**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 20-F**

**(Mark One)**

**o**         REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OFTHE SECURITIES EXCHANGE ACT OF 1934

**OR**

**x**        ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the fiscal year endedDecember 31, 2005**

**OR**

**o**         TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Commission file number 333-125371**

**JSG FUNDING PLC**

**JSG ACQUISITIONS**

(Exact name of registrants as specified in theirrespective charters)

**IRELAND**

(Jurisdiction of incorporation or organization)

**BEECH HILL, CLONSKEAGH,DUBLIN 4, IRELAND**

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) ofthe Act:

**None**

Securities registered or to be registered pursuant to Section 12(g) ofthe Act:

**None**

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act:

**101**¤8%Senior Notes due 2012

**95**¤8%Senior Notes due 2012

**7.75% Senior SubordinatedNotes due 2015**

Indicatethe number of outstanding shares of each of the JSG Funding’s classes ofcapital or common stock as of December 31, 2005: Ordinary Shares of €0.001 each 40,000,000.

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.

o Yes    x No

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

o Yes    x No

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

x Yes    o No

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

o Large acceleratedfiler   o Accelerated filer   x Non-accelerated filer

Indicateby check mark which financial statement item the registrant has elected tofollow.

o Item 17   x Item 18

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    x No

 

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**TABLEOF CONTENTS**
| Item 1.    |   | Identity  of Directors, Senior Management and Advisers                    |   | 4  |
|------------|--------|---------------------------------------------------------------------------|--------|----|
| Item  2.   |   | Offer  Statistics and Expected Timetable                                  |   | 4  |
| Item 3.    |   | Key  Information                                                          |   | 4  |
| Item  4.   |   | Information  on the Company                                               |   | 13 |
| Item 4A.   |   | Unresolved Staff Comments                                                 |   | 30 |
| Item  5.   |   | Operating  and Financial Review and Prospects                             |   | 31 |
| Item  6.   |   | Directors,  Senior Management and Employees                               |   | 51 |
| Item 7.    |   | Major Shareholders and Related Party Transactions                         |   | 63 |
| Item  8.   |   | Financial  Information                                                    |   | 67 |
| Item  9.   |   | The  Offer and Listing                                                    |   | 69 |
| Item 10.   |   | Additional Information                                                    |   | 69 |
| Item  11.  |   | Quantitative  and Qualitative Disclosures About Market Risk               |   | 87 |
| Item  12.  |   | Description  of Securities Other Than Equity Securities                   |   | 89 |
| Item  13.  |   | Defaults,  Dividends Arrearages and Delinquencies                         |   | 89 |
| Item  14.  |   | Material  Modifications to Rights of Security Holders and Use of Proceeds |   | 89 |
| Item  15.  |   | Controls  and Procedures                                                  |   | 89 |
| Item 16.   |   | Reserved                                                                  |   | 89 |
| Item  16A. |   | Audit  Committee Financial Expert                                         |   | 89 |
| Item 16B.  |   | Code of  Ethics                                                           |   | 90 |
| Item  16C. |   | Principal  Accountant Fees and Services                                   |   | 90 |
| Item 16D.  |   | Exemptions from the Listing Standards for Audit  Committees               |   | 90 |
| Item 16E.  |   | Purchases of Equity Securities by the Issuer and  Affiliated Purchasers   |   | 90 |
| Item  17.  |   | Financial  Statements                                                     |   | 91 |
| Item  18.  |   | Financial  Statements                                                     |   | 91 |
| Item 19.   |   | Exhibits                                                                  |   | 92 |

 

                

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**Introduction**

In this annualreport, unless the context otherwise requires:

·        “JSGFunding” refers to JSG Funding plc, a direct subsidiary of JSL and indirectowner of JSG and Kappa, and issuer of the 95¤8% senior notesdue 2012, the 101¤8%senior notes due 2012 and the 7.75% senior subordinated notes due 2015;

·        “JSGAcquisitions” refers to JSG Acquisitions, a wholly-owned subsidiary ofJSG Funding and guarantor of the 95¤8%Senior Notes due 2012 and the 101¤8%Senior Notes due 2012;

·        “JSL”refers to Jefferson Smurfit Group Limited;

·        “JSG”refers to Smurfit Packaging Corporation Ltd and its consolidated subsidiaries;

·        “SKGL”refers to Smurfit Kappa Group Limited (formerly known as JSG Packaging Limited(“JSG Packaging”), an Irish limited company which from February 6, 2004became the ultimate parent;

·        “JSGHoldings” refers to JSG Holdings plc, a direct subsidiary of SKGL and from February 6,2004, the indirect parent of JSG and from December 1, 2005, the indirectparent of Kappa;

·        “Kappa”refers to Kappa Holding B.V. and its consolidated subsidiaries;

·        “SSCC”refers to Smurfit-Stone Container Corporation; and

·        “SKG,”“Group”, “we,” “us,” and “our” and similar terms refer to the consolidatedbusiness of JSG Funding plc and all of its consolidated subsidiaries and itspredecessors, including JSG and Kappa.

SKG’s 2005 results include 11 months of JSG and onemonth of Kappa and JSG combined. See Item 4 “Information on the Company—Historyand Development of the Company” for more information relating to the merger ofJSG and Kappa and the acquisition of JSG by JSG Acquisitions.

This annual report on Form 20-Fcovers both JSG Funding and JSG Acquisitions. JSG Acquisitions is the whollyowned subsidiary of JSG Funding and guarantor of JSG Funding’s 101¤8%Senior Notes due 2012 and the 95¤8% Senior Notes due 2012. Theoperating earnings, net income and cash flows of both companies are almostidentical. Although the interest expense of both are similar, JSG Funding has agreater third party interest cost while JSG Acquisitions has asubstantial inter company interest expense payable to JSG Funding. This relatesto the advance to JSG Acquisitions of the proceeds from the issuance of thesenior notes, the subordinated notes and the senior subordinated notes by JSGFunding. The balance sheets of both companies are also substantially the samewith the exception of the composition of their debt. The third party debt ofJSG Funding is greater than that of JSG Acquisitions. However, JSG Acquisitionshas substantial inter company debt due to JSG Funding relating to the advanceof the proceeds of the senior notes, subordinated notes and senior subordinatednotes offerings.

**Presentation of ourFinancial Information**

Unless otherwise indicated, financial information inthis annual report has been prepared in accordance with generally acceptedaccounting principles in Ireland (“*IrishGAAP*”). Irish GAAP differs in certain significant respects fromaccounting principles generally accepted in the United States (“*U.S. GAAP*”). For a discussion of thesignificant differences between Irish GAAP and U.S. GAAP as they apply to JSGFunding, see note 35 to the historical audited consolidated financial statementsincluded elsewhere in this annual report.

The financial statementsin this annual report do not comprise ‘full group accounts’ within the meaningof Regulation 40(1) of the European Communities (Companies: GroupAccounts) Regulations, 1992 of Ireland insofar as such group accounts wouldhave to comply with the disclosure and other requirements of those Regulations.Full group accounts for JSL for the year ended December 31, 2003 and 

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fullgroup accounts for JSG Packaging (now known as SKGL) for the year ended December 31,2004, have received unqualified audit reports and have been filed asappropriate with the Irish Registrar of Companies. Full group accounts for SKGLfor the year ended December 31, 2005, will be filed with the Registrar indue course.

**Exchange RateInformation**

In this annual report: (1) *“IR£”*or *“Irishpunt”* refers to the former currency of Ireland; (2) *“**€”* or *“euro”*refers to the single currency of the participating Member States in the ThirdStage of European Economic and Monetary Union of the Treaty Establishing theEuropean Community, as amended from time to time; (3) “*$*” or “*U.S.dollars*” refers to the lawful currency of the United States ofAmerica; (4) “*£*” or “*sterling*” refers to the lawful currency ofthe United Kingdom; and (5) “*SEK*”or “*Swedish Krona*” refers to thelawful currency of Sweden.

Irelandis a participant in the European Monetary Union. In accordance with theMaastricht Treaty, the euro was launched as the single European currency on January 1,1999. Upon the launch of the euro, the exchange rate for the Irish punt wasirrevocably fixed at IR£0.787564 = €1.00, and on January 1,2002, the Irish punt was replaced by the euro. The following tables show forthe period from January 1, 2001 through December 31, 2005, theperiod-end, average, high and low Noon Buying Rates in the City of New Yorkfor cable transfers of euro as certified for customs purposes by the FederalReserve Bank of New York expressed as U.S. dollars per €1.00,which we refer to as the “*Noon Buying Rate*.”

| ** **                              | ** ** | **U.S. dollar/euro Exchange Rates**                             | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **At and for the Years Ended December 31,** | ** ** |
| ** **                              | ** ** | **2001**                                                                       | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Exchange rate at  end of period         |       | 0.8822                                                                         |       | 1.0485 |   | 1.2597 |   | 1.3538 |   | 1.1842 |   |
| Average exchange  rate during period(1) |       | 0.8909                                                                         |       | 0.9495 |   | 1.1412 |   | 1.2478 |   | 1.2400 |   |
| Highest exchange  rate during period    |       | 0.9535                                                                         |       | 1.0485 |   | 1.2597 |   | 1.3625 |   | 1.3476 |   |
| Lowest exchange rate  during period     |       | 0.8370                                                                         |       | 0.8594 |   | 1.0361 |   | 1.1801 |   | 1.1667 |   |

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(1)          Theaverage of the Noon Buying Rates on the last business day of each month duringthe applicable period.

| ** **                          | ** ** | **U.S. dollar/euro Exchange Rates** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | **At and for the Months Ended**     | ** ** |
| ** **                          | ** ** | **2005**                            | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **Jan**                             | ** ** | **Feb** | ** ** | **Mar** | ** ** | **Apr** | ** ** | **May** | ** ** | **Jun** | ** ** | **Jul** | ** ** | **Aug** | ** ** | **Sep** | ** ** | **Oct** | ** ** | **Nov** | ** ** | **Dec** | ** ** | **Jan** | ** ** | **Feb** | ** ** | **Mar** | ** ** |
| Exchange rate at end of period      |       | 1.30                                |       | 1.33 |   | 1.30 |   | 1.29 |   | 1.21 |   | 1.21 |   | 1.23 |   | 1.23 |   | 1.21 |   | 1.20 |   | 1.18 |   | 1.18 |   | 1.22 |   | 1.19 |   | 1.21 |   |
| Average exchange rate during period |       | 1.31                                |       | 1.30 |   | 1.32 |   | 1.29 |   | 1.27 |   | 1.20 |   | 1.23 |   | 1.23 |   | 1.22 |   | 1.20 |   | 1.18 |   | 1.19 |   | 1.21 |   | 1.19 |   | 1.20 |   |
| Highest exchange rate during period |       | 1.35                                |       | 1.33 |   | 1.35 |   | 1.31 |   | 1.23 |   | 1.22 |   | 1.24 |   | 1.24 |   | 1.25 |   | 1.21 |   | 1.21 |   | 1.20 |   | 1.23 |   | 1.21 |   | 1.22 |   |
| Lowest exchange  rate during period |       | 1.30                                |       | 1.28 |   | 1.28 |   | 1.28 |   | 1.20 |   | 1.19 |   | 1.21 |   | 1.21 |   | 1.20 |   | 1.19 |   | 1.17 |   | 1.17 |   | 1.20 |   | 1.19 |   | 1.19 |   |

 

On April 27, 2006, the Noon Buying Rate was €1.00=$1.2525.

Our inclusion of theseexchange rates is not meant to suggest that the euro amounts actually representsuch U.S. dollar amounts or that such amounts could have been converted intoU.S. dollars at such rate or any other rate. In connection with the preparationof the group profit and loss account and the group cash flow statement,management uses average monthly exchange rates. In connection with thepreparation of the group balance sheet, management uses the closing exchangerate at the balance sheet date. For a 

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discussionof the impact of the exchange fluctuations on our financial condition andresults of operations, see “Operating and Financial Review and Prospects.”

**Market, Ranking AndOther Data**

The data included in thisannual report regarding markets and ranking, including the size of certainmarkets and SKG’s position and the position of SKG’s competitors within thesemarkets, are based on independent industry publications, reports fromgovernment agencies or other published industry sources and estimates based on SKGmanagement’s knowledge and experience in the markets in which it operates. Theestimates have been based on information obtained from SKG’s customers,distributors, suppliers, trade and business organizations and other contacts inthe markets in which it operates. We believe these estimates to be accurate asof the date of this annual report. However, this information may prove to beinaccurate because of the method by which some of the data was obtained orbecause this information cannot always be verified with complete certainty dueto the limits on availability and reliability of raw data, the voluntary natureof the data gathering process and other limitations and uncertainties inherentin a survey of market size. All references to market positions of SKG set forthherein are based on a comparison of volumes sold.

**DisclosureRegarding Forward-Looking Statements**

This annual report includes forward-lookingstatements. These forward-looking statements can be identified by the use of forward-lookingterminology, including the terms “believes,” “estimates,” “anticipates,” “expects,”“intends,” “may,” “will” or “should” or, in each case, their negative, or othervariations or comparable terminology. These forward-looking statements includeall matters that are not historical facts. They appear in a number of placesthroughout this annual report and include statements regarding our intentions,beliefs or current expectations concerning, among other things, our results ofoperations, financial condition, liquidity, prospects, growth strategies andthe industry in which we operate.

By their nature,forward-looking statements involve risks and uncertainties because they relateto events and depend on circumstances that may or may not occur in the future.We caution you that forward-looking statements are not guarantees of futureperformance and that our actual results of operations, financial condition andliquidity, and the development of the industry in which we operate may differmaterially from those made in, or suggested by, the forward-looking statementscontained in this annual report. In addition, even if our results ofoperations, financial condition and liquidity, and the development of theindustry in which we operate are consistent with the forward-lookingstatements contained in this annual report, those results or developments maynot be indicative of results or developments in subsequent periods. Importantfactors that could cause those differences include, but are not limited to:

·        oursubstantial leverage and our ability to meet our debt service obligations;

·        ourability to generate growth or profitable growth;

·        theavailability and price of raw materials;

·        ourability to integrate the JSG operations with the Kappa operations successfully;

·        ourexposure to currency or interest rate fluctuations;

·        ourability to implement our business strategy successfully;

·        ourability to comply with existing or newly implemented environmental regimes inthe countries in which we operate;

·        ourliability for violations, known or unknown, under environmental laws;

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·        increasedcompetition from other companies in our industry and our ability to retain orincrease our market shares;

·        ourability to maximize operating and organizational efficiencies; and

·        generallocal and global economic conditions.

We urge you to read the sections of this annual reportentitled Item 3 “Key Information—Risk Factors” and Item 4 “Information on theCompany—Business Overview” for a more complete discussion of the factors thatcould affect our future performance and the industry in which we operate. Inlight of these risks, uncertainties and assumptions, the forward-looking eventsdescribed in this annual report may not occur.

We undertake no obligationto publicly update or publicly revise any forward-looking statement, whether asa result of new information, future events or otherwise. All subsequent writtenand oral forward-looking statements attributable to us or to persons acting on ourbehalf are expressly qualified in their entirety by the cautionary statementsreferred to above and contained elsewhere in this annual report.

**Item 1.**                        Identityof Directors, Senior Management and Advisers

Not applicable.

**Item 2.**                        OfferStatistics and Expected Timetable

Not applicable.

**Item 3.        Key Information**

**Selected HistoricalFinancial Data**

The following table sets forth our selected historicalfinancial data. The periods prior to and including September 2, 2002reflect data of JSG, JSG Funding’s predecessor for financial accountingpurposes. The periods beginning September 3, 2002 reflect data of JSGFunding and its consolidated subsidiaries after the acquisition of JSG. Becauseof the revaluation of certain assets and liabilities acquired and the increasedlevel of debt as part of the acquisition of JSG, and their related impact onthe financial data, the consolidated financial statements of JSG, JSG Funding’spredecessor for the periods prior to September 3, 2002, are not comparableto those of JSG Funding subsequent to that date.

We have derived the selected historical consolidatedfinancial data for the period January 1, 2002 through September 2,2002 and for the fiscal year ended December 31, 2001 from JSG’s auditedconsolidated financial statements, which are not included in this annualreport. We have derived the selected historical consolidated financial data forthe period from September 3, 2002 through December 31, 2002 from JSGFunding’s audited consolidated financial statements, which are not included inthis annual report. We have derived the selected historical consolidatedfinancial data for the years ended December 31, 2003, 2004 and 2005 fromJSG Funding’s audited consolidated financial statements and the related notesincluded elsewhere in this annual report. The selected historical financialdata set forth below is not necessarily indicative of the results of futureoperations and should be read in conjunction with the discussion under theheading “Operating and Financial Review and Prospects,” and the historicalconsolidated financial statements of JSG Funding and accompanying notesincluded elsewhere in this annual report.

Unless otherwiseindicated, this historical financial data has been prepared in accordance withIrish GAAP. Irish GAAP differs in certain significant respects from U.S. GAAP.For a discussion of the most 

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significantdifferences between Irish GAAP and U.S. GAAP as they apply to JSG Funding, seenote 35 to JSG Funding’s historical financial statements included elsewhere inthis annual report.

| ** **                                                 | ** ** | **Predecessor**   | ** ** | ** **                     | ** ** | **Successor** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|--------------------------------|------------|---------------|------------|
| ** **                                                 | ** ** | **Year  Ended**   | ** ** | **Jan. 1,  2002 to** | ** ** | ** **    | ** ** | **Sept. 3,  2002 to** | ** ** | **Year  Ended** | ** ** | **Year  Ended** | ** ** | **Year  Ended** | ** ** |
| ** **                                                 | ** ** | **Dec. 31,** | ** ** | **Sept. 2,**              | ** ** | ** **    | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                                 | ** ** | **2001**          | ** ** | **2002**                       | ** ** | ** **    | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005**(1) | ** ** |
| **Consolidated  Statement of Income Data:**                |       |              |       |                           |       |          |       |   |   |   |   |   |   |   |   |
| *Irish  GAAP unless stated otherwise*                      |       |              |       |                           |       |          |       |   |   |   |   |   |   |   |   |
| Net sales                                                  |       | €            | 4,511,650  |                           | €     | 3,134,080     |       |   |   | € | 1,575,575 |   | € | 4,746,315 |   | € | 4,805,082 |   | € | 4,437,329 |   |
| Cost of sales                                              |       | 3,243,372         |       | 2,272,287                      |       |          |       | 1,145,857 |   | 3,419,820 |   | 3,473,299 |   | 3,222,705 |   |
| Impairment of  property, plant and equipment               |       | 26,642            |       | —                         |       |          |       | — |   | — |   | — |   | 45,214 |   |
| Gross profit                                               |       | 1,241,636         |       | 861,793                        |       |          |       | 429,718 |   | 1,326,495 |   | 1,331,783 |   | 1,169,410 |   |
| Net operating  expenses                                    |       | 883,964           |       | 656,419                        |       |          |       | 284,005 |   | 982,345 |   | 1,010,564 |   | 977,292 |   |
| Reorganization  and restructuring costs                    |       | 23,763            |       | 12,484                         |       |          |       | 11,978 |   | 35,006 |   | 39,430 |   | 25,090 |   |
| Operating income  subsidiaries—  continuing           |       | 333,909           |       | 192,890                        |       |          |       | 133,735 |   | 309,144 |   | 281,789 |   | 167,028 |   |
| Share of  associates’ operating income           |       | 242,212           |       | 117,473                        |       |          |       | 7,224 |   | 12,155 |   | 12,611 |   | 7,287 |   |
| Share of  associates’ restructuring costs             |       | (10,895           | )          | (7,541                         | )          |          |       | — |   | — |   | — |   | — |   |
| Total operating  income                                    |       | €            | 565,226    |                           | €     | 302,822       |       |   |   | € | 140,959 |   | € | 321,299 |   | € | 294,400 |   | € | 174,315 |   |
| Income on sale of  operations subsidiaries—continuing |       | —            |       | 20,440                         |       |          |       | — |   | 5,560 |   | 22,173 |   | 52,587 |   |
| Interest income                                            |       | 23,053            |       | 10,286                         |       |          |       | 5,230 |   | 11,631 |   | 8,335 |   | 10,730 |   |
| Interest expense                                           |       | (108,621          | )          | (65,881                        | )          |          |       | (92,718 | ) | (309,368 | ) | (299,338 | ) | (360,009 | ) |
| Share of  associates’ net interest                    |       | (154,654          | )          | (74,387                        | )          |          |       | (386 | ) | (2,062 | ) | (1,301 | ) | (1,336 | ) |
| Other financial  expense(2)                                |       | —            |       | —                         |       |          |       | (10,775 | ) | (15,266 | ) | (15,718 | ) | (13,259 | ) |
| Income/(loss)  before taxes and equity minority interests  |       | 325,004           |       | 193,280                        |       |          |       | 42,310 |   | 11,794 |   | 8,551 |   | (136,972 | ) |
| Taxes on income,  as  reported                             |       | (137,565          | )          | (77,889                        | )          |          |       | (31,395 | ) | (62,354 | ) | (26,973 | ) | (21,561 | ) |
| Income/(loss)  before equity minority interests            |       | 187,439           |       | 115,391                        |       |          |       | 10,915 |   | (50,560 | ) | (18,422 | ) | (158,533 | ) |
| Equity minority  interests                                 |       | (37,022           | )          | (19,969                        | )          |          |       | (9,061 | ) | (16,768 | ) | (16,067 | ) | (18,813 | ) |
| Net income/(loss)                                          |       | €            | 150,417    |                           | €     | 95,422        |       |   |   | € | 1,854 |   | € | (67,328 | ) | € | (34,489 | ) | € | (177,346 | ) |
| Net income/(loss)  in accordance with US  GAAP             |       | €            | 151,921    |                           | €     | 95,973        |       |   |   | € | 10,267 |   | € | (36,748 | ) | € | (31,500 | ) | € | (232,002 | ) |

 

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| ** **                                           | ** ** | **Predecessor**   | ** ** | ** **                     | ** ** | **Successor** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|--------------------------------|------------|---------------|------------|
| ** **                                           | ** ** | **Year  Ended**   | ** ** | **Jan. 1,  2002 to** | ** ** | ** **    | ** ** | **Sept. 3,  2002 to** | ** ** | **Year  Ended** | ** ** | **Year  Ended** | ** ** | **Year  Ended** | ** ** |
| ** **                                           | ** ** | **Dec. 31,** | ** ** | **Sept. 2,**              | ** ** | ** **    | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                           | ** ** | **2001**          | ** ** | **2002**                       | ** ** | ** **    | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005**(1) | ** ** |
| **Other Financial Data:**                            |       |              |       |                           |       |          |       |   |   |   |   |   |   |   |   |
| EBITDA:(3)                                           |       | €            | 572,673    |                           | €     | 385,684       |       |   |   | € | 215,621 |   | € | 597,452 |   | € | 591,370 |   | € | 649,371 |   |
| Depreciation, depletion and amortization expense     |       | 238,764           |       | 172,354                        |       |          |       | 92,661 |   | 298,014 |   | 303,126 |   | 443,015 |   |
| Net cash provided by  (used in):                     |       |              |       |                           |       |          |       |   |   |   |   |   |   |   |   |
| Operating activities                                 |       | €            | 584,492    |                           | €     | 356,514       |       |   |   | € | 271,698 |   | € | 690,964 |   | € | 640,929 |   | € | 512,869 |   |
| Capital expenditure and financial investment         |       | (136,627          | )          | (121,206                       | )          |          |       | (90,307 | ) | (161,680 | ) | (166,013 | ) | (166,880 | ) |
| Acquisitions and disposals                           |       | (42,431           | )          | (297,064                       | )          |          |       | (2,516,819 | ) | (180,546 | ) | 5,619 |   | 374,670 |   |
| Financing activities                                 |       | (128,032          | )          | 43,502                         |       |          |       | 2,561,209 |   | (7,421 | ) | (123,548 | ) | 475,449 |   |
| Capital expenditures                                 |       | (177,213          | )          | (119,620                       | )          |          |       | (91,139 | ) | (207,518 | ) | (206,466 | ) | (192,434 | ) |
| **Balance  Sheet Data (at end of period):**          |       |              |       |                           |       |          |       |   |   |   |   |   |   |   |   |
| Cash at bank and in hand                             |       | €            | 440,109    |                           | n/a        |          |       |   | € | 184,331 |   | € | 179,067 |   | € | 248,033 |   | € | 247,807 |   |
| Property, plant and equipment                        |       | 2,088,019         |       | n/a                            |       |          |       | 2,214,254 |   | 2,435,946 |   | 2,334,858 |   | 3,499,084 |   |
| Total assets                                         |       | 5,936,617         |       | n/a                            |       |          |       | 5,842,608 |   | 5,816,927 |   | 5,768,077 |   | 9,375,777 |   |
| Total long term debt and other long term liabilities |       | 1,404,432         |       | n/a                            |       |          |       | 3,027,284 |   | 3,022,350 |   | 2,959,840 |   | 4,537,329 |   |
| Shareholders’ equity                            |       | 2,525,191         |       | n/a                            |       |          |       | 878,099 |   | 895,356 |   | 869,101 |   | 1,418,862 |   |
| **U.S.  GAAP (*Restated*):****(4)**                  |       |              |       |                           |       |          |       |   |   |   |   |   |   |   |   |
| Total assets                                         |       | €            | 5,913,972  |                           | n/a        |          |       |   | € | 6,071,534 |   | € | 5,880,648 |   | € | 5,926,319 |   | € | 9,621,704 |   |
| Shareholders’  equity                           |       | 2,685,847         |       | n/a                            |       |          |       | 691,685 |   | 666,278 |   | 634,016 |   | 861,520 |   |

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(1)           The financialdata reflects the combination of JSG and Kappa with effect from December 1,2005, incorporating one month’s results for the combined business.

(2)           Other financialexpense represents the difference between the expected return on pension schemeassets and the interest cost of pension scheme liabilities and is disclosed inaccordance with FRS 17—“RetirementBenefits.”

(3)           EBITDArepresents “operating income subsidiaries—continuing” plus “income on sale ofoperations subsidiaries—continuing” plus “depreciation, depletion andamortization” less “other financial expense”. EBITDA is included in this annualreport because it is a basis upon which we assess our financial performance anddebt service capabilities, and because certain covenants in our (and oursubsidiaries’) borrowing arrangements are tied to similar measures. You shouldnot consider EBITDA in isolation from or as a substitute for cash flows fromoperations, net income or other consolidated statement of operations or cashflow statement data prepared in accordance with Irish GAAP or U.S. GAAP or as ameasure of a company’s profitability or liquidity. We understand that whileEBITDA is frequently used by securities analysts, lenders and others in theirevaluation of companies, EBITDA as used herein is not necessarily comparable toother similarly titled captions of other companies due to potentialinconsistencies in the method of calculation. For example, EBITDA does notinclude income or expense relating to associates or equity minority interests.

(4)           The amounts as at December 31, 2004 and 2003 have beenrestated as indicated in note 35 to the consolidated financial statements toreflect the currency translation adjustment associated with the goodwillarising from the acquisition of JSG in 2002.

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Thefollowing is a reconciliation of net income/(loss) to EBITDA:

| ** **                                            | ** ** | **Predecessor**   | ** ** | ** **                     | ** ** | **Successor** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|--------------------------------|------------|---------------|------------|
| ** **                                            | ** ** | **Year  Ended**   | ** ** | **Jan. 1,  2002 to** | ** ** | ** **    | ** ** | **Sept. 3,  2002 to** | ** ** | **Year  Ended** | ** ** | **Year  Ended** | ** ** | **Year  Ended** | ** ** |
| ** **                                            | ** ** | **Dec. 31,** | ** ** | **Sept. 2,**              | ** ** | ** **    | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                            | ** ** | **2001**          | ** ** | **2002**                       | ** ** | ** **    | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net income/(loss)  available to ordinary shareholders |       | €            | 150,417    |                           | €     | 95,422        |       |   |   | € | 1,854 |   | € | (67,328 | ) | € | (34,489 | ) | € | (177,346 | ) |
| Equity minority  interests                            |       | 37,022            |       | 19,969                         |       |          |       | 9,061 |   | 16,768 |   | 16,067 |   | 18,813 |   |
| Taxes on income                                       |       | 137,565           |       | 77,889                         |       |          |       | 31,395 |   | 62,354 |   | 26,973 |   | 21,561 |   |
| Share of  associates income                           |       | (76,663           | )          | (35,545                        | )          |          |       | (6,838 | ) | (10,093 | ) | (11,310 | ) | (5,951 | ) |
| Net interest  expense                                 |       | 85,568            |       | 55,595                         |       |          |       | 87,488 |   | 297,737 |   | 291,003 |   | 349,279 |   |
| Depreciation,  depletion and amortization expense     |       | 238,764           |       | 172,354                        |       |          |       | 92,661 |   | 298,014 |   | 303,126 |   | 443,015 |   |
| EBITDA                                                |       | €            | 572,673    |                           | €     | 385,684       |       |   |   | € | 215,621 |   | € | 597,452 |   | € | 591,370 |   | € | 649,371 |   |

 

**RISK FACTORS**

*You should carefully consider the risks describedbelow that could affect our business. The risks below are not the only onesthat we face—some risks are not yet known to us and some that we do notcurrently believe to be material could later turn out to be material. All ofthese risks could significantly harm our business, revenues, operating income,net income, net assets and liquidity and capital resources.*

*This annual report contains forward-looking statementsthat involve risks and uncertainties. Our actual results could differmaterially from those anticipated in the forward-looking statements as a resultof many factors, including the risks faced by us described below and elsewherein this annual report. You should also refer to other information in thisannual report, including the consolidated financial statements and the relatednotes.*

**Risks Relating to Our Indebtedness**

**Oursubstantial indebtedness could have a material adverse effect on our financialhealth and prevent us fromfulfilling our outstanding obligations.**

We have significant debtservice obligations. As of December 31, 2005, we had outstanding long termindebtedness of approximately €4,671 million (includingthe current portion of €20 million) and shareholders’ equity ofapproximately €1,419million.

Oursubstantial debt could have important consequences. For example, it could:

·        make it more difficult forus to satisfy our obligations with respect to the senior notes, the 7.75%senior subordinated notes and our obligations under the new senior creditfacility;

·        require us to dedicate asubstantial portion of our cash flow from operations to payments on our debt,which would reduce the funds available for working capital, capitalexpenditures, acquisitions and other general corporate purposes;

·        limit our flexibility inplanning for, or reacting to, changes in the manufacture, production,distribution or marketing of our products, customer demand, competitivepressures, and the industries we serve;

·        place us at a competitivedisadvantage compared to any of our competitors that are less leveraged than weare;

·        increase our vulnerabilityto both general and industry-specific adverse economic conditions; and

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·        limitour ability to borrow additional funds.

We are able to incur substantial additional debt inthe future under the senior notes indentures and the 7.75% senior subordinatednotes indentures. The addition of further debt to our current debt levels couldintensify the leverage-related risks that we now face. The senior notesindentures also permit us to incur additional debt which may be senior to thesenior notes and the guarantees and which may be secured. The 7.75% seniorsubordinated notes indentures also permit us to incur additional debt which maybe senior to the 7.75% senior subordinated notes and which may be secured.

In addition, the seniornotes indentures and the 7.75% senior subordinated notes indentures and the newsenior credit facility contain financial and other restrictive covenants thatlimit our ability to engage in activities that may be in our long term bestinterests. Our failure to comply with those covenants could result in an eventof default which, if not cured or waived, could result in the acceleration ofall of our debts.

**Our ability to make payments and to refinance ourindebtedness depends on our ability to generatesufficient cash in thefuture.**

Our ability to make payments on and to refinance ourindebtedness, and to fund planned capital and development expenditures oropportunities that may arise, such as acquisitions of other businesses, willdepend on our ability to generate sufficient cash in the future. This, to someextent, is subject to general economic, financial, competitive and otherfactors that are beyond our control.

We cannot assure you thatour business will generate sufficient cash flows from operations or that futureborrowing will be available to us under our new senior credit facility in anamount sufficient to enable us to pay our debt, including the notes, or to fundour other liquidity needs. If our future cash flows from operations and othercapital resources are insufficient to pay our obligations as they mature or tofund our liquidity needs, we may be forced to reduce or delay our businessactivities and capital expenditures, sell assets, obtain additional debt orequity capital or restructure or refinance all or a portion of our debt. Wecannot assure you that we would be able to accomplish any of these alternativeson a timely basis or on satisfactory terms, if at all. In addition, the termsof our existing and future indebtedness, including the senior notes, the newsenior credit facility and the 7.75% senior subordinated notes, may limit ourability to pursue any of these alternatives.

**Increases in marketinterest rates will increase the debt service obligations of our subsidiaries.**

A portion of our debt,including all of the debt we incur under the new senior credit facility, bearsinterest at variable rates. An increase in the interest rates on our debt willreduce our funds available to repay our debt and to finance our operations andfuture business opportunities and, as a result, will intensify the consequencesof our leveraged capital structure. The new senior credit facility signed on November 30,2005, requires that we hedge at least 50% of the term loan facilities under thenew senior credit facility for at least two years within a certain period afterDecember 1, 2005. As of December 31, 2005, €1,336million of our total outstanding debt of €5,510 million boreinterest at variable rates after taking into account interest rate hedges.

**Risks Relating to Our Business**

**Weare exposed to changes in market conditions for our products, the cyclicalityof the packaging industry andthe resulting threat of overcapacity.**

The principal factoraffecting the demand for our products, both globally and regionally, is thegeneral level of economic growth and activity. Since the markets forpaper-based packaging products in the developed world are generally mature,there is a close correlation between economic growth and demand for packagingproducts such as corrugated containers and their component materials, including

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containerboard.Accordingly, the demand for our products is adversely affected by an economicslowdown. This occurred in 2004 and 2005.

In addition, our operatingresults reflect the packaging industry’s general cyclical pattern. Thiscyclicality arises, in part, from the capital intensity of facilities such aspaper mills, which generally results in continued production as long as pricesare sufficient to cover marginal costs, the long lead time between the planningand completion of a new mill, the commodity-like nature of a majority of ourproducts and substantial price competition. Consequently, the industry has fromtime to time experienced intermittent periods of substantial overcapacity. Theproduct from a number of new paper mills was introduced to the market in 2005,with one more machine to be completed in 2006. In 2005, this addedapproximately 200,000 metric tons of new capacity. In the absence of sufficienteconomic growth or the closure of other capacity, these new mills could cause aperiod of regional overcapacity. On the other hand, approximately 700,000metric tons of capacity was removed from the market in 2003 and 2004 while in2005 the closure of a further 800,000 metric tons of high cost capacity wasannounced, for implementation in 2005 and 2006. In early 2006, capacity closureannouncements for a further 500,000 metric tons were made, for implementationduring the year. Periods of overcapacity, combined with weak demand, cause theindustry to take downtime periodically to reduce inventory levels. We continueto take downtime as necessary to manage our inventories, but we have not neededdowntime of a large magnitude since 2001. In the event we take downtime at ourmills but our competitors continue production at high levels, our sales volumescould be adversely affected without any significant offsetting benefit ofimproved prices in the market. Further, these adverse effects could beexacerbated in the event U.S. producers continue production and increase theirlevel of containerboard exports to Europe.

**Our industry is highly competitive and pricefluctuations could diminish our sales volumes and revenues.**

The paperboard andpaper-based packaging products industries are highly competitive, and no singlecompany is dominant. Our competitors include large, vertically integratedpaperboard and packaging products companies and numerous smaller companies. Theindustries in which we compete are particularly sensitive to price fluctuationsas well as other factors, including innovation, design, quality and service,with varying emphasis on these factors depending on the product line. To theextent that one or more of our competitors becomes more successful with respectto any key competitive factor, our ability to attract and retain customerscould be materially adversely affected, which could diminish our sales volumesand revenues.

**It is critical to our financial results of operationsthat the Piteå kraftliner mill operates smoothly and without interruptions.**

Our kraftliner mill inPiteå, Sweden, is responsible for a substantial amount of our kraftlinerproduction. It is, therefore, a critical part of our business. If operations atthe Piteå mill were interrupted for any significant length of time, eitherbecause of natural disaster (such as flooding), man-made disruptions (such aslabor strikes), failure to obtain raw materials, or any other reason, it wouldadversely affect our financial position and results of operations.

