   |   |   | 5.0 |   |
| Cash and cash equivalents, beginning of year               |   |                      | – |   |                  |   | – |                     |   |   | 3.2                |   |   |                                    | (3.2    | ) |   |   | – |   |
| Cash and cash equivalents, end of year                     |   | $                         | – |   |                  | $      | 5.2     |                     |   | $      | 2.4                |   |   | $                                       | (2.6    | ) |   | $ | 5.0 |   |

----

| 33. | RECONCILIATION OF UNITED STATES AND CANADIAN GENERALLY ACCEPTED |
|-----|-----------------------------------------------------------------|

|                                                                                                                                                                                                                                            |   | Years ended December 31, |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                                                                                                                                                                            |   | 2010                     |    |   | 2009 |   |   | 2008 |   |
|                                                                                                                                                                                                                                            |   |                     |    |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) as reported under U.S. GAAP                                                                                                                                                                                                 |   | $                        | (398.2  | ) |   | $ | (5.6 | ) |   | $ | (219.0 | ) |
| Net (earnings) loss attributable to non-controlling interest (a)                                                                                                                                                                                |   |                     | 1.3     |   |   |   | 1.2 |   |   |   | (0.8 | ) |
| Foreign exchange gain on hedge of net investment (b)                                                                                                                                                                                            |   |                     | – |   |   |   | – |   |   |   | (2.4 | ) |
| Amortization related to hedge of net investment (b)                                                                                                                                                                                             |   |                     | 0.1     |   |   |   | 0.2 |   |   |   | – |   |
| Income tax effect of rate change on employee future benefits                                                                                                                                                                                    |   |                     | – |   |   |   | 0.7 |   |   |   | 1.1 |   |
|                                                                                                                                                                                                                                            |   |                     |    |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) in accordance with Canadian GAAP                                                                                                                                                                                            |   |                     | (396.8  | ) |   |   | (3.5 | ) |   |   | (221.1 | ) |
| Other comprehensive income (loss), net of taxes:                                                                                                                                                                                                |   |                     |    |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss) in accordance with U.S. GAAP                                                                                                                                                                                  |   |                     | 6.7     |   |   |   | (6.9 | ) |   |   | 14.6 |   |
| Other comprehensive loss attributable to non-controlling interest                                                                                                                                                                               |   |                     | (0.1    | ) |   |   | 0.6 |   |   |   | – |   |
| Reclassification of amortization of employee future benefits included in pension cost, net of tax expense (recovery) of $1.1 million         (2009 – $2.5 million; 2008 – $3.6 million) (c) |   |                     | (2.0    | ) |   |   | (6.8 | ) |   |   | (10.3 | ) |
| Employee future benefits liability adjustment net of taxes of $3.9 million (2009 – ($9.9) million; 2008 – $8.1 million) (c)                                                                                                         |   |                     | (12.5   | ) |   |   | 26.2 |   |   |   | (22.8 | ) |
| Comprehensive income (loss) in accordance with Canadian GAAP                                                                                                                                                                                    |   | $                        | (404.7  | ) |   | $ | 9.6 |   |   | $ | (239.6 | ) |
|                                                                                                                                                                                                                                            |   |                     |    |   |   |   |   |   |   |   |   |   |
| Basic and diluted net earnings (loss) per share in accordance with Canadian GAAP (in dollars)                                                                                                                                                   |   | $                        | (1.04   | ) |   | $ | (0.01 | ) |   | $ | (0.66 | ) |
|                                                                                                                                                                                                                                            |   |                     |    |   |   |   |   |   |   |   |   |   |
| Basic and diluted weighted average number of shares in accordance with Canadian GAAP (in millions)                                                                                                                                              |   |                     | 381.8   |   |   |   | 381.8 |   |   |   | 336.1 |   |