**Pricefluctuations in raw materials and energy costs could adversely affect ourability to obtain the materialsneeded to manufacture our products and could adversely affect our manufacturingcosts.**

Wood fiber purchased fromthird parties and recycled wastepaper, particularly old corrugated containers,or “OCC,” the principal raw materials used in the manufacture of our products,are purchased in highly competitive, price sensitive markets. These rawmaterials have historically exhibited price and demand cyclicality and extremevolatility even within a single year. The price of OCC in Europe has peakeddramatically two times in recent years—in June 2002 and in April 2003.In each case, a relatively low level of supply was matched with a relativelyhigh level of demand, principally caused by increased demand from Asia. Withina period of three months, supply and demand conditions leveled to return the 

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price tomore normal levels. In the second case, the spike was even more rapid withrecycled waste paper prices falling back to previous levels almost immediately.Prices were more stable throughout 2004 and 2005, partly as a result of flatAsian demand and Asian buyers focusing more on the U.S. market due to theweakness of the U.S. dollar. Monthly price variations were not more than €5to €10per metric ton. In particular, the supply and price of such fiber depends on avariety of factors over which we have no control, including environmental andconservation regulations, natural disasters and weather. A decrease in thesupply of such fiber has caused, and likely will continue to cause, higherfiber costs. In addition, the increase in demand for products manufactured, inwhole or in part, from OCC has caused an occasional tightness in the supply ofOCC. It may also cause a significant increase in the cost of such fiber used inthe manufacture of recycled containerboard and related products. Such costs arelikely to continue to fluctuate based upon demand and supply characteristics.The table below provides information about the European OCC price informationper metric ton at and for the years ended December 31, 2003, 2004 and 2005.

**Free-on-BoardOCC Price per Metric Ton**

| ** **                      | ** ** | **As of and for the Year  Ended December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | ** 2003 **                                                              | ** ** | ** 2004 ** | ** ** | ** 2005 ** | ** ** |
| ** **                      | ** ** | **(euro)**                                                                        | ** ** |
| Price at the end  of the period |       |                                                                              | 56         |   |   |   | 58 |   |   |   | 58 |   |   |
| Average price  during period    |       |                                                                              | 62         |   |   |   | 60 |   |   |   | 58 |   |   |
| Highest price  during period    |       |                                                                              | 73         |   |   |   | 63 |   |   |   | 63 |   |   |
| Lowest price during  period     |       |                                                                              | 56         |   |   |   | 58 |   |   |   | 57 |   |   |

 

The cost of producing ourproducts is also sensitive to the price of energy. Energy prices, in particularoil and natural gas, have experienced significant volatility in recent years,with a corresponding effect on our production costs. Three significantincreases occurred in the last five years. In January 2001, natural gasprices reached a high of nearly $10.00 per million British thermal units, or “mmBtu,”compared to a historical 10-year average of $2.61 per mmBtu. Natural gasprices normalized in the second half of 2001. In 2004, gas prices reached $6.00per mmBtu in March 2004, rising to a peak of almost $10.00 in October 2004before falling again to $6.80 per mmBtu by the end of the year. In 2005, gasprices reached a high of $15.40 per mmBtu and closed the year at $11.00 permmBtu. Energy prices may not remain at current rates and may rise to higherlevels, in which case our production costs, competitive position and results ofoperations could be adversely affected thereby.

**Ourability to maximize our cash flow and profitability depends on a number offactors, including the successfulimplementation of our business strategy.**

Our business strategy isto maximize our cash flow and strengthen our position as one of the world’sleading providers of containerboard, corrugated containers and otherpaper-based packaging products by implementing initiatives aimed at achievingcost savings and generating profitable growth. In order to continue to realizecost savings, we must successfully reduce our overhead costs, improve ourprocurement process, realize certain operating efficiencies and rationalize ourmanufacturing capacity. Our ability to generate growth will depend on oursuccessful promotion of our products, our ability to innovate and, ultimately,customer demand for and acceptance of our products. The success of our effortsto implement our strategy and accomplish these goals could be affected by anumber of factors beyond our control, such as operating difficulties, increasedoperating costs, personnel turnover, competitors and customers, delays inimplementing initiatives and general economic or industry conditions. Inaddition, implementing our strategy requires significant management resourcesand may divert or strain our management’s ability to focus on other companyobjectives. We cannot assure you that we will be successful in achieving costsavings, generating growth or in increasing our cash flows or profitability. Ifwe are unsuccessful in implementing our business strategy and achieving costsavings, we may be unable to fulfill our obligations under the notes.

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**Integrating the JSG operations with the Kappaoperations may prove to be disruptive and could result in the combinedbusinesses failing to meet our expectations.**

We expect that the merger betweenJSG and Kappa will result in increased revenue and profit growth. We cannot besure that we will realize these anticipated benefits in full. Achieving theexpected benefits from these acquisitions will depend, in part, upon whetherthe operations and personnel of both companies can be integrated in anefficient and effective manner. Our management team may encounter unforeseendifficulties in managing the integration of the businesses. The process ofintegrating formerly separately operated businesses may prove disruptive toboth businesses, may take longer than we anticipate and may cause aninterruption of and have a material adverse effect on our combined businesses.

**We are exposed to currency rate fluctuations.**

With the introduction ofthe euro in 15 of the present 25 European Union Member States, our exposure toexchange rate fluctuation arises mainly in relation to the U.S. dollar,sterling and the Swedish krona. In light of the use of the U.S. dollar as thefunctional currency of our Latin American operations, the U.S. dollar is themost important foreign currency in which we conduct our business.

Fluctuations in the valueof the U.S. dollar have a significant effect on our operations and on ourreported results in euro. A weaker U.S. dollar will decrease and, conversely, astronger U.S. dollar will increase, the euro figures reported in ourconsolidated financial statements with respect to our Latin Americanoperations. The appreciation in the U.S. dollar favorably affected our reportednon-euro denominated sales revenues in 2005. During the year ended December 31,2005, the euro weakened by approximately 13% against the U.S. dollar, resultingin a €73million increase in our borrowing in foreign currencies. During the year ended December 31,2004, the euro strengthened by approximately 8% against the U.S. dollar,resulting in a €40million reduction in our borrowing in foreign currency. Borrowing in foreigncurrencies decreased by €152 million during the year ended December 31,2003, principally as a result of the relative weakness of the U.S. dollar,which declined approximately 20% during the year relative to the value of theeuro. In addition, the relative strength or weakness of the U.S. dollar isimportant for the European industry because U.S. containerboard prices tend toinfluence the world market. A weak U.S. dollar over a sustained period couldresult in lower sales into the United States by European manufacturers thatship products in corrugated containers and, as a result, lower European demandfor our containers. A weak U.S. dollar could also result in additionalcompetition in the European market from U.S. manufacturers that have anincentive to sell more products in Europe due to increased European demand forthe relatively lower priced U.S. goods. The decline in the value of the U.S.dollar during 2003 and 2004 adversely affected European demand growth becausefinished goods for export to the United States were significantly lesscompetitive relative to U.S. goods.    

**We are subject to numerous environmental laws andregulations.**

We are subject to a widerange of environmental, health and safety laws and regulations in all thejurisdictions where we operate. These requirements are complex, frequentlychanging and have tended to become more stringent over time. In particular, weare subject to the European Union’s Integrated Pollution Prevention andControl, or “IPPC,” program, which requires that most of our European millsobtain IPPC permits and achieve specified pollution control measures by 2007.While we have obtained IPPC permits for many of our mills that require them, weremain in the process of obtaining such permits for other mills. Additionally,as part of the IPPC program, we are required to conduct “baseline”environmental investigations or otherwise provide information regarding thecondition of the underlying soil and groundwater at our European mill sites. Inthe event we incur unforeseen significant containment and clean-up expenses,our operating results could be adversely affected. See Item 4. “Information onthe Company—Environmental Issues” for a more complete discussion of theenvironmental regulatory regimes applicable to our operations.

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We may in the future be adversely affected by theKyoto Protocol, by which most industrialized nations agreed to reduce theiremissions of carbon dioxide and other “greenhouse gases.”. In February 2005,the Emission Trading Scheme, or “ETS,” came into force. The European Unionbegan Emission Trading for a first 3 year period (2005-2007), before thecommencement of the worldwide emission trading scheme in 2008. All our millshave received their CO2 allocation for the period 2005-2007. Each memberstate granted every mill an allocation according to their level of productionand previous CO2 emission levels. At the end of 2005, the sum of CO2 emissionfrom our European mills was 17 % lower than our allocation. The extraallocation over and above the actual emission level can be sold on the Europeanmarket or can be rolled over for the remaining 2 years of the first tradingperiod.

We cannot assure you thatwe have been or will be at all times in complete compliance with these or otherenvironmental health and safety requirements or that we will not incur materialcosts or liabilities in connection with such requirements in the future. We cansimilarly provide no assurance that we will not experience an accident orotherwise become liable for contamination that may have occurred in the past(including such liability to buyers of properties or businesses that we havesold). Additionally, if environmental, health and safety laws and regulationschange, or new information comes to our attention regarding our compliance withsuch laws and regulations, we may have to make additional expenditures or incurliabilities beyond what is currently anticipated, and such expenditures andliabilities could adversely affect our operating results and financialcondition.

**We are exposed tothe risk of product substitution.**

Our main product,corrugated containers, competes with other forms of packaging, principallyreusable plastic containers. Within Europe, this competition has been feltmainly in the container market for fruit, vegetable, meat, poultry and dairyproduce, collectively referred to as the “short shelf-life sector.” This sectoris estimated to account for approximately 14% of the European corrugatedmarket. Any significant substitution away from paper-based packaging productswill adversely affect our profitability. Although we believe the substitutionof reusable plastic containers in the short shelf-life sector has now reachedits limit in countries within Europe, we can provide no assurance that furthersubstitution will not occur in this sector or in other sectors, nor can weprovide any assurance that future packaging developments and trends will notdrive further substitution.

**The loss of key personnel could have a materialadverse effect on our business, financial condition and results**of operations.

Our ability to effectivelysell existing products, develop and introduce new products, and integratecertain acquired businesses will depend on the efforts and abilities of ourexecutive officers and key employees. Our operations could be adverselyaffected if, for any reason, a number of these officers or key employees didnot remain with us.

**Thecosts and difficulties of acquiring and integrating complementary businessesand technologies could impedeour future growth and adversely affect our competitiveness.**

As part of our growth strategy, we intend to consideracquiring complementary businesses. Currently we do not have any commitments oragreements relating to any material acquisitions. Future acquisitions couldresult in the incurrence of debt and contingent liabilities, which could have amaterial adverse effect upon our business, financial condition and results ofoperations. Risks we could face with respect to acquisitions include:

·        greater than expectedcosts and management time and effort involved in identifying, completing andintegrating acquisitions;

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·        potential disruption ofour ongoing business and difficulty in maintaining our standards, controls,information systems and procedures;

·        the inability tosuccessfully integrate the services, products and personnel of any acquisitioninto our operations or realize any expected cost savings or other synergiesfrom any acquisition;

·        a need to incur debt, whichmay reduce our cash available for operations and other uses due to increaseddebt service obligations; and

·        realizinglittle, if any, return on our investment.

**Weare engaged in a number of active litigation matters, the outcome of whichcould have a materialadverse**effect on ourfinancial condition and results of operations.

In addition to litigationarising in the ordinary course of business, we are involved in a number ofactive litigation matters, the outcome of which could have a material adverse effecton our financial condition and results of operations. See “Item 8. FinancialInformation—Legal Proceedings” for a more complete discussion of such legalproceedings.

**Item4.        Information on the Company**

**History and Development of the Company**

***History of JSG/SKG***

JSG was originallyincorporated in Ireland as a private company on January 15, 1934, becominga public company on June 30, 1964. JSG was re-registered as a publiclimited company on February 1, 1985. On November 18, 2002, JSGconverted to a private limited company. JSG has grown from its original Irishbase to become a major international manufacturer of containerboard, corrugatedcontainers and other paper-based packaging products with operations in over 30countries. Initial expansion in Ireland in the 1960s and early 1970s wasfollowed by a series of acquisitions in the United Kingdom, the United States,Latin America and, during the 1990s, in continental Europe. In 1998, JSGextended its operations to Canada with the acquisition of a 50% holding inSmurfit MBI, formerly MacMillan Bathurst, the remaining 50% being owned by ourformer associate, SSCC. On December 1, 2005, it acquired Kappa andthe combined company was renamed Smurfit Kappa Group (SKG).

***The JSG Acquisition***

JSG Funding, a publiclimited company, was incorporated in Ireland as MDP Acquisitions plc on June 12,2002 to act as a financing company in connection with the acquisition of JSG byMadison Dearborn Partners and management. For ease of reference, we refer tothis acquisition as the “JSG Acquisition.” On June 10, 2003, MDP Acquisitionsplc changed its name to JSG Funding plc. OnOctober 7, 2002, JSG Acquisitions, a wholly owned subsidiary of JSGFunding, acquired all of the ordinary shares of JSG in a take privatetransaction. Prior to this acquisition, JSG Funding had no operations. As partof the JSG Acquisition, JSG distributed its 29.3% interest in SSCC, its U.S.affiliate, to its shareholders. The registered office of JSG Funding is BeechHill, Clonskeagh, Dublin 4, Ireland.

***SSCC Asset SwapTransaction***

On March 31, 2003, wecompleted the acquisition of SSCC’s European packaging assets. In thistransaction which we refer to as the ‘SSCC Asset Swap,’ JSG Funding exchangedits 50% ownership in Smurfit MBI, Canada and approximately €185million for SSCC’s European assets. The cash consideration for the transactionwas financed by U.S. $205 million of 95¤8% senior notes due 2012 issued inFebruary 2003.

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***Corporate Structure***

On February 6, 2004, JSGPackaging (now known as Smurfit Kappa Group Limited) completed an exchangeoffer for the existing shares of JSL for an identical number of newly issuedshares of JSG Packaging (now known as Smurfit Kappa Group Limited) havingsubstantially identical rights, privileges, terms and conditions. Uponcompletion of the exchange, JSG Packaging (now known as Smurfit Kappa GroupLimited) contributed its shares of JSL to JSG Holdings in exchange for newlyissued shares of JSG Holdings. JSG Holdings is a public limited companyincorporated in Ireland. As a result, JSG Holdings became a subsidiary of JSGPackaging (now known as Smurfit Kappa Group Limited) and the holder of all of theoutstanding capital stock of JSL. All outstanding warrants to purchase ordinaryshares of JSL were converted, without any action of the holders thereof, intothe right to purchase ordinary shares of JSG Packaging (now known as SmurfitKappa Group Limited) in accordance with the terms of those instruments.

***Munksjö SpecialtiesDisposal***

OnMarch 1, 2005, JSG completed the sale of its Munksjö specialty paperbusiness for approximately €450 million. On May 18, 2005, JSG completedthe sale of its Munksjö tissue business for approximately €28 million. Theproceeds from these disposals were used to pay down part of the term portion ofour then existing senior credit facility. Together,the operations sold had net sales of approximately €512 million forthe year to December 31, 2004 (2003: €483 million).

***Refinancing Transactions***

In January 2005, JSG completed an offering ofapproximately €370 million of 7.75%senior subordinated cash-pay notes. JSG Funding applied the net proceeds fromsuch offering to fund the purchase of its existing 15.5% subordinated notespursuant to the tender offer described below and to pay related fees andexpenses. 

In February 2005, JSG Funding completed a tender offerand consent solicitation for its 15.5% subordinated notes due 2013. All of the euro15.5% subordinated notes were tendered in the tender offer. The 0.1% of thedollar 15.5% subordinated notes not tendered in the tender offer were redeemedin October 2005.

In January 2005,JSG Holdings completed an offering of €325 million in aggregate principal amount of11.5% senior pay-in-kind notes due 2015 (the “PIK notes”), substantially all ofthe net proceeds of which were loaned to JSG Packaging (now known as SmurfitKappa Group Limited), which, in turn, paid such net proceeds to itsshareholders by means of a share capital reduction under Irish law. Neither JSGFunding nor any of its subsidiaries guarantee the PIK notes and thus the PIKnotes are effectively subordinated to all debt and other liabilities and preferredstock, if any, of JSG Funding and its subsidiaries. 

***Kappa Merger***

On December 1, 2005, JSG Packaging (now known as Smurfit Kappa GroupLimited), JSG Acquisitions and the shareholders of Kappa completed the mergerof the operations of both groups of companies. The merger was completed throughthe issuance of shares by JSG Packaging and the payment of considerationcomprising cash of approximately €238 million and an €89million subordinated promissory note, primarily to Kappa’s former shareholders.The ownership structure of the combined company results in the existingshareholders of JSG Packaging owning approximately 58.3% of the combinationwhile Kappa’s existing shareholders own approximately 41.7%. In connection withthe merger, JSG Packaging was renamed Smurfit Kappa Group Limited. As part ofthe merger transaction, Kappa’s existing 10.625% senior subordinated notes due2009 and its 12.5% senior subordinated notes due 

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2009were redeemed, and the existing JSG Acquisitions and Kappa senior creditfacilities were refinanced by way of a new senior credit facility. The mergerrequired European Commission approval which was granted subject to thefulfilment of an agreed schedule of commitments to dispose of a number ofbusinesses. The financial statements reflect the combination with effect from December 1,2005 incorporating one month’s results for the combined business. Thecombination is accounted for as a purchase. 

**Business Overview**

We are the largest European integrated manufacturer ofcontainerboard, corrugated containers and other paper-based packaging products,with operations mainly in Europe and Latin America. JSG was incorporated inIreland in 1934 as the owner of a single converting plant. It has grown to itscurrent position, owning 47 mills, most of which produce containerboard used tomanufacture corrugated containers, 277 converting plants, most of which convertcontainerboard into corrugated containers, 44 reclamation facilities, whichprovide some of the wastepaper requirement for our mills, and 30 otherproduction facilities. Our European and Latin American operations accounted forapproximately 82% and 18% respectively, of our net sales for the year ended December 31,2005. 

We command a leading share of the European corrugatedcontainer market and are Europe’s largest producer of containerboard. In LatinAmerica, we believe we are the largest producer of corrugated containers andthe second largest producer of containerboard.

Our containerboard millsand converting operations are highly integrated, as our corrugated containerplants convert much of our own containerboard production. For the year ended December 31,2005, we produced over 3,000,000 metric tons of containerboard in Europe, andaround 2,800,000 metric tons of corrugated containers. In Latin America, weproduced approximately 690,000 metric tons of containerboard and approximately730,000 metric tons of corrugated containers. In addition, our mills in Europeproduced 580,000 metric tons of other grades of paper, including solid board, sackkraft, which is used to make industrial grade paper sacks, boxboard, which isused in the manufacture of folding cartons, together with non packaging grades,such as graphic board and printing and writing paper, while our mills in LatinAmerica produced over 330,000 metric tons of other grades of paper, includingboxboard, sack kraft and printing and writing paper. Our conversion plants inEurope produced over 220,000 metric tons of other paper based packagingproducts, such as solid board, paper sacks and folding cartons, while our LatinAmerican operations produced approximately 80,000 metric tons of theseproducts.

**Industry Overview**

Corrugated containers are a safe and economical meansof transporting consumer and industrial products. More goods are shipped incorrugated containers than in any other type of packaging. Containerboard,which is a generic term used to describe various types of paperboard such aslinerboard and corrugating medium, is the principal raw material used tomanufacture corrugated containers. Linerboard is used as the inner and outerfacing (liner) of a corrugated container. The two main types of linerboard arekraftliner, which is produced using primarily virgin fiber, and testliner,which is produced using primarily recycled fiber. Corrugating medium is flutedand laminated to linerboard in a corrugator plant to produce corrugated sheets.The sheets are then printed, cut, folded and glued in corrugator plants orsheet plants to produce corrugated containers. 

Recycled fiber is obtained principally from oldcorrugated case material, or OCC, acquired through open market purchases orfrom company-owned reclamation facilities. Virgin fiber is obtained in the formof wood chips or pulp wood acquired through open market purchases of wood fiberor from company-owned timberland. These fibers are chemically treated and thenprocessed through paper machines, which consist of a paper-forming section, apress section (where water is removed by pressing the wet 

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containerboard betweenrolls) and a drying section. The containerboard is then wound into rolls, whichare shipped to company-owned converting plants or outside converters.

The dispersion of customers for corrugated containersand the high bulk, low density and low value of corrugated containers, whichtypically are delivered by truck, make shipping costs a relatively highpercentage of total costs. As a result, corrugator plants usually serve marketswithin a 250-kilometer radius of the plant and employ a local sales force toserve the market area.

Containerboard pricing is driven primarily by thesupply/demand balance and price movements in OCC and wood pulp, although aprice increase announcement in November 2005 was attributed by manycompanies, JSG included, to rises in other input costs and particularly inenergy. Corrugated container pricing is driven significantly by movements incontainerboard pricing. Price increases at the corrugated level tend to lagbehind containerboard price movements, sometimes by months. Part of thereason for this is that the pricing element in some contracts to sellcorrugated is based on changes to a published paper price index, which reflectshistoric and not anticipated price movements. As a result, the greater thelevel of forward integration, the slower generally is the rate of change in netprofits resulting from containerboard price movements.

Recycled waste paper, principally OCC, is theprincipal raw material used in the manufacture of our products. Recycled fiberprices can vary widely at times and are very dependent upon mill demand. Whilewood prices are relatively stable, fluctuations in Asian demand and reducedcollections in the United States have been the principal factors driving theprice of OCC.

Historically, the marketfor paper-based packaging products and paperboard has tended to be cyclical.Because of the capital intensity of the production facilities and the long leadtime between the planning and completion of a new mill, capacity cannot readilybe adapted to changing demand conditions. This has resulted in significantshort term imbalances when capacity has exceeded demand, leading to significantprice cuts and inventory growth. Many leading paper manufacturers havecontinued to react to reduced demand by taking downtime and by rationalizinghigh cost or inefficient capacity.

**CompetitiveStrengths**

We believe we possess the following competitivestrengths:

***Leading MarketPositions and Economies of Scale.******  ***The industryin which we operate remains fragmented, and few of our competitors havecomparable scales of production. We are Europe’s largest integrated producer ofcontainerboard, both kraftliner and testliner, and the leading producer ofcorrugated containers. In Latin America, we believe we are the largest producerof corrugated containers and the second largest producer of containerboard. Thescale and density of our production network allows us to benefit from economiesof scale in purchasing, production, distribution, marketing, research anddevelopment and the application of best practices. In addition, our extensiveEuropean presence allows us to provide better service to our pan-Europeancustomers. The financial barriers to entry into the containerboard segment andour long-standing customer relationships in the converting segment also help toprotect our leading market positions.

***Highly IntegratedProducer.******  ***We are a highly integrated producer ofcontainerboard and corrugated packaging products. We have the ability toutilize substantially all of our containerboard mills’ production internallybecause our converting plants’ volume requirements for containerboard generallymeet our mills’ production. We believe we can manage our operations to achievemore stable operating performance than competitors that are not as integrated.Integration provides us with stability, largely because fluctuations in theearnings of our mills tend to be offset by changes in the earnings of ourconverting operations. Moreover, our high level of integration ensuresconsistent demand for our mills’ containerboard production, which allows us tooptimize capacity utilization, even during trough demand 

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periods. This integrationalso secures containerboard supply for our converting plants during peak demandperiods. In addition, our vertical integration allows us to realize certainefficiencies throughout the production process by increasing control over thequality of the containerboard, its particular specifications and the timing ofdelivery to our converting facilities.

***Cost Competitiveand Well-Positioned Manufacturing Base.******  ***Ourcontainerboard mill system benefits from a favorable cost position in theproduction and delivery of containerboard. We believe that we incur among thelowest delivered cost to our customers as a result of our efficient, long-livedmanufacturing base and the close proximity of our mills to customers and rawmaterial sources. In addition, we believe we operate the two lowestdelivered-cost European kraftliner mills.

***Quality Asset Base.***   The SKG assetbase is of a high quality. We believe that our asset base is one of the morecost efficient in the containerboard industry. We have realized this position through our continuous focus on energyefficiency, optimal recipe composition, efficient water management and wastedisposal and our management expertise.

SKG possess key recycled containerboard mills inRoermond, Zulpich, Wrexen, Hoya and Mengibar while in kraftliner we have threeof the largest mills in Europe in Piteå, Nettingsdorfer and Facture along witha number of smaller efficient mills.

***Diversified ProductOfferings, Geographic Markets and Customer Base.******  ***With leadingpositions in the production of kraftliner, testliner and corrugated containers,an operating presence in over 30 countries and thousands of customers, our cashflows are broadly diversified across product offerings, geography and customertype. Our management believes that this diversification reduces our dependenceon any single product, economy, market or customer and helps to offset thecyclical nature of the paper and packaging business.

***ExperiencedManagement with Substantial Equity Interest.******  ***We have anexperienced senior management team with an average of approximately 20 years ofindustry experience. We are led by Gary McGann (Chief Executive Officer),Anthony Smurfit (Chief Operations Officer) and Ian Curley (Chief FinancialOfficer). This senior management team together with Sir Michael Smurfit, ourChairman, and over 200 JSG managers have invested directly in the equity ofSKGL. These equity stakes which, in combination with a significant equity-basedcompensation program, collectively represent up to 12.6% of the fully dilutedownership of SKGL. Over 100 of the Kappa managers together with Frits Beurskens,our deputy chairman, as a result of the merger, have an indirect investmentthrough a Dutch foundation in SKGL. We believe these investments will provide asignificant incentive to achieve financial targets.

***Principal Shareholders with Proven Paper and PackagingSector Expertise.******  ***Madison Dearborn is one of theworld’s largest and most experienced private equity investment firms. MadisonDearborn invests across a broad range of industries with a principal focus onbasic industrial sectors, including the paper and packaging sector. MadisonDearborn is considered to be among the most active private equity investor inthe United States in the paper and packaging industry, having previously madeinvestments in Boise Cascade, L.L.C., Packaging Corporation of America, GraphicPackaging Corporation (formerly known as Riverwood Holding Corp.), BuckeyeTechnologies, Inc. and Bay State Paper Holding Company. CVC and Cinvenhave retained an investment in Kappa Packaging since April 1998, and eachhave investments across a broad range of industries, including, in CVC’s case,the Lecta white paper company in Europe, BSN Glasspack and Mivisa. Cinven has experience in the paperand packaging industry through investments in Kappa Packaging and KlöcknerPentaplast amongst others.

**Business Strategy**

The primary strategicobjective following the merger will be to maximize cash flows and integrate thetwo companies in order to realize maximum synergies, strengthening the positionof the combined Group 

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as oneof the world’s leading providers of containerboard, corrugated containers andother paper-based packaging products.

***Successful integration of the two businesses andrealization of synergies***

We target a quick and fullintegration of the two operations in order to realize expected synergies fromthe merger. The integration represents a step change in the ongoing operatingstrategy of the company, which involves:

***Migrationtowards the lower end of the production cost spectrum***

We intend to continuefocusing on operational improvements, including leveraging the technical designand production tools, which we believe will reduce costs and improve the value weprovide to our customers. 

***Continuingsuccessful growth particularly in fast growing markets of Eastern Europe andLatin America***

We intend to continue the successful growth in thefast growing markets of Eastern Europe and Latin America. In both regions wealready have good market positions and a strong footprint in terms of networkof production facilities.

The merger also providessignificantly improved coverage in Western Europe and the ability to grow andto better serve our customers throughout the region. We believe that ourcontinuing focus on service and quality is a key element of our strategy.

***Focuson end-customer (‘pull strategy’)***

We are focused on the endcustomer—the purchaser of corrugated containers. We intend to focus thecombined marketing strength of the two businesses on service but also onensuring that the right products are produced.

***Focuson higher margin products***

There are highervalue-added products within the paper based packaging industry such as standardcorrugated products using lighter weight and white top paper as well as morespecialty type corrugated products such as displays, heavy duty, litholaminated and high quality print products. We plan to increase our exposure tothese businesses going forward.

***Continuingdisciplined capital expenditure program and working capital management***

Going forward, we intendto continue to maximize cash flow through a disciplined capital expenditureprogram focused on return on invested capital in which annual expenditureremains at or below depreciation levels and through further disposals ofnon-core assets.

**Operations**

Our main focus is on the production of containerboardand its conversion into corrugated containers. We also produce boxboard, sackkraft paper, solid board, graphicboard and non-packaging grades of paper, aswell as converted products such as folding cartons, solid board packaging andpaper sacks.

Containerboard, boxboard, sack kraft paper, solidboard and graphicboard are all forms of paperboard. Containerboard is a form ofpaperboard used primarily for the production of corrugated materials. Boxboardis used for the production of folding cartons. Sack kraft paper is used for the

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production of durablepaper sacks. Solid board is used for the production of solid board packaging.Graphicboard is used for the production of, among other things, book covers.

We use OCC and, to a lesser extent, wood to produceour paperboard and paper. We then use the paperboard and paper that we produceas a source of raw materials for our converted product facilities, and we alsosell some of our paperboard and paper to third parties. We outsource somepaperboard and paper from third parties as raw materials for our convertedproduct facilities, particularly where, for reasons of geographic proximity orprice, it can be more efficiently outsourced.

OCC is the principal raw material used in ourproduction of paperboard and is the essential component of recycledcontainerboard, one of the two types of containerboard we produce. Recycledcontainerboard can be subdivided into testliner and fluting. Wood is theprincipal component used in the manufacture of the second type ofcontainerboard we make, which is called kraftliner. Both testliner andkraftliner serve as the outer facing component of containerboard. Fluting isthe wavy inner layer of paper.

There is significant price volatility in the marketfor OCC. However, the market for wood is relatively stable. Accordingly, to theextent that we are able to source wood that we convert into virgin pulp at ourown mills, we have a raw material source with greater price stability thathelps protect margins. Our Latin American mills in Colombia and Venezuelaprimarily use wood from our nearby forestry operations and thereby benefit fromthe price stability of this raw material source. 

We make a relatively higher margin on our productionof kraftliner than we do on our production of recycled containerboard. Demandfor kraftliner, however, is price sensitive relative to recycledcontainerboard, which moderates our ability to raise prices during an upturn inthe industry cycle. We believe that the market demand for recycledcontainerboard in Europe and in Latin America will grow over time at a fasterrate than the market demand for kraftliner, and we believe that we are wellpositioned in these markets to respond to this expected change in demand mix.

Our operations are currently managed on the basis oftwo regions: Europe and Latin America. After the sale of the majority of ourU.S. subsidiaries and the completion of the SSCC Asset Swap, we no longerconduct significant operations in the United States and Canada.

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Thetable below shows a regional breakdown of our production volumes in 2005.

| **Product**                                    | ** ** | ** **                     | ** ** | **Europe** | ** ** | **Latin  America** | ** ** | **Total SKG** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|------------|------------|--------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **(metric tons in thousands)** | ** ** |
| *Raw Materials*                                |       |                           |       |       |       |               |       | ** **         |       |   |   | ** ** |   |
| Recycling                                      |       |                           | 1,825      |       |       |               | 461        | ** **         |       |   | 2,286 | ** ** |   |
| **Total  raw materials**                       |       |                           | 1,825      |       |       |               | 461        | ** **         |       |   | 2,286 | ** ** |   |
| *Mill:*                                        |       |                           |       |       |       |               |       | ** **         |       |   |   | ** ** |   |
| Containerboard                                 |       |                           | 3,047      |       |       |               | 692        | ** **         |       |   | 3,739 | ** ** |   |
| Sack kraft                                     |       |                           | 124        |       |       |               | 38         | ** **         |       |   | 162 | ** ** |   |
| Boxboard                                       |       |                           | 81         |       |       |               | 167        | ** **         |       |   | 248 | ** ** |   |
| Solid &  graphic board                     |       |                           | 257        |       |       |               | —     | ** **         |       |   | 257 | ** ** |   |
| Other paperboard                               |       |                           | —     |       |       |               | 41         | ** **         |       |   | 41 | ** ** |   |
| **Total  containerboard and other paperboard** |       |                           | 3,509      |       |       |               | 938        | ** **         |       |   | 4,447 | ** ** |   |
| Other non-packaging paper(1)                   |       |                           | 120        |       |       |               | 89         | ** **         |       |   | 209 | ** ** |   |
| **Total  mill**                                |       |                           | 3,629      |       |       |               | 1,027      | ** **         |       |   | 4,656 | ** ** |   |
| *Conversion*                                   |       |                           |       |       |       |               |       | ** **         |       |   |   | ** ** |   |
| Corrugated  containers                         |       |                           | 2,764      |       |       |               | 729        | ** **         |       |   | 3,493 | ** ** |   |
| Solid board                                    |       |                           | 86         |       |       |               | —     | ** **         |       |   | 86 | ** ** |   |
| Paper sacks                                    |       |                           | 98         |       |       |               | 51         | ** **         |       |   | 149 | ** ** |   |
| Folding cartons                                |       |                           | 27         |       |       |               | 31         | ** **         |       |   | 58 | ** ** |   |
| Other                                          |       |                           | 11         |       |       |               | —     | ** **         |       |   | 11 | ** ** |   |
| **Total conversion**                           |       |                           | 2,986      |       |       |               | 811        | ** **         |       |   | 3,797 | ** ** |   |

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(1)          Othergrades of non-packaging papers include printing and writing paper, tissue, andother specialty papers.

**Europe**

Within Europe, our largestregion, we have two segments, packaging and specialties. Our European packagingsegment is comprised principally of our containerboard mills and corrugatedcontainer plants. These operations are highly integrated, with the productionof our mills approximately matching the volume of the containerboard beingconverted into corrugated containers in our plants. There is also a degree ofthird-party sales of containerboard for reasons of both product mix andlogistics. Our specialties segment consists of solid and graphic board mills,solid board converting, sackpaper and sack converting operations and some nonpaper/packaging businesses such as our bag-in-box business.

***Packaging***

*Paperboard.*   The principal paperboardproduct in our packaging segment is containerboard. However, our mills produceother grades of paperboard for use in packaging products, such as sack kraftpaper for use in the production of durable paper sacks, solid board, used inthe production of solid board packaging products, and boxboard, used in theproduction of folding cartons.

The main market for containerboard is the corrugatedcontainers market. Pricing for containerboard is principally driven by theprice of its inputs, particularly OCC, the demand conditions for the productand the supply conditions in the industry. The demand for corrugated containersis ultimately a function of the rate of industrial growth. There have beensignificant additions to capacity in Europe in recent years as well as onesignificant new capacity addition announced for 2006. On the other hand,approximately 700,000 metric tons of capacity was removed from the market in2003 and 2004, while in 2005, the closure 

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of a further 800,000metric tons of high cost capacity was announced, for implementation in 2005 and2006. In early 2006, capacity closure announcements for a further 500,000metric tons were made, for implementation during the year. 

In 2003, a combination of the increased supply and therelatively poor economic conditions across Europe caused the pricing ofrecycled containerboard to be lower than in 2002. In 2004, with slightlyimproved demand and no significant increase in supply, prices were more stableand on average were slightly higher than in 2003. The same relative economicweakness, along with the growing strength of the euro against the U.S. dollar,caused pricing in kraftliner in Europe to be lower in 2003 than in 2002.Although kraft prices increased towards the end of 2004 on average they werelower in 2004 than in 2003. In 2005, a combination of new capacity additions tothe market, and relatively weak economic conditions, which led to relativelypoor demand conditions, resulted in a reduction in containerboard prices,particularly in the second and third quarters. There were price increaseannouncements in the final quarter of 2005, principally driven by the movementupwards in the supply curve due to increases in the cost of manufacture ofpaper, including energy costs.

OCC is the principal raw material for our paperboardmills. While we have our own reclamation operations in Ireland, the UnitedKingdom and Germany, we source most of our OCC requirements on the open market.In addition to our recycled paperboard mills, we have five mills in Europe forwhich wood pulp is the primary raw material. These are our three kraftlinermills, Facture in France, Nettingsdorfer in Austria and Piteå in Sweden, oursemi chemical fluting mill in Sturovo, Slovakia, and our Spanish sack kraftmill, Smurfit Nervion. While Nettingsdorfer, Piteå and Sturovo purchase theirwood fiber requirements on the open market, we co-operate with landowners todevelop forest resources, primarily in the Aquitaine region of France, whichfacilitates the supply of wood fiber to Facture. We own a wood procurementbusiness in Spain, which facilitates the supply of wood to our Nervion mill.

*Paper-basedpackaging products.**  *Theraw material for our paper-based packaging products is paperboard, primarilycontainerboard. Our conversion plants convert paperboard into corrugatedcontainers and paper-based packaging products. The predominant product of ourpackaging segment is corrugated containers.

Corrugated containers are sold to a broad range ofmanufacturers of consumable goods and are used to ship a diverse range of consumerproducts, such as food and beverages, agricultural produce, household goods andelectrical appliances. Corrugated products are also used for many otherapplications. We provide innovative packaging solutions with an emphasis on thevalue-added aspects of our corrugated containers in terms of design andpresentation, including the use of multicolor graphics. Some of our value-addedproducts and services include point-of-sale displays, “white top,” agrade of kraftliner on which graphics can be printed, and Innobook, acomprehensive product database which gives our customers the ability tocustomize their corrugated containers.

Our corrugated container plants are widely spreadacross the various regional and international markets that we serve. In Europe,our largest regional market, we are the largest integrated producer ofcorrugated containers, with an estimated aggregate market share (based on ownershipof Kappa for the full year 2005) of in excess of 25% of the European market. Webelieve that we are the market leader in France, Ireland, Italy, the Beneluxregion, Scandinavia, Poland and Germany, and one of the leading two or threeproducers in the United Kingdom, Spain, Switzerland, the Czech Republic andSlovakia.

In 2003, the demand forcorrugated containers was relatively weak as industrial growth in Europe waslimited, and indeed negative in the case of certain countries. With littledemand growth and reducing raw material prices, there was no upward pressure inpricing for corrugated containers in 2003. This situation continued into 2004,where estimated market growth was around 2.3%. However, increased competitionand a lack of a cost “push” from paper pricing helped cause a decrease incorrugated pricing of approximately 2.5%. In 2005, there continued to berelatively low market growth across Europe, with an 

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estimatedgrowth of 1%. When combined with reductions in paper prices, the trend incorrugated prices was downwards in the year.

***Specialties***

Our European specialties segment includes ourprincipal solid and graphic board mills together with our sack paper, papersack converting, and bag-in-box operations.

Solid board is a grade of paperboard used primarily inthe manufacture of packaging products, mainly for the fish, flower andagricultural sectors. Mills produce the paper while converting plants convertthis paper into packaging products.

Graphic board is a grade of paperboard used in themanufacture of a variety of products such as bookbinding, lever arch files andpuzzles.

Multi-wall paper sacks areused in a wide range of industries including agriculture, food and cement.While the industrial products sector predominates, the use of these durablesacks is growing in the retail or take-home sector where paper sacks provide aconvenient means of carrying such goods as pet food and “do-it-yourself” products.Our paper sack plants are based in the United Kingdom, France, Spain, Ireland,Italy, Sweden and Poland.

**Latin America**

In Latin America, we believe we are the largestproducer of corrugated containers and the second largest producer ofcontainerboard. Our Latin American operations are located principally inMexico, Colombia, Venezuela and Argentina, with smaller operations in Chile, theDominican Republic and Puerto Rico.

Our Latin American operations are highly integrated,from the reclamation of wastepaper and the production of wood pulp toconversion into paper-based packaging products of a substantial portion of thepaperboard produced by our mills. Our reclamation operations, located inVenezuela, Puerto Rico, Colombia, Mexico and Argentina, processed approximately460,000 metric tons of OCC in 2005. The OCC we recover in Venezuela and PuertoRico is consumed entirely by our mills in Venezuela, largely satisfying theirrecycled fiber requirements. Likewise, the OCC we collect in Colombia isconsumed entirely by our mills in Colombia, largely satisfying Colombia’srecycled fiber requirements. Our paperboard mills in Mexico purchase the majorpart of their recycled fiber requirements from third parties.

We also have forestry operations in Latin America. InColombia and Venezuela, we own over 230,000 acres (95,000 hectares) and managea further 10,000 acres (4,100 hectares). These plantations provide the localmills with a significant portion of their total wood fiber needs. Because woodhas more stable pricing than both the pre-processed virgin pulp that wepurchase from third parties and OCC, our mills that source from theseplantations benefit from relatively greater margin protection. We also procureraw materials from third parties.

Mexico is the largest ofthe four main Latin American markets in which we operate. We believe we are thesecond largest manufacturer of paperboard and paper-based packaging products inMexico. Additionally, we also believe that we are the leading producer inColombia and Venezuela and one of the largest in Argentina.

**United States and Canada**

After the completion ofthe SSCC Asset Swap in March 2003, we no longer have significantoperations in the United States or Canada. As part of the SSCC Asset Swap, we transferredour 50% ownership interest in Smurfit MBI Canada, our principal subsidiaryoperation in Canada, in exchange for 

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SSCC’sEuropean assets. Our principal subsidiary operation in the United States, adécor base paper mill in Fitchburg, Massachusetts, was sold in 2005.

**Marketing and Sales**

We concentrate our marketing and sales activities inour regional and local business units in order to remain close to ourcustomers, our competitors and local market developments. On a worldwide basis,we predominantly sell directly to the end-user rather than through agents. Ourmarketing strategy is to focus on the quality of products and the high caliberof service we offer to our customers. This strategy is geared towardsmaintaining margins for our products throughout the business cycle andenhancing profitability. Through continuous communication with customers, ourgoal is to improve the quality of service we provide.

The marketing strategy for our mills is to profitablymatch the sale of paper and paperboard to the demand requirements of bothinternal and external converters located within an economically reasonableshipping distance from each mill. The strategy in the corrugated container and otherconverting plants focuses on both customized products tailored to fit customers’needs and high volume sales of commodity products. Most sales of convertedproducts are made on the basis of spot sales or short-term orders for specifiedvolumes at market rates. These orders are priced based on a number of factorssuch as currency, volume, weight and geographic area. We seek to maintain abroad customer base for each of our markets rather than concentrate on only afew accounts for each plant.

No single customeraccounts for more than 5% of our global sales.

**Patents, Licensesand Research and Development**

Proprietary products do not generally characterize thepaper and packaging industry and although we hold or are licensed to usecertain patents, the successful continuation of any important part of ourbusiness is not dependent upon such patents.

Accordingly, the focus ofresearch on papermaking is on providing the materials that will enable ourconverting operations and other packaging manufacturers to meet the challengesof a changing market place. In recent years, the focus in the corrugatedcontainer industry, for example, has been on more efficiently meeting theperformance characteristics required of the corrugated container as atransport, storage and point of display medium. In addition to improvedcontainerboard quality, research programs have provided improvements inprinting processes. Furthermore, the need to meet the changing demands ofcustomers’ automated packaging lines requires us to stay abreast of innovationsin industrial processes.

**Competition**

The markets in which we operate are international,highly competitive and consist of many participants. While containerboard andmany other paperboard and paper grades are marketed and sold internationally,the paper-based packaging industry tends to be more regionally or locallybased. Many of the largest producers have multinational operations, but thereare also many smaller regional and local operators. Some producers have fullyintegrated operations from forestry and waste fiber through to paperboardproduction and on to paper-based packaging while others focus more narrowly oncertain intermediate or end products or in certain markets.

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Althoughno single company is dominant, we do face significant competition in each ofour businesses and the geographic markets in which we operate. Our competitorsinclude other large vertically integrated companies as well as numerous smallercompanies. The European and Latin American containerboard markets are morefragmented than the U.S. and Canadian markets. Our principal competitors in thegeographic regions in which we operate are listed in the table below:

| **Europe**                                              | ** ** | ** **                         | ** ** | **Latin America** |
|---------------------------------------------------------|------------|------------------------------------|------------|-------------------|
| DS Smith plc                                            |       | Cartonajes Estrella,  S.A. de C.V. |
| Mondi Packaging  Europe                                 |       | Corporacion Durango,  S.A. de C.V. |
| Sociedad Anonima  Industrias Celulosa Aragonesa (SAICA) |       | Empresas CMPC, S.A.                |
| Svenska Cellulosa  Aktiebolaget (SCA)                   |       | Klabin S.A.                        |

 

The level of competition in a given product market maybe affected by the relative strength of the U.S. dollar against the euro andother market factors including geographic location, general economic conditionsand the operating efficiencies of competitors. Although price is an importantfactor because many of our products are characterized by commodity pricing,other factors affecting competition include product quality and performance,service and product innovation. In addition, our paper-based packaging productscompete with various other packaging materials, including products made ofplastic and wood.

The markets in which weoperate are large relative to the production capacity of any one company,particularly with respect to paper and paperboard. Due to the high density andconsequent easy transportability of paper and paperboard, the geographic marketfor kraftliner is worldwide. Because of the number and scale of recycled mills,the geographic market for testliner tends to be regional. The geographic marketfor converted products, such as corrugated containers, is somewhat limited bytheir low density and larger required transport space, which results in highertransportation costs.

**EnvironmentalIssues**

We are subject to a widerange of environmental, health and safety laws and regulations. Theserequirements are complex, frequently changing and tend to become more stringentover time. We are committed to environmental, health and safety excellence anddevote substantial resources to tracking applicable requirements and monitoringcompliance. Despite these efforts, we cannot assure you that we have been orwill be at all times in complete compliance with all such requirements or thatwe will not incur material costs or liabilities in connection with suchrequirements in the future.

***Compliance with Environmental Regulatory Requirements***

The most significant impact from environmental, healthand safety regulatory requirements on our operations relates to our mills,which constitute 47 of our 398 facilities. Our manufacturing processes resultin discharges to water and emissions to air, and they can produce elevatednoise levels. At the same time, most of our mills are recycled mills, andtherefore do not handle black liquor (a by-product of certain wood pulpingoperations) or employ chlorine bleaching, which in each case can createadditional environmental challenges. Nonetheless, we are affected byincreasingly stringent environmental regulations in the countries where weoperate.

Our mill in Nervion, Spain has an internal landfillwhich was used between 1975 and 1985 to store waste calcium carbonate prior toits application as a neutralizing agent to farming and forest lands. In 1985,the provincial government required us to cease the land application, and westopped using the landfill for storage and began disposing of the materialoffsite. In 1998, in response to complaints from the local municipality, weconducted a hydrogeological study to assess the potential impacts of thelandfill on the Ibaizabal River. The study concluded that the material has notadversely affected the river, but it can affect the pH of storm water runoff.We installed a collecting drain around the material to collect and treat 

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storm water. We arecurrently under no regulatory obligation to take further action. If we elect toremove the material at some future time or if a regulatory obligation to removethe material is imposed in the future, the cost would be approximately €5million, which would be incurred over a period of five to ten years.

Our mills in Europe are subject to the European Union’sIPPC program. The IPPC program requires member countries to ensure that industriesemploy Best Available Technologies, or “*BAT*,”for all environmental aspects of their operations, including wastewaterdischarges, air emissions, noise, energy use and environmental management. Mostof our European mills are required to obtain permits imposing BAT by 2007.While we have obtained IPPC permits for many of our mills that require them, weremain in the process of obtaining such permits for other mills. Overall, wehave incurred approximately €8 million in capitalexpenditures for environmental controls at our facilities worldwide in both2004 and 2005. We anticipate that our annual environmental capital expenditureswill continue at about this level through 2007.

Our European operations are also subject to theEuropean Union’s Directive on Packaging and Packaging Waste, which was revisedin 2004 and which imposes mandatory targets for the recovery and recycling ofpackaging wastes. Member countries were required to comply with the Directiveby 2001, but implementation to date has varied greatly from country to country.We do not expect the Directive to have a material adverse effect on ourbusiness or financial condition, primarily because the targets imposed by theDirective are not significantly higher than the existing levels of recovery andrecycling in most member countries.

Our European mills are also subject to requirementsstemming from the Kyoto Protocol, by which the European Union agreed to reduceemissions of “greenhouse gasses” by 8%, as compared with 1990 emission levels,over the commitment period (2008-2012). In February 2005, theEmission Trading Scheme, or “ETS,” came into force. The European Union beganEmission Trading for a first 3 year period (2005-2007), before thecommencement of the worldwide emission trading scheme in 2008.

All our mills have received their CO2 allocation forthe period 2005-2007. Each member state granted every mill an allocationaccording to their level of production and previous CO2 emission levels. At theend of 2005, the sum of CO2 emission from our European mills was 17% lower thanour allocation. The extra allocation over and above the actual emission levelcan be sold on the European market or can be rolled over for the remaining 2 yearsof the first trading period.

We can be reasonably confident that our European millshave a sufficient allocation to avoid the need to purchase any ETS credits forthe 2005 to 2007 first stage. Moreover the surplus of allocation over emissionduring this first period can also be rolled over to the next period 2008-2012.

At the end of 2006, the new National Allocation Plan(NAP) for the period 2008-2012 will be announced. We do not expect anyburden for this new allocation to cover the current volume of production of ourmills.

We presently are notinvolved in any environmental regulatory legal proceedings which are expectedto have a material adverse effect on our business or financial condition.

***Environmental Contamination***

We may also be held liable for releases ofcontaminants from our operations, or historical contamination that isdiscovered at our facilities or facilities that we have divested.

The IPPC program requires, as part of the permitprocess, that our European mills conduct “baseline” environmentalinvestigations or otherwise provide the regulatory authorities informationregarding the condition of the underlying soil and groundwater at the mills.While the purpose of providing such 

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information is not toforce a facility to clean up historical contamination that is identified,several member countries intend to review the results and, if significantcontamination is detected, may issue orders to address the contamination. Thus,providing such information may result in our having to address contaminationthat is currently undetected at some of our mills. The cost of addressing thecontamination, if necessary, will depend upon the extent of contaminationdetected and the required remedies, and therefore, cannot yet be determined atsome of our mills. We may also be required to address contamination at anymills we decide to close or have sold in the past.

In November 2001, black liquor was released fromour mill in Nervion, Spain to the local municipal waste water treatment plantin Iurreta, Spain. As a result of the waste water treatment plant being unableto handle this additional load, the contamination reached the Ibaizabal Riverand caused a fish kill. An ecological group filed a complaint for an ecologicalcrime. This resulted in preliminary assessments, which took place during December 2001and February 2002. A number of people, including the mill manager, haveprovided evidence. Two of our employees and a third person have been accused.In October 2004, the court agreed to provisionally stay the proceedingsand consequently the three accused individuals were automatically released fromthe case. A report is expected to be issued regarding the provisional shelvingof the case dictated by the criminal court. As of today’s date there is no evidencethat this report has been issued by the Public Prosecutor.

Our Facture, France mill is the subject of litigationarising from ruptures of sewer pipe seals that resulted in contamination in1997 and 1987. Remedial repairs have been estimated at €6.4million, which will be shared between several companies. We do not expect ourshare of the repairs to be material.

In November 2002, we were notified by the SpanishEnvironmental Enforcement Agency, Seprona, that they had become aware of anaccumulation of rain water mixed with manufacturing waste and that suchconcentration posed a potential environmental hazard at our Sanguesa Plant. Therain water was removed and new procedures were put in place to prevent anyrecurrence. Management is currently in discussions with the local municipalityregarding ongoing environmental compliance. Three of our managers have beenimputed by the court for an offence against natural resources and theenvironment. It is our belief that this action is without merit as it  does not follow any leakage of the water orescape of noxious substances.

As part of our applicationfor an IPPC permit for our mill in Townsend Hook, U.K., we conducted anenvironmental investigation in 2001. The investigation detected contaminationin portions of the property. We submitted the results of the investigation tothe governmental authorities in June 2002. In 2003, we received our IPPCpermit for this mill and submitted a site closure plan for part of the site. Noaction has been required by the authorities since the issuance of the IPPCpermit in 2003. The dismantling of an old building was approved and has beencompleted with no adverse consequences.

**Raw Materials**

OCC is the principal raw material used in ourproduction of paperboard and is the essential component of testliner, one ofthe two types of containerboard we produce. Wood is the principal componentused in the manufacture of kraftliner, the second type of containerboard wemake. We source most of our OCC supply on the open market; however, at December 31,2005, we had 44 reclamation plants located in Europe and Latin America, theprimary focus of which is sourcing fiber for our mills.

In Europe, we generally procure virgin fiber throughlong-term relationships with third parties. However, we also source asignificant proportion of our virgin fiber needs from our forestry operationswhich are located principally in Latin America. In Colombia and Venezuela, weown over 230,000 acres (95,000 hectares) and manage a further 10,000 acres(4,100 hectares). These plantations provide our local mills with a significantportion of their total virgin fiber needs. Our three European kraftliner mills,Facture in France, Nettingsdorfer in Austria and Piteå in Sweden, as well asour semi chemical fluting mill 

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in Sturovo, Slovakia andour Spanish sack kraft mill, Smurfit Nervion, use primarily virgin fiber intheir production of paperboard.

Increases in the price of wastepaper and virgin fiberas raw materials could result from a variety of factors. The prices we pay forthese raw materials tend to be cyclical, subject to significant volatility, andvary on a regional basis.

The price of OCC in Europe has peaked dramaticallytwice in recent years—in June 2002 and in April 2003. In each case, arelatively low level of supply was matched with a relatively high level ofdemand, principally caused by increased demand from Asia. In the first case,the free-on-board price rose to over €150 per metric ton. Withina period of three months, supply and demand conditions levelled to return theprice to around €100per metric ton. In the second case, the spike was even more rapid with wasteprices falling back to previous levels almost immediately. During 2004 and2005, the price per metric ton remained relatively stable.

We believe that our available sources of virgin fiberand OCC (including from our own reclamation activities) will be adequate tosupply our raw material needs for the foreseeable future.

The table below provides information on averageEuropean OCC pricing per metric ton during and at the end of each year in thethree year period from 2003 to 2005:

**Free-on-Board OCC Price per MetricTon**

| ** **                      | ** ** | **As of and for the Year  Ended December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | ** 2003 **                                                              | ** ** | ** 2004 ** | ** ** | ** 2005 ** | ** ** |
| ** **                      | ** ** | **(euro)**                                                                        | ** ** |
| Price at the end  of the period |       |                                                                              | 56         |   |   |   | 58 |   |   |   | 58 |   |   |
| Average price  during period    |       |                                                                              | 62         |   |   |   | 60 |   |   |   | 58 |   |   |
| Highest price  during period    |       |                                                                              | 73         |   |   |   | 63 |   |   |   | 63 |   |   |
| Lowest price during  period     |       |                                                                              | 56         |   |   |   | 58 |   |   |   | 57 |   |   |

 

**SegmentalInformation**

We have identifiedreportable segments primarily on a geographic basis. In Europe, we have tworeportable product segments: Packaging and Specialties. The operations in thePackaging segment are highly integrated and include a system of mills andconversion plants producing containerboard and corrugated containers. Theprimary products of the Specialties segment include specialty papers, solidboard, graphicboard, paper sacks and bag-in-box. The tables below set out thetotal sales, including internal sales, net sales and income (before taxes andequity minority interests), generated by our operations in each region in thelast three years.

**Segmental Analysis of Total Sales**

| ** **               | ** ** | **2003**                  | ** **            | **2004**                  | ** ** | **2005**                  | ** **            |
|--------------------------|------------|---------------------------|-----------------------|---------------------------|------------|---------------------------|-----------------------|
| ** **               | ** ** | **(**€ million) | ** **            | **(**€ million) | ** ** | **(**€ million) | ** **            |
| Packaging                |       |                      | 3,969                 |                      |       |                      | 4,256                 |   |   |   | 4,339 |   |   |
| Specialties              |       |                      | 1,108                 |                      |       |                      | 1,139                 |   |   |   | 652 |   |   |
| Europe                   |       |                      | 5,077                 |                      |       |                      | 5,395                 |   |   |   | 4,991 |   |   |
| United States and Canada |       |                      | 104                   |                      |       |                      | —                |   |   |   | — |   |   |
| Latin America            |       |                      | 1,067                 |                      |       |                      | 1,090                 |   |   |   | 1,221 |   |   |
| **Total Subsidiaries**   | ** ** | ** **                | **€ 6,248** |                      | ** ** | ** **                | **€ 6,485** |   | ** ** | ** ** | **€ 6,212** |   |   |

 

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**Segmental Analysis of Net Sales**

| ** **               | ** ** | **2003**                  | ** **            | **2004**                  | ** ** | **2005**                  | ** **            |
|--------------------------|------------|---------------------------|-----------------------|---------------------------|------------|---------------------------|-----------------------|
| ** **               | ** ** | **(**€ million) | ** **            | **(**€ million) | ** ** | **(**€ million) | ** **            |
| Packaging                |       |                      | 2,973                 |                      |       |                      | 3,093                 |   |   |   | 3,117 |   |   |
| Specialties              |       |                      | 988                   |                      |       |                      | 1,009                 |   |   |   | 531 |   |   |
| Europe                   |       |                      | 3,961                 |                      |       |                      | 4,102                 |   |   |   | 3,648 |   |   |
| United States and Canada |       |                      | 104                   |                      |       |                      | —                |   |   |   | — |   |   |
| Latin America            |       |                      | 681                   |                      |       |                      | 703                   |   |   |   | 789 |   |   |
| **Total Subsidiaries**   | ** ** | ** **                | **€ 4,746** |                      | ** ** | ** **                | **€ 4,805** |   | ** ** | ** ** | **€ 4,437** |   |   |

 

**Segmental Analysis of Income (before taxes and equityminority interests)**

| ** **                                                           | ** ** | **2003**                  | ** **                      | **2004**                  | ** ** | **2005**                  | ** **                                 |
|----------------------------------------------------------------------|------------|---------------------------|---------------------------------|---------------------------|------------|---------------------------|--------------------------------------------|
| ** **                                                           | ** ** | **(**€ million) | ** **                      | **(**€ million) | ** ** | **(**€ million) | ** **                                 |
| Packaging                                                            |       |                      | 207                             |                      |       |                      | 152                                        |   |   |   | 130 |   |   |   |
| Specialties                                                          |       |                      | 95                              |                      |       |                      | 98                                         |   |   |   | 33 |   |   |   |
| Associates                                                           |       |                      | 9                               |                      |       |                      | 10                                         |   |   |   | 6 |   |   |   |
| Europe                                                               |       |                      | 311                             |                      |       |                      | 260                                        |   |   |   | 169 |   |   |   |
| Packaging                                                            |       |                      | 8                               |                      |       |                      | —                                     |   |   |   | — |   |   |   |
| United States and  Canada                                            |       |                      | 8                               |                      |       |                      | —                                     |   |   |   | — |   |   |   |
| Packaging                                                            |       |                      | 86                              |                      |       |                      | 118                                        |   |   |   | 114 |   |   |   |
| Associates                                                           |       |                      | 1                               |                      |       |                      | 3                                          |   |   |   | 1 |   |   |   |
| Latin America                                                        |       |                      | 87                              |                      |       |                      | 121                                        |   |   |   | 115 |   |   |   |
| Asia (Associates)                                                    |       |                      | 2                               |                      |       |                      | —                                     |   |   |   | — |   |   |   |
| Centre costs                                                         |       |                      | (22                             | )                         |       |                      | (25                                        | ) |   |   | (23 | ) |   |   |
| Profit before goodwill amortization, interest and  exceptional items |       |                      | 386                             |                      |       |                      | 356                                        |   |   |   | 261 |   |   |   |
| Goodwill amortization                                                |       |                      | (45                             | )                         |       |                      | (38                                        | ) |   |   | (30 | ) |   |   |
| Group net  interest                                                  |       |                      | (298                            | )                         |       |                      | (285                                       | ) |   |   | (245 | ) |   |   |
| Loss from early  extinguishment of debt                              |       |                      | —                          |                      |       |                      | (6                                         | ) |   |   | (105 | ) |   |   |
| Share of  associates’ net interest                              |       |                      | (2                              | )                         |       |                      | (1                                         | ) |   |   | (1 | ) |   |   |
| Profit/(loss)  before exceptional items                              |       |                      | 41                              |                      |       |                      | 26                                         |   |   |   | (120 | ) |   |   |
| Reorganization and restructuring costs                               |       |                      | (35                             | )                         |       |                      | (39                                        | ) |   |   | (25 | ) |   |   |
| Impairment of  property, plant and equipment                         |       |                      | —                          |                      |       |                      | —                                     |   |   |   | (45 | ) |   |   |
| Profit on the  sale of operations                                    |       |                      | 6                               |                      |       |                      | 22                                         |   |   |   | 53 |   |   |   |
| **Profit/(loss) before taxation**                                    | ** ** | ** **                | **€    12** | ** **                | ** ** | ** **                | **€      9** |   | ** ** | ** ** | **€ (137** | **)** |   |   |

 

 

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**OrganizationalStructure**

Eachof SKGL, JSG Holdings, JSL, JSG Funding, JSG Acquisitions and JSG are holdingcompanies with no operations of their own. A listing of SKGL’s principalsubsidiaries is set out below.

| **Subsidiaries**                                                                                                                            | ** ** | ** **                                                                                                                                                 | ** ** | **Principal Activities** | ** ** | **Country of    Incorporation** | ** ** | **Holding%** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------------|------------|--------------|
| **Carton  de Colombia, S.A.******Apartado Aereo 219, Cali, Colombia                                                                         |       | Manufacture of  paperboard and packaging products                                                                                                          | ** ** | **Colombia**             |       | 70                              |
| **Carton  de Venezuela, S.A******Apartado Aereo 609, Caracas, Venezuela                                                                     |       | Manufacture of  paperboard and packaging products                                                                                                          | ** ** | **Venezuela**            |       | 88                              |
| **Grupo  Smurfit Mexico, S.A. de C.V.******Jaime Balmes, No. 11 Torre D. 7 Piso,  Col. Los Morales Polanco 11510,  Mexico D.F., Mexico |       | Manufacture of  paperboard and packaging products                                                                                                          | ** ** | **Mexico**               |       | 100                             |
| **Kappa  Kraftliner**** AB**  SE-941 86, Piteå, Sweden                                                                            |       | Manufacture of  containerboard and holding company for operations in Sweden and other  countries which manufacture specialty papers and packaging products | ** ** | **Sweden**               |       | 100                             |
| **Smurfit Kappa Nederland B.V.******Dr. Holtroplaan 5, 5652 Eindhoven  The Netherlands                                                 |       | Holding company  for Dutch operations which manufacture containerboard, solid board and  packaging products                                                | ** ** | **The Netherlands**      |       | 100                             |
| **Nettingsdorfer Papierfabrik  AG & Co KG******A-4054 Nettingsdorf-Fabrik, Austria                                                 |       | Manufacture of  containerboard and holding company for Austrian operations which manufacture  corrugated board                                             | ** ** | **Austria**              |       | 100                             |
| **Smurfit,  S.A.******Paque Saenz Pena 308—8th Floor,  Buenos Aires, Argentina                                                         |       | Manufacture of  paperboard and packaging products                                                                                                          | ** ** | **Argentina**            |       | 100                             |
| **Smurfit  Capital Funding Limited******Beech Hill, Clonskeagh, Dublin 4, Ireland                                                           |       | Finance company                                                                                                                                            | ** ** | **Ireland**              |       | 100                             |
| **Smurfit  Deutschland GmbH & Co KG******Tilsiter Strasse 144,  22047 Hamburg, Germany                                             |       | Holding company  for German operations which manufacture paperboard and packaging products                                                                 | ** ** | **Germany**              |       | 100                             |
| **Smurfit  International B.V.******Fred Roeskestraat 123,  1076 EE Amsterdam, The Netherlands                                               |       | Principal  international holding company                                                                                                                   | ** ** | **The Netherlands**      |       | 100                             |
| **Smurfit International France S.A.******2 rue Goethe,  75116 Paris, France                                                                 |       | Holding company  for French operations whose activities are the manufacture of paperboard and  packaging products                                          | ** ** | **France**               |       | 100                             |

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| **Smurfit  Investments UK Limited******Darlington Road, West Auckland,  Bishop Auckland, Co. Durham  DL14 9PE, United Kingdom |   | Holding company for UK  operations whose principal activities are the manufacture of paperboard and  packaging products                                                                                 | ** ** | **United Kingdom** |   | 100 |
|-------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|--------|-----|
| **Smurfit  Kappa Ireland Limited******Beech Hill, Clonskeagh, Dublin 4, Ireland                                               |   | Manufacture of  paperboard and packaging products and printing                                                                                                                                          | ** ** | **Ireland**        |   | 100 |
| **Smurfit  Nervion, S.A.**  B Arriandi s/n, 48215 lurreta,  Vizcaya, Spain                                                    |   | Manufacture of  sack paper and holding company for Spanish, Portuguese and sack converting  operations whose principal activities are the manufacture of paperboard,  packaging and paper sack products | ** ** | **Spain**          |   | 99  |
| **Smurfit  SISA, S.p.A******Strada Serravalle 30,  15067 Novi Ligure (AL), Italy                                              |   | Manufacture of  paperboard and packaging products                                                                                                                                                       | ** ** | **Italy**          |   | 90  |

 

**Property, Plant andEquipment**

Our manufacturing facilities are mainly spread acrossEurope and Latin America. Our paper and paperboard mills are our main assets.We believe that our facilities are suitable and adequate for our businesspurposes for the foreseeable future. At December 31, 2005, the net bookvalue of our tangible fixed assets amounted to €3,499 million,of which €43million related to capitalized leased assets.

Thetable below provides a regional summary of our facilities at December 31,2005.

| **Facilities**         | ** ** | ** ** | ** ** | **Europe** | ** ** | **Latin  America** | ** ** | **Total SKG** | ** ** |
|------------------------|------------|------------|------------|------------|------------|--------------------|------------|--------------------|------------|
| Reclamation            |       |       | 18         |       |       |               | 26         |               |       |   | 44 |   |   |
| Mills                  |       |       | 36         |       |       |               | 11         |               |       |   | 47 |   |   |
| Corrugated  containers |       |       | 199        |       |       |               | 28         |               |       |   | 227 |   |   |
| Folding cartons        |       |       | 2          |       |       |               | 3          |               |       |   | 5 |   |   |
| Paper sacks            |       |       | 13         |       |       |               | 5          |               |       |   | 18 |   |   |
| Other conversion       |       |       | 26         |       |       |               | 1          |               |       |   | 27 |   |   |
| Other                  |       |       | 29         |       |       |               | 1          |               |       |   | 30 |   |   |
| **Total facilities**   | ** ** | ** ** | **323**    |       | ** ** | ** **         | **75**     |               | ** ** | ** ** | **398** |   |   |

 

Our facilities at December 31, 2005 include atotal of 112 acquired as a result of the merger with Kappa. This totalcomprises 13 paperboard mills, 70 corrugated container plants, 16 otherconversion facilities, primarily solid board packaging plants, eight otherfacilities and five reclamation facilities.

The table above includessix facilities in Europe, the disposal of which is required under the terms ofthe European Union approval of the merger of the operations of JSG and Kappa.

**Item 4A.     Unresolved StaffComments**

Not applicable.

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**Item 5.**                        Operating and Financial Review and Prospects

*The followingdiscussion and analysis is based on our consolidated financial statements,which are prepared in accordance with Irish GAAP. Our accounting policies arediscussed in the notes to the consolidated financial statements. Irish GAAPdiffers in certain significant respects from U.S. GAAP. A description of theprincipal differences as they apply to SKG and reconciliations of net incomefor 2005, 2004 and 2003 and shareholders’ equity at December 31, 2005 and2004 are set forth in note 35 to the audited consolidated financial statements.*

*While the merger ofthe former JSG and Kappa operations to form SKG has had a major impact on ourfinancial structure, this is seen more in the balance sheet than in the resultsfor year since it was completed only on December 1, 2005. In addition, theeffect of including the former Kappa operations for one month was offset by theabsence of the principal Munksjö specialty operations for the year. There is nolonger any contribution from our interest in SSCC, and we no longer show theUnited States and Canada as a reportable segment following the transfer of our50% ownership interest in Smurfit MBI of Canada as part of the SSCC Asset Swap.*

*Certain information in the review set forth below andelsewhere in this annual report includes forward-looking statements thatinvolve risks and uncertainties. See “Disclosure Regarding Forward-LookingStatements” and Item 3 “Key Information—Risk Factors” for a discussion ofimportant factors that could cause actual results to differ materially from theresults described in the forward-looking statements.*

**General**

SKG is the largest European-based integratedmanufacturer of containerboard, corrugated containers and other paper-basedpackaging products. SKG is a world leader in corrugated containers, combiningJSG’s previous strong positions particularly in Western and Southern Europewith those of Kappa who was particularly strong in Northern and Eastern Europe.SKG is the leading European producer of containerboard and also has marketleading positions in both containerboard and corrugated in Latin America. SKG’soperations span over 30 countries, with total capacity of approximately6 million metric tons of both containerboard and corrugated. SKG is also aleading producer of solid board, paper sacks and bag-in-box.

Our operations areorganized and managed on the basis of two regions: Europe and Latin America.Prior to the sale of our Canadian subsidiary, Smurfit MBI, as part of the SSCCAsset Swap in 2003, we also had operations in the United States and Canada.

·       *Europe*.   OurEuropean operations are spread across the major economies of Western Europe.Within Europe, our operations are divided into two segments: packaging andspecialties. As restructured following the Smurfit-Kappa merger, our packagingsegment consists principally of our containerboard and corrugated containeroperations. Our specialties segment consists primarily of our graphic and solidboard businesses along with our paper sack (comprising the Nervion mill and thesack conversion plants) and bag-in-box operations. Through the creation of SKGwe have extended the geographic spread of our packaging operations andsignificantly increased our presence in the European solid board market. Priorto the merger, we had earlier expanded our European presence through the SSCCAsset Swap in 2003, selling our 50% shareholding in Smurfit MBI as part of thistransaction.

·       In late 2004, we agreed tosell Munksjö’s specialty paper and pulp operations with effect from January 1,2005 and completed this sale in March 2005. While we retained thepackaging operations, we also agreed to sell Munksjö’s tissue operations, thesale of which was completed in May 2005. Until the end of 2004, the décorbase paper and other specialty papers produced by Munksjö formed part of ourspecialties segment while the tissue operations formed part of this segmentuntil their disposal.

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·       In June 2005, wecompleted the sale of assets comprising The K Club and the site of the formerClonskeagh, Dublin paper mill. The Munksjö specialty operations and The K Clubare treated as discontinued for the year to December 2005.

·       *LatinAmerica*.   Our Latin American operations are located principallyin Mexico, Colombia, Venezuela and Argentina. Since our initial investments inthe late 1980’s, Latin America has contributed significantly to our earningsand cash flow. While our largest businesses are in Mexico and Colombia, theprofitability of our Venezuelan operations was positively enhanced during 2004by the fact that the economy and currency remain relatively protected. Theimpact of a more open economy in 2005 is reflected in a reduced level of profitability.

·       *UnitedStates and Canada*.   Historically, our principal investment inthe United States and Canada was our 29.3% interest in SSCC. As a result of thespin-off as part of the September 2002 acquisition of JSG, we no longerhold any interest in SSCC. Subsequent disposals, including the SSCC Asset Swapand culminating in that of Munksjö’s specialty operations (where Munksjö had adécor base paper mill in the United States), has left SKG with only a tokenpresence in North America through a small bag-in-box operation. This operationreports as part of the European specialties segment along with the remainder ofthe bag-in-box operations.

Thetable below sets forth the actual net sales generated by our subsidiaryoperations in each region in the last three years:

| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| **Region:**               | ** ** | ** **                                  | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                | ** ** | **€000**                               | ** ** | **€000** | ** ** | **€000** | ** ** |
| Europe:                   |       |                                        |       |   |   |   |   |
| Packaging                 |       | 2,972,383                                   |       | 3,093,484 |   | 3,117,403 |   |
| Specialties               |       | 988,275                                     |       | 1,009,038 |   | 530,629 |   |
| Total Europe              |       | 3,960,658                                   |       | 4,102,522 |   | 3,648,032 |   |
| Latin America             |       | 681,302                                     |       | 702,560 |   | 789,297 |   |
| United States and  Canada |       | 104,355                                     |       | — |   | — |   |
| Total                     |       | €                                      | 4,746,315  |   | € | 4,805,082 |   | € | 4,437,329 |   |
|                           |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Our European and Latin American operations accountedfor approximately 82% and 18% respectively of our net sales for the year ended December 31,2005.

We conduct our business primarily through wholly ownedsubsidiaries. Within SKG’s operations, however, there are several subsidiariesin which SKG’s ownership is less than 100% and in respect of which minorityinterests exist. For example, we own approximately 70% and 88% of theoutstanding equity interests of our Colombian and Venezuelan subsidiaries,respectively.

In addition to theactivities of our subsidiaries, we conduct our operations through a number ofassociated companies in which we hold minority interests. We account for theseassociated companies under the equity method of accounting. Accordingly, weinclude in our operating results our proportionate share (based on ourownership percentage) of the net earnings or losses of such associates. Beforethe spin-off in September 2002, our principal associated company wasSSCC.

**Overview**

We generate sales principally through the productionof paperboard and the conversion of paperboard into paper-based packagingproducts. Our paper mills sell containerboard and other grades of paperboardprimarily to SKG-owned converting operations. We also sell containerboard andother grades of paperboard to third parties.

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Key factors thatimpact our operating results are:

·       changes in demand;

·       changes in industrycapacity;

·       recovery of paperboardprice increases from our packaging customers;

·       the cost of recycledwastepaper; and

·       certain currency exchangerate movements.

Demand for our products is generally driven by thelevel of economic growth and activity. Increased levels of economic growth andactivity typically result in higher per capita use of packaging materials, bothwith respect to transportation of goods and consumer presentation. Because themarkets for containerboard and packaging products in developed economies aregenerally mature, historically there has been a close correlation betweengeneral economic growth and demand for packaging products such as corrugatedcontainers and, therefore, for their component materials such ascontainerboard. In contrast, less-developed economies, including those in LatinAmerica and Eastern Europe, generally have a lower rate of per capitaconsumption of packaging materials and containerboard. Thus, we believe theyoffer greater opportunity for growth.

Demand for containerboard and packaging products isaffected to a lesser degree by changes in their market prices. Significantincreases in the price of containerboard and corrugated containers have, onsome occasions, resulted in decreased demand as customers elect to purchasesubstitute products, such as returnable plastic containers, wooden crates orshrink-wrap.