----

|                                                                                          |   | Years ended December 31, |    |
|-----------------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                          |   | 2010                     |    |   | 2009 |   |   | 2008 |   |
|                                                                                          |   | U.SGAAP                  |    |   | CanadianGAAP |   |   | U.S.GAAP |   |   | CanadianGAAP |   |   | U.S.GAAP |   |   | CanadianGAAP |   |
| Sales                                                                                         |   | $                        | 1,228.6 |   |   | $ | 1,228.6 |   |   | $ | 1,223.5 |   |   | $ | 1,223.5 |   |   | $ | 1,866.7 |   |   | $ | 1,866.7 |   |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                                                            |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales, excluding depreciation and amortization                                        |   |                     | 1,113.6 |   |   |   | 1,113.6 |   |   |   | 1,037.6 |   |   |   | 1,037.6 |   |   |   | 1,611.8 |   |   |   | 1,611.8 |   |
| Depreciation and amortization                                                                 |   |                     | 119.3   |   |   |   | 119.2 |   |   |   | 146.6 |   |   |   | 146.4 |   |   |   | 165.8 |   |   |   | 165.8 |   |
| Selling, general and administrative                                                           |   |                     | 43.4    |   |   |   | 43.4 |   |   |   | 44.8 |   |   |   | 44.8 |   |   |   | 46.9 |   |   |   | 46.9 |   |
| Restructuring and change-of-control                                                           |   |                     | 25.3    |   |   |   | 25.3 |   |   |   | 17.9 |   |   |   | 17.9 |   |   |   | 30.1 |   |   |   | 30.1 |   |
| Impairment and other closure costs                                                            |   |                     | 294.5   |   |   |   | 294.5 |   |   |   | 17.4 |   |   |   | 17.4 |   |   |   | 151.0 |   |   |   | 151.0 |   |
|                                                                                          |   |                     | 1,596.1 |   |   |   | 1,596.0 |   |   |   | 1,264.3 |   |   |   | 1,264.1 |   |   |   | 2,005.6 |   |   |   | 2,005.6 |   |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating earnings (loss)                                                                     |   |                     | (367.5  | ) |   |   | (367.4 | ) |   |   | (40.8 | ) |   |   | (40.6 | ) |   |   | (138.9 | ) |   |   | (138.9 | ) |
| Interest expense, net                                                                         |   |                     | (72.0   | ) |   |   | (72.0 | ) |   |   | (69.3 | ) |   |   | (69.3 | ) |   |   | (75.0 | ) |   |   | (75.0 | ) |
| Gain on cancellation of long-term debt                                                        |   |                     | 0.6     |   |   |   | 0.6 |   |   |   | 30.7 |   |   |   | 30.7 |   |   |   | – |   |   |   | – |   |
| Foreign exchange gain (loss) on long-term debt                                                |   |                     | 27.6    |   |   |   | 27.6 |   |   |   | 75.3 |   |   |   | 75.3 |   |   |   | (82.2 | ) |   |   | (82.2 | ) |
| Other income (expense), net                                                                   |   |                     | (3.2    | ) |   |   | (3.2 | ) |   |   | (29.1 | ) |   |   | (29.1 | ) |   |   | (13.6 | ) |   |   | (16.0 | ) |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss) before income taxes                                                           |   |                     | (414.5  | ) |   |   | (414.4 | ) |   |   | (33.2 | ) |   |   | (33.0 | ) |   |   | (309.7 | ) |   |   | (312.1 | ) |
| Income tax recovery                                                                           |   |                     | (16.3   | ) |   |   | (16.3 | ) |   |   | (27.6 | ) |   |   | (28.3 | ) |   |   | (90.7 | ) |   |   | (91.8 | ) |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) before non-controlling interest – Canadian GAAP                     |   |                     | N/A     |   |   |   | (398.1 | ) |   |   | N/A |   |   |   | (4.7 | ) |   |   | N/A |   |   |   | (220.3 | ) |
| Non-controlling interest – Canadian GAAP                                                |   |                     | N/A     |   |   |   | 1.3 |   |   |   | N/A |   |   |   | 1.2 |   |   |   | N/A |   |   |   | (0.8 | ) |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                           |   |                     | (398.2  | ) |   |   | (396.8 | ) |   |   | (5.6 | ) |   |   | (3.5 | ) |   |   | (219.0 | ) |   |   | (221.1 | ) |
| Net (earnings) loss attributable to non-controlling interest – U.S. GAAP                |   |                     | 1.3     |   |   |   | N/A |   |   |   | 1.2 |   |   |   | N/A |   |   |   | (0.8 | ) |   |   | N/A |   |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) attributable to the company – U.S. GAAP                             |   | $                        | (396.9  | ) |   | $ | N/A |   |   | $ | (4.4 | ) |   | $ | N/A |   |   | $ | (219.8 | ) |   | $ | N/A |   |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss), before non-controlling interest – Canadian GAAP |   |                     | N/A     |   |   |   | (7.9 | ) |   |   | N/A |   |   |   | 12.5 |   |   |   | N/A |   |   |   | (18.5 | ) |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss), net of taxes – U.S. GAAP                             |   | $                        | 6.7     |   |   | $ | N/A |   |   | $ | (6.9 | ) |   | $ | N/A |   |   | $ | 14.6 |   |   | $ | N/A |   |
| Other comprehensive loss attributable to non-controlling interest                             |   |                     | (0.1    | ) |   |   | – |   |   |   | 0.6 |   |   |   | 0.6 |   |   |   | – |   |   |   | – |   |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income (loss) – Canadian GAAP                                             |   |                     | N/A     |   |   |   | (404.7 | ) |   |   | N/A |   |   |   | 9.6 |   |   |   | N/A |   |   |   | (239.6 | ) |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income (loss) attributable to the company – U.S. GAAP                     |   |                     | (390.3  | ) |   |   | N/A |   |   |   | (10.7 | ) |   |   | N/A |   |   |   | (205.2 | ) |   |   | N/A |   |
|                                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted net earnings (loss) per share (in dollars)                                  |   | $                        | (1.04   | ) |   | $ | (1.04 | ) |   | $ | (0.01 | ) |   | $ | (0.01 | ) |   | $ | (0.65 | ) |   | $ | (0.66 | ) |
| Weighted average common shares outstanding (in millions)                                      |   |                     | 381.8   |   |   |   | 381.8 |   |   |   | 381.8 |   |   |   | 381.8 |   |   |   | 336.1 |   |   |   | 336.1 |   |