Historically, prices for containerboard and packagingproducts have tended to be cyclical. This cyclicality has resulted fromsignificant imbalances in supply and demand for paper. On the one hand, paperproduction capacity cannot be readily adapted to reflect changing marketconditions due to the capital intensity of paper production facilities and thelong lead time between the planning and completion of a new paper mill. On theother hand, significant containerboard and corrugated container price cuts andinventory growth have resulted when capacity has exceeded demand. Many leadingpaper manufacturers have continued to react to reduced demand by takingdowntime and by rationalizing high cost or inefficient capacity. This hasresulted in a reduced level of capacity expansion with production decisionsincreasingly being based more on current rather than projected demand.

The profitability of our mills can be affected by thedifferent characteristics of the markets for testliner and kraftliner. Becausethe primary raw material for the production of testliner is wastepaper, andwastepaper prices tend to fluctuate, our testliner mills can experiencetemporary increases and decreases in profits but earn a relatively stablemargin over time. In contrast, the primary raw material for the production ofkraftliner is wood, the cost of which is relatively more stable. As a result,our kraftliner mills can earn relatively strong margins during periods of highprices, but relatively lower margins when prices decline. Moreover, a majorityof our kraftliner sales are made to third parties (in contrast to our testlinersales). Consequently, changes in the profitability of kraftliner have a moreimmediate impact on our operating results than testliner, which we primarilysell to our converting plants.

Our overall profitability is also affected not only bysupply and demand for raw materials and our finished products, but also by thelength of time it takes us to translate price increases in raw materials toprices we charge for third-party sales of containerboard and paper-based packagingproducts. To the extent our containerboard is sold internally, ourprofitability will only be affected by the ability to recover any priceincreases from third-party sales of paper-based packaging products. Priceincreases at the corrugated level tend to lag containerboard price movements,sometimes by months. As a result, during periods of rising containerboardprices, our profitability is generally adversely affected. Conversely, duringperiods of declining containerboard prices, our profitability is generallypositively affected.

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The principal determinant of the cost of ourpaperboard products is wastepaper, which is used extensively in the manufactureof our paperboard products. An important driver of recycled wastepaper pricesis the balance of supply and demand for paper products in general. When theprice of recycled wastepaper begins to rise, paper and containerboardmanufacturers attempt to raise their prices to preserve profit margins, whichgenerally narrow as a result of increased raw material costs. It generallytakes approximately two months for the mills to pass along their priceincreases to the paper-based packaging products manufacturers. In turn, themanufacturers of paper-based packaging products generally attempt to raiseprices to recover containerboard cost increases. It generally takesapproximately four months for these manufacturers to pass through their priceincreases. In a down cycle, as recycled wastepaper and containerboard pricesfall, manufacturers of paper and paper-based packaging products attempt tomaintain prices. From our experience, our mills are able to maintain prices forbetween two and three months while our paper-based packaging operations areable to maintain prices for between four and six months. As a result, theeffect of price fluctuations on our mills and converting operations will varydepending on the relevant point in the industry cycle.

Given the wide geographic spread of our operations, weare exposed to currency rate fluctuations. Since the introduction of the euroon January 1, 1999, our exposure to fluctuations in exchange rates withinthe European Union has been reduced. However, the United Kingdom, Sweden,Norway, Denmark and Poland have not adopted the euro as their nationalcurrency. While the merger has increased our presence in these countries, ithas also extended it into other countries outside the euro zone such as theCzech Republic, Slovakia, Switzerland and Russia. Although the results of ouroperations in Latin America are reported in U.S. dollars, they are denominatedin local currency meaning that fluctuations in the value of those currenciesagainst the U.S. dollar and, in turn, in the value of the dollar may have asignificant effect on our operations and on our reported results in euro. Aweaker U.S. dollar decreases and, conversely, a stronger U.S. dollar increases,the euro figures we report in our financial statements with respect to ourLatin American operations. As a result, comparability of performance betweenfinancial periods can be significantly affected by fluctuations in the value ofthe U.S. dollar against the euro.

In addition, the relativestrength or weakness of the U.S. dollar is important for the European industrybecause U.S. containerboard prices tend to influence the world market.Movements in the U.S. dollar exchange rate may also have an effect on tradingsince a strong U.S. dollar tends to make U.S. exports less competitive.Conversely, a weak U.S. dollar over a sustained period has, to some degree,resulted in lower sales into the United States by European manufacturers whoship products in corrugated containers resulting in lower European demand forour containers. A weak U.S. dollar has, to some degree, also resulted inadditional competition in the European market from U.S. manufacturers that havean incentive to sell more products in Europe due to increased European demandfor the relatively lower priced U.S. goods over higher priced European goods.Therefore, the sustained strength of the euro relative to the U.S. dollar couldadversely affect our operating results and financial condition.

***Comparability of Periods***

While the merger of the former JSG and Kappaoperations to form SKG has had a major impact on our financial structure, thisis seen primarily in our balance sheet. The impact on the results for the yearended December 31, 2005 is relatively modest given that the merger wascompleted only on December 1, 2005 and that the effect on sales andprofits was offset by the disposal of Munksjö specialty operations in March andMay 2005 and of The K Club in June 2005. While the merger resulted in asignificant increase in net borrowing, the impact on our interest charge wasmodest in the context of the year as a whole given the timing of thetransaction. Nevertheless, our financial statements and our balance sheet inparticular vary in important respects from the historical consolidatedfinancial statements of the former JSG.

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In addition, the financial statements for the formerJSG after the SSCC Asset Swap in March 2003 vary in important respectsfrom the historical consolidated financial statements.

The merger of the former JSG and Kappa operations wasaccounted for as an acquisition of the former Kappa operations by JSG.

Period to periodcomparisons are significantly affected by these changes to the structure of theGroup as well as by fluctuations in foreign currency exchange rates.

**Results of Operations**

Thefollowing table sets forth each category of our consolidated statement ofoperations data, expressed as a percentage of net sales for the years endedDecember 31, 2005, 2004 and 2003:

| ** **                                                        | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Consolidated Statement of Operations Data** | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                                                         | ** ** | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                                     |       | 72.6                                        | %          | 72.3 | % | 72.1 | % |
| Impairment of  fixed assets                                       |       | 1.0                                         | %          | — |   | — |   |
| Gross profit                                                      |       | 26.4                                        | %          | 27.7 | % | 27.9 | % |
| Net operating  expenses                                           |       | 22.0                                        | %          | 21.0 | % | 20.7 | % |
| Reorganization  and restructuring costs                           |       | 0.6                                         | %          | 0.8 | % | 0.7 | % |
| Operating income  subsidiaries                                    |       | 3.8                                         | %          | 5.9 | % | 6.5 | % |
| Share of  associates’ operating income                       |       | 0.1                                         | %          | 0.2 | % | 0.3 | % |
| Total operating  income                                           |       | 3.9                                         | %          | 6.1 | % | 6.8 | % |
| Profit on sales  of operations subsidiaries                       |       | 1.2                                         | %          | 0.5 | % | 0.1 | % |
| Net interest                                                      |       | 5.5                                         | %          | 6.1 | % | 6.3 | % |
| Loss from early  extinguishment of debt                           |       | 2.4                                         | %          | — |   | — |   |
| Other financial  expense                                          |       | 0.3                                         | %          | 0.3 | % | 0.3 | % |
| Income before  taxes and equity minority interests                |       | 3.1                                         | %          | 0.2 | % | 0.3 | % |
| Taxes on income                                                   |       | 0.5                                         | %          | 0.6 | % | 1.3 | % |
| (Loss) before  equity minority interests                          |       | (3.6                                        | )%         | (0.4 | )% | (1.0 | )% |
| Equity minority  interests                                        |       | 0.4                                         | %          | 0.3 | % | 0.4 | % |
| Net (loss) available to  ordinary shareholders                    |       | (4.0                                        | )%         | (0.7 | )% | (1.4 | )% |
|                                                                   |            |                                             |            |  |  |  |  |  |  |

 

***Comparisonof Year Ended December 31, 2005 and Year Ended December 31, 2004***

*Netsales.*   Net sales fromcontinuing operations at €4,213 million for the year ended December 31,2005 were 1.5% lower than in 2004, primarily as a result of weak marketconditions in Europe. Allowing for the impact of net disposals and closures asoffset by a positive currency move, the underlying movement was an overalldecrease of €70million. The positive currency move in the year arose in Latin America mainlyas a result of the strong appreciation of the Colombian Peso in 2005 as offsetby the reduced value of the Venezuelan Bolivar following its devaluation inMarch 2005. Within Europe, currency movements had a marginal impact in overallterms. While the euro was stronger against Sterling and the Swedish Krona, theimpact was largely offset by the positive effect of a relative strengthening inthe Norwegian and Polish currencies against the euro in 2005.

Including the sales of €200million generated by Kappa’s operations and the sales of €25million generated in 2005 by Munksjö’s tissue business and The K Club prior totheir disposal, net sales in total amounted to €4,437 million in the yearended December 31, 2005. Including the sales of €527 million generated byMunksjö’s specialty operations and The K Club, net sales in total amounted to €4,805million in the year ended December 31, 2004.

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*With the impact of the disposal ofMunksjö’s specialty operations and The K Club outweighing that of the inclusionof the sales generated by Kappa’s operations, net sales from our Europeanoperations decreased from*€4,103 million in the year ended December 31,2004 to €3,648 millionin the year ended December 31, 2005.

Net sales from our European Packaging operations were €3,117million in the year ended December 31, 2005 compared to €3,093 millionin the year ended December 31, 2004. The increase reflects the inclusionof the sales of Kappa’s packaging operations, without which the year-on-yearmove would be a decrease of €141 million. With overallcontainerboard and corrugated volumes within the continuing operations of theformer JSG flat year-on-year, the decrease in net sales reflects the impact oflower average selling prices in 2005 for our principal products.

Kraftliner volumes in the former JSG were 2% lower in theyear ended December 31, 2005 than in 2004. This decline in volumes,coupled with lower prices and rising input costs, negatively impacted thefinancial performance of the kraftliner operations. Recycled containerboardvolumes (excluding mills closed or sold) in the former JSG were unchanged in2005 on 2004 levels, although paper prices declined year-on-year. Paper priceincreases, of €50 per metric ton onkraftliner and recycled, were partially implemented in the fourth quarter of2005 in an attempt to commence the recovery of rising input costs; specificallyenergy prices. Nevertheless, given that price increases were implemented in thelatter part of 2004 also, average containerboard prices were lower year-on-yearin 2005. Corrugated volumes in the former JSG in 2005 were unchanged on 2004levels but selling prices declined on 2004 levels reflecting the weakness inpaper prices throughout the year.

In Specialties, the decrease in net sales aroseprimarily as a result of the absence in 2005 of Munksjö’s specialty operations(except for the relatively small tissue business in the early part of the year)although the Kappa operations added approximately €35 millionin sales. Allowing for these moves, comparable sales at approximately €470million were approximately 2% lower than in the year ended December 31, 2004.

Latin American sales asreported in euro terms increased by 12% to €789 millionin the year ended December 31, 2005 from €703 million in theyear ended December 31, 2004. While part of the increase came from thepresence in 2005 of Smurfit Chile and the recently acquired sack plants inEcuador and Costa Rica, it mainly reflects the underlying strong performance ofthe operations. Given the general appreciation of the local currencies againstthe euro in 2005, there is also a positive currency element in the year-on-yearmove. On a comparable basis, the real growth in sales revenues in the regionwas approximately 7% and reflects primarily overall higher sales volumes in2005 although conditions varied from country to country.

**INCOME BEFORE INTEREST EXPENSE AND TAXES**

With sales revenue lower in the year ended December 31,2005, cost of sales decreased also while representing 72.6% of net salescompared to 72.3% in 2004. The slightly higher percentage in 2005 resultsmainly from lower average selling prices and from the impact of higher costssuch as energy. Gross profit in the year ended December 31, 2005 was €1,169.4 million,after an asset impairment charge of €45.2 million, compared to €1,331.8 millionin the year ended December 31, 2004. The charge was in respect of thewrite down in asset values of those plants which we expect to close during2006.

Net operating expenses, which consist of selling andadministration expenses as well as distribution costs, decreased by 3.3% to €977.3million in the year ended December 31, 2005 from €1,010.6million in 2004. The decrease of €33.3 million resultedmainly from net disposals with the impact of the inclusion of the former Kappaoperations for one month being more than offset by that of the Munksjödisposal. Allowing for the impact of currency and net disposals, the underlyingyear-on-year move was a modest decrease of €2 million, with loweradministration costs being partly offset by higher distribution costs. 

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Although lower in absoluteterms in the year ended December 31, 2005, net operating expensesrepresented 22.0% of net sales compared to 21.0% in 2004 with the increasedriven primarily by the change in our overall sales mix following the disposalof Munksjö specialties.

Profit before goodwill amortization, interest,exceptional items and taxation amounted to €260.6 millionin the year ended December 31, 2005 compared to €356.0million in 2004. The shortfall on 2004 arose primarily within Europe andreflected the generally weak market conditions faced by our Packagingoperations. Although weak demand conditions affected certain of our businesseswithin Specialties, the absence of Munksjö’s specialty operations was theunderlying reason for the large decrease in the profitability of this segment.

While our Latin American operations generallyperformed well in the year ended December 31, 2005, the overall profitabilityof the region was adversely affected by a decline in Venezuela and, to a lesserextent, by the effect of the relative strength of the euro in 2005. Following astrong result in the year ended December 31, 2004, lower profits wereexpected in Venezuela in 2005 reflecting changes to market conditions as aresult of increased competition from imports and the devaluation of the Bolivarin March 2005. This decline was more than offset, however, by higherprofits in Colombia and, despite a slowdown in the latter part of the year, inMexico.

Exceptional items in the year ended December 31,2005 comprised disposal gains of €52.6 million net ofreorganization and restructuring costs of €25.1 million andimpairment of property, plant and equipment of  €45.2 million. Theprincipal disposal in the year ended December 31, 2005 was that of Munksjö’sspecialty operations, which were sold in two separate transactions with acombined gain of approximately €30 million. Other gainsarose in relation to the sale of The K Club (including the Clonskeagh mill site)and the Voghera mill. The reorganization and restructuring costs arose inEurope with the largest charges relating to the closure of our Irish mill andto two of our French corrugated plants.

In the year ended December 31,2004, exceptional items amounted to €17.2 million andcomprised reorganization and restructuring costs of €39.4 million net ofdisposal gains of €22.2 million.The reorganization and restructuring costs arose mainly in the fourth quarterwith the largest charges relating to the Cordoba mill in Spain and to Tamworthcorrugated and Witham cartons in the United Kingdom. In addition to the BotanicRoad property, the disposal gains related to the sale of surplus property inItaly and Spain and to the disposal of an investment in a French associate.

**INTERESTEXPENSE AND TAXES**

Group net interest for the year ended December 31,2005 was €244.6 million (before the €104.7 millionloss from early extinguishment of debt) compared to €285.3 million (before the €5.7million loss from early extinguishment of debt)in 2004. The year-on-yeardecrease arose primarily as a result of lower net borrowing in 2005 partlyoffset by an increase as a result of the merger affecting only the month ofDecember. Neither currency nor interest rates had any real impact on the moveother than through the redemption earlier in the year of the relatively highcost original PIK debt.

With the pay down of the original PIK debt in February 2005,our PIK interest charge was €33.0 million loweryear-on-year while our cash interest was marginally higher due to the switchbetween non-cash and cash interest as a result of redeeming the PIK andmovements in our level of net borrowing. Prior to the completion of the mergerin December, our net borrowing level had fallen during 2005 as a result of ourasset sales, principally Munksjö specialties and The K Club, but this trend wasreversed with the significant increase in December as a result of themerger. With significant accelerated write-offs of debt issue costs (includedwithin the loss from the early extinguishment of debt), the amortization chargewas lower in 2005.

The loss of €104.7 million from theearly extinguishment of debt arose mainly as a result of our refinancing anddebt reduction activities during 2005. We incurred costs of €76.4million in the first quarter 

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of 2005 as a result of theFebruary refinancing and the subsequent repayment of debt with the Munksjöand The K Club proceeds. The early pay down of the original PIK debt, followingthe refinancing, resulted in the write-off of €13.5 millionin deferred debt issue and other costs as well as cash costs of €53.0 million,primarily the cash premium paid for early redemption. In addition, we wrote offdebt issue costs of €9.9 millionin respect of the debt repaid with the Munksjö proceeds. We wrote off a further€4.0million in the second quarter in respect of the debt repaid with The K Clubproceeds and €24.2million in the fourth quarter as a result of the early pay down of the formerJSG senior credit facility as part of the financing of the merger.

After other financial expense of €13.3 million,the result before taxation for the year ended December 31, 2005 was a lossof €137.0 million(€14.6million before exceptional items, the asset impairment charge and the loss fromearly extinguishment of debt) compared to a profit of €8.6 million(€25.8 millionbefore exceptionals) in 2004. The other financial expense represents thedifference between the expected return on pension scheme assets and theinterest cost of pension scheme liabilities and is disclosed in accordance withFRS 17—“Retirement Benefits”.

The tax charge amounted to €21.6 millionin the year ended December 31, 2005 compared to €27.0 millionin 2004. As in 2004 when we had the benefit of the Dutch tax refund followingthe Bosal judgment, we benefited from tax credits in certain countries in theyear ended December 31, 2005. Our overall effective tax rate is adverselyaffected by the presence of items not allowable for tax (such as the goodwillamortization). Where profits are low, these add-backs have a significant impacton our overall effective tax rate resulting in a significant charge despite areported loss before taxation.

Equity minority interestsamounted to €18.8 million in the year ended December 31,2005 compared to €16.1 millionin 2004 and arose mainly in Latin America. After minorities, the net loss forthe year ended December 31, 2005 was €177.3 million compared to €34.5 millionin the year ended December 31, 2004.

***Comparison of Year Ended December 31, 2004 andYear Ended December 31, 2003***

*NetSales.*   Net sales from continuing operations forthe year ended December 31, 2004 were €4,278 millioncompared to €4,146 millionin 2003. Including the discontinued sales of Munksjö’s specialty paper andtissue businesses and of The K Club and, in 2003, the sales of Smurfit MBI,total net sales for the year ended December 31, 2004 were €4,805 millioncompared to €4,746 millionin 2003, an increase of €59 million. Allowing for the impact ofnet acquisitions and currency, however, the increase was €82 millionor 1.7%. While net acquisitions, primarily the SSCC Asset Swap and PapeleraNavarra, increased sales by €47 million, thisincrease was partially offset by currency movements of €70 millionas a result of the relatively stronger euro in 2004. In 2004, the euroappreciated by 11% from an average of approximately U.S. $1.12 in 2003 to U.S.$1.24 in 2004.

Excluding the impact of net acquisitions, overallvolumes in our European operations were higher in 2004 than in 2003. Kraftlinervolumes were 6% higher in 2004 than in 2003 while recycled containerboardvolumes were 3% higher. In overall terms, corrugated volumes were 1% higherthan in 2003 although market conditions varied from country to country.

In terms of net sales, however, the benefit of highervolumes in Europe was partially offset by the impact of weaker selling pricesfor corrugated containers and kraftliner. Recycled containerboard prices werebroadly unchanged year-on-year. Overall, our Latin America operations benefitedfrom a combination of higher volumes and, to a lesser extent, higher averageprices for containerboard and corrugated containers.

Net sales from our European operations increased to €4,103million in 2004 from €3,961 million in 2003, representing anincrease of approximately 4%. This increase arose principally as a result ofthe inclusion of the sales of the former European operations of SSCC and ofPapelera Navarra for the full 

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twelve months compared toonly nine months and seven months respectively in 2003. In total, acquisitionsadded approximately €184 million to netsales with an offset of €34 million from the absence in 2004 ofoperations such as the Lestrem mill and the Noveant sack plant.

Excluding both the former European operations of SSCCand Papelera Navarra, net sales from our remaining packaging operations wouldhave been lower in 2004 than in 2003 with the negative impact of lower averageprices more than offsetting the benefit of higher containerboard and corrugatedcontainer volumes. While recycledcontainerboard prices were marginally higher in 2004, reflecting the recoveryin the fourth quarter, average prices for kraftliner were 5% lower than in2003, a decrease of approximately €20 per metric ton.Although the corrugated operations benefited from the weakness ofcontainerboard pricing and from slightly higher volumes, box prices acrossEurope were lower than in 2003. Despite the absence of the Lestrem millin 2004 and the presence of the Noveant sack plant for only part of the year, net sales from Specialties operationswere higher in 2004 reflecting mainly an improved performance in Munksjö’sdécor base paper and pulp operations and in bag-in-box operations.

Net sales from our LatinAmerican operations increased to €703 million in 2004 from €681million in 2003, representing an increase of approximately 3%. Reflecting thecontinued strength of our markets in 2004, sales growth was achieved across theregion through a combination of higher volumes and average prices. Overallcontainerboard and corrugated volumes were approximately 9% higher in 2004compared to 2003 while average prices for containerboard and corrugated volumesincreased by 1% and 5% respectively year-on-year. Although the underlyingincrease was approximately 14% in terms of U.S. dollars, this increase wasreduced when translated into euro given the substantially weaker U.S. currencyin 2004.

**INCOMEBEFORE INTEREST EXPENSE AND TAXES**

Gross profit from subsidiaries for 2004 was €1,331.8million, an increase of €5.3 million or 0.4% from 2003. Althoughboth net sales and costs of sales were higher than in 2003, the increase incost of sales was slightly higher. Accordingly, cost of sales as a percentageof net sales in 2004 was 72.3% compared to 72.1% in 2003. The higher percentagein 2004 resulted mainly from lower average selling prices with the impact ofhigher energy costs in 2004 offset by the benefit of lower waste fiber costs inEurope.

Net operating expenses, which consist of selling andadministration costs as well as distribution costs, increased by 2.9% to €1,010.6 millionin 2004 from €982.3 millionin 2003. The increase of €28.2 resulted primarily from net acquisitionsand the €18.2million gain on the sale of property at The K Club in 2003. Allowing forthe impact of currency, net acquisitions and this one-off gain in 2003, netoperating expenses were broadly unchanged year-on-year. Netoperating expenses represented 21.0% of third party sales compared to 21.1%(adjusting for The K Club property disposal gain) in 2003.

Operating income from subsidiaries afterreorganization and restructuring costs amounted to €281.8 millionin 2004 compared to €309.1 millionin 2003. Continuing operations contributed €226.0 million in2004, with the decrease on 2003 reflecting primarily the impact of loweraverage prices, while discontinued operations contributed €55.8 million.

Profit before goodwill amortization, interest,exceptional items and taxation amounted to €356.0 millionin 2004 compared to €385.6 millionin 2003. This decrease of €29.6 million, or approximately 8%,reflected a combination of difficult trading conditions in Europe in 2004 andthe benefit in 2003 of the one-off disposal gain on the sale of property at TheK Club.

Profit from our European operations was €260.3 million,a decrease of €50.7million (€32.5million excluding the disposal gain) from 2003, despite the presence of boththe former operations of SSCC and Papelera Navarra for a full year in 2004. Within Europe, the results varied with animproved performance in our specialties operations partly offsetting theshortfall in our packaging operations. Although both 

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containerboardand corrugated container volumes were higher in 2004, partly as a result of netacquisitions, profitability was adversely affected by generally lower averageprices.

Profit from our Latin American operations was €121.0 million,39% higher than in 2003 reflecting a strong performance across the region,especially in Venezuela and Mexico. The underlying increase for the region wasgreater in U.S. dollars, taking into account the relative weakness of the U.S.currency in 2004.

The absence of earnings in both the United States andCanada and Asia in 2004 reflected the sale during 2003 of our Canadiansubsidiary, Smurfit MBI, as part of the SSCC Asset Swap and of our investmentsin Leefung Asco and Smurfit Toyo. Unallocated centre costs were €25.3million in 2004 compared to €22.5 million in 2003, theincrease reflecting higher charges for professional services in areas such asSarbanes-Oxley compliance and our accounts receivable securitization program.

Exceptional items in 2004amounted to €17.2 million and comprised reorganization andrestructuring costs of €39.4 million net of disposal gains of €22.2 million.The reorganization and restructuring costs arose mainly in the fourth quarterof 2004 with the largest charges relating to the Cordoba mill in Spain and tothe Tamworth corrugated container facility and the Witham folding cartonsfacility in the United Kingdom. The disposal gains related to the sale ofsurplus property in Europe. In 2003, exceptional items of €29.4 millioncomprised reorganization and restructuring costs of €35.0 million, over €14 millionof which related to the Lestrem mill, net of disposal gains of approximately €5.6 million.

**INTERESTEXPENSE AND TAXES**

Group net interest of €285.3 million(before the €5.7million loss from early extinguishment of debt) in 2004 was lowerthan in 2003, reflecting mainly a lower level of net borrowing and the positiveeffect of the stronger euro. In addition, we benefited from generally lowerinterest rates in respect of our non-fixed rate debt. The loss of €5.7 millionarose following the accounts receivable securitization. Our shareof associates’ net interest was modest in 2004 as a result of the reducingscale of our associates.

After other financial expense of €15.7million, which represents the difference between the expected return on pensionscheme assets and the interest cost of pension scheme liabilities and isdisclosed in accordance with FRS 17—“Retirement Benefits,” the resultbefore taxation for the year to December 31, 2004 was a profit of €8.6 million(€25.8 millionpre-exceptional) compared to a profit of €11.8 million (€41.2 millionpre-exceptional) in 2003.

The accounting tax charge was €27.0 millionin 2004 compared to €62.4 millionin 2003 with the decrease reflecting mainly the benefit of the €20 millioncredit booked in respect of tax refunded in the Netherlands under the Bosaljudgement. Our overall effective accounting tax rate is adversely affected bythe presence of items not allowable for tax (such as the goodwill amortization).Against a backdrop of low profitability, these add-backs have a significantimpact on our overall effective tax rate resulting in a significant chargedespite a relatively modest reported overall profit.

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**Liquidity AndCapital Resources**

***Historical Cash Flow***

Summarycash flows for the years ended 2005, 2004 and 2003 are set out in the followingtable:

| ** **                                  | ** ** | **Year Ended  December 31, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** | **Year Ended  December 31, 2003** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **€ Million**                          | ** ** | **€ Million**                          | ** ** | **€ Million**                          | ** ** |
| (Loss)/profit  before tax—subsidiaries |       |                                             | (148       | )                                                |       |                                             | (3         | ) |   |   | 2 |   |   |
| Exceptional items                           |       |                                             | (44        | )                                                |       |                                             | 1          |   |   |   | 11 |   |   |
| Impairment of  fixed assets                 |       |                                             | 48         |                                             |       |                                             | —     |   |   |   | — |   |   |
| Depreciation and  depletion                 |       |                                             | 240        |                                             |       |                                             | 263        |   |   |   | 253 |   |   |
| Goodwill  amortization                      |       |                                             | 32         |                                             |       |                                             | 38         |   |   |   | 45 |   |   |
| Non cash interest  expense                  |       |                                             | 70         |                                             |       |                                             | 68         |   |   |   | 59 |   |   |
| Refinancing costs                           |       |                                             | 53         |                                             |       |                                             | —     |   |   |   | — |   |   |
| Working capital  change                     |       |                                             | 48         |                                             |       |                                             | 42         |   |   |   | 63 |   |   |
| Capital  expenditure                        |       |                                             | (192       | )                                                |       |                                             | (206       | ) |   |   | (207 | ) |   |
| Change in capital  creditors                |       |                                             | (5         | )                                                |       |                                             | 7          |   |   |   | — |   |   |
| Sale of fixed  assets                       |       |                                             | 18         |                                             |       |                                             | 34         |   |   |   | 12 |   |   |
| Tax paid                                    |       |                                             | (43        | )                                                |       |                                             | (37        | ) |   |   | (59 | ) |   |
| Dividends from  associates                  |       |                                             | 3          |                                             |       |                                             | 3          |   |   |   | 1 |   |   |
| Other                                       |       |                                             | (14        | )                                                |       |                                             | (23        | ) |   |   | (2 | ) |   |
| Free cash flow                              |       |                                             | 66         |                                             |       |                                             | 187        |   |   |   | 178 |   |   |
| Investments                                 |       |                                             | (207       | )                                                |       |                                             | (6         | ) |   |   | (181 | ) |   |
| Sale of  businesses and investments         |       |                                             | 326        |                                             |       |                                             | 3          |   |   |   | 36 |   |   |
| Dividends                                   |       |                                             | (6         | )                                                |       |                                             | (6         | ) |   |   | (7 | ) |   |
| Debt issue costs                            |       |                                             | (98        | )                                                |       |                                             | (6         | ) |   |   | (8 | ) |   |
| Acquisition costs  and fees                 |       |                                             | (4         | )                                                |       |                                             | (3         | ) |   |   | (21 | ) |   |
| Transfer of cash  from /(to) affiliates     |       |                                             | 10         |                                             |       |                                             | 13         |   |   |   | (28 | ) |   |
| Refinancing costs                           |       |                                             | (53        | )                                                |       |                                             | —     |   |   |   | — |   |   |
| Net cash inflow /  (outflow)                |       |                                             | 34         |                                             |       |                                             | 182        |   |   |   | (31 | ) |   |
| Net (debt) / cash  acquired/disposed        |       |                                             | (1,809     | )                                                |       |                                             | —     |   |   |   | 56 |   |   |
| Munksjö  inter-company debt repaid     |       |                                             | 157        |                                             |       |                                             | —     |   |   |   | — |   |   |
| K Club  inter-company debt repaid           |       |                                             | 92         |                                             |       |                                             | —     |   |   |   | — |   |   |
| SSCC  inter-company debt repaid             |       |                                             | —     |                                             |       |                                             | —     |   |   |   | (97 | ) |   |
| Non-cash interest  accrued                  |       |                                             | (12        | )                                                |       |                                             | (45        | ) |   |   | (41 | ) |   |
| Currency  translation adjustments           |       |                                             | (73        | )                                                |       |                                             | 40         |   |   |   | 152 |   |   |
| (Increase) / decrease in  net borrowing     |       |                                             | €     | (1,611)                                          |       |                                             |       | € | 177 |   |   |   | € | 39 |   |   |
|                                             |            |                                                  |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |  |  |

 

***Comparison of the Year Ended December 31, 2005and Year Ended December 31, 2004***

Free cash flow foryear ended December 31, 2005 was €66 million compared to €187million in 2004. Although our loss before taxation was higher in 2005, much ofthe increase arose from charges, such as the refinancing costs and the impairmentof fixed assets, which are added back in arriving at free cash flow. Thereduction in free cash flow in 2005 versus 2004 arises mainly due to lowerpre-tax profits, lower proceeds from the sale of fixed assets and higher taxpayments. On the other hand, outflows such as capital expenditure and otheroutflows were lower in 2005.

The outflow of €44million for exceptional items represents the reclassification of the disposalgains of €53 millionnet of the inflow of approximately €9 million in non-cashreorganization and restructuring costs. While the larger gains relate to thesale of businesses and investments and are transferred to the 

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investment and financingsection of the cash flow, the gains made on property disposals are reclassifiedto sales of fixed assets. Proceeds from the sale of fixed assets in turnrelated mainly to the properties sold in both Norway and Mexico. Thereclassification of exceptional items in 2004 related mainly to the profit onthe sale of the Botanic Road site, which is reported within sales of fixedassets, offset by the reclassification of non-cash reorganisation andrestructuring costs.

Our interest charge in 2005 included the refinancingcosts of €53 million, which are reclassifiedwithin the cash flow to financing and investment activity. The non cashinterest expense in 2005 at €70 million was broadlyunchanged from 2004 though the composition was somewhat different. 2005includes €46million in respect of the accelerated write-off of debt issue costs, €8million in respect of the PIK, together with the normal write-off of debt issuecosts. In 2004, the add-back of €68 million comprisedmainly the normal write-off of debt issue costs and the PIK interest charge.

At €192 million, ourcapital expenditure was lower than in 2004, with a reduced level of expenditurein JSG’s continuing operations being partly offset by an uplift reflecting thepresence of Kappa operations in 2005, and the absence of Munksjö specialties.For 2005, capital expenditure at €192 million represented 80%of depreciation, compared to 79% in 2004.

Our depreciation and goodwill amortization charges in2005 reflect an adjustment to the balances determined by the fair valueexercise following the privatization of the Group in 2002. As a result, thegoodwill amortization charge in 2005 was significantly reduced while thedepreciation charge was increased, thereby masking, in part, the impact of theabsence of Munksjö’s specialty operations in 2005.

Working capital decreased by approximately €48 millionin 2005 with lower debtors and, to a lesser extent, stocks offset by lowercreditors. In 2004, despite an increase in debtors, working capital decreasedby €42 milliondue to an increase in creditors and, to a lesser extent, a decrease in stocks.As a percentage of annualized net sales (adjusting for the impact of includingKappa’s sales for December only), working capital of****€502 millionat December 2005 represented 7.4% compared to 7.6% at December 2004.

Cash tax payments in 2005 were €43 millioncompared to €37 millionin 2004 when we had the benefit of the Dutch tax refund of approximately €20 millionas a result of the Bosal judgment. Allowing for this refund, our tax paymentsin 2005 are considerably lower than in 2004. The year-on-year reductionreflects in part the absence of Munksjö’s specialty operations, which generatedrelatively high tax charges and payments, and the benefit of variousinitiatives taken in 2004 to reduce our liabilities in countries such as Italyand Germany. In addition, we received a tax credit in Mexico as a result of asuccessful court case.

Financing and investment activity in 2005 of €32million reflects payments to former Kappa shareholders which more than offsetthe proceeds arising from the sale of assets, primarily the Munksjö operationsand The K Club.

The total proceeds received from the sale of theMunksjö operations was €455 million, €298million of which is shown within sale of businesses and investments and €157 millionwithin the movement on net borrowing as the repayment of inter-company debt. Inaddition to Munksjö, sale of businesses and investments at €326 millionincluded €23million in respect of The K Club and €5 million in respectof the cash element of the Voghera proceeds. The total proceeds of €115million received in respect of The K Club and the Clonskeagh mill site isalso split between the sale of businesses and investments and the repayment ofinter-company loans.

Of the total of €238million payable in respect of the merger, primarily to Kappa’s formershareholders, approximately €204 million was paid inDecember. The merger financing resulted in debt issuance costs of €88million and transaction fees and expenses of €4 million. We incurred an additional €10 million in debt issuance costs, mainly inthe first quarter in respect of the new senior notes. The €53 million of refinancing costs comprisethe €51 million premium paid for the early redemption of the PIKtogether with waiver fees of approximately €2 million.

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Financing and investment outflows were modest in 2004with dividend payments, investments and transaction costs being offset bydisposal proceeds and the receipt of almost €13 millionin surplus funds from the SPV.

The net cash inflow of €34 million,in 2005, was increased by inter-company debt repaid of €157million and €92 millionin respect of Munksjö and The K Club respectively. This was offset by the netborrowing acquired following the merger and by the add-back of non-cashinterest and currency. Net borrowing acquired of €1,809 million includes theKappa borrowings taken on, plus cash of €4 million in theoperations sold during 2005. The overall result in 2005 was an increase in netborrowing of €1,611million. In 2004, net borrowing decreased by €177 million with thenet cash inflow for the year of €182 million being offsetby the add-back of non-cash interest and enhanced by a positive currency adjustment

The movement in therelative strengths of the euro and the dollar was different in 2005 than inrecent years. In contrast to both 2003 and 2004 when the euro rallied late inthe year, the euro suffered a downward trend during 2005 from its relativelystrong position at the end of 2004. Primarily as a result of the relativeweakness of the euro, the currency adjustment in 2005 was negative at €73million. Conversely, 2004’s positive adjustment of €40 million reflected arelative strengthening of the euro compared to December 2003.

***Comparison of the Year Ended December 31, 2004and Year Ended December 31, 2003***

Free cash flow for the year ended December 31,2004 was €187 million compared to €178million in 2003 mainly reflects lower tax payments year-on-year offset by areduced working capital inflow.

Depreciation was higher in 2004, reflecting theacquisition of the former Smurfit-Stone European packaging operations during2003 and the adjustments to fixed assets effected at the end of 2003 arisingfrom the completion of the fair value exercise. Capital expenditure at €206million for 2004 represented 79% of depreciation compared to 82% in 2003. Goodwillamortization in 2004 amounted to €38 million, down from €45million in 2003. This reflects the changing structure of the Group and fairvalue adjustments mentioned above.

The non cash interest represents the roll up of the15.5% pay in kind bonds issued in connection with the MDP acquisition in 2002.These notes were subsequently redeemed in 2005.

We continued to focus on managing our working capitallevels in 2004. Although the level of receivables increased, working capitaldecreased by €42 million in 2004. Working capital of €360 millionat December 2004 represented 7.6% of annualised fourth quarter salescompared to 9.1% at December 2003. During 2003 our working capitaldecreased by €63 millionon 2002 levels. Factors contributing to the 2003 inflow included a generalfocus on cash collection, which resulted in a significant reduction in thelevel of receivables at the year-end.

We continued to focus on generating cash flow fromsales of surplus assets during 2004. Sales of fixed assts in 2004 generated aninflow of €34 million including €29million from the sale of unused property.