----

|                                                                      |   | As at December 31, |    |
|---------------------------------------------------------------------------|--------|--------------------|---------|
|                                                                      |   | 2010               |    |   | 2009 |   |
|                                                                      |   |               |    |   |   |   |   |   |
| Prepaids and other – U.S. GAAP                                      |   | $                  | 27.7    |   |   | $ | 25.2 |   |
| Tax effect of employee future benefits adjustment (c)                     |   |               | (0.9    | ) |   |   | - |   |
| Deferred financing costs (d)                                              |   |               | (0.1    | ) |   |   | - |   |
| Prepaids and other – Canadian GAAP                                  |   | $                  | 26.7    |   |   | $ | 25.2 |   |
|                                                                      |   |               |    |   |   |   |   |   |
| Property, plant and equipment – U.S. GAAP                           |   | $                  | 1,285.6 |   |   | $ | 1,664.7 |   |
| Foreign exchange gain on hedge of net investment, net of amortization (b) |   |               | (2.1    | ) |   |   | (2.2 | ) |
| Property, plant and equipment – Canadian GAAP                       |   | $                  | 1,283.5 |   |   | $ | 1,662.5 |   |
|                                                                      |   |               |    |   |   |   |   |   |
| Other assets – U.S. GAAP                                            |   | $                  | 27.0    |   |   | $ | 38.0 |   |
| Employee future benefits (c)                                              |   |               | 35.4    |   |   |   | 35.2 |   |
| Tax effect of employee future benefits adjustment                         |   |               | – |   |   |   | (1.9 | ) |
| Deferred financing costs (d)                                              |   |               | (10.0   | ) |   |   | (6.6 | ) |
| Non-controlling interest deficit (a)                                      |   |               | 20.1    |   |   |   | 18.0 |   |
| Other assets – Canadian GAAP                                        |   | $                  | 72.5    |   |   | $ | 82.7 |   |
|                                                                      |   |               |    |   |   |   |   |   |
| Accounts payable and accrued liabilities – U.S. GAAP                |   | $                  | 171.6   |   |   | $ | 173.3 |   |
| Employee future benefits (c)                                              |   |               | (2.5    | ) |   |   | – |   |
| Accounts payable and accrued liabilities – Canadian GAAP            |   | $                  | 169.1   |   |   | $ | 173.3 |   |
|                                                                      |   |               |    |   |   |   |   |   |
| Long-term debt – U.S. GAAP                                          |   | $                  | 783.9   |   |   | $ | 774.6 |   |
| Deferred financing costs (d)                                              |   |               | (10.1   | ) |   |   | (6.6 | ) |
| Long-term debt – Canadian GAAP                                      |   | $                  | 773.8   |   |   | $ | 768.0 |   |
|                                                                      |   |               |    |   |   |   |   |   |
| Employee future benefits – U.S. GAAP                                |   | $                  | 269.1   |   |   | $ | 294.6 |   |
| Employee future benefits (c)                                              |   |               | (36.8   | ) |   |   | (59.0 | ) |
| Employee future benefits – Canadian GAAP                            |   | $                  | 232.3   |   |   | $ | 235.6 |   |
|                                                                      |   |               |    |   |   |   |   |   |
| Future income taxes – U.S. GAAP                                     |   | $                  | 11.4    |   |   | $ | 22.8 |   |
| Tax effect of employee future benefits adjustment                         |   |               | 27.4    |   |   |   | 31.4 |   |
| Tax effect of other adjustments                                           |   |               | (9.1    | ) |   |   | (9.1 | ) |
| Future income taxes – Canadian GAAP                                 |   | $                  | 29.7    |   |   | $ | 45.1 |   |
|                                                                      |   |               |    |   |   |   |   |   |
| Equity – U.S. GAAP                                                  |   | $                  | 403.4   |   |   | $ | 795.6 |   |
| Foreign exchange gain on hedge of net investment, net of amortization (b) |   |               | (2.1    | ) |   |   | (2.2 | ) |
| Employee future benefits (c)                                              |   |               | 74.7    |   |   |   | 94.2 |   |
| Tax effect of employee future benefits adjustment                         |   |               | (28.3   | ) |   |   | (33.3 | ) |
| Tax effect of other adjustments                                           |   |               | 9.1     |   |   |   | 9.1 |   |
| Non-controlling interest deficit (a)                                      |   |               | 20.1    |   |   |   | 18.0 |   |
| Equity – Canadian GAAP                                              |   | $                  | 476.9   |   |   | $ | 881.4 |   |

----

|                                                                |   | As at December 31, |   |
|---------------------------------------------------------------------|--------|--------------------|--------|
|                                                                |   | 2010               |   |   | 2009 |   |
|                                                                |   |               |   |   |   |   |   |   |
| Accumulated other comprehensive income (loss) – U.S. GAAP     |   | $                  | (46.1  | ) |   | $ | (52.7 | ) |
| Employee future benefits (b)                                        |   |               | 46.4   |   |   |   | 60.9 |   |
| Accumulated other comprehensive income (loss) – Canadian GAAP |   | $                  | 0.3    |   |   | $ | 8.2 |   |

|                                          |   | As at December 31, |    |
|-----------------------------------------------|--------|--------------------|---------|
|                                          |   | 2010               |    |   | 2009 |   |
|                                          |   | U.S.GAAP           |    |   | CanadianGAAP |   |   | U.S.GAAP |   |   | CanadianGAAP |   |
|                                          |   |               |    |   |   |   |   |   |   |   |   |   |
| Assets                                        |   |               |    |   |   |   |   |   |   |   |   |   |
| Current assets                                |   |               |    |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                     |   | $                  | 95.4    |   |   | $ | 95.4 |   |   | $ | 83.1 |   |   | $ | 83.1 |   |
| Accounts receivable                           |   |               | 120.6   |   |   |   | 120.6 |   |   |   | 101.5 |   |   |   | 101.5 |   |
| Inventories                                   |   |               | 139.9   |   |   |   | 139.9 |   |   |   | 178.3 |   |   |   | 178.3 |   |
| Prepaids and other                            |   |               | 27.7    |   |   |   | 26.7 |   |   |   | 25.2 |   |   |   | 25.2 |   |
|                                          |   |               | 383.6   |   |   |   | 382.6 |   |   |   | 388.1 |   |   |   | 388.1 |   |
| Property, plant and equipment                 |   |               | 1,285.6 |   |   |   | 1283.5 |   |   |   | 1,664.7 |   |   |   | 1,662.5 |   |
| Other assets                                  |   |               | 27.0    |   |   |   | 72.5 |   |   |   | 38.0 |   |   |   | 82.7 |   |
|                                          |   | $                  | 1,696.2 |   |   | $ | 1,738.6 |   |   | $ | 2,090.8 |   |   | $ | 2,133.3 |   |
|                                          |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                   |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                           |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities      |   | $                  | 171.6   |   |   | $ | 169.1 |   |   | $ | 173.3 |   |   | $ | 173.3 |   |
| Current portion of long-term debt             |   |               | 27.0    |   |   |   | 27.0 |   |   |   | 1.0 |   |   |   | 1.0 |   |
|                                          |   |               | 198.6   |   |   |   | 196.1 |   |   |   | 174.3 |   |   |   | 174.3 |   |
| Long-term debt                                |   |               | 783.9   |   |   |   | 773.8 |   |   |   | 774.6 |   |   |   | 768.0 |   |
| Employee future benefits                      |   |               | 269.1   |   |   |   | 232.3 |   |   |   | 294.6 |   |   |   | 235.6 |   |
| Other long-term obligations                   |   |               | 20.2    |   |   |   | 20.2 |   |   |   | 13.4 |   |   |   | 13.4 |   |
| Future income taxes                           |   |               | 11.4    |   |   |   | 29.7 |   |   |   | 22.8 |   |   |   | 45.1 |   |
| Deferred credits                              |   |               | 9.6     |   |   |   | 9.6 |   |   |   | 15.5 |   |   |   | 15.5 |   |
|                                          |   |               | 1,292.8 |   |   |   | 1,261.7 |   |   |   | 1,295.2 |   |   |   | 1,251.9 |   |
|                                          |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity                                        |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders’ equity                    |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common stock                                  |   |               | 1,035.0 |   |   |   | 1,035.0 |   |   |   | 1,035.0 |   |   |   | 1,035.0 |   |
| Additional paid-in capital                    |   |               | 16.6    |   |   |   | 16.6 |   |   |   | 16.4 |   |   |   | 16.4 |   |
| Retained earnings (deficit)                   |   |               | (582.0  | ) |   |   | (575.0 | ) |   |   | (185.1 | ) |   |   | (178.2 | ) |
| Accumulated other comprehensive income (loss) |   |               | (46.1   | ) |   |   | 0.3 |   |   |   | (52.7 | ) |   |   | 8.2 |   |
|                                          |   |               | 423.5   |   |   |   | 476.9 |   |   |   | 813.6 |   |   |   | 881.4 |   |
| Non-controlling interest (deficit)            |   |               | (20.1   | ) |   |   | – |   |   |   | (18.0 | ) |   |   | – |   |
|                                          |   |               | 403.4   |   |   |   | 476.9 |   |   |   | 795.6 |   |   |   | 881.4 |   |
|                                          |   | $                  | 1,696.2 |   |   | $ | 1,738.6 |   |   | $ | 2,090.8 |   |   | $ | 2,133.3 |   |