Cash tax payments in 2004, at €37million, were lower than the €59 million paid in 2003,reflecting a Dutch tax refund and tax repayments in certain other Europeancountries. These credits were partly offset by higher payments in Latin Americaas a result of the growth in regional profits. Under the Bosal judgement, JSGreceived approximately €20 million from the Dutch authorities in2004. Cash generation was partly offset in ‘Other’ by accelerated profitsharing payments to employees of €13 million coupledwith a lease bullet payment of €10 million. Changed taxlaws in France reduced the length of the deferral period and resulted inaccelerating payments to employees in respect of deferred compensation.

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Financing and investment outflows were modest in 2004resulting in an overall net cash inflow of approximately €182million for the year. Dividend payments, investments and transaction costs wereoffset by business disposal proceeds and the transfer of surplus funds from thenewcos. The €182million net cash inflow was offset by the add-back of non-cash interest butpositively impacted by a currency adjustment of €40 million. As a result,net borrowing decreased by €177 million year-on-year.

Investments in 2003 at €181 millionincluded payments of €90 million for the equity of SSCCEurope, €55 milliondeferred consideration for Nettingsdorfer and over €30 million in respect ofPapelera Navarra. Disposals in 2003 included our Asian associates, Leefung Ascoand Smurfit Toyo, the proceeds from which were transferred to the SPV.Including dividends to minorities and transaction related payments, the overallresult for 2003 was a net cash outflow of €31 million.

Reflecting thestrengthening of the euro, primarily against the U.S. dollar, the value of ournon-euro denominated debt decreased in 2004 giving rise to a currencyadjustment of €40 million comparedto €152 millionin 2003. In both years, the euro appreciated strongly moving from approximatelyU.S. $1.05 at December 2002 to U.S. $1.26 at December 2003and U.S. $1.36 at December 2004.

**Capital Resources**

Our primary sources of liquidity are cash flow fromoperations and borrowings under the revolving credit facility. Our primary usesof cash are for debt service and capital expenditures.

At December 31, 2005 JSG Funding had outstanding €350million 10 1/8% senior notes due 2012, $750 million 95¤8% senior notes due 2012, €217.5million 7.75% senior subordinated notes due 2015 and US$ 200 million seniorsubordinated notes due 2015. In addition Smurfit Capital Funding Limited hadoutstanding US$ 292.3 million 7.50% senior debentures due 2025 and the Grouphad outstanding €210million floating rate notes issued under an accounts receivable securitizationprogram maturing in 2011.

As of January 1, 2005, $211,110,848 aggregateprincipal amount of our 15.5% subordinated notes due 2013 and €140,740,568aggregate principal amount of our 15.5% subordinated notes due 2013 wereoutstanding. On January 13, 2005, JSG Funding commenced a tender offer topurchase for cash all outstanding existing 15.5% subordinated notes, which werefer to as the “tender offer”. In connection with the tender offer, we alsosolicited consents to amend the indentures governing the existing 15.5%subordinated notes to remove substantially all of the restrictive covenantsthereunder. The tender offer was completed and the proposed amendments becameeffective on February 14, 2005. All of the euro 15.5% subordinated noteswere tendered. The .01% of the 15.5% dollar subordinated notes not tendered in February wereredeemed on October 28, 2005, in accordance with the terms andconditions of the indentures governing the notes, at a redemption price of108.0%. In January 2005, JSG Funding completed an offering ofapproximately €217.5 millionof 7.75% senior subordinated notes and $200 million of 7.75% seniorsubordinated notes. JSG Funding applied the net proceeds from such offering tofund the purchase of its existing 15.5% subordinated notes pursuant to thetender offer and to pay related fees and expenses.

JSG Acquisitions and certain subsidiaries were partyto a senior credit facility dated September 12, 2002 which provided for threeterm loans in an aggregate amount of €1.2 billion as at December 31,2004 and a revolving credit facility with up to €425 million inavailability. In March 2005, €421 million from theproceeds of the Munksjö Specialties sale were used to repay all of theoutstanding term loans under Tranche A and part of the outstanding term loansunder Tranches B and C of the facility. In May 2005, €20million from the proceeds of the Munksjö tissues sale and in June, €112million from the proceeds of The K Club sale were used to part repay Tranches Band C. The remaining outstanding indebtedness under the 2002 senior creditfacility was repaid on December 1, 2005 with the proceeds of anew senior credit facility (the “new senior credit facility”) which wasarranged to finance the merger of the operations of JSG and Kappa to formSmurfit Kappa Group.

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JSGAcquisitions and certain subsidiaries are party to the new senior creditfacility which was used (a) to refinance 10.625% Senior Subordinated Notesand 12.5% Senior Subordinated Discount Notes due 2009 of Kappa Beheer B.V. (the“Kappa Bonds”) (b) to refinance the existing JSG and Kappa senior creditfacilities (c) to fund the cash consideration payable to the Kappashareholders and (d) to fund the costs associated with the merger. Whenfully drawn the new senior credit facility will amount to approximately €2,862million and comprises a €485 million amortizing A Tranche maturing in2012, a €1,188million B Tranche maturing in 2013 and a €1,189 million C Tranchematuring in 2014. In addition the new facility includes €875million in committed lines including a €600 million revolvingcredit facility of which €9 million was drawn at as at 31 December 2005.The following table provides the range of interest rates as of December 31,2005 for each of the drawings under the term loans and the revolving creditfacility.

| **Borrowing arrangement** | ** ** | ** ** | ** ** | **Currency** | ** ** | **Interest Rate** | ** ** |
|--------------------------------|------------|------------|------------|--------------|------------|------------------------|------------|
| Term Loan A                    |       |       | EUR        |         |       |                   | 4.664      | % |   |
| Term Loan B                    |       |       | EUR        |         |       |                   | 5.164      | % |   |
|                           |       |       | USD        |         |       |                   | 7.114      | % |   |
| Term Loan C                    |       |       | EUR        |         |       |                   | 5.664      | % |   |
|                           |       |       | USD        |         |       |                   | 7.614      | % |   |

 

Borrowings under the revolving credit facility areavailable to fund the Group’s working capital requirements, capitalexpenditures and other general corporate purposes. The Term Loan A must berepaid by instalments from December 2006 through December 2012. TheTerm Loan B must be repaid in December 2013. The Term Loan C must berepaid in December 2014. As of December 31, 2005 there was €9million drawn under the revolving credit facility by way of drawings onancillary facilities and documentary letters of credit. The revolving creditfacility will terminate in December 2012.

The instrumentsgoverning our indebtedness, including the new senior credit facility and theindentures governing the senior and senior subordinated notes, containfinancial and other covenants that restrict, among other things, the ability ofJSG Funding and its subsidiaries to:

·       incuradditional indebtedness and issue preference shares

·       paydividends or make certain other restricted payments

·       consummatecertain asset sales

·       incurliens

·       enterinto certain transactions with affiliates, or

·       mergeor consolidate with any other person or sell or otherwise dispose of all or substantiallyall of the assets of the Group.

These limitations, together with the highly leveragednature of JSG Funding, could limit corporate and operating activities.

*SecuritizationTransactions.*   In September 2004, we initiated asecuritization transaction where we raised seven-year funding of €210million, which was used to repay a portion of our term loans under our thenexisting senior credit facility. Receivables generated by certain of our operatingcompanies in the United Kingdom, Germany and France are sold to special purposesubsidiaries and entities to support the funding provided by a JP Morganconduit. The sale of the securitized receivables is not intended to, and willnot, meet the requirements for off-balance sheet treatment under Irish GAAP,with the result that the sold receivables will, as an accounting matter,continue to be shown on our balance sheet and the notes to be issued to fundthe purchase of the receivables will be shown as liabilities. The gross amountof 

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receivablescollateralizing the receivables securitization at December 31, 2005 was €262,046,000.At December 31, 2005 cash of €14,085,000 was insecuritization bank accounts which was not available for transfer to othergroup subsidiaries.

***Capital Expenditures and Other Contingencies***

From 1996 through 2005, the level of capitalexpenditures on aggregate were at or below annual depreciation levels.Management expects this trend to continue for at least the next three years. Wemade approximately €200 million in capitalexpenditures for each of the years ended December 31, 2003, 2004 and 2005.These expenditures were used primarily for cost reduction, business growth,maintenance and environmental and other regulatory compliance. We currentlyestimate approximately €360 million in capital expenditures in 2006.

In order to comply with increasingly stringentenvironmental requirements, we continue to incur capital expenditures toupgrade certain wastewater treatment facilities and to address air emissions, solidwaste and noise at our mills. Our mills in Europe are subject to the EuropeanUnion’s IPPC program. The IPPC program requires member countries to ensure thatindustries employ Best Available Techniques, or ‘‘*BAT*,’’ for all environmental aspects of their operation,including wastewater discharges, air emissions, noise, energy use andenvironmental management. Overall, we have incurred approximately €7 millionin capital expenditures for environmental controls at our facilities worldwide in2003 and approximately €8 million in both 2004 and 2005. Weanticipate that our annual environmental capital expenditures will continue atabout this level through 2007. See Item 4 ‘‘Information on theCompany—Environmental Issues.’’

We are subject to several put arrangements and capitalcommitments in certain companies which are not wholly owned or in which we holdonly a minority interest, namely Fustelpack S.p.A. in Italy, IndustriaCartonera Dominicana in the Dominican Republic and Cajas de Carton Sultana S.A.de C.V. in Mexico. The owner of a 12% shareholding in Fustelpack S.p.A. (ofwhich we own 69%) has the right every two years to put his shareholding to the othershareholders for a put price presently estimated to be approximately €1million. The owner of almost 20% of Industria Cartonera Dominicana (of which weown 80%) has a put option on such shareholding, with the put price presentlyestimated to be approximately €1 million. Inaddition, we have an option expiring at the end of December 2008 to acquire theapproximate 55% shareholding of Cajas de Carton Sultana S.A. de C.V. that we donot already own. The price for such option, which will be determined by anappraiser at the time it is exercised, is currently estimated at approximately €13 million.

In addition, we are a party to various lawsuits andare subject to various contingent liabilities for which we have not taken areserve. In the event we are found liable in any or all of such lawsuits, or thecontingencies relating to such liabilities actually occur, our business andfinancial condition could be adversely affected. For more information, see Item3 ‘‘Key Information—Risk Factors’’ and Item 4 ‘‘Information on theCompany—Legal Proceedings.’’

JSG Funding believes that cash generated fromoperations will be adequate to meet its anticipated debt service requirements,capital expenditures and working capital needs for the next 12 months, and thatcash generated from operations and amounts available under the revolving creditfacility will be adequate to meet its anticipated debt service requirements,capital expenditures and working capital needs for the foreseeable future.There can be no assurance, however, that JSG Funding’s business will generatesufficient cash flow from operations or that future borrowings will beavailable under the new senior credit facility or otherwise to enable it toservice its indebtedness, including the new senior credit facility, the seniorand senior subordinated notes, to retire or redeem the notes or to makeanticipated capital expenditures. JSG Funding’s future operating performanceand its ability to service or refinance the notes 

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and to service, extend orrefinance the new senior credit facility will be subject to future economic conditionsand to financial, business and other factors, many of which are beyond ourcontrol.

**Critical Accounting Policies and Estimates**

Certainaccounting issues require management estimates and judgments for thepreparation of financial statements. Our most significant policies requiringthe use of estimates and judgments are listed below.

***Long lived assets and goodwill***

Weconduct impairment reviews of long-lived assets and goodwill in accordance withFRS 10 “Goodwill and Intangible Assets”, FRS 11 “Impairment of Fixed Assets andGoodwill” and SFAS No. 142 “Goodwill and Other Intangible Assets”,respectively. Such reviews require us to make estimates of future cash flowsand fair values. We have performed the required reviews in 2005 and haverecognized an impairment charge of €45 million. Our cash flow projections includesignificant assumptions about economic conditions, demand and pricing for ourproducts and costs. Our estimates of fair value are determined using a varietyof valuation techniques, including pricing of recent industry acquisitions.While significant judgment is required, we believe that our estimates of futurecash flows and fair values are reasonable. However, should our assumptionschange in future years, our fair value models could indicate lower fair valuesfor long-lived assets and goodwill. This could result in material impairmentprovisions affecting the carrying value of property, plant and equipment,goodwill and results of operations.

***Allowance for doubtful accounts***

Weevaluate the collectibility of our accounts receivable on a case-by-case basis,and make adjustments to the bad debt reserve for expected losses. We considersuch things as ability to pay, bankruptcy, credit ratings and payment history.For all other accounts, we estimate reserves for bad debts based on historicalexperience and past due status of the accounts. In the fourth quarter of 2005,we conducted a detailed review of the consistency of the application of thispolicy. Taking this into account, our bad debt provision reduced from €53 million to €46 million in 2005.Our bad debt write-off in 2004 was €4 million.

***Legal and environmentalcontingencies***

Accrualsfor legal and environmental matters are recorded when it is probable that aliability has been incurred and the amount of loss can be reasonably estimated.Such liabilities are developed based on currently available information andrequire judgments as to probable outcomes. Assumptions are based on historicalexperience and recommendations of legal counsel. Environmental estimatesinclude assumptions and judgments about particular sites, remediationalternatives and environmental regulations. We believe our accruals areadequate. However, due to uncertainties associated with these assumptions andjudgments, as well as potential changes to governmental regulations andenvironmental technologies, actual costs could differ materially from theestimated amounts.

***Post retirement benefits***

JSG Funding has adopted FRS 17—“RetirementBenefits.” FRS 17 applies to all types of benefits that an employer providesafter employees have completed their service, including pensions and other postretirement benefits. The cost of the expected increase in the present value ofscheme liabilities arising from employee service in the current or priorperiods, together with the change in the present value of scheme liabilitiesarising from settlements and curtailments and the expected returns on schemeassets at the start of the period, is recognized in the Summary Group Profitand Loss Accounts. Differences between the expected and the actual return onplan assets, together with the effect of changes in the current or prior 

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assumptionsunderlying the liabilities are recognized in the statement of recognized gainsand losses. Scheme assets are valued at fair value and scheme liabilities aremeasured using the projected unit method. Net scheme assets and liabilities,reduced by deferred tax amounts, are recorded on the balance sheet as a pensionsurplus or deficit as appropriate.

Thereare several assumptions that impact the actuarial calculation of pensionobligations and, in turn, net periodic pension expense in accordance with SFASNo.87, “Employer’s Accounting for Pensions”. These assumptions require variousdegrees of judgment. The most significant assumptions are (1) the expectedreturn on plan assets and (2) the discount rate. Changes in theseassumptions can have a material impact on pension obligations and pensionexpense. For example, holding all other assumptions constant, a one percentagepoint decrease in our estimated discount rate would increase the estimated 2006pension expense by approximately €9 million. A one percentage point increasein the estimated discount rate would decrease the estimated pension expense for2006 by approximately €9 million. Similarly, holding other assumptionsconstant, a one percentage point decrease in JSG Funding’s estimated long-termrate of return on plan assets would increase the pension expense for the yearended December 31, 2006 by approximately €13 million. A onepercentage point increase in the estimated long-term rate of return woulddecrease pension expense by approximately €13 million for the same period.

***Income tax matters***

Deferred tax assets andliabilities reflect our assessment of future taxes to be paid in thejurisdictions in which we operate. These assessments involve temporarydifferences resulting from differing treatment of items for tax and accountingpurposes, as well as estimates of our current tax exposures. Based on ourevaluation of our tax positions, we believe we are adequately reserved forthese matters at December 31, 2005.

At December 31,2005, we had net operating loss carryforwards of €1,050 million. Theseloss carryforwards have a tax value of €294 million. Valuation allowances of €167 million have beenestablished for a portion of these deferred tax assets. The realization ofthese deferred tax assets is dependent on future taxable income. Based uponrecent levels of taxable income, we expect that our deferred tax assets, net ofvaluation allowances, will be fully utilized. We frequently face challengesfrom domestic and foreign tax authorities regarding the amount of taxes due.These challenges include questions regarding the timing and amount ofdeductions and the allocation of income among various tax jurisdictions. To theextent we prevail in matters for which accruals have been established or arerequired to pay amounts in excess of our reserves, our effective tax rate in agiven financial statement period may be materially impacted. While the ultimateresults cannot be predicted with certainty, we believe that the conclusion ofany such challenge will not have a material adverse effect on our consolidatedfinancial condition or results of operations.

**Research andDevelopment**

Weare committed to continuous innovation in our products and processes in orderto reduce costs, improve operating efficiencies and increase profitability.Innovation is also an important factor in meeting our customers’ needs. To meetthis commitment, we have a major research and innovation center in Bordeaux,France. The research and development activities embrace all aspects of ourbusiness from the consumption of both recycled and virgin fibers by our millsand the manufacture of paper and paperboard to the conversion of paperboardinto paper-based packaging products. In 2005, 2004 and 2003, the Group’sresearch and development costs were approximately €4.3 million, €4.9 million and €5.0 millionrespectively.

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**Trend Information**

**Europe**

Volumes of our core grades of product—kraftliner,recycled containerboard and corrugated containers, were down 4.6%, 2.3% and up0.3% respectively in 2005 over 2004 (including the effect of operations closingand excluding one month of Kappa in 2005).

Volumes of corrugated containers closely followincreases in industrial production. In 2005, industrial production was uparound 1.5% on aggregate through the Western European countries. This reflectedrelatively weak economic conditions, particularly in the manufacturing sectorand was exacerbated by a relatively strong currency, particularly when comparedwith the U.S. dollar. As kraftliner and recycled containerboard are the primaryraw materials used in the manufacture of corrugated containers, the growth inthese products tends to closely follow that of corrugated containers. That JSGwere able to have a higher growth rate in kraftliner and recycledcontainerboard in 2005 than in corrugated containers is attributable to JSG’sstrategy of increasing our levels of integration—utilizing more of our ownpaper in our system.

Pricing for corrugated containers depends on thelevels of supply and demand in the marketplace as well as the cost ofproduction, particularly the cost of kraftliner and recycled containerboard.Kraftliner prices depend on levels of supply and demand and can also beaffected by the exchange rate differential between the euro and the U.S.dollar, given that kraftliner is a worldwide commodity and in many cases issold in U.S. dollars. Recycled containerboard prices are affected by supply anddemand conditions, as well as the cost of production, particularly the cost ofOCC.

Increases in the price of wastepaper and virgin fiberas raw materials could result from a variety of factors. The prices we pay forthese materials tend to be cyclical, subject to significant volatility,particularly in the case of wastepaper, and vary on a regional basis.

The price of OCC has peaked dramatically two times inrecent years,—in June 2002 and in April 2003. In each case, arelatively low level of supply was matched by a relatively high level of demand,principally caused by increased demand from Asia. In both years, within aperiod of three months, supply and demand conditions levelled to return theprice to more normal levels. In 2003, the spike was particularly rapid, withwaste prices increasing in February and March, but then falling almostimmediately. In 2004 and 2005, there were no spikes in Europe, due to a numberof factors, including relatively weak Asian demand, caused by relative economicconditions but also by the weakness of the U.S dollar, which encouraged Asianpurchasers to source wastepaper in the U.S rather than in Europe. In each year,there was a slight increase in wastepaper prices in the second quarter, whichwas relatively quickly eroded.

Thetable below provides information about the European OCC price information permetric ton at and for the years ended December 31, 2003, 2004, and 2005.

**Free-on-BoardOCC Price per Metric Ton**

| ** **                      | ** ** | **As of and for the Year  Ended December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2003**                                                                          | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(euro)**                                                                        | ** ** |
| Price at the end  of the period |       |                                                                              | 56         |   |   |   | 58 |   |   |   | 58 |   |   |
| Average price  during period    |       |                                                                              | 62         |   |   |   | 60 |   |   |   | 58 |   |   |
| Highest price  during period    |       |                                                                              | 73         |   |   |   | 63 |   |   |   | 63 |   |   |
| Lowest price  during period     |       |                                                                              | 56         |   |   |   | 58 |   |   |   | 57 |   |   |

 

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We believe that our available sources of virgin fiberand OCC (including from our own reclamation facilities) will be adequate tosupply our raw material needs for the foreseeable future.

Kraftliner prices in early 2005 were at 4% above theaverage for 2004, and above the average level of the prior three years. Withthe relatively weak markets, however, prices declined through the first threequarters, to a level 10% below the opening price. Price increases wereimplemented in the fourth quarter, moving the year end price to within 4% ofthe opening price for the year. On average, 2005 prices were 2% below theaverage for 2004. Recycled containerboard prices entered 2004 at about theaverage price for 2004, and around 3% higher than the average over the priorthree years. Prices, however, declined in the opening three quarters,dramatically so in June and July, to a level that was over 12% below theopening position in August. Price increases were implemented in the fourthquarter, bringing the closing price for the year to within 2% of the openingprice. The average for the year was, however, 7% down on 2004.

The trend in corrugatedpricing across the European region generally followed that of containerboard,falling a couple of percent through the year. Overall, corrugated prices onaverage in 2005 for the JSG operations were 3% below those of 2004.

**Latin America**

Pricing and volume trends for our main products inLatin America are affected by the same factors as those in Europe.

In 2005, the performances of our individual LatinAmerican countries were not uniform. Corrugated volumes in Venezuela were up18%, reflecting growth in the market caused by a continued recovery of domesticproduction. Volumes in Argentina were up 9%, which again reflected growth in theindustrial and agricultural sectors of the economy. Corrugated volumes inColombia were also up 9%, reflecting strong industrial growth, while Mexicanvolumes declined 1%, with the Mexican economy losing some industrial productionto the Far East and the economy following US industrial growth, which wasrelatively weak in the first half of the year. In total, corrugated growth was8% and containerboard growth was 4%. The difference in growth rates reflectscapacity constraints for containerboard in the region.

Pricing in Latin Americawas relatively stable through the year although they reflected the globalmarket conditions. Containerboard prices were down 2% on average and corrugatedprices down 4%. Price declines were most notable in Venezuela, as the countrylowered its import barriers.

**Off Balance SheetArrangements**

We have not used specialpurpose vehicles or similar financing arrangements on an historical basis. Inaddition, we have not had off-balance sheet arrangements with any of ouraffiliates. However, in connection with the JSG Acquisition, certainnon-operating assets and non-core operating assets were transferred to newlyformed, wholly owned subsidiaries of JSL (the “newcos”) in exchange forintercompany notes. On October 2, 2002, the newcos borrowed €125million under a bank credit facility, which was non-recourse to JSG Funding.The newcos then loaned the proceeds to JSL, and JSL used them to make a capitalcontribution to JSG Funding. JSG Funding in turn made a capital contribution toJSG Acquisitions. JSG Funding’s debt and shareholders’ equity under U.S. GAAPwould reflect the consolidation of the newcos with JSG Funding for financialreporting purposes. The newcos facility was repaid in full prior to December 31,2003. We do not have off-balance sheet arrangements with any of our otheraffiliates.

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**Effect of Inflation**

We donot believe that inflation has had any material effect on our results ofoperations during fiscal years 2005, 2004 and 2003.

**Tabular Disclosureof Contractual Arrangements**

**Thetable below sets out our contractual arrangements as of December 31, 2005:**

| ** **                          | ** ** | **Payments due by period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Total**                                 | ** ** | **1 year** | ** ** | **1 to 5 years** | ** ** | **After 5 years** | ** ** |
| ** **                          | ** ** | **(euro in millions)**          | ** ** |
| Long term debt                      |       | €                                    | 4,671      |   |   | € | 20 |   |   |   | € | 281 |   |   |   | € | 4,370 |   |   |
| Capital lease  obligations          |       | 23                                        |       |   | 4 |   |   |   | 14 |   |   |   | 5 |   |   |
| Operating leases                    |       | 190                                       |       |   | 41 |   |   |   | 95 |   |   |   | 54 |   |   |
| Other long term obligations         |       | 33                                        |       |   | 33 |   |   |   | — |   |   |   | — |   |   |
| Total contractual cash  obligations |       | €4,917                               |       |   | € | 98 |   |   |   | € | 390 |   |   |   | € | 4,429 |   |   |
|                                     |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We believe we havesufficient facilities available to meet our working capital requirements.

**Item 6.        Directors, Senior Management andEmployees**

**Directors andExecutive Officers**

JSG Funding is owned approximately 100% by JSL, whichis a wholly owned subsidiary of JSG Holdings. JSG Holdings is a wholly ownedsubsidiary of SKGL, whose owners include Madison Dearborn, Smurfit Kappa FeederL.P., an investment partnership formed by CVC and Cinven (the “CVC / CinvenPartnership”), and certain co-investors and certain management investorsidentified herein.

Certain members ofthe board of directors of JSG Funding also serve as directors of JSL, SKGL and JSGHoldings, as noted below.

The directors andexecutive officers of SKGL, and their ages and positions, are as follows:

| **Name**                 | ** ** | ** ** | ** ** | ** **                             | **Age** | ** ** | ** ** | **Position** |
|--------------------------|------------|------------|------------|----------------------------------------|---------|------------|------------|--------------|
| Sir Michael W.J. Smurfit |       | 69         |       | Non-executive Chairman                 |
| Frits Beurskens          |       | 59         |       | Non-executive Deputy  Chairman         |
| Gary W. McGann           |       | 55         |       | Chief Executive Officer  and Director  |
| Anthony P.J. Smurfit     |       | 42         |       | Chief Operations Officer  and Director |
| Ian J. Curley            |       | 44         |       | Chief Financial Officer  and Director  |
| Hugh Briggs              |       | 37         |       | Non-executive Director                 |
| John A. Canning, Jr      |       | 61         |       | Non-executive Director                 |
| Christopher J. McGowan   |       | 34         |       | Non-executive Director                 |
| Samuel M. Mencoff        |       | 49         |       | Non-executive Director                 |
| Valerio Massimo          |       | 32         |       | Non-executive Director                 |
| Rolly van Rappard        |       | 45         |       | Non-executive Director                 |
| Thomas S. Souleles       |       | 36         |       | Non-executive Director                 |
| Marcus Wood              |       | 37         |       | Non-executive Director                 |

 

*Sir MichaelW.J. Smurfit*serves as our Chairman and as a director of JSL,SKGL and JSG Holdings. He retired as Chief Executive Officer of JSL on November 1,2002. He was appointed Chairman and Chief Executive Officer of JSG in 1977prior to which he was a Deputy Chairman and Joint Managing Director. Hecurrently holds the position of Honorary Irish Consul to the Principality ofMonaco.

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*Frits Beurskens*****serves as****ourDeputy Chairman and as a director of SKGL since December 1, 2005.He joined the Kappa Group in 1990 and held various Managing Director positionsuntil his appointment as its President in 1996 which he held until the mergeron December 1, 2005. He is a member of the Supervisory Board of OcéTechnologies B.V. and chairman of CEPI (Confederation of European PaperIndustries).

*Gary W.McGann*serves as our Chief Executive Officer and as adirector of JSG Funding, JSL, SKGL and JSG Holdings. He became Chief ExecutiveOfficer in November 2002 upon the retirement of Dr. Smurfit. He wasappointed President and Chief Operations Officer of JSL on January 28,2000. He joined JSG in 1998 as Chief Financial Officer. He had previously helda number of senior positions in both the private and public sectors over thelast 20 years, including Chief Executive of Gilbeys of Ireland Limited and AerLingus Group. He is also Chairman of Dublin Airport Authority plc and adirector of Anglo Irish Bank Corporation plc, United Drug plc and Aon McDonaghBoland Group Limited.

*AnthonyP.J. Smurfit*serves as our Chief Operations Officer and as adirector of JSL, SKGL and JSG Holdings. He has worked in various parts of JSGin Europe and the United States. Prior to taking up his position as ChiefExecutive of Smurfit Europe in October 1999 and Chief Operations Officeron November 1, 2002, he was Deputy Chief Executive of Smurfit Europe andpreviously Chief Executive Officer of Smurfit France. He is also a director ofThe Irish National Stud Company.

*Ian J.Curley*serves as our Chief Financial Officer and as adirector of JSG Funding, JSL, SKGL and JSG Holdings. He was appointed ChiefFinancial Officer of Smurfit Europe in 1997, prior to which he served asfinancial controller of Smurfit Continental Europe.

*HughBriggs* serves as a director of SKGL since December 1, 2005.He previously held positions at Mid Ocean from 2000 prior to joining CVC in2004. He holds a MA Degree in Economics from the University of Cambridge.

*John A.Canning, Jr.*serves as a director of JSL, SKGL and JSGHoldings. He has been employed principally by Madison Dearborn since 1993 andcurrently serves as its Chairman and Chief Executive Officer. From 1969 to1993, he worked in various positions with First Chicago Corporation, mostrecently as Executive Vice President of The First National Bank of Chicago andPresident of First Chicago Venture Capital. He is a member of the board ofdirectors of the Milwaukee Brewers Baseball Club, Norfolk Tides Baseball Club,Northwestern Memorial Hospital, Children’s Inner City Educational Fund and theFederal Reserve Bank of Chicago.

*ChristopherJ. McGowan*serves as a director of JSL, SKGL and JSGHoldings. He has been employed principally by Madison Dearborn since 1999 andcurrently serves as a Director. Prior to joining Madison Dearborn, he attendedHarvard Graduate School of Business Administration, where he received an M.B.A.He is a member of the board of directors of Forest Product Holdings, LLC and AutoTradeCenter, Inc.

*SamuelM. Mencoff*serves as a director of JSG Funding, JSL, SKGL andJSG Holdings. He has been employed principally by Madison Dearborn since 1993and currently serves as a Co-President. From 1987 until 1993, he served as VicePresident of First Chicago Venture Capital. He is a member of the board ofdirectors of Forest Product Holdings, LLC, Evanston Northwestern Healthcare,Great Lakes Dredge & Dock Corporation and Packaging Corporation ofAmerica, and a member of the board of trustees of Brown University.

*ValerioMassimo* serves as a director of SKGL since December 13,2005. He previously held positions at McKinsey and Co. from 1997 to 1999 and ReedElsevier Ventures from 2000 prior to joining TDR Capital in 2002. He joined Cinvenin 2004 as a principal. He holds a Masters Degree from the London School ofEconomics.

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*Rollyvan Rappard* serves as a director of SKGL since December 1,2005. He was a member of the Supervisory Board of Kappa from 1998. He heldpositions at Citicorp prior to becoming a managing partner of CVC CapitalPartners in 1989. He is also a member of the Supervisory board of Wavin B.V.,Veen Bosch and Keuning Uitgevers N.V and Danske Traelast.

*ThomasS. Souleles*serves as a director of JSG Funding, JSL, SKGLand JSG Holdings. He has been employed principally by Madison Dearborn since1995 and currently serves as a Managing Director. He is a member of the boardof directors of Astoria Generating Holdings, LLC, Forest Product Holdings, LLC,Great Lakes Dredge & Dock Corporation, Magellan G.P. LLC, MagellanMidstream Holdings G.P., LLC and Packaging Corporation of America, and a memberof the board of trustees of the National Multiple Sclerosis Society—GreaterIllinois Chapter.

*MarcusWood* serves as a director of SKGL since December 1,2005. He was a member of the Supervisory Board of Kappa from 2000. Hepreviously held positions at Pricewaterhouse Coopers prior to joining Cable andWireless in 1994. He joined Cinven as a partner in 1997. He is also a Directorof Amadeus and MediMedia.

The mailing address for Sir Michael Smurfit and Messrs. Beurskens,McGann, Anthony Smurfit and Curley is c/o Smurfit Kappa Group Limited, BeechHill, Clonskeagh, Dublin 4, Ireland, the mailing address for Messrs. Canning,McGowan, Mencoff and Souleles is c/o Madison Dearborn Partners, L.L.C., ThreeFirst National Plaza, Suite 3800, Chicago, Illinois 60602, United States;the mailing address for Mr. van Rappard is c/o CVC Capital Partners Group SA, Chausseede la Hulpe 166, 1170 Brussels, Belgium; the mailing address for Mr Briggs isc/o CVC Capital Partners LTD,111 Strand, London WC2R 0AG, United Kingdom; andthe mailing address for Messrs. Massimo and Wood is c/o Cinven Ltd,Warwick Court, Paternoster Square, London EC4M 7AG, United Kingdom.

Except as described in this annual report, there areno arrangements or understandings between any member of the board of directorsor executive officer and any other person pursuant to which that person waselected or appointed to his position.

SKGL’s board of directors has the power to appointofficers. Each officer will hold office for the term determined by SKGL’s boardof directors and until such person’s successor is chosen and qualified or untilsuch person’s death, resignation or removal. The SKGL board of directors hastwo committees: the Audit Committee and the Compensation Committee. The AuditCommittee is comprised of Samuel Mencoff, Thomas Souleles, Christopher McGowan,Hugh Briggs and Valerio Massimo. The Compensation Committee is comprised ofJohn Canning, Samuel Mencoff, Thomas Souleles, Rolly van Rappard and MarcusWood.

Theresponsibilities of the Audit Committee include:

·        Reviewing the Group’sannual and interim reports.

·        Reviewingthe scope of the external audit and considering reports of the externalauditors.

·        Theapproval of services provided by the external auditors.

·        Recommendationof the appointment of external auditors to the Board and the members.

·        Reviewingthe effectiveness of internal control.

·        Appointmentof the Group Internal Auditor.

·        Approvalof the Internal Audit plan and review of internal audit reports.

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Theresponsibilities of the Compensation Committee include:

·        Determiningthe contracts of service and remuneration of all the executive directors.

·        Monitoring the level andstructure of remuneration for senior management.

·        Operationof the Group’s Management Equity Plan.

**Family Relationships**

Mr. Anthony Smurfitis the son of Sir Michael Smurfit.

**Compensation**

None of JSG Funding’s, JSL’sor SKGL’s directors is entitled to receive any fees for serving as directors,other than Sir Michael Smurfit who receives fees for serving as chairmanof JSL and Mr. Frits Beurskens who receives fees as a director of SKGL and itssubsidiaries. All of the directors are reimbursed for out-of-pocketexpenses related to their service as directors.

For the year ended December 31,2005, the aggregate compensation paid to officers of JSL and its subsidiaries,including fees, salaries, bonuses, other benefits and payments to pensionplans, was approximately €8,057,000. Of this amount,approximately €892,000was set aside or accrued to provide pension, retirement or similar benefits forofficers of JSL and its subsidiaries and approximately €2,199,000was paid or is payable to officers in the form of performance related benefits.

**Management Employment Agreements**

JSL, SKGL and themanagement investors listed in the table below, which are referred tocollectively as the “*management investors*,”have entered into certain amended and restated letter agreements, dated as of February 6,2004, regarding the terms of employment of the management investors, which arereferred to collectively as the “*managementemployment agreements*”. The terms of each management employmentagreement were originally established pursuant to arm’s length negotiationsbetween Madison Dearborn and each management investor and were amended toaccount for the exchange from JSL to SKGL and otherwise reaffirmed. A summaryof the material terms of the management employment agreements is set forth below:

Pursuant to the terms ofthe management employment agreements, the senior team of JSL consists of thefollowing:

| **Name**                       | ** ** | ** **               | ** ** | **Position with Jefferson Smurfit Group Limited** |
|--------------------------------|------------|--------------------------|------------|---------------------------------------------------|
| Sir Michael W.J.  Smurfit |       | Non-executive Chairman   |
| Mr. Gary W. McGann        |       | Chief Executive Officer  |
| Mr. Anthony P.J.  Smurfit |       | Chief Operations Officer |
| Mr. Ian J. Curley         |       | Chief Financial Officer  |

 

Under the terms of themanagement employment agreements, each management investor has been providedwith a letter from JSL, pursuant to which JSL has agreed to procure hisemployment by JSL and its subsidiaries upon terms described below. Each lettersets forth the management investor’s title and principal duties andresponsibilities from November 1, 2002.

Sir Michael Smurfithas a six-year term as Non-Executive Chairman of JSL and is entitled to a totalbenefit package of €2.75 million perannum from JSL and its subsidiaries, with a one year total benefits severancepackage in the case of termination by JSL.

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Pursuant to the terms of the management employmentagreements, the employment terms applicable to each of Messrs. GaryMcGann, Anthony Smurfit and Ian Curley remained the same as those prevailingprior to consummation of the take-over offer, subject only to salary increasespreviously agreed.

Each of Messrs. Gary McGann, Anthony Smurfit andIan Curley covenanted to JSL that he would not exercise his contractual rightto leave JSG after its acquisition by JSL and thereby trigger paymentobligations from JSG thereunder and agreed not to trigger any rights that hemay have had as a result of the exchange. In consideration for thisundertaking, SKGL has provided each such individual a “put” letter with termsidentical to those currently applicable, except that:

·       “RelevantEvent” will be the sale of SKGL, except for a sale to the underwriters of aninitial public offering and the consummation of the take-over offer and theexchange of ordinary shares of JSL for shares of SKGL, which is referred to asthe “*exchange;*” and

·       theperiod within which he must exercise his rights upon a Relevant Event will be12 months after the Relevant Event or, if his obligation to offer his servicesto purchasers upon a vesting of his unvested convertible equity is enforced, 12months following the expiration of such period of employment.

In addition, the management employment agreementsprovide that in the event of termination of the employment of Messrs. GaryMcGann, Anthony Smurfit or Ian Curley by JSL or JSG other than for just cause,such individual will be entitled to compensation equal to two times hisprevailing annual remuneration/benefits package (including Management IncentiveProgram, pension, etc.). Mr. Gary McGann will retain his existing noticeperiod of 360 days but the notice period for Messrs. Anthony Smurfit andIan Curley will be 90 days.

In consideration for the foregoing severanceobligations, each of Messrs. Gary McGann, Anthony Smurfit and Ian Curleywill enter into covenants with JSL whereby each will agree that, provided theforegoing severance payments have been paid to them, they will not for a periodof two years after their termination (i) compete with JSL and itssubsidiaries in a material part of its business, or (ii) solicit theemployees, customers or suppliers of JSL and its subsidiaries.

Pursuant to the terms ofthe management employment agreements and the management incentive plan, aminimum payment of 60% of salary is guaranteed under the MIP to each of Messrs. GaryMcGann, Anthony Smurfit and Ian Curley for each of the years 2003 through 2006and the remaining 40% will be dependent upon the achievement of appropriateobjectives established by JSL’s board of directors or its compensationcommittee. The minimum payment of 60% of salary under the MIP was extended in2005 for a further two years through 2008.

**Directorship Agreement**

SKGL and Mr. FritsBeurskens have entered into a directorship agreement, dated as of December 1,2005, wherein he will provide services as a director to certain subsidiaries ofthe Group. The Agreement is for a term of two years and Mr. Beurskens willreceive Directors fees from certain subsidiaries totaling €500,000for each year of the contract. Mr. Beurskens shall also be eligible for a timebased bonus of €250,000per annum for each year of the term that he completes and a success based bonusof €500,000which is dependant on the achievement of synergy targets.

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**Management Equity Agreement**

*Purchaseof Equity.**  *Underthe Amended and Restated Management Equity Agreement, dated as ofSeptember 5, 2002, by and among JSL and each of the executives that becameparty thereto, JSL undertook to sell to each executive that is a party to suchagreement, certain of JSL’s ordinary shares, nominal value €0.001per share, and certain of JSL’s class A convertible shares, nominal value €0.001per share, which we refer to as “*class Aconvertible shares*”, class B convertible shares, nominal value €0.001per share, which we refer to as “*class Bconvertible shares*”, and class C convertible shares, nominal value €0.001per share, which we refer to as “*class Cconvertible shares*”, each of which was convertible into ordinaryshares of JSL. Each executive of JSL entered into a management equity agreementwith JSG Packaging (now known as SKGL), dated February 6, 2004, to whicheach management shareholder exchanged their existing shares of JSL for anidentical number of newly issued shares of JSG Packaging (now known as SKGL)having identical terms. In connection with the acquisition of Kappa, themanagement equity agreement was amended and restated effective December 1,2005, which amended and restated agreement we refer to as the “*management equity agreement*”. Pursuant tothe management equity agreement, management was afforded the right (but had noobligation) to exchange his or her class A convertible shares, class Bconvertible shares and class C convertible shares of SKGL for, respectively,class E convertible shares, nominal value €0.001 per share, which werefer to as “*class E convertible shares*”,class F convertible shares, nominal value €0.001 per share, which werefer to as “*class F convertible shares*”,and class G convertible shares, nominal value €0.001 per share, which werefer to as “*class G convertible shares*”.Furthermore, certain management investors were issued class H convertibleshares, nominal value €0.001 per share, which we refer to as “*class H convertible shares*”. Each of theclass E convertible shares, class F convertible shares, class G convertibleshares and class H convertible shares is convertible into ordinary shares ofSKGL as further described below. Following is a summary of the material termsof the new management equity agreement.

*Vesting.**  *The class A convertible shares,class B convertible shares, class C convertible shares, class E convertibleshares, class F convertible shares, class G convertible shares and class Hconvertible shares are subject to vesting.

So long as the executiveis and has continued to be employed by or served as an officer or director forSKGL and its subsidiaries, such executive’s class A convertible shares willvest as follows:

**CumulativePercentage of Class A**

| **Vesting Date**  | ** ** | ** ** | ** ** | **Convertible Shares Vested** | ** ** |
|------------------------|------------|------------|------------|-----------------------------------------|------------|
| December 31, 2005 |       |       | 33.3       | %                                       |       |
| December 31, 2006 |       |       | 66.7       | %                                       |       |
| December 31, 2007 |       |       | 100.0      | %                                       |       |

 

None of an executive’s class A convertible shares willbecome vested if such executive ceases to be employed by, or to serve as anofficer or director for, SKGL or its subsidiaries prior to December 31,2005. If an executive ceases to be employed by, or to serve as an officer ordirector for, SKGL or its subsidiaries on any date other than any vesting dateset forth in the table above after December 31, 2005 but prior to December 31,2007, the cumulative percentage of such executive’s class A convertible sharesto become vested will be determined on a pro rata basis according to the numberof days elapsed from the immediately preceding vesting date. However, upon thesale of SKGL or certain public listing events, which we refer to as an “*acceleration event*,” all of an executive’sclass A convertible shares will become vested and will convert to an equalnumber of class D convertible shares of SKGL, nominal value €0.001per share, which we refer to as “*class Dconvertible shares*,” unless at such time such executive is no longeremployed by, or no longer serves as an officer or director for, SKGL and itssubsidiaries. On each vesting date set forth in the table above, 33.3% of theaggregate number of each executive’s class B convertible 

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shares will become vestedif, and only if, the internal rate of return, or “*IRR*,” of MDCP IV Global Investments LP, MDCP III GlobalInvestments LP, MDSE III Global Investments LP and any affiliate of theforegoing entities that owns or holds ordinary shares of SKGL, which we referto collectively as the “*MDCP co-investors*,”equals or exceeds 25%. However, if the IRR of the MDCP co-investors as of suchvesting date is greater than 15% but less than 25%, the percentage of theaggregate class B convertible shares which will become vested as of suchvesting date will be the percentage determined by multiplying 3.33 by theexcess of (i) the IRR of the MDCP co-investors as of the applicable vestingdate over (ii) 15%. Further, if the IRR of the MDCP co-investors as of thedate of an acceleration event, which we refer to as the “*acceleration date*,” is equal to or greaterthan 25%, 100% of the class B convertible shares not previously eligible forvesting will vest as of such acceleration date. If the IRR of the MDCPco-investors as of the acceleration date is greater than 15% but less than 25%,the percentage of class B convertible shares not previously eligible forvesting prior to the acceleration date that will vest as of such accelerationdate will be the percentage determined by multiplying 10 by the excess of(i) the IRR of the MDCP co-investors as of the applicable vesting dateover (ii) 15%. Vesting with respect to the class B convertible shares willbe cumulative such that if the IRR of the MDCP co-investors as of anacceleration date or any subsequent applicable vesting date is greater than anypreceding applicable vesting date, the percentage of each executive’s entireholding of class B convertible shares vested will be recalculated to be equalto the percentage vested for such acceleration date or subsequent applicablevesting date. No class B convertible shares will vest for any executive as ofany applicable vesting date or acceleration date if the executive holding suchclass B convertible shares is no longer employed by, or no longer serves as anofficer or director for, SKGL and its subsidiaries as of such date.

On December 31, 2007, 100% of each executive’sclass C convertible shares will become vested if, and only if, the IRR of theMDCP co-investors as of such date is equal to or greater than 30%. In the eventthat an acceleration event occurs prior to December 31, 2007, 100% of theclass C convertible shares will become vested as of the acceleration date if,and only if, the IRR of the MDCP co-investors as of such acceleration date isequal to or greater than 30%. No class C convertible shares will vest for anyexecutive as of December 31, 2007 or the acceleration date if the executiveholding such class C convertible shares is no longer employed by, or no longerserves as an officer or director for, SKGL and its subsidiaries as of suchdate.

So long as the executiveis and has continued to be employed by or served as an officer or director forSKGL and its subsidiaries, such executive’s class E convertible shares willvest as follows:

**CumulativePercentage of Class E**

| **Vesting Date**   | ** ** | ** ** | ** ** | **Convertible Shares Vested** | ** ** |
|-------------------------|------------|------------|------------|-----------------------------------------|------------|
| December 31,  2008 |       |       | 33.3       | %                                       |       |
| December 31,  2009 |       |       | 66.7       | %                                       |       |
| December 31, 2010  |       |       | 100.0      | %                                       |       |

 

None of an executive’s class E convertible shares willbecome vested if such executive ceases to be employed by, or to serve as anofficer or director for, SKGL or its subsidiaries prior to December 31,2008. If an executive ceases to be employed by, or to serve as an officer ordirector for, SKGL or its subsidiaries on any date other than any vesting dateset forth in the table above after December 31, 2008 but prior toDecember 31, 2010, the cumulative percentage of such executive’s class Econvertible shares to become vested will be determined on a pro rata basisaccording to the number of days elapsed from the immediately preceding vestingdate. However, upon an acceleration event, all of an executive’s class Econvertible shares will become vested and will convert to an equal number ofclass D convertible shares of SKGL, unless at such time such executive is nolonger employed by, or no longer serves as an officer or director for, SKGL andits subsidiaries. On each vesting date set forth in the table above, 33.3% ofthe aggregate number of each executive’s class F convertible shares and class Hconvertible shares will become 

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vested if, and only if,the IRR of the MDCP co-investors equals or exceeds 20%. However, if the IRR ofthe MDCP co-investors as of such vesting date is greater than 15% but less than20%, the percentage of the aggregate class F convertible shares and class Hconvertible shares which will become vested as of such vesting date will be thepercentage determined by multiplying 6.66 by the excess of (i) the IRR ofthe MDCP co-investors as of the applicable vesting date over (ii) 15%.Further, if the IRR of the MDCP co-investors as of the acceleration date isequal to or greater than 20%, 100% of the class F convertible shares and classH convertible shares not previously eligible for vesting will vest as of suchacceleration date. If the IRR of the MDCP co-investors as of the accelerationdate is greater than 15% but less than 20%, the percentage of class Fconvertible shares and class H convertible shares not previously eligible forvesting prior to the acceleration date that will vest as of such accelerationdate will be the percentage determined by multiplying 20 by the excess of(i) the IRR of the MDCP co-investors as of the applicable vesting dateover (ii) 15%. Vesting with respect to the class F convertible shares andclass H convertible shares will be cumulative such that if the IRR of the MDCPco-investors as of an acceleration date or any subsequent applicable vestingdate is greater than any preceding applicable vesting date, the percentage ofeach executive’s entire holding of class F convertible shares and class Hconvertible shares vested will be recalculated to be equal to the percentagevested for such acceleration date or subsequent applicable vesting date. Noclass F convertible shares or class H convertible shares will vest for anyexecutive as of any applicable vesting date or acceleration date if theexecutive holding such class F convertible shares or class H convertibleshares is no longer employed by, or no longer serves as an officer or directorfor, SKGL and its subsidiaries as of such date.

On December 31, 2010, 100% of each executive’sclass G convertible shares will become vested if, and only if, the IRR of theMDCP co-investors as of such date is equal to or greater than 25%. In the eventthat an acceleration event occurs prior to December 31, 2010, 100% of theclass G convertible shares will become vested as of the acceleration date if,and only if, the IRR of the MDCP co-investors as of such acceleration date isequal to or greater than 25%. No class G convertible shares will vest for anyexecutive as of December 31, 2010 or the acceleration date if theexecutive holding such class G convertible shares is no longer employed by, orno longer serves as an officer or director for, SKGL and its subsidiaries as ofsuch date.

As a condition to accelerated vesting of anexecutive’s class A convertible shares, class B convertible shares, class Cconvertible shares, class D convertible shares, class E convertible shares,class F convertible shares, class G convertible shares and class H convertibleshares in connection with a sale of SKGL, such executive will, if requested bythe purchaser of SKGL and for no additional consideration therefor, agree tocontinued employment for up to 12 months following such sale so long as suchexecutive’s compensation package and job description is substantially similarimmediately following such sale.

*Conversion.**  *Each class A convertible share, class Bconvertible share, class C convertible share, class E convertibleshare, class F convertible share, and class G convertible share will convertinto one class D convertible share once it has fully vested and each classH convertible share will automatically convert into one class I convertibleshare, nominal value €0.001 per share, which we refer to as “*class I convertible shares*,” once ithas fully vested. An executive may at any time and from time to time, uponpayment in full in cash of the conversion price per share, convert all or anyportion of such executive’s class D convertible shares into class Aordinary shares, nominal value €0.001 per share, of SKGL,which we refer to herein as “*class Aordinary shares*”. An executive may at an time and from time to time,upon payment in full in cash of the conversion price per share, convert all orany portion of such executive’s class I convertible shares into class Bordinary shares, nominal value €0.001 per share, of SKGL,which we refer to herein as “*class Bordinary shares*”. The conversion price per share applicable to theclass D convertible shares will equal the excess of the fair market value of anordinary share of SKGL as of the date of sale of a convertible share over thesubscription price for such convertible share (or, in the case of class Dconvertible shares, the subscription price for the convertible share from whichit was converted) as reduced, in an amount per share, in the case of suchconvertible shares currently in issue, equal to a fraction the numerator ofwhich is 

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the sum of the amount ofthe share capital reduction plus interest accrued (including throughcapitalization) or paid on the notes issued to fund the share capitalreduction, plus fees and expenses related to the offering of the notes to fundthe share capital reduction and the denominator of which is the number ofordinary shares of SKGL plus the number of shares of SKGL issuable uponexercise of warrants, in each case determined as of the date of consummation ofthe share capital reduction. The conversion price per share applicable to classI convertible shares equals the fair market value of a class B ordinary shareas of the date of issue of the class H convertible share from which the class Iconvertible share was converted less the subscription price per share for theclass H convertible share. No convertible share issued under the managementequity agreement will be convertible after the seventh anniversary of the dateof issuance of such convertible share and with respect to any class Dconvertible share, the date of issuance for the class A convertible share,class B convertible share, class C convertible share, class E convertibleshare, class F convertible share or class G convertible share from which suchclass D convertible share has been converted or with respect to any class I convertibleshare, the date of issuance for the class H convertible share from which suchclass I convertible share was issued. For all purposes of the management equityagreement, the date of issuance of a convertible share of JSL for which suchconvertible share of SKGL was issued shall be deemed that date of issuance ofsuch new convertible share.

*Redemption.**  *In the event any executive ceasesto be employed by, or to serve as an officer of or director for, SKGL or itssubsidiaries, which we refer to as a “*termination*,”all of such executive’s ordinary shares and convertible shares issued orissuable under the management equity agreement (except for ordinary shares ofSKGL exchanged for ordinary shares of JSL purchased by such executive at theclosing of the transactions contemplated by the management equity agreement onSeptember 17, 2002) may be redeemed or purchased by, in order of priority,each of SKGL and the MDCP co-investors (in the case of class A convertibleshares, class B convertible shares, class C convertible shares, class Dconvertible shares, class E convertible shares, class F convertible shares,class G convertible shares and class A ordinary shares) and each of SKGL andthe CVC / Cinven Partnership (in the case of class H convertible shares, classI convertible shares and class B ordinary shares). In the case of anytermination other than for cause, the purchase price for each class Aconvertible share, class B convertible share, class C convertible share, classE convertible share, class F convertible share, class G convertible share andclass H convertible share will be such executive’s original cost for suchshare, and the purchase price for each class D convertible share, class Iconvertible share and ordinary share will be the fair market value for suchshare. In the event of a termination for cause, the purchase price for eachconvertible share and ordinary share will be the lower of (i) the fairmarket value of such share and (ii) the original cost for such share. Suchredeemed shares will be made available for sale by SKGL, the MDCP co-investorsand the CVC / Cinven Partnership to any member of SKGL’s management for thesame purchase price and on the same terms as such shares were purchased bySKGL, the MDCP co-investors and CVC / Cinven Partnership, respectively.

*Restrictionson Transfer.**  *Themanagement equity agreement prohibits the executives from transferring any oftheir ordinary shares or convertible shares, subject to certain exceptions.

*Participation andPreemptive Rights.**  *Theexecutives party to the management equity agreement are granted certain“tag-along” rights under the management equity agreement which entitle them toparticipate in certain sales by any MDCP co-investors and the CVC / CinvenPartnership. In addition, if SKGL proposes to issue any newly issued ordinaryshares to the MDCP co-investors, the CVC / Cinven Partnership or any of theirrespective affiliates or co-investors, each executive will have, subject tocertain exceptions, the right to purchase on the same terms and conditions apro rata portion of such new issuance.

**Board Practices**

Each member of SKGL’s board of directors was electedin accordance with the terms of the Shareholders and Corporate GovernanceAgreement. See “Related Party Transactions—Shareholders and CorporateGovernance Agreement.” In addition, each of the officers of JSL has enteredinto an agreement 

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with SKGL relating to histerms of employment. See “Management Employment Agreements.” SKGL’s board ofdirectors has the power to appoint officers. Each officer will hold office forthe term determined by SKGL’s board of directors and until such person’ssuccessor is chosen and qualified or until such person’s death, resignation orremoval.

SKGL’s board of directorshas two committees: the Audit Committee and the Compensation Committee.

**Employees**

We employedan average of 29,212 employees on a full time equivalent basis in 2005. Thetable below sets forth the average number of employees for the last three yearsby region and reporting segment.

| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Europe:                          |       |     |       |     |       |     |       |
| Packaging                        |       | 18,659   |       | 18,536   |       | 17,759   |       |
| Specialties                      |       | 2,725    |       | 4,395    |       | 4,589    |       |
| Total                            |       | 21,384   |       | 22,931   |       | 22,348   |       |
| Latin America                    |       | 7,828    |       | 7,440    |       | 7,318    |       |
| United  States & Canada |       | —   |       | —   |       | 639      |       |
| Total                            |       | 29,212   |       | 30,371   |       | 30,305   |       |

 

In 2004 the average number of European employeesincreased in the packaging division mainly as a result of the presence for afull year of operations acquired in 2003 such as SSCC’s  European packaging assets. In 2005 there wasan increase in employees in the packaging division due to the merger with Kappa.However this increase was partly offset by the disposal of the Munksjöoperations, the disposal of The K-Club, the closure of the Tamworth plantin the UK, the disposal of the Witham cartons plant in the UK, the disposal ofthe Voghera Mill and the closure of the Paper Mill in Clonskeagh, Dublin.

In 2004 the start up of the Chilean operationsincreased Latin American employee numbers. In 2005 the increase in employeenumbers related to the Venezuelan corrugated division. Colombia had an increasein employee numbers due to the start up of operations at the Costa Rican plantand outsourced employees in Ecuador being made direct employees.

In 2004 our operations inthe United States and Canada ceased.

**Share Ownership**

SKGL is a limited companyowned, in part, by the MDCP co-investors, the CVC/Cinven Partnership, theadditional co-investors and the management investors. JSG Funding is anindirectly wholly owned subsidiary of SKGL.

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Thefollowing table sets forth certain information regarding the beneficialownership of SKGL, as of March 31, 2006 by: (i) each person or entityknown to us to own more than 5% of any class of SKGL’s outstanding securitiesand (ii) each member of SKGL’s board of directors, each of its namedexecutive officers and all members of the board of directors and executiveofficers as a group. 73,573,336 A ordinary shares and 52,624,495 B ordinaryshares of SKGL are beneficially owned. To our knowledge, each of such securityholders has sole voting and investment power as to the ordinary shares shownunless otherwise noted. Beneficial ownership of the securities listed in thetable has been determined in accordance with the applicable rules andregulations promulgated under the U.S. Exchange Act.

|                                                               | ** ** | **Beneficial Ownership**(1)          | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                    | ** ** | **Number of   Ordinary   Shares**(2) | ** ** | **Percentage of   Ordinary   Shares**(3) | ** ** |
| **Principal Securityholders:**                                |       |                                      |       |   |   |   |   |
| MDCP Co-investors(4)                                     |       | 46,682,056                                |       |   | 37.0 | % |   |
| c/o Walkers SPV Limited                                       |       |                                      |       |   |   |   |   |
| Walkers House                                                 |       |                                      |       |   |   |   |   |
| Mary Street                                                   |       |                                      |       |   |   |   |   |
| P.O. Box 908GT                                           |       |                                      |       |   |   |   |   |
| George Town                                                   |       |                                      |       |   |   |   |   |
| Grand Cayman, Cayman  Islands                                 |       |                                      |       |   |   |   |   |
| MidOcean Europe GP (Jersey) Limited                           |       | 7,500,000                                 |       |   | 5.9 | % |   |
| 22 Grenville Street                                           |       |                                      |       |   |   |   |   |
| St. Helier                                                    |       |                                      |       |   |   |   |   |
| Jersey JB4 8PX                                                |       |                                      |       |   |   |   |   |
| Channel Islands                                               |       |                                      |       |   |   |   |   |
| Smurfit Kappa Feeder G.P.                                     |       | 52,624,495                                |       |   | 41.7 | % |   |
| 22 Grenville Street                                           |       |                                      |       |   |   |   |   |
| St. Helier                                                    |       |                                      |       |   |   |   |   |
| Jersey JB4 8PX                                                |       |                                      |       |   |   |   |   |
| Channel Islands                                               |       |                                      |       |   |   |   |   |
| **Directors and Executive  Officers:**                        | ** ** | ** **                                | ** ** |   |   |   |   |
| Hugh Briggs                                                   |       | —                                    |       |   | — |   |   |
| John A. Canning, Jr                                           |       | —                                    |       |   | — |   |   |
| Christopher J. McGowan                                        |       | —                                    |       |   | — |   |   |
| Samuel M. Mencoff                                             |       | —                                    |       |   | — |   |   |
| Valerio Massimo                                               |       | —                                    |       |   | — |   |   |
| Thomas S. Souleles                                            |       | —                                    |       |   | — |   |   |
| Sir Michael W.J. Smurfit(5),(6)                          |       | 5,414,788                                 |       |   | 4.3 | % |   |
| Gary W. McGann(5)                                             |       | 150,000                                   |       |   | 0.1 | % |   |
| Anthony P.J. Smurfit(5)                                       |       | 400,000                                   |       |   | 0.3 | % |   |
| Ian J. Curley(5)                                              |       | 150,000                                   |       |   | 0.1 | % |   |
| Frits Beurskens                                               |       | —                                    | (7)        |   | — |   |   |
| Marcus Wood                                                   |       | —                                    | (8)        |   | — |   |   |
| Rolly van Rappard                                             |       | —                                    | (9)        |   | — |   |   |
| All directors and executive officers as  a group (13 persons) |       | 6,114,788                                 |       |   | 4.8 | % |   |

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(1)          “Beneficial ownership”generally means any person who, directly or indirectly, has or shares voting orinvestment power with respect to a security. The MDCP co-investors, theCVC/Cinven Partnership, the additional co-investors and the managementinvestors entered into the shareholders and corporate governance agreement,which provides for, among other things, certain agreements of the parties as tothe composition of SKGL’s board of directors. The number of ordinary sharesindicated in the table by each party does not include any ordinary shares heldby other parties solely by virtue of the shareholders and corporate governanceagreement. For further information regarding the terms 

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of the shareholders andcorporate governance agreement, see “Certain Relationships and RelatedTransactions—Shareholders and Corporate Governance Agreement.”

(2)          With the exception ofSmurfit Kappa Feeder G.P., all shares held are A ordinary shares. Smurfit KappaFeeder G.P. holds B ordinary shares. Holders of A ordinary shares and Bordinary shares are entitled to the same rights, except that holders of Aordinary shares are entitled to vote on the election or removal of directorsand holders of B ordinary shares are not entitled to vote on the election orremoval of directors but may vote on other matters.

(3)          The percentage shown isof the combined total of A ordinary and B ordinary shares in issue.

(4)          Includes: (a) 39,020,270ordinary shares beneficially owned by MDCP IV Global Investments LP, whose solegeneral partner is MDP IV Global GP, LP, a Cayman Islands exempted limitedpartnership, whose sole general partner is MDP Global Investors Limited, aCayman Islands exempted company (MDP Investors); (b) 7,495,357 ordinaryshares beneficially owned by MDCP III Global Investments LP, whose sole generalpartner is MDP III Global GP, LP, a Cayman Islands exempted limited partnership(MDP III Global), whose sole general partner is MDP Investors; and (c) 166,429ordinary shares beneficially owned by MDSE III Global Investments LP, whosesole general partner is MDP III Global. 14 shareholders own MDP Investors, eachof whom are principals of Madison Dearborn, with all voting and investmentdecision-making determined on a majority-vote basis based on capital and withno individual shareholder owning more than 10% of the capital stock of MDPGlobal Investors Limited. An aggregate 26,517,944 shares owned beneficially byholders other than the MDCP Co-Investors are subject to a voting agreementpursuant to which such holders agree to vote on any matter submitted toshareholders for a vote in the same manner as a majority of the ordinary sharesowned by MDCP Co-Investors are voted, unless such vote is adverselydiscriminatory to any such holder in a manner different than the MDCPCo-Investors.

(5)          Pursuant to the terms ofthe management equity agreement, Sir Michael Smurfit and Messrs. McGann,Anthony Smurfit and Curley have received class E convertible shares, class Fconvertible shares and class G convertible shares. Messrs. McGann, AnthonySmurfit and Curley have also received class H convertible shares. Theconvertible shares will be non-voting and subject to certain vestingrestrictions. Upon vesting, class E convertible shares, class F convertibleshares and class G convertible shares convert into non-voting class Dconvertible shares and class H convertible shares convert into non-voting classI convertible shares. Holders of class D convertible shares may convert theirclass D convertible shares into class A ordinary shares of SKGL and holders ofclass I convertible shares may convert their class I convertible shares into classB ordinary shares of SKGL upon payment in full in cash of the conversion priceper share . For further information with respect to the vesting and conversionof the convertible shares, see “Management—Management Equity Agreement.”

(6)          An entity controlled by Sir MichaelSmurfit purchased 5,000 units in the October 2002 units private placement.The units included warrants to purchase, in the aggregate, 14,788 ordinaryshares of SKGL. The warrants were exercised in February 2005.

(7)          Mr. Frits Beurskenshas a beneficial interest, through his interest in Stichting Senior ManagementKappa “SSMK” a Dutch Foundation which holds current and former Kappamanagements interests in Smurfit Kappa Feeder L.P. As of March 20, 2006 SSMKhas 146,413 Ordinary Interests (of a total of 1,580,159), €14,085,925Preference Capital Interests (of a total of €140,859,243), €4,436,846Cumulative Interests (of a total of €232,490,732), €01998 Loan Interests (of a total of €277,361,171) and €2,271,9862001 Loan Interests (of a total of €299,208,984) in SmurfitKappa Feeder L.P. The Preference Capital Interests , the Cumulative Interestsand the 1998 and 2001 Loan Interests accrue interest on the balance standing tothe each account. Distributions will be made with priority firstly to the 1998and 2001 Loan Interests, secondly to Cumulative Interests, thirdly toPreference Capital 

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Interests and fourthly anybalance to Ordinary Interests. Mr Beurskens through SSMK has 22,410 OrdinaryInterests, €2,322,487 Preference Capital Interests, €604,121Cumulative Interests and and €283,998 2001 LoanInterests in Smurfit Kappa Feeder L.P. Smurfit Kappa Feeder L.P. holds52,624,495 B Ordinary Shares in Smurfit Kappa Group Limited.

(8)          Mr Marcus Wood holds 170Ordinary Interests and €16,239 Preference Capital Interests inSmurfit Kappa Feeder L.P.

(9)   Mr. Rolly van Rappard’s immediate family holds 4,789 OrdinaryInterests and €472,301 Preference CapitalInterests.

**Item 7.**                        MajorShareholders and Related Party Transactions

**Shareholdersand Corporate Governance Agreement**

SKGL, the MDCP co-investors, the CVC / CinvenPartnership and certain additional co-investors, which we refer to as theadditional co-investors, have entered into a Shareholders and CorporateGovernance Agreement, dated as of December 1, 2005, which we refer to asthe “*shareholders agreement*.” Theshareholders agreement replaced the Exchange and Shareholders Agreement, datedas of February 6, 2004, among JSG Packaging (now known as Smurfit KappaGroup Limited), the MDCP co-investors and certain additional co-investors, andthe Corporate Governance Agreement, dated as of February 6, 2004, among JSGPackaging, the MDCP co-investors and certain additional co-investors. Followingis a summary of the material terms of the shareholders agreement.

*Covenants.**  *Under the terms of the shareholdersagreement and until the occurrence of an acceleration event, SKGL undertakes (a) todeliver to each party (i) monthly and quarterly unaudited consolidatedbalance sheets, statements of operations and cash flows of SKGL and itssubsidiaries, (ii) annual audited consolidated balance sheets, statementsof operations and cash flows of SKGL and its subsidiaries, and (iii) anannual budget prepared on a monthly basis for SKGL and its subsidiaries and (b) todeliver to the MDCP co-investors and the CVC / Cinven written commentaries orreports on the foregoing financial information.

*PreemptiveRights.**  *Subjectto certain exceptions, if SKGL proposes to issue any additional ordinary sharesor equity securities or equity equivalents that are convertible or exercisableinto ordinary shares, which we refer to as the “*new shares*,” each party will have the right to purchase allor part of a portion of the new shares equal to the product of (i) thetotal number of new shares proposed to be issued, multiplied by (ii) afraction, the numerator of which is the number of class D convertible sharesand ordinary shares held by such shareholder as of immediately prior to theproposed issuance and the denominator of which is the total number of class Dconvertible shares and ordinary shares which are held by all shareholdersimmediately prior to the proposed issuance (plus in the case of both thenumerator and denominator, an additional number of class D convertible sharesand ordinary shares deemed owned by the CVC / Cinven Partnership).

*Restrictionson Transfer.**  *Theshareholders agreement prohibits any co-investor from transferring any of itsordinary shares, subject to certain exceptions such as pursuant to applicablelaws of descent in the case of individuals and, in the case of a party which isa company or partnership, among its affiliates. There are no restrictions onthe ability of either the MDCP co-investors or the CVC / Cinven Partnership totransfer securities of SKGL (other than to a competitor) which as long as CVCco-investors and Cinven co-investors are deemed to beneficially own not lessthan 10% of the fully-diluted ordinary shares of SKGL requires the consent ofthe CVC directors or Cinven directors (in the case of a sale by the MDCPco-investors) and which as long as the MDCP co-investors are deemed tobeneficially own not less than 10% of the fully-diluted ordinary shares of SKGLrequires the consent of the holders of a majority of ordinary shares held byall MDCP co-investors, including any affiliates, which we refer to as the “*MDCP majority*.”

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*Saleof SKGL.**  *Ifthe MDCP majority and either the Cinven directors or CVC directors (or, afterany of the MDCP co-investors, Cinven co-investors or CVC co-investors aredeemed to beneficially own less than 10% of fully-diluted ordinary shares ofSKGL, which we refer to as “*required votetermination date*”, the holders of a majority of ordinary sharesparty to the shareholders agreement), which approval we refer to as “*required shareholder approval*”, approve ofa sale of SKGL, which we refer to as an “*approvedsale*,” each party will vote for and consent to such approved saleand will take all necessary and desirable actions in connection with theconsummation of the approved sale as were approved by the required shareholderapproval, in each case subject to the satisfaction of certain conditions.

*ParticipationRights.**  *Theparties to the shareholders agreement are granted certain “tag-along” rightswhich entitle them to participate in certain sales by any MDCP co-investors andthe CVC / Cinven Partnership or their permitted transferees.

*Voting.**  *Under the terms of the shareholdersagreement, each party thereto undertakes to vote all of such investor’sordinary shares and any other voting securities of SKGL and to take all otherreasonably necessary or desirable actions within such investor’s control toensure that, among other things:

·       theauthorized number of directors on SKGL’s board of directors is established at14 directors;

·       fourrepresentatives designated by MDCP IV Global Investments LP, who we refer to asthe “*MDCP IV directors*,” and onerepresentative designated by MDCP III Global Investments LP, whom we refer toas the “*MDCP III director*,” beelected to the board of directors of SKGL;

·       eachof the management investors is elected to the board of directors of SKGL;

·       fourrepresentatives designated by the CVC / Cinven Partnership, two of which aredesignated as CVC directors, whom we refer to as the “*CVC directors*”, and two of whom aredesignated as Cinven directors, whom we refer to as the “*Cinven directors*”;

·       uponthe affirmative vote of a majority of the MDCP III director and the MDCP IVdirectors then in office and either the CVC directors or the Cinven directorsor, from and after the required vote termination date, upon the affirmativevote of a majority of the members of the board of directors of SKGL, each ofwhich we refer to as “*required board vote*”,the composition of the board of directors of all or any of SKGL’s subsidiarieswill be the same as, or as close to proportionally equivalent to that of, theboard of directors of SKGL;

·       inthe event that any MDCP IV director or MDCP III director ceases to serve as amember of the board of directors, such vacancy will be filled by arepresentative designated by MDCP IV Global Investments LP or MDCP III GlobalInvestments LP, as the case may be;

·       inthe event that any CVC director or Cinven director ceases to serve as a memberof the board of directors, such vacancy will be filled by a representativedesignated by the CVC / Cinven Partnership

·       eachmanagement investor will resign or be removed as a member of SKGL’s board ofdirectors, any board of directors of any subsidiary and any committees by avote of a majority of ordinary shares then held by the investors if suchmanagement investor is no longer employed by SKGL and its subsidiaries;

·       inthe event that the CVC directors and Cinven directors are removed or notappointed in contravention of the terms of the shareholders agreement, and suchbreach is not cured as soon as reasonably practicable after notice, that thearticles of association of SKGL will be amended to provide that class Bordinary shares of SKGL vote in the election of directors; and

·       inthe event that any of the management investors is removed or resigns from theboard of directors of SKGL, and board of directors of any subsidiary or anycommittee, MDCP IV Global 

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Investments LP will beentitled to appoint any replacement director, subject to the right of anymanagement investor to appoint a director, as described below.

Any management investor who, together with anyaffiliates or family members, owns (i) ordinary shares of SKGL with anaggregate investment cost of not less than €50million (which includes the investment cost in the underlying shares of JSLwhich were exchanged for shares of SKGL) prior to any public listing of theordinary shares of SKGL or (ii) on or after a public listing of SKGL’sordinary shares, a number of ordinary shares having an aggregate value of notless than €50million or a number of ordinary shares with an aggregate investment cost of notless than 50% of the aggregate investment cost of the ordinary shares held bysuch investor and such investor’s affiliates and family members as of the datefor settlement of consideration after the offer was declared unconditional willhave the collective right, together with any other management investorssatisfying such requirements, to appoint one member of the board of directorsof SKGL, whom we refer to as the “*purchasedequity director*.”

However, in the event that a purchased equity directorbecomes an employee of, serves as a director of or otherwise provides servicesfor any person other than SSCC and its subsidiaries without the board ofdirectors’ consent, such person will be removed from the board of directors ofSKGL.

*Covenants.**  *The shareholders agreement containscertain covenants, which, among other things, limit SKGL’s ability to enterinto any affiliate transactions outside the ordinary course of business or tochange any accounting policy of SKGL in a manner that would adversely affectthe calculation of any management incentive target or performance without theprior consent of a management investor that serves on the board of directors ofSKGL or, in the absence of any such management investor serving on such board,the purchased equity director. Furthermore, subject to certain exceptions, SKGLcovenant and agree with the management investors that they will providemanagement investors with certain inspection rights, issue, allocate andreallocate equity interests under its management equity incentive plan only tomembers of management and other persons recommended by the chief executiveofficer of SKGL.

*Mattersfor Required Board Vote.*   The Company agreed withthe MDCP co-investors and the CVC / Cinven Partnership that they would not takeany of the following actions without the required board vote: (i) hire orfire the chairman, CEO, CFO or COO of SKGL and its subsidiaries, (ii) approveany annual budget or business plan, (iii) subject to certain exceptions,approve, authorize, declare, make or pay any dividend, distribution, repurchaseor redemption of equity securities, (iv) incur indebtedness for borrowedmoney or capital lease obligations in excess of €10,000,000 in any 12 monthperiod not permitted under the senior credit facility, (v) subject tocertain exceptions, announce, approve, authorize, execute a definitiveagreement with respect to or complete any acquisition or divestiture with anenterprise value in excess of €25,000,000, (vi) announce,approve, authorize, execute a definitive agreement with respect to the sale ofcertain non-core assets of Kappa, (vii) enter into certain affiliatetransactions, (viii) voluntarily instigate insolvency proceedings, (ix) acceleratevesting on class H convertible shares of SKGL unless there is similaraccelerated vesting on the class B convertible shares and class F convertibleshares of SKGL, (x) approve, authorize, execute or amend any definitiveagreement or plan regarding management equity issuances, (xi) enter into orexit any business line, or (xii) appoint an attorney to take any of theforegoing actions that require required board vote.

*GeneralVoting Agreement.*   Each investor party to theshareholders agreement (other than the management investors) agrees to votetheir equity securities of SKGL as directed by required shareholder approval aslong as such action is not materially adversely discriminatory to such party ina manner different from the MDCP majority or the CVC / Cinven Partnership.

*Termination.**  *The shareholders agreement willterminate upon the earlier of a public listing of the ordinary shares of SKGLand a sale of SKGL to an independent third party pursuant to which such partyacquires (i) capital stock of SKGL possessing the voting power to elect amajority of SKGL’s board of directors or (ii) all or substantially all ofSKGL’s assets. However, with respect to the right of any 

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management investorto appoint a purchased equity director, such management investor’s rights willnot terminate until the earlier of a sale of SKGL of the type described aboveor the date on which such management investor no longer satisfies the ordinaryshare ownership requirements entitling such management investor to appoint apurchased equity director. The rights of the MDCP co-investors to appoint ornominate the MDCP IV directors and the MDCP III director pursuant to theshareholders agreement terminates on the date that the MDCP co-investors andtheir affiliates are deemed to beneficially own less than 10% of the ordinaryshares of SKGL pursuant to the shareholders agreement. The rights of the CVC /Cinven Partnership to appoint or nominate the CVC directors pursuant to theshareholders agreement terminates on the date that the CVC co-investors andtheir affiliates are deemed to beneficially own not less than 10% of theordinary shares of SKGL pursuant to the shareholders agreement. The rights ofthe CVC / Cinven Partnership to appoint or nominate the Cinven directorspursuant to the shareholders agreement terminates on the date that the Cinvenco-investors and their affiliates are deemed to beneficially own not less than10% of the ordinary shares of SKGL pursuant to the shareholders agreement.

**Registration RightsAgreement**

Each of the MDCP co-investors, the CVC / CinvenPartnership, the management investors, certain additional co-investors and SKGLentered into the Amended and Restated Registration Rights Agreement, dated asof December 1, 2005, which we refer to as the “*registration rights agreement*.” The registration rightsagreement replaced the Registration Rights Agreement of JSG Packaging (nowknown as Smurfit Kappa Group Limited), dated as of February 6, 2004, whichin turn replaced the Amended and Restated Registration Rights Agreement, datedas of September 5, 2002, entered into by the MDCP co-investors, themanagement investors, certain additional co-investors and JSL in connectionwith the JSG Acquisition, which had substantially the same terms.

*DemandRegistrations.**  *Underthe registration rights agreement, after an initial public offering of equitysecurities of SKGL, the holders of a majority of the registrable securitiesheld by the MDCP co-investors and their affiliates have the right at any timeto require SKGL to register any or all of their securities under up to threelong-form registrations (but, after the time that the MDCP co-investors andtheir affiliates cease to own at least 10% of fully-diluted ordinary shares ofSKGL, no more than one long-form registration) and if available, an unlimitednumber of registrations on Forms F-2 and F-3 or similar short-formregistrations, which we refer to as “*short-formregistrations*,” at SKGL’s expense. We refer to each of these typesof registrations as “*demand registrations*.”

Furthermore, under the registration rights agreement,after an initial public offering of equity securities of SKGL, the CVC / CinvenPartnership has the right at any time to require SKGL to register any or all oftheir securities under up to three long-form registrations (but, after the timethat the CVC / Cinven Partnership ceases to own at least 10% of fully-dilutedordinary shares of SKGL, no more than one long-form registration) and ifavailable, an unlimited number of registrations on Forms F-2 and F-3or similar short-form registrations, which we refer to as “*short-form registrations*,” at SKGL’sexpense.

The aggregate offering value of each long-formregistration must be at least $100 million and the aggregate offering value ofeach short-form registration must be at least $50 million

SKGL is not required, however, to effect any long-formregistration within 180 days after the effective date of a previous demandregistration which was a long-form registration or a registration in which theholders of the registrable securities were given piggyback rights pursuant tothe registration rights agreement. In addition, SKGL may postpone for up to 180days the filing or the effectiveness of a registration statement for a demandregistration if SKGL’s board of directors determines that such demandregistration would reasonably be expected to have a material adverse effect onany proposal or plan by SKGL or any of its subsidiaries to engage in anymaterial acquisition of assets or any material merger, tender offer,reorganization or similar transaction.

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*Piggyback Registrations.**  *All holders of registrablesecurities are entitled to request the inclusion of such securities in anyregistration statement at SKGL’s expense whenever SKGL proposes to register anyoffering of its equity securities (other than pursuant to a registrationstatement on Form F-4 or Form S-8 under the U.S.Securities Act) and the registration form to be used may be used for theregistration of such registrable securities.

**Transactions withDirectors and Executive Officers**

No transaction material tous, on a consolidated basis, has been entered into in the last three years withany director, executive officer or member of their respective families or withany major shareholder except for that described under Related PartyTransactions . There are no loans outstanding between us or our subsidiariesand any director or executive officer or member of their respective families orwith any major shareholder.

**Related PartyTransactions**

In June 2005, SKG disposed of the Group companieswhich owned and operated The K Club, some land proximate to The K Club and thesite of the former paper mill in Clonskeagh for total cash proceeds of €115 millionto a company controlled by Sir Michael Smurfit, the Chairman of the Group.As required under Irish law, shareholder approval was sought and received forthe proposed transaction.

In 2005 the Grouppurchased in the normal course of business approximately 28,000 metric tonsof  paper amounting to  approximately €11million from Savon Sellu, a company controlled by Dr. Dermot Smurfit togetherwith his  brothers  Sir Michael Smurfit, our Chairman, and Dr.Alan Smurfit. At December 31, 2005, an amount of €3.2million was owing by SKG to Savon Sellu.

**Transaction Fees**

Madison Dearborn receiveda fee of approximately €38.0 million at theclosing of the JSG Acquisition plus out-of-pocket expenses incurred inconnection with the JSG Acquisition. Madison Dearborn may be paid additionalfees from time to time in the future for providing management, consulting oradvisory services and related expenses.

**Interests ofExperts and Counsel**

Certain partners ofKirkland & Ellis LLP are members of a limited liability company thatis an investor in funds affiliated with Madison Dearborn. Kirkland &Ellis LLP has from time to time represented, and may continue to represent,Madison Dearborn and certain of its affiliates in connection with legalmatters.

**Item 8.**                        FinancialInformation

**ConsolidatedStatements and Other Financial Information**

**See “Item 18. Financial Statements.”**

**Legal Proceedings**

In addition to litigation arising in the ordinarycourse of business, we were involved in certain civil and criminal proceedingsin Spain arising out of a past acquisition. In November 1988, a subsidiaryof JSG acquired ICSA, a Spanish incorporated company, from a subsidiary ofTorras. In early 1989, JSG acquired a 35% interest in another Spanish company,INPACSA, a former parent of ICSA. A number of individuals associated withTorras were charged by the public prosecutor in Madrid with diverting, fortheir own use, a substantial part of the purchase consideration paid by JSG forICSA. The public prosecutor, on behalf of the minority shareholders of INPACSA,also claimed that certain transactions, including the transfer of 

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ICSA by INPACSA which tookplace prior to JSG’s acquisition of ICSA, caused damage to the minorityshareholders of INPACSA. In 1998, the public prosecutor also charged JSG’sChairman, Sir Michael W.J. Smurfit, as the representative of JSG, in theseproceedings with respect to the alleged damage to the minority shareholders ofINPACSA and Torras. A JSG subsidiary is also one of a number of parties againstwhom secondary civil liability had been claimed. JSG and Smurfit InternationalB.V. have each indemnified Sir Michael Smurfit against loss or liabilitydue to such proceedings. Bonds were posted with the Spanish court in the amountof €47million, which equals the amount of alleged damages, excluding interest. Themaximum estimated total exposure relating to the liabilities, includinginterest through December 31, 2002, was approximately €118million, for which no reserve has been taken and which amount could accrueinterest until payment of any final judgment. Preliminary proceedings commencedin March 2003 and on April 11, 2003, the court dismissed the proceedingsagainst Sir Michael Smurfit, the JSG subsidiary and others. The bondspreviously posted were released and the Spanish court has now taken a lien overcertain Spanish assets pending final resolution of the case. The final decisionof the court was handed down in March 2004 and confirmed the earlierdismissal with respect to Sir Michael Smurfit and the JSG subsidiary. Thedecision is being appealed to a higher court by two private complainants butnot by the public prosecutor. We cannot assure you, however, that theconsequences of any future adverse findings, if any, will not have a materialadverse effect on our financial position or results of operations.

We are also the subject of litigation in the DominicanRepublic arising from the acquisition in 1996 of a controlling interest in asmall local corrugator owned by Industria Cartonera Dominicana. The lawsuits,alleging damages in excess of $300 million, are brought by a local competitorwho is claiming loss of potential profits, as a consequence of our entry to themarket. He is also alleging breach of contract. In June 2004 we receivedan adverse ruling in our main lawsuit, which found for the original plaintiffbut which made no determination as to damages. The damage amount has been leftfor yet another court to decide. We have appealed this ruling and arechallenging a number of due process irregularities surrounding the ruling.

We believe the foregoing lawsuits are without meritand are defending them vigorously.

In May 2004, Kappa Packaging’s subsidiary KappaZülpich was visited by the German “Bundes Kartellamt” regarding a suspicionabout possible price co-ordination of recovered paper purchases by paper andboard producers. We are cooperating fully with the investigation.

In July 2004, representatives of the Office ofFair Trading visited our UK operation. We understand that the investigation,which centers on the sheet-feeding business, was prompted by consumercomplaints, which were filed during the UK Competition Commission’sinvestigation of the March 2004 acquisition proposal by David S. SmithLimited for Linpac Limited, a competitor of our sheet feeding business. Theinvestigation is looking into the high levels of pricing transparency whichexist in the sector and which are a function of, inter alia, verticalintegration, swaps and market concentration. We are co-operating fully with theongoing investigation.

We are also a party tovarious claims and legal actions that arise in the ordinary course of business,including with respect to environmental matters. For more information, see “—EnvironmentalIssues.” We believe such claims and legal actions, individually and in theaggregate, will not have a material adverse effect on our business, financialcondition and results of operations.

**Dividends**

The senior notesindentures, the senior subordinated notes indentures and the new senior creditfacility contain financial and other restrictive covenants that limit ourability to engage in activities that may be in our long term best interests. Forexample, these covenants significantly restrict our ability to:

·       paydividends or make certain other payments, investments, loans and guarantees;

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·       incuradditional indebtedness;

·       createliens or other encumbrances; and

·       sellor otherwise dispose of assets and merge or consolidate another entity.

In addition, the new seniorcredit facility requires us to comply with certain financial covenants

**Item 9.**                        TheOffer and Listing

The 101¤2%Senior Notes due 2012, the 95¤8%Senior Notes due 2012 and the 7.75% Senior Subordinated Notes due 2015 arelisted on the Luxembourg Stock Exchange.

**Item 10.      AdditionalInformation**

**Memorandum andArticles of Association**

The following is a summary of JSG Funding Memorandumand Articles of Association. A copy of the Memorandum and Articles ofAssociation of JSG Funding plc is included as an exhibit to this annual report.

JSG Funding is registeredwith the Companies Registration Office in Ireland and its company number is357958.

*Objects andPurposes of JSG Funding*

The objects of JSGFunding, as set out more fully in clause 3 of its memorandum of association areas follows:

·  To carry on in any or all of its branches thebusiness of manufacturing, producing, selling, exporting, importing and dealingin and with any and all kinds of paper, paperboard, cardboard, strawboard,plastic, paper substitutes and paper materials generally which may bemanufactured or produced from any material or by any process or method and anyand all ingredients, by-products and compounds thereof and all articles,commodities, materials or substances made of the foregoing may be utilized,including, without limiting the generality of the foregoing, cartons, boxes,gabs, packaging, books, insulating material, wall board, corrugated wrappers,plastic wrappers and containers, building supplies, stationer, toiletaccessories, clothing and every other kind of goods, wares and merchandise inthe manufacture, production or processing of which paper or its components orcompositions might be employed and any and all materials that may be used oruseful in connection with such manufacture or production.

·  To acquireand hold controlling and other interests in the share or loan capital of anycompany or companies.

***Directors***

JSG Funding is managed by directors. There shall be noless than two nor more than ten directors. The directors may exercise all suchpowers of JSG Funding as are not, under the Articles of Association or theIrish Companies Acts, 1963 to 2005, which we refer to as the “Irish CompaniesActs”, required to be exercised by JSG Funding in the general meeting ofshareholders. 

The directors may delegateany of their powers to any committee consisting of one or more directors. Thedirectors may by power of attorney appoint any company, firm or person, whethernominated directly or indirectly by the directors, to be the attorneys of JSGFunding and with such powers, authorities and discretions for such period andsubject to such conditions as they may think fit. 

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*Material Interests*

A director who is in any way, whether directly orindirectly, interested in a contract or a proposed contract with JSG Fundingshall declare the nature of his interest at a meeting of the directors inaccordance with the Irish Companies Acts. 

Except as provided for inJSG Funding’s Articles of Association, a director shall not vote in respect ofany contract or arrangement or any other proposal in which he has any materialinterest which conflicts or may conflict with the interest of JSG Fundingotherwise than by virtue of his interest in shares or debentures or othersecurities of or otherwise in or through JSG Funding. A director shall not becounted in the quorum present at a meeting related to such a resolution wherehe is not entitled to vote.

*Remuneration*

The remuneration of directors is determined byordinary resolution of JSG Funding and is divisible among the directors as theyagree, or failing agreement, equally. However, any director who holds officefor only part of the period in respect of which remuneration is payable shallbe entitled only to rank in such division for portion of remuneration to theperiod during which he has held office. 

Any director who is called upon to perform extraservices which in the opinion of the directors are outside the scope of theordinary duties of a director, JSG Funding may remunerate such director eitherby a fixed sum or by a percentage of profits or otherwise as may be determinedby resolution passed at a meeting of the directors and such remuneration may beeither in addition or in substitution for any other remuneration to which hemay be entitled as a director. 

The directors may also bepaid all traveling, hotel and other expenses properly incurred by them inattending and returning from meetings of the directors or any committee of thedirectors or general meetings of JSG Funding or in connection with the businessof JSG Funding. The directors have the power to provide benefits, includingpension, gratuities, or otherwise, for any director, former director or otherofficer or former officer of JSG Funding.

*Borrowing Powers*

Subject to the Companies(Amendment) Act, 1983, the directors may exercise all the powers of JSG Fundingto borrow or raise money, to mortgage or charge its undertaking, property,assets or uncalled capital, and to issue debentures, debenture stock and othersecurities whether outright or as collateral security for debts, liability, orobligation of JSG Funding or any third party, without any limitation as toamount. 

*Retirement*

At every annual generalmeeting one-third of the directors (other than any managing director and anydirector holding an executive office) or if their number is not three or amultiple of three then the number nearest one-third, shall retire from office.A retiring director is eligible for re-election. Those directors to retire byrotation shall be the directors who have been in office the longest since thelast election. 

*Number of Sharesfor Directors’ Qualification*

Currently, a director isnot required to hold any shares of JSG Funding in order to qualify fordirectorship. A shareholding qualification for directors may be fixed by JSGFunding in general meeting.

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***Rights of Each Class of Shares***

*Dividend Rights*

Each share, subject to the provisions of the Articlesof Association and the Irish Companies Act, may be issued with such rights andrestrictions as JSG Funding may determine by ordinary resolution. 

Subject to the provisions of the Companies (Amendment)Act 1983, JSG Funding may in general meeting declare dividends in accordancewith the respective rights of the shareholders. No dividend shall exceed theamount recommended by the directors. The directors may also from time to timepay interim dividends. 

The directors, beforerecommending any dividend, set aside out of the profits of JSG Funding suchsums as they think proper as a reserve or reserves. 

*Capitalization ofDistributable and Non-distributable Profits and Reserves*

At a general meeting ofshareholders, JSG Funding may, upon the recommendation of the directors,resolve that it is advantageous to capitalize any part of the amount for thetime being standing to the credit of any of JSG Funding’s reserve accounts orto the credit of the profit and loss account.

*Voting Rights*

Shareholders may exercise their votes eitherpersonally or by proxy, subject to any rights and restrictions attached to anyclass or classes of shares. Voting is conducted by a show of hands and everymember present in person and every proxy shall have one vote. On a poll, everymember present or by proxy shall have one vote per share. 

If there are joint holders of a share, the vote of asenior shall prevail over all other joint holders. Seniority is determined bythe order in which the names of the holders appear on the register with respectto the share.

If at any time the share capital is divided intodifferent classes of shares, the rights attached to any class may be varied or abrogatedwith the consent in writing of the holders of three-fourths of the nominalvalue of the issued shares of that class, or with the sanction of a specialresolution passed at a separate general meeting of the holders of the shares ofthe class, and may be so varied or abrogated whether or not JSG Funding isbeing wound-up. The quorum at any such meeting, other than the adjournedmeeting, shall be two persons holding or representing the proxy of at leastone-third of the issued shares of the class. If at any adjourned meeting ofsuch holders a quorum as defined above is not present within thirty minutes ofthe time appointed for such adjourned meeting those members who are present inperson or by proxy shall be a quorum. 

The rights conferred uponthe holders of the shares of any class issued with preferred or other rightsshall not, unless otherwise expressly provided by the terms of issue of theshares of that class, be deemed to be varied by the creation or issue offurther shares ranking *pari passu*therewith.  

*Reserves*

The directors may, beforerecommending any dividend, set aside out of the profits of the company suchsums as they think proper as a reserve or reserves which shall, at thediscretion of the directors, be applicable for any purpose to which the profitsof the company may be properly applied and pending such application may at thelike discretion either be employed in the business of the Company or beinvested in such investments as the directors may lawfully determine. Thedirectors may also, without placing the same to reserve, carry forward anyprofits which they may think it prudent not to divide.

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*RedemptionProvisions*

Subject to the provisionsof the 1990 Act, JSG Holdings may agree with any shareholder that all or partof such shareholder’s shares are to be redeemed or are liable to be redeemed atthe option of JSG Holdings or the shareholder on such terms and in such manneras may be determined by the directors of JSG Holdings. Also, subject to theprovisions of the 1990 Act, JSG Holdings may issue any shares of the companywhich are to be redeemed or are liable to be redeemed at the option of thecompany or the shareholder on such terms and in such manner as may bedetermined by the company in general meeting by special resolution on therecommendation of the directors. 

***Changing the Rights of Holders of Stock***

*Disclosure ofInterests*

The directors may,in their absolute discretion, when they consider it to be in the best interestsof JSG Funding, give notice to the holder of any share requiring them to notifyJSG Funding of the particulars of certain matters, as follows:

·  his interest in such share;

**· **interest of all persons having beneficialinterest in the share; and/or

·  any agreement that pertains to thetransferability of the share.

Depending on whether the person who has a beneficialinterest in the share is a corporation, trust, society or any other legalentity or association of individuals, the directors may require full andaccurate information about the names and addresses of the individuals whocontrol the shares, interest or unit of such corporation, trust, society, orother entity or association.

*Alteration of ShareCapital*

JSG Funding may, pursuantto an ordinary resolution of shareholders, increase its share capital. JSGFunding may also, subject to the provisions of the Articles of Association,consolidate, subdivide, or cancel any shares. JSG Funding may, by specialresolution, reduce its share capital, any capital redemption reserve fund orany share premium in any manner and with, and subject to, any incidentauthorized, and consent required, by law. JSG Funding has first and senior lienon every share not being a fully paid share for all monies (whether immediatelypayable or not) called or payable at a fixed time in respect of that share.

*Transfer of Shares*

All transfers of shares may be effected by transfer inwriting in any usual or common form or in any form acceptable to the directorsand must be executed by or on behalf of the transferor and, if the shares transferredare not fully paid, by or on behalf of the transferee. The transferor will bedeemed to remain the holder of the shares transferred until the name of thetransferee is entered in the register of JSG Funding. 

The directors may,in their absolute discretion and without assigning any reason, refuse toregister:

·  the transfer of a share warrant if theconditions of issue of any share warrants so authorize or permit the directorsto so refuse; or

·  any transfer of a share which is not fullypaid.

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The directors mayalso decline to recognize any instrument of transfer unless the instrument oftransfer:

·  is accompanied by the certificate of theshares or share warrants to which it relates and such other evidence as thedirectors may reasonably require to show the right of the transferor to makethe transfer;

**· **in respect of only one class of share orshare warrant only; and 

·  in favorof not more than four transferees.

*Restriction ofVoting Rights*

When a specifiedevent occurs shareholders’ rights may be restricted. These events are: 

·  failure of the holder or holders to pay anycall or installment of a call in the correct manner and by the time requiredfor such payment;

·  failure of the holder or holders to comply, tothe satisfaction of the directors, with the terms of Article 15 of JSGFunding’s Articles of Association regarding disclosure of beneficial ownershipin respect of any notice or notices given to him or any of them; or

·  the failure by a transferee named in atransfer presented for registration to comply, to the satisfaction of thedirectors, with all or any of the terms of Article 15 of the Articles ofAssociation in respect of any notice or notices given to him or any transferee.

If any of these eventsoccur, the directors may serve a restriction notice to the holder of theshares. This restriction notice shall prevent such holder from attending,speaking or voting either personally or by proxy at any general meeting.

*Purchase of OwnShares*

Subject to the provisionsof the Irish Companies Acts and the Articles of Association, JSG Funding maypurchase any of its shares (without any obligation to purchase on any pro ratabasis as between shareholders of the same class) on such terms and conditionsin such manner as the directors may determine. JSG Funding may cancel anyshares so purchased, hold them as treasury shares or reissue any such shares.The manner in which shares can be purchased and held is described in Section211 and Section 209 of the Companies Act, 1990.

*General Meetings*

Each year JSG Funding shall hold a general meeting asits annual general meeting in addition to any other meeting in that year andshall specify this in the meeting notice. Any general meeting other than theannual general meeting shall be called an extraordinary general meeting.Directors may call general meetings, and extraordinary meetings may be calledon such requisition, or in default, in such manner as provided by the IrishCompanies Acts. Subject to the provision of the Irish Companies Acts, anyannual general meeting and a meeting called for passing of a special resolutionshall be called upon at least 21 days’ notice in writing and othermeetings shall be called upon at least 14 days’ notice in writing. The noticeperiod shall be calculated by excluding the day when notice is given or deemedto be given and the day for which it is given or on which it is to take effect.The notice shall specify the time, place and general nature of the business tobe transacted. The accidental omission to give notice of a meeting, or thenon-receipt of notice of a meeting, shall not invalidate the proceedings atthat meeting.

No business shall be transacted at any general meetingunless there is quorum. Three members present in person or by proxy andentitled to vote shall be a quorum.

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The chairman, if any,shall preside at every general meeting, and if there is no such chairman or inhis absence the directors shall elect one of them to act as chairman of themeeting. The chairman with consent of a meeting at which quorum is present, mayadjourn the meeting from time to time and from place to place, but no businessshall be transacted at any adjourned meeting other than business leftunfinished at the meeting from which the adjournment took place. 

*Winding-Up*

If JSG Funding is woundup, the liquidator may, with the sanction of a special resolution of JSGFunding and any other sanction required by the Irish Companies Acts, divideamong the members in specie or kind the whole or any part of the assets of JSGFunding (whether they shall consist of property of the same kind or not) andmay, for such purpose, set such value as he deems fair upon any property to bedivided as aforesaid and may determine how such division shall be carried outas between the members or different classes of members. The liquidator may,with the like sanction, vest the whole or any part of such assets in trusteesupon such trusts for the benefit of the contributories as the liquidator, withthe like sanction, shall think fit, but so that no member shall be compelled toaccept any shares or other securities whereon there is any liability. 

*Untraced Members*

JSG Funding isentitled to sell, at the best price reasonably obtainable, any share registeredin the name of holder or person entitled by transmission, who remain untracedafter 12 years. This is provided that:

·  the holder failed to communicate with JSGFunding during the 12 year period;

·  JSG Funding by advertisement has indicated itsintent to sell the share;

·  JSG Funding has received no communication fromthe untraced member for three months following its advertisement; and

·  if any shares are listed or dealt in on theIrish Stock Exchange, JSG Funding has first given notice in writing to theIrish Stock Exchange of its intention to sell such shares.

To give effect to such asale, JSG Funding may appoint any person to serve as a transferee of theproceeds. The net proceeds shall be held in a separate account which shall be adebt of JSG Funding.

**Material Contracts**

**Acquisition of Jefferson Smurfit Group plc**

On October 7, 2002, aninvestor group led by Madison Dearborn Partners and management of JSG (the“Transaction”) acquired Jefferson Smurfit Group plc. The following reflectsubstantially all of the material contracts entered into in connection with theTransaction.

**Financing Arrangements.****  **The following contracts were enteredinto by the parties named below to finance the Transaction:

*SeniorCredit Facility.**  *Inconnection with the Transaction, JSG Acquisitions as original borrower enteredinto a senior credit facility on September 12, 2002, with Deutsche Bank AGLondon, as facility agent and security agent, Deutsche Bank AG London andMerrill Lynch International as joint arrangers and joint bookrunners, DeutscheBank AG London and Merrill Lynch Capital Corporation and others as originallenders, JSL, JSG Funding and JSG Acquisitions as original guarantors, and asyndicate of financial institutions and institutional lenders. The seniorcredit facility originally provided for facilities of up to €2.525 billion.The Senior Credit Facility was subsequently refinanced by the New Senior CreditFacility referred to below on November 30, 2005 as part of the financingarrangements for the merger with 

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Kappa Holding B.V. Wherereferences are made to senior credit facility the reference applies to both theSenior Credit Facility and the New Senior Credit Facility as appropriate.

*SeniorNotes due 2012 of JSG Funding.**  *As part of the Transaction, JSGFunding issued €350million in aggregate principal amount of 101¤8% senior notesdue 2012, pursuant to a Euro Indenture, dated as of September 30, 2002, amongJSG Funding, JSG Acquisitions and Deutsche Bank Trust Company Americas, astrustee, and $545 million in aggregate principal amount of 95¤8% senior notesdue 2012, pursuant to a Dollar Indenture, dated September 30, 2002, among JSGFunding, JSG Acquisitions and Deutsche Bank Trust Company Americas, as trustee.As part of the SSCC Asset Swap (as defined below), JSG Funding issued anadditional $205 million in aggregate principal amount of 95¤8% senior notesdue 2012 under the Dollar Indenture. The senior notes mature on October 1,2012. The senior euro notes bear interest at a rate equal to 101¤8% per annum.The senior dollar notes bear interest at a rate equal to 95¤8% per annum.Through maturity, interest on the senior notes is payable semi-annuallyin arrears on April 1 and October 1 of each year. The senior notes are general,unsecured obligations of JSG Funding and rank equally with or senior in rightof payment to all current and future indebtedness of JSG Funding. Each seriesof the senior notes will rank *pari passu*withthe other and senior in right of payment to, among other things, the senior subordinatednotes. The senior notes effectively rank junior to all of the existing andfuture  indebtedness of JSG Funding’ssubsidiaries, including those of JSG Acquisitions and all borrowing under thesenior credit facility, whether such debt is secured or unsecured. JSGAcquisitions is the guarantor of the senior notes on a senior subordinatedbasis. The guarantees rank behind all current and future senior indebtedness ofJSG Acquisitions, including all borrowing under the senior credit facility. Theguarantees also rank behind all liabilities of JSG Acquisitions’ subsidiaries.The indentures governing the senior notes contain customary covenants andevents of default. 

*UnitsPrivate Placement.**  *Aspart of the Transaction, JSL and JSG Funding issued 100,000 euro units and150,000 dollar units for an aggregate of approximately €252.7million in net proceeds (at the September 23, 2002 exchange rate of €1.00= $0.9822). The units were issued pursuant to a Euro Unit Agreement, dated asof October 2, 2002, among JSG Funding, JSL, Deutsche Bank AG London, as EuroUnit Agent, and Deutsche Bank Trust Company Americas, as Euro Trustee andWarrant Agent, and a Dollar Unit Agreement, dated as of October 3, 2002, amongJSG Funding, JSL, Deutsche Bank Trust Company Americas, as Dollar Unit Agentand Deutsche Bank AG London, as Co-Warrant Agent. Each euro unit consisted of a€1,000principal amount 15.5% subordinated note due 2013 of JSG Funding, and a warrantto subscribe for ordinary shares of JSL. Each dollar unit consists of a $1,000principal amount 15.5% subordinated note due 2013 of JSG Funding, and a warrantto subscribe for ordinary shares of JSL.

*15.5%Subordinated Notes due 2013 of JSG Funding.**  *In January 2005, JSG Fundingcommenced a tender offer to purchase, for cash, all outstanding existing 15.5%subordinated notes ( the ‘‘Tender Offer’’). The Tender Offer was completed onFebruary 14, 2005. All of the euro 15.5% subordinated notes were tendered.The approximately 0.01% of the 15.5% dollar subordinated notes not tendered inFebruary 2005 were redeemed on October 28, 2005 at a redemption priceof 108.0%, in accordance with the terms and conditions of the indenturegoverning the dollar subordinated notes.

*EquityWarrants.**  *Holdersof the 15.5% subordinated notes received warrants to purchase, in theaggregate, 1.0% of the outstanding ordinary shares of JSL, inclusive of theordinary shares issuable upon the exercise of the warrants, at the price of €0.001per ordinary share, subject to certain anti-dilution protections. The warrantswere issued pursuant to a Warrant Agreement, dated as of October 2, 2002, byand among JSL, Deutsche Bank Trust Company Americas, as Warrant Agent, DeutscheBank AG London, as Co-Warrant Agent and MDCP Co-Investors (as defined therein),as amended by the First Amendment to Warrant Agreement, dated as of March 31,2003, among the Company, the Warrant Agent and the Co-Warrant Agent, and assupplemented by the Supplemental Warrant Agreement, dated as of February 6,2004, among JSL, the Warrant Agent, the Co-Warrant Agent and SKGL. Inaccordance with the terms of the Supplemental Warrant Agreement, SKGL assumedthe obligations of JSL in respect of 

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the warrants and,accordingly, the warrants are now in respect of the issue of the outstandingordinary shares of SKGL. The warrants will expire on October 1, 2013. Inaddition, the holders of warrants are entitled to certain registration rights,tag-along rights and drag-along obligations. 

**2005Refinancing Transaction**   The following contractswere entered into by the parties named below as part of the RefinancingTransactions to finance the repayment of the 15.5% Subordinated Notes due 2013of JSG Funding.

*7.75%Senior Subordinated Notes due 2015 of JSG Funding.**  *JSG Funding issued the 7.75% eurosenior subordinated notes in an aggregate principal amount of €217.5million under a Euro Indenture, dated January 31, 2005, between JSG Funding andDeutsche Bank Trust Company Americas, as trustee, Deutsche Bank LuxembourgS.A., as paying agent and transfer agent, and Deutsche Bank AG London, asprincipal paying agent and transfer agent, and issued the 7.75% dollar seniorsubordinated notes in an aggregate principal amount of $200 million under aDollar Indenture, dated as of January 31, 2005, between JSG Funding andDeutsche Bank Trust Company Americas, as trustee, and Deutsche Bank LuxembourgS.A., as paying agent and transfer agent. The senior subordinated notes matureon April 1, 2015 and bear interest at a rate equal to 7.75% per annum. Throughmaturity, the interest on the subordinated notes is payable each April 1 andOctober 1 in cash. The senior subordinated notes are unsecured obligations ofJSG Funding and are subordinated in right of payment to all existing and futuresenior indebtedness of JSG Funding. The subordinated notes are not guaranteedby any of JSG Funding’s subsidiaries. As a result, they also effectively rankbehind all current and future liabilities, including trade payables, of JSGFunding’s subsidiaries. The indentures governing the senior subordinated notescontain customary covenants and events of default. 

*Tenderoffer for 15.5% Subordinated Notes due 2013 of JSG Funding.**  *On January 13, 2005, JSGFunding commenced a tender offer to purchase for cash all outstanding JSGFunding 15.5% subordinated notes (the “Tender Offer”). JSG Funding applied thenet proceeds from the offering of the €217.5 million 7.75% SeniorSubordinated Notes due 2015 and the $200 million 7.75% Senior SubordinatedNotes due 2015 to fund the purchase of its 15.5% subordinated notes.

**SSCC Asset Swap.****  **Pursuant to (i) that certain Stock PurchaseAgreement, dated February 20, 2003, by and among Smurfit-Stone ContainerCorporation (“SSCC”), Stone Container France S.A. (“SIF”) and SmurfitInternational B.V. (“SIBV”) (the “EC Agreement”) and (ii) that certain Exchangeand Sale Agreement, dated February 20, 2003, by and among SSCC, Stone, SSCC LUXI S.A.R.L., SSCC LUX VII S.A.R.L. (“Lux VII”), SIBV, SIF and Smurfit CanadaHoldings Limited (the “MBI Agreement” and together with the EC Agreement, the“Agreements”), JSG purchased substantially all of the assets that comprisedSSCC’s European operations for JSG’s 50% ownership interest in Smurfit MBI ofCanada and a cash payment of approximately €185 million (the “SSCCAsset Swap”). The Agreements contain standard representations and warranties asto the respective businesses involved in the transaction and requires bothparties to provide indemnification to the other against certain losses incertain circumstances. The SSCC Asset Swap was completed on March 30, 2003. 

**Merger with KappaHolding B.V.**

On December 1, 2005, JSG Acquisitions acquired KappaHolding B.V. (the “Merger”). The following reflect substantially all of thematerial contracts entered into in connection with the Merger.

**SharePurchase Agreement.****  **OnNovember 23, 2005, JSG Packaging, JSG Acquisitions, Smurfit Kappa FeederG.P. Limited (in its capacity as general partner of Smurfit Kappa Feeder L.P.),certain investment funds managed or advised by Cinven Limited and certaininvestment funds managed or advised by CVC Capital Partners Limited, which arethe controlling shareholders of Kappa, and the other Kappa shareholders enteredinto a Share Purchase Agreement (the “Share Purchase Agreement”). Pursuant to the Share Purchase Agreement, JSG Packaging and its subsidiariesand Kappa and its subsidiaries merged 

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their respectiveoperations on December 1, 2005.  JSG Packaging was re-named SmurfitKappa Group Limited.  The Merger was completed through the issue of classB ordinary shares of Parent and the payment of consideration comprising €238 millionin cash and the issuance of a subordinated promissory note in the amount ofapproximately €89million to Kappa’s shareholders.  As a result of the Merger, JSGPackaging’s shareholders own approximately 58.3% and Kappa’s shareholders own approximately41.7% of SKGL.

**NewSenior Credit Facility.****  **The following contract was entered into by the partiesnamed below in connection with the Merger. 

On November 30, 2005, JSL, JSG Acquisitions,certain other subsidiaries of JSL, as borrowers or guarantors, Deutsche BankAG, London Branch, Citigroup Global Markets Limited, Credit Suisse First BostonInternational and JP Morgan PLC, as arrangers, certain lenders named therein,and Deutsche Bank AG, London Branch, as issuing bank, facility agent andsecurity agent, entered into a senior credit facility (the “New Senior CreditFacility”).  This facility consists of a €485million amortizing A Tranche maturing in 2012, a €1,188 million B Tranchematuring in 2013 and a €1,189 million C Tranche maturing in2014.  The borrowers have €875 million of additionalborrowing availability under the New Senior Credit Facility, including a €600million revolving credit facility.  On December 1, 2005, €2,622million and US$175 million was drawn under the New Senior Credit Facility tofund the initial cash consideration for the Kappa shares, to refinance theexisting senior credit facility of JSG Acquisitions and the existing seniorcredit facility of Kappa Packaging B.V. (“Kappa Packaging”), and to fund theredemption price for the 105¤8%Senior Subordinated Notes due 2009 and the 121¤2% SeniorSubordinated Discount Notes due 2009 issued by Kappa Beheer B.V., and to payrelated costs and expenses.

**PriorityAgreement.****  **Thefollowing contract was entered into by the parties named below in connectionwith the New Senior Credit Facility.

On November 30, 2005, JSL, certain subsidiariesof JSL, as obligors, certain banks and financial institutions named therein assenior creditors, Deutsche Bank Trust Company Americas, as bond trustee,Adavale (Netherlands) B.V., as junior creditor, certain banks and financialinstitutions named therein as hedging banks, and Deutsche Bank AG, LondonBranch, as senior agent and security agent, entered into a priority agreement(the “Priority Agreement”). The Priority Agreement provides, among otherthings, that each of the intercompany loans made by JSG Funding to JSGAcquisitions is subordinated in right of payment to the prior payment in fullin cash of all obligations of JSG Acquisitions in respect of senior obligationsunder the New Senior Credit Facility. The intercompany loans consist of JSGFunding’s loans to JSG Acquisitions of the gross proceeds JSG Funding receivedfrom the issuance of 95¤8%senior notes due 2012, 101¤8%senior notes due 2012 and 7.75% senior subordinated notes due 2015.

**ManagementArrangements.****  **Inconnection with the Transaction, each of the executive officers of JSG enteredinto an employment agreement and management equity agreement with JSL. Themanagement equity agreement was amended and restated in December 2005 inconnection with the merger and the formation of SKGL. A detailed description ofthe contract is set forth in this Form 20-F under Item 6 under the caption“Management Equity Agreements.”

**InvestorArrangements.****  **Inconnection with the Transaction, substantially all of the investors in theTransaction (including the management investors) entered into a number ofagreements relating to their equity investment in JSL. Each of these agreementswere amended and restated in December 2005 in connection with the merger andthe formation of SKGL. A detailed description of each of these contracts is setforth in this Form 20-F under Item 7 under the captions “Registration RightsAgreement” and “Shareholders and Corporate Governance Agreement.”

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**Exchange Control**

There are no Irish foreignexchange control restrictions on the payment of dividends on the OrdinaryShares to holders non resident in Ireland or on the conduct of our operations.

**Taxation**

**United StatesTaxation**

The following is a description of the material U.S.tax consequences of the acquisition, ownership and disposition of the 95¤8%senior notes due 2012, the 101¤8%senior notes due 2012 and the 7.75% senior subordinated notes due 2015(collectively, the “notes”). The statements regarding U.S. tax laws andpractices set out below, including the statements regarding U.S./Irish doubletaxation convention relating to income and capital gains, which we refer to asthe Tax Treaty, assume that the notes were issued, and transfers thereof andpayments thereon will be made, in accordance with the applicable notesindenture. For purposes of the Tax Treaty and the U.S. Internal Revenue Code of1986, as amended to the date hereof, which we refer to as the Code, U.S.Holders of book-entry interests will be treated as owners of the notesunderlying such book-entry interests and, except as noted below, the taxconsequences of owning book-entry interests will be the same as thoseapplicable to ownership of the notes.

Holders of the notes are also advised to consult theirown tax advisors as to the U.S. or other tax consequences of the purchase,ownership and disposition of the notes, including the effect of any state,local, or foreign tax laws.

This discussion deals only with investors that hold notesas capital assets. The discussion does not cover all aspects of U.S. federaltaxation that may be relevant to, or the actual tax effect that any of thematters described herein will have on, the acquisition, ownership ordisposition of notes by particular investors, and does not address state,local, foreign or other tax laws. In particular, this discussion does notaddress all of the tax considerations that may be relevant to certain types ofinvestors subject to special treatment under the U.S. federal income tax laws(such as banks, insurance companies, regulated investment companies, realestate investment trusts, investors liable for the alternative minimum tax,individual retirement accounts and other tax-deferred accounts, tax-exemptorganizations, dealers in securities or currencies, investors that will holdthe notes as part of a straddle or hedging, constructive sale, integrated orconversion transactions for U.S. federal tax purposes, a person that actuallyor constructively owns more than 10% of the voting stock of JSL, traders insecurities that have elected the mark-to-market method ofaccounting for their securities, or investors whose functional currency is notthe U.S. dollar).

As used herein, the term “U.S. Holder” generally means(i) a citizen or resident of the U.S. for U.S. federal income taxpurposes, (ii) a corporation, partnership or limited liability companycreated or organized under the laws of the U.S. or any political subdivisionthereof, (iii) a person or entity that is otherwise subject to U.S.federal income tax on a net income basis in respect of income derived from thenotes or (iv) a partnership to the extent the interest therein is owned bya person who is described in clause (i), (ii) or (iii) of thisparagraph. As used herein, the term “Non-U.S. Holder” means anyone that is nota U.S. Holder.

This discussion assumes that, for U.S. federal incometax purposes, the notes are treated as debt. The discussion is based on theCode, its legislative history, existing and proposed regulations thereunder,published rulings and court decisions, all as currently in effect and allsubject to change at any time, perhaps with retroactive effect. If apartnership holds the notes, the tax treatment of a partner will generallydepend upon the status of the partner and the activities of the partnership.Partners in partnerships that hold our notes should consult their tax advisors.

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The discussion may notaddress your particular circumstances. You are thus urged to consult your taxadvisors as to the federal, state, local, foreign and other tax consequences ofacquiring, owning and disposing of the notes to you based on your particularcircumstances.

**IRS Circular 230Disclosure**

To ensure compliance with requirements imposed by theU.S. Internal Revenue Service, we inform you that any tax advice containedherein was not intended or written to be used, and cannot be used, by anytaxpayer for the purpose of (1) avoiding tax-related penalties under the U.S.Internal Revenue Code or (2) promoting, marketing or recommending to anotherparty any tax-related matters addressed herein. Each taxpayer should seek advice based on the taxpayer’s particularcircumstances from an independent tax advisor.

***Consequences to U.S. Holders***

*Paymentof Interest.**  *Thenotes were not issued with original issue discount. Accordingly, a U.S. Holderwill be taxed on the interest on a note at ordinary income rates at the time atwhich such interest accrues or is received in accordance with such U.S. Holder’sregular method of accounting for U.S. federal income tax purposes.

A U.S. Holder who uses the cash method of accountingfor federal income tax purposes and who receives interest on a euro note, whichwe refer to as a “foreign currency note,” in a currency other than the U.S.dollar, which we refer to as “foreign currency,” will be required to include inincome the U.S. dollar value of such foreign currency, determined using thespot rate in effect on the date such payment is received, regardless of whetherthe payment is in fact converted to U.S. dollars at that time. No currencyexchange gain or loss will be recognized by such holder on such interestpayments if the foreign currency is converted into U.S. dollars on the datereceived at that spot rate. The U.S. federal income tax consequences to a U.S.Holder of a foreign currency note of the conversion of foreign currencyreceived in respect of the foreign currency note to U.S. dollars are describedbelow. See “—Exchange of Foreign Currencies.”

A U.S. Holder who uses the accrual method ofaccounting for federal income tax purposes will be required to include inincome the U.S. dollar value of the amount of interest income accrued withrespect to a foreign currency note in a taxable year in accordance with eitherof two methods. Under the first method, the U.S. dollar value of such accruedincome will be determined by translating such income at the average rate ofexchange for the relevant interest accrual period, or with respect to anaccrual period that spans two taxable years, at the average rate for theportion of such accrual period within the taxable year. The average rate ofexchange for an interest accrual period (or portion thereof) is the simpleaverage of the spot rates for each business day of such period (or such otheraverage that is reasonably derived and consistently applied). Under the secondmethod, an accrual basis U.S. Holder may elect to translate such accruedinterest income using the spot rate in effect on the last day of the accrualperiod or, with respect to a partial accrual period, using the spot rate ineffect on the last day of the taxable year. If the last day of an accrualperiod is within five business days of the receipt of the accrued interest, aU.S. Holder may translate such interest using the spot rate in effect on thedate of receipt. The above described election must be made in a statement filedwith the U.S. Holder’s first U.S. tax return for which the election iseffective and must be applied consistently to all debt obligations held by theU.S. Holder from year to year and may not be changed without the consent of theInternal Revenue Service. Whether or not such election is made, a U.S. Holdermay recognize exchange gain or loss (which will be treated as ordinary incomeor loss) with respect to accrued interest income on the date such interestincome is actually paid or received (including upon a sale or other dispositionof such note, the receipt of proceeds of which include amounts attributable toaccrued interest previously included in income). The amount of ordinary incomeor loss recognized will be equal to the difference, if any, between the U.S.dollar value of the foreign 

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currency received(determined using the spot rate in effect on the date such payment is received)in respect of such accrued interest and the U.S. dollar value of the interestincome that accrued during such interest accrual period (as determined above).No additional exchange gain or loss will be recognized by such holder if suchforeign currency is converted to U.S. dollars on the date received at that spotrate. The U.S. federal tax consequences of the conversion of foreign currencyinto U.S. dollars are described below. See “—Exchange of ForeignCurrencies.”

*Dispositionof Notes.**  *Uponthe sale, exchange, retirement, or other disposition of a note, a U.S. Holdergenerally will recognize taxable gain or loss equal to the difference betweenthe amount realized upon the sale, exchange, retirement, or other disposition(less any portion attributable to accrued but unpaid interest or marketdiscount (discussed below), both of which will be treated as ordinary incomefor U.S. federal income tax purposes) and such U.S. Holder’s adjusted tax basisin a note. A U.S. Holder’s adjusted tax basis in a dollar note generally willequal the cost of the dollar note to such U.S. Holder, less any principalpayments received by such U.S. Holder plus any market discount previouslyincluded in income by the holder with respect to the note. Assuming the foreigncurrency notes are not traded on an established securities market, (1) theamount realized by a U.S. Holder on a sale, exchange, retirement, or otherdisposition of a foreign currency senior note generally will be based on theU.S. dollar value of the foreign currency on the date of disposition, and (2) aU.S. Holder’s adjusted tax basis in a foreign currency note will equal the U.S.dollar cost of the foreign currency note to such holder on the date of purchaseless any principal payments received by the U.S. Holder plus any marketdiscount previously included in income by the holder with respect to the note.

If the foreign currency notes are traded on anestablished securities market, a special rule applies for thedetermination of the amount realized and the basis of the foreign currency notesheld by a cash basis taxpayer. Pursuant to this rule, units of foreign currencypaid or received are translated into U.S. dollars at the spot rate on thesettlement date of the purchase or sale. In that case, no exchange gain or losswill result from currency fluctuations between the trade date and thesettlement date of such a purchase or sale. An accrual basis taxpayer may electthe same treatment required of cash basis taxpayers with respect to purchasesand sales of foreign currency notes that are traded on an establishedsecurities market, provided the election is applied consistently from year toyear. Such election may not be changed without the consent of the InternalRevenue Service.

Except as provided below with respect to gain or losson a foreign currency senior note attributable to currency fluctuations, a U.S.Holder’s gain or loss realized upon the sale, exchange, retirement or otherdisposition of a note will be long term capital gain or loss if, at the time ofthe sale, exchange, retirement or other disposition of a note, the U.S. Holderhas held the note for more than one year. If a U.S. Holder is an individual andthe note being sold, exchanged, or retired is a capital asset held for morethan one year, the U.S. Holder may be eligible for reduced rates of taxation onany capital gain recognized. The ability to deduct capital losses is subject tolimitations.

To the extent that the amount realized on a sale,exchange, retirement, or other disposition of a note represents accrued butunpaid interest, such amount must be taken into account as interest income, ifit was not previously included in income, and exchange gain or loss may berealized as described above. See “—Payment of Interest.” In the case of aU.S. Holder who acquired the notes with market discount (discussed below), anygain recognized upon the sale, exchange, redemption, or other disposition ofthe notes generally will be treated as ordinary income to the extent of themarket discount that accrued during the period such U.S. Holder held such notes,unless the U.S. Holder previously had elected to include such accrued marketdiscount in the U.S. Holder’s income on a current basis. See “—Market Discountand Bond Premium.”

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Gain or loss realized by aU.S. Holder upon the sale, exchange, or retirement, or other disposition of aforeign currency note that is attributable to fluctuations in the rate ofexchange between the U.S. dollar and the foreign currency will be ordinaryincome or loss and generally will be treated as U.S. source gain or loss. Gainor loss attributable to fluctuations in exchange rates will equal thedifference between (i) the U.S. dollar value of the foreign currencyprincipal amount of the foreign currency note, determined at the spot rate onthe date such payment is received or the foreign currency note is disposed of(or, where the foreign currency note is traded on an established securitiesmarket and the holder is a cash-basis taxpayer or an electing accrual basistaxpayer, on the settlement date), and (ii) the U.S. dollar value of theprincipal amount of the foreign currency note, determined at the spot rate onthe date the U.S. Holder acquired the foreign currency note. Such foreigncurrency exchange gain or loss will be recognized only to the extent of thetotal gain or loss realized by the U.S. Holder on the sale, exchange,retirement, or other disposition of the foreign currency note.

**Market Discount and Bond Premium**

A U.S. Holder who purchases a note at a “marketdiscount” that exceeds a statutorily defined de minimis amount will be subjectto the “market discount” rules. In general, “market discount” is the excess ofa debt instrument’s stated redemption price at maturity over the holder’s basisin such debt instrument immediately after its acquisition. The statedredemption price at maturity of a debt instrument is the sum of all amountspayable with respect to the debt instrument, whether denominated as principalor interest (other than qualified stated interest payments). Qualified statedinterest generally means stated interest that is unconditionally payable incash or other property (other than additional debt instruments of the JSG Funding)at least annually at a single fixed rate (or at certain qualifying variablerates).

Any gain on sale of a debt instrument attributable toa U.S. Holder’s unrecognized accrued market discount is generally treated asordinary income to the U.S. Holder. The amount of accrued market discount iscalculated on a ratable basis or, at the election of the holder, on a constantyield to maturity basis. In addition, a U.S. Holder who acquires a debtinstrument at a market discount may be required to defer a portion of anyinterest expense that otherwise may be deductible on any indebtedness incurredor maintained to purchase or carry the debt instrument until the U.S. Holderdisposes of the debt instrument in a taxable transaction.

Instead of recognizing any market discount upon adisposition of a note (and being required to defer any applicable interestexpense), a U.S. Holder may elect to include market discount in incomecurrently as the discount accrues. Any current accruals of market discount withrespect to notes pursuant to such election should be treated as interest on thenotes (as discussed above). The current income inclusion election, once made,applies to all market discount obligations acquired by the electing U.S. Holderon or after the first day of the first taxable year in which the electionapplies, and may not be revoked without the consent of the IRS.

Accrued market discount on a foreign currency note(other than market discount that a U.S. Holder has elected to currently includein income) will be translated into U.S. dollars at the spot rate on the datethe foreign currency note is sold, exchanged, redeemed, or otherwise disposedof. No part of such accrued market discount is treated as exchange gain orloss. Accrued market discount that a U.S. Holder has elected to currentlyinclude in income will be translated into U.S. dollars at the average exchangerate for the accrual period. Such U.S. Holder may recognize exchange gain orloss (which will be treated as ordinary income or loss) with respect to marketdiscount on the date such market discount is actually received (including upona sale or other disposition of such note, the receipt of the proceeds of whichinclude amounts attributable to accrued market discount previously included inincome). The amount of ordinary income or loss recognized will be equal to thedifference, if any, between the U.S. dollar value of the foreign currencyreceived (determined using the spot rate in effect on the date such payment isreceived) in respect of such accrued market discount and the U.S. dollar valueof the market discount that 

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accrued during suchaccrual period. No additional exchange gain or loss will be recognized by suchholder if such foreign currency is converted to U.S. dollars on the datereceived at that spot rate. The U.S. federal tax consequences of the conversionof foreign currency into U.S. dollars are described below. See “—Exchange ofForeign Currencies.”

In the event that a note is purchased at a premium,i.e., for an amount in excess of the amount payable at maturity, a U.S. Holdergenerally may elect to offset payments of qualified stated interest on such noteby an allocable portion of the premium (which will result in a correspondingreduction in such U.S. Holder’s tax basis in the note). The portion of thepremium allocable to each interest payment generally is calculated based on theU.S. Holder’s yield to maturity for the note. If a U.S. Holder elects toamortize bond premium with respect to the note, such election will also applyto all other debt instruments held by such U.S. Holder during the year in whichthe election is made and to all debt instruments acquired after that year. Theelection may not be revoked without the consent of the IRS.

A U.S. Holder of foreign currency notes who haselected to offset payment of qualified stated interest on such foreign currencynotes with an allocable portion of the premium will reduce interest income inunits of foreign currency. Exchange gain or loss will be realized with respectto such premium by treating the portion of such premium amortized as a returnof principal. With respect to a holder who does not elect to amortize premium,the amount of premium will constitute a market loss when the foreign currencynote matures.

*Exchangeof Foreign Currencies.**  *AU.S. Holder will have a tax basis in any foreign currency received as interestor on the sale, exchange, retirement or other disposition of a note equal tosuch currency’s U.S. dollar value at the time such foreign currency isreceived. As discussed above, however, if the foreign currency notes are tradedon an established securities market, cash basis taxpayers (or, upon election,accrual basis taxpayers) will determine the U.S. dollar value of any foreigncurrency received in connection with the sale, exchange, retirement or otherdisposition by translating such foreign currency received at the spot rate ofexchange on the settlement date of the sale, exchange, retirement or otherdisposition. Any gain or loss realized by a U.S. Holder on a sale or otherdisposition of foreign currency (including the exchange of such currency forU.S. dollars) will be ordinary income or loss and generally will be U.S. sourcegain or loss.

*Foreign Tax Credit.**  *Interest received (and marketdiscount recognized) by a U.S. Holder generally will be treated as foreignsource income and will be considered “passive” income or “financial services”income, which is treated separately from other types of income in computing theforeign tax credit such U.S. Holder may take under U.S. federal income taxlaws.

***Consequences to Non-U.S. Holders***

*Interestand Market Discount on the Notes.**  *A Non-U.S. Holder generally willnot be subject to U.S. federal income tax or withholding with respect to theinterest (or market discount) on a note. If, however, the interest (includingmarket discount) on a note is effectively connected to a U.S. trade or businessof the Non-U.S. Holder or, if a tax treaty applies, is attributable to aU.S. permanent establishment of the Non-U.S. Holder, such holder, althoughexempt from U.S. withholding tax, will be subject to U.S. federal income tax onsuch interest (and market discount) on a net income basis in a similar manneras if it were a U.S. Holder. Interest (and market discount) received by aNon-U.S. Holder on a note generally will be considered effectively connectedwith a U.S. trade or business only if the Non-U.S. Holder is (i) aninsurance company carrying on a U.S. business to which such interest (or marketdiscount) is attributable, within the meaning of the Code, or (ii) has anoffice or other fixed place of business in the U.S. to which the interest (ormarket discount) is attributable and either (x) the interest (or marketdiscount) is derived in the active conduct of a banking, financing, or similarbusiness within the U.S. or (y) the interest (or market discount) isreceived by a corporation the principal business of which is trading in stockor 

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securities for its ownaccount. In addition, if such holder is a foreign corporation, it may besubject to a branch profits tax equal to 30% of its effectively connectedearnings and profits for the taxable year, subject to adjustments. For thispurpose, interest (and market discount) on a note will be included in suchforeign corporation’s earnings and profits.

*Dispositionof Notes.**  *ANon-U.S. Holder will generally not be subject to U.S. federal income tax withrespect to gain recognized on a sale, exchange, redemption or other dispositionof notes, provided that (i) the gain is not effectively connected with atrade or business of the Non-U.S. Holder in the U.S. (or, if a tax treatyapplies, is attributable to a U.S. permanent establishment of the Non-U.S.Holder) and (ii) in the case of a foreign individual, the foreign personis not present in the U.S. for 183 days or more in the taxable year, andcertain other conditions are met.

If an individual Non-U.S. Holder meets the effectivelyconnected requirement described above, he will be taxed on his net gain(including any gain attributable to market discount) derived from the sale orother disposition under U.S. federal income tax rates applicable to a U.S.Holder.

If a Non-U.S. Holder thatis a foreign corporation meets the “effectively connected” requirementdescribed above, it will be taxed on its gain (including any gain attributableto market discount) under U.S. federal income tax rates applicable to a U.S.Holder and, in addition, may be subject to the branch profits tax equal to 30%of its effectively connected earnings and profits within the meaning of theCode for the taxable year, as adjusted for certain items, unless it qualifiesfor a lower rate under an applicable income tax treaty.

**Tax ShelterReporting Requirements**

**If aholder of notes realizes a foreign currency loss in an amount that exceeds acertain threshold, it is possible that the provisions of U.S. TreasuryRegulations involving “reportable transactions” could apply, with a resultingrequirement to separately disclose the loss generating transactions to the IRS.While these regulations are directed towards “tax shelters”, they are writtenquite broadly, and apply to transactions that would not typically be consideredtax shelters. Significant penalties may be imposed for failure to comply withthese requirements. Holders should consult their own tax advisors concerningany possible disclosure obligation with respect to the notes.**

**Backup Withholdingand Information Reporting**

In general, holders may be subject to informationreporting requirements and backup withholding at a rate of 28% with respect tointerest on the notes and proceeds received on the sale, exchange or redemptionof the notes. The information reporting and backup withholding rules generallydo not apply to payments to corporations, whether domestic or foreign.

An individual U.S. Holder generally will be subject tobackup withholding on payments or proceeds received through a U.S. broker ornominee unless such U.S. Holder provides its taxpayer identification number tothe payor on a properly executed Internal Revenue Service Form W-9or if the Internal Revenue Service notifies the payor that backup withholdingis required for such U.S. Holder.

A Non-U.S. Holder generally will be subject to backupwithholding on payments or proceeds received through a U.S. broker or nomineeunless such Non-U.S. Holder certifies its foreign status by providing aproperly executed Internal Revenue Service Form W-8 BEN, W-8IMY,or W-8ECI.

Any amount withheld underthe backup withholding rules will be creditable against the U.S. federaltax liability of a U.S. Holder upon furnishing the required information to theInternal Revenue Service.

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**Irish Taxation**

The following is a summaryof the material current Irish tax law and practice with regard to holders ofthe notes. It does not purport to be a complete description of all of the taxconsiderations that may be relevant to a decision to buy, hold, sell, redeem ordispose of the notes and does not constitute tax or legal advice but is asummary of the material Irish tax considerations. The comments relate only tothe position of persons who are the beneficial owners of the notes and allcoupons and other rights thereon, and who will hold notes as capital assets,and may not apply to certain classes of persons such as dealers in securities.The comments are generally based upon Irish tax law and the practice of theIrish Revenue Commissioners as of the date hereof, which may be subject tochange. Prospective noteholders are advised to consult their own tax advisersconcerning the overall tax consequences of such ownership.

***Withholding Tax***

Withholding taxwill not apply to interest payments (whether satisfied in cash or in kind) madeby JSG Funding to holders of the notes to the extent:

(1)          thenotes are represented by a global note in bearer form and are quoted on arecognized stock exchange, which we refer to as “*quoted eurobond*s,” and interest payments are made:

a)     by orthrough a non-Irish paying agent; or

b)     by orthrough an Irish paying agent and:

(i)             the notes are held ina recognized clearing system such as Euroclear, or Clearstream, Luxembourg, orDTC; or

(ii)         an appropriate form ofdeclaration of non-residence is provided to the paying agent by or on behalf ofthe person who is the beneficial owner of the notes and entitled to theinterest (or, where the provisions of Irish tax legislation deem the interestto be that of some other person, by that person); or

(2)          the interest is paid inthe ordinary course of a trade or business of JSG Funding and the holder is an “*excluded company*”. An excluded company forthese purposes is a company which is tax resident in a Member State of theEuropean Union, or in a territory with which Ireland has a double tax treaty,is not tax resident in Ireland, does not carry on a trade or business inIreland through a branch or agency with which the interest is connected, andhas provided the required confirmation of same to JSG Funding on or before thedate on which the interest is paid; or

(3)          the holder is residentin a jurisdiction which has concluded a double tax treaty with Ireland whichprovides that payment of interest may be paid either without deduction orwithholding or with reduced withholding in respect of taxes and the holder isentitled to the benefit of that exemption from, or, as the case may be,reduction of withholding tax and has made all the requisite filings with theappropriate authorities to obtain relief under that treaty in advance of anyinterest payment.

As the notes are listed on the Luxembourg StockExchange and provided they remain in global bearer form, they will qualify as “*quoted eurobond*s”. Furthermore the payingagent is located outside Ireland. Accordingly, for so long as this is the case,the exemption under 1(a) above should apply to payments of interest on thenotes.

Original issue discount,if any, payable on the notes will not be subject to Irish withholding taxirrespective of the place of residence or ordinary residence of the holder.

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***Encashment Tax***

A collection or encashmentagent in Ireland obtaining payment of interest whether in Ireland or elsewhereon a note or realizing in Ireland any interest on behalf of a holder of a notemust withhold income tax at the standard rate (which is currently 20%) onmaking payments of such interest. This obligation does not arise where theperson that is the beneficial owner of the note and entitled to the interest isnot resident in Ireland and has made a declaration in the prescribed form andhas provided that declaration to the collection or encashment agent, and theinterest is not deemed, under the provisions of Irish tax legislation, to bethat of some other person. Holders should note that appointment of an Irishcollection or encashment agent may (subject to the above) bring them within thecharge to Irish encashment tax.

***Taxation of Interest arising on the notes***

Interest paid on notes issued in Ireland whether paidgross or not, or in cash or in kind, is Irish source income and may bechargeable to Irish income tax or corporation tax, as the case may be. Ingeneral, holders that are resident or ordinarily resident in Ireland for taxpurposes will be chargeable to Irish corporation tax or income tax in respectof interest on the notes.

Holders that arenot resident or ordinarily resident in Ireland for tax purposes will be exemptfrom Irish income tax in respect of interest on the notes where:

·       theholder is an “*excluded company*”as described above;

·       thenotes constitute “quoted eurobonds” and the interest is paid free ofwithholding tax in the circumstances described above, to a person who is taxresident in a Member State of the European Union, or in a territory with whichIreland has a double taxation treaty and is not resident in Ireland, which werefer to as an *“excluded person”*;or

·       the holder is resident in acountry with which Ireland has a double tax treaty, the provisions of whichexempt such person from Irish income tax on the interest, which we refer to asan *“exempt double tax treaty resident.”*

Ireland operates a self assessment system of tax andany person other than an *“excluded company*”,“*excluded person*” or “*exempt double tax treaty resident*” inreceipt of Irish source income comes within its scope, including a person whois neither resident nor ordinarily resident in Ireland. However, in the absenceof a withholding tax there is currently no mechanism to enable the IrishRevenue Commissioners to obtain payment of any liability from a non-residentperson and for that reason to date it has been the practice of the RevenueCommissioners not to seek to collect the liability from such non-residentpersons unless the recipient of the income has any other tax connection withIreland such as a claim for repayment of Irish tax deducted at source, an Irishagency, branch, trustee or trade.

Generally, original issuediscount payable by an Irish resident JSG Funding is regarded as Irish sourceincome and therefore, although paid gross, may be chargeable to Irish incometax or corporation tax as the case may be. Holders that are resident orordinarily resident in Ireland for tax purposes may be chargeable to Irishcorporation tax or income tax in respect of original issue discount, if any,payable on the notes depending on their circumstances.

***E.U. Savings Tax Directive***

On June 3, 2003, theEuropean Union adopted the directive regarding the taxation of savings incomein the form of interest payments from debt-claims. Each Member State wasrequired to implement the Directive before January 1, 2004 and to applythe Directive from January 1, 2005. With effect from 1 July 2005, theEuropean Savings Directive was incorporated into Irish law. The aim of theDirective is to ensure 

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thatindividual tax residents within the E.U. are subject to effective taxation onany interest income received by them. In order to achieve this, the majority ofMember States have adopted a system of automatic exchange of information,however, certain States, such as Belgium, Austria and Luxembourg have opted tooperate a withholding tax rather than exchange information. Certain dependantand associated territories of the UK and the Netherlands, such as Anguilla,Aruba and the British Virgin Islands have also adopted the Savings Directivefrom 1 July 2005. In addition, a series of agreements between the E.U. andAndorra, Liechtenstein, Monaco, San Marino and Switzerland also came intoeffect from 1 July 2005.

***Capital Gains Tax***

Holders resident or ordinarily resident in Ireland maybe subject to Irish capital gains tax on any gain realized on the disposal(including redemptions) of the notes. Irish capital gains tax is chargeable(currently at the rate of 20%) on taxable capital gains, subject to anyapplicable indexation or loss relief.

Holders that are neitherresident nor ordinarily resident in Ireland will not be subject to Irishcapital gains tax on any gain realized on the disposal of the notes unless thenotes either (i) are or were held for the purposes of a trade or businesscarried on by the holder in Ireland; or (ii) are not quoted on a stockexchange and derive (directly or indirectly) the greater part of their value fromIrish land or exploration rights.

***Anti Avoidance***

Holders of the notes who are resident or ordinarilyresident in Ireland for tax purposes (“Irish Holders”) may be subject to Irishincome tax or corporation tax, as the case may be, arising from their disposal.The nature of the tax charge will depend on the particular circumstances of theholder.

Irish Holders should haveregard, where appropriate, to the provisions relating to the taxation of incomedeemed to arise on certain sales of securities and other provisions containedin the Taxes Consolidation Act, 1997 relating to the purchase and sale ofsecurities. In particular, certain Irish Holders should note that if theydispose of their notes “cum” interest they may be subject to income tax on theinterest which has accrued on the notes up to the date of sale in certaincircumstances. Irish Holders who sell or transfer the right to receive interest(whether paid in cash or in kind) on the notes without selling or transferringthe notes, may be liable to pay income tax on that interest, in the tax year inwhich the right to receive the interest is sold. In addition, certain Irishholders who purchase the notes “cum” interest and who subsequently sell thenotes “ex” interest may be disallowed loss relief for income tax in certaincircumstances.

***Stamp Duty***

No Irish stamp duty willbe payable on the issue or subsequent transfer of the notes.

***Capital Acquisitions Tax***

A gift or inheritanceconsisting of the notes will generally be within the charge to Irish capitalacquisitions tax (which subject to available exemptions and reliefs, iscurrently levied at 20%) if either (i) the disponer or the donee/successorin relation to the gift or inheritance is resident or ordinarily resident inIreland (or in certain circumstances, if the disponer is domiciled in Irelandirrespective of his residence or that of the donee/successor) on the relevantdate or (ii) if the notes are Irish situated property. Bearer instruments(such as the notes while in bearer form) would not usually be Irish situatedproperty unless they are physically located in Ireland or there is a registerof such notes maintained in Ireland. In the event that the notes cease to berepresented by a global bearer note and are issued in 

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definitiveform, the notes would be Irish situate property if the principal register ismaintained or required to be maintained in Ireland.

**Documents onDisplay**

We are subject to the reporting requirements of theSecurities Exchange Act of 1934, as amended, and file reports, including AnnualReports on Form 20-F, and other information with the SEC. You mayread and copy any document we file with the SEC at its public reference rooms at100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330for more information on the public reference rooms and their copy charges. Inaddition, the SEC maintains an Internet site at *http://www.sec.gov*that contains reports and otherinformation regarding issuers that file electronically with the SEC. Thesefilings are also available to the public from commercial document retrievalservices.

JSG Funding’s annualreport on Form 20-F, current reports on Form 6-K, the June 2005registration statement on Form F-4 and all amendments to thosereports are made available free of charge through our website(www.smurfitkappa.com) as soon as practicable after such material iselectronically filed with or furnished to the Securities and ExchangeCommission.

**Item 11.      Quantitative and Qualitative Disclosures AboutMarket Risk**

***InterestRate Market Risk***

We are exposed to changesin interest rates. Our senior credit facility is variable rate debt. Interestrate changes therefore generally do not affect the market value of such debtbut do impact the amount of our interest payments and, therefore, our futureearnings and cash flows, assuming other factors are held constant. As at December 31,2005, we had variable rate debt of approximately €1,336 million.Holding other variables constant, including levels of indebtedness, a onepercentage point increase in interest rates would have had an estimated impacton pre-tax earnings of approximately €13 million. Under theterms of the senior credit facility, we have entered into one or more interestrate protection agreements establishing a fixed interest rate with respect tosome of the outstanding term loan borrowing under the senior credit facility.We are required to keep these agreements or their replacements in place for atleast two years after the closing of the transactions.

***Currency Sensitivity***

The consolidated groupoperates in the following principal currency areas: the euro, the U.S. dollar,the Swedish Krona and sterling. At the end of 2005, 59% of our net assets weredenominated in currencies other than the euro, as compared to 29% at year-end2004. In 2005, we reported a translation gain of approximately €6 millionon our foreign currency net assets, compared to €15 million in 2004. Webelieve that a strengthening of the euro exchange rate by 10% against all otherforeign currencies from December 31, 2005 would reduce the shareholders’equity at the end of 2005 by approximately €76 million (ascompared to €23million at end of 2004).

***Commodity Pricing Risks***

We are exposed to commodity price risks through ourdependence on OCC, the principal raw material used in the manufacture ofcontainerboard. The price of OCC is dependent on both demand and supplyconditions. Demand conditions include the production of recycled containerboardin Europe and the demand for OCC for the production of recycled containerboardoutside of Europe, principally in Asia. Supply conditions include the rate ofrecovery of OCC, itself dependent on historic pricing related to the cost ofrecovery, and have some slight seasonal variations.

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Just over 1.05 metric tons of OCC are required tomanufacture 1.0 metric tons of recycled containerboard. Consequently, anincrease in the price of OCC of, for example, €20per metric ton would increase the cost of production of recycled containerboardby €21per metric ton. Historically, increases in the cost of OCC have led to a rapidrise in the price of recycled containerboard, with a lag of one to two months.

The price of OCC in Europe has peaked dramaticallytwice in recent years—in June 2002 and in April 2003. In each case, arelatively low level of supply was matched with a relatively high level ofdemand, principally caused by an increased demand from Asia. In the first case,the free-on-board price rose to over €150 per metric ton. Withina period of three months, supply and demand conditions leveled to return theprice to around €100per metric ton. In the second case, the spike was even more rapid with wasteprices falling back to previous levels almost immediately. In 2004, the priceper metric ton has remained relatively stable.

The table below providesinformation about the European OCC price information per metric ton at and forthe years ended December 31, 2003, 2004 and 2005;

**Free-on-BoardOCC Price per Metric Ton**

| ** **                      | ** ** | **As of and for the Year Ended December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2003**                                                                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(euro)**                                                                            | ** ** |
| Price at the end  of the period |       |                                                                                  | 56         |   |   |   | 58 |   |   |   | 58 |   |   |
| Average price  during period    |       |                                                                                  | 62         |   |   |   | 60 |   |   |   | 58 |   |   |
| Highest price  during period    |       |                                                                                  | 73         |   |   |   | 63 |   |   |   | 63 |   |   |
| Lowest price during  period     |       |                                                                                  | 56         |   |   |   | 58 |   |   |   | 57 |   |   |

 

The cost of producing ourproducts is also sensitive to the price of energy. Energy prices, in particularoil and natural gas, have experienced significant volatility in recent years,with a corresponding effect on our production costs. Three significantincreases occurred in the last five years. In January 2001, natural gas pricesreached a high of nearly $10.00 per million British thermal units, or “mmBtu,”compared to a historical 10-year average of $2.61 per mmBtu. Natural gas pricesnormalized in the second half of 2001. In 2004, gas prices reached $6.00 permmBtu in March 2004, rising to a peak of almost $10.00 in October 2004 beforefalling again to $6.80 per mmBtu by the end of the year. In 2005, gas pricesreached a high of $15.40 per mmBtu and closed the year at $11.00 per mmBtu.Energy prices may not remain at current rates and may rise to higher levels, inwhich case our production costs, competitive position and results of operationscould be adversely affected thereby.

***Qualitative Information about Market Risk***

The operating parameters and policies of treasurymanagement are established under formal board authority. The formal treasurypolicy covers the areas of funding, counterparty risk, foreign exchange,controls and derivatives. Risk arising on counterparty default is controlledwithin a framework of dealing with high quality institutions and, by policy,limit the amount of credit exposure to any one bank or institution. We usefinancial instruments, including fixed and variable rate debt, to financeoperations, for capital spending programs and for general corporate purposes.Additionally, financial instruments, including derivative instruments, are usedto hedge exposure to interest rate and foreign currency risks. We do not usefinancial instruments for trading purposes. We mitigate the risk thatcounterparties to derivatives will fail to perform by contracting with majorfinancial institutions having high credit ratings and consider the likelihoodof counterparty failure to be remote.

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The successful management of our currency and interestrate exposure depends on a variety of factors, some of which are outside of ourcontrol. We are exposed to the impact of interest rate changes and foreigncurrency fluctuations due to our investing and funding activities and ouroperations in foreign currencies. We manage interest rate exposure to achievean appropriate balance of fixed and variable rate funding. To achieve thisobjective, we enter into interest rate swaps, options and forward rateagreements. Interest rate swap agreements are used to change the interestpayable or receivable on our underlying borrowing and cash from variable tofixed rate or from fixed to variable rate. At December 31, 2005, theproportion of our total borrowing that was at fixed interest rates was 72% (ascompared to 73% at December 31, 2004 and 70% at December 31, 2003).

The fair value of our interest rate swap agreements atDecember 31, 2005, 2004 and 2003 was €(45.8)million, €(57.4)million and €(13.8)million, respectively. See note 19 to the consolidated financial statementsincluded elsewhere in this document. The weighted average interest rate on ourtotal borrowing as of December 31, 2005 was 6.87% (as compared to 7.91% atDecember 31, 2004 and 7.89% at December 31, 2002).

Certain of our currency swaps are not designated ashedges under SFAS No. 133 due to the fact that the maturity dates of theunderlying debt do not match the maturity dates of the swap transactions. Thecash flows on these swaps do however economically hedge US dollar cash flows onthe underlying debt for the period of the swap by effectively converting the USdollar cash flows on the debt into euro cash flows.

We manage our balance sheethaving regard to the currency exposures arising from our assets beingdenominated in a wide range of currencies