----

|   | (a) | Non-controlling interest |
|--------|-----|--------------------------|

|   | (b) | Foreign exchange on hedge of net investment |
|--------|-----|---------------------------------------------|

|   | (c) | Employee future benefits |
|--------|-----|--------------------------|

|                                                                                   |   | Pension benefit plans |   |   | Other benefit plans |   |
|----------------------------------------------------------------------------------------|--------|-----------------------|--------|--------|---------------------|--------|
|                                                                                   |   | 2010                  |   |   | 2009                |   |   | 2010 |   |   | 2009 |   |
|                                                                                   |   |                  |   |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Accrued benefit obligation at end of year                                              |   | $                     | 379.4  |   |                | $      | 360.7 |   |   | $ | 154.5 |   |   | $ | 189.3 |   |
| Fair value of plan assets at end of year                                               |   |                  | 246.4  |   |                |   | 241.6 |   |   |   | – |   |   |   | – |   |
|                                                                                   |   |                  |   |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Funded status deficit, recognized in the U.S. GAAP consolidated balance sheets         |   |                  | (133.0 | )      |                |   | (119.1 | ) |   |   | (154.5 | ) |   |   | (189.3 | ) |
| Unrecognized prior service (credits) costs                                             |   |                  | 4.2    |   |                |   | 4.7 |   |   |   | (36.2 | ) |   |   | (18.5 | ) |
| Unrecognized actuarial (gains) losses                                                  |   |                  | 108.7  |   |                |   | 92.8 |   |   |   | (2.2 | ) |   |   | 15.1 |   |
| Accrued benefit obligation recognized in the Canadian GAAP consolidated balance sheets |   | $                     | (20.1  | )      |                | $      | (21.6 | ) |   | $ | (192.9 | ) |   | $ | (192.7 | ) |

----

|                                                                     |   | Pension benefit plans |   |   | Other benefit plans |   |
|--------------------------------------------------------------------------|--------|-----------------------|--------|--------|---------------------|--------|
|                                                                     |   | 2010                  |   |   | 2009                |   |   | 2010 |   |   | 2009 |   |
|                                                                     |   |                  |   |   |                |   |   |   |   |   |   |   |   |   |   |   |
| Other assets                                                             |   | $                     | 35.6   |   |                | $      | 35.4 |   |   | $ | – |   |   | $ | – |   |
| Accounts payable and accrued liabilities                                 |   |                  | (9.4   | )      |                |   | (6.8 | ) |   |   | (6.9 | ) |   |   | (7.3 | ) |
| Employee future benefits                                                 |   |                  | (46.3  | )      |                |   | (50.2 | ) |   |   | (186.0 | ) |   |   | (185.4 | ) |
| Accrued benefit obligation recognized in the consolidated balance sheets |   | $                     | (20.1  | )      |                | $      | (21.6 | ) |   | $ | (192.9 | ) |   | $ | (192.7 | ) |

|   | (d) | Deferred financing costs |
|--------|-----|--------------------------|

----

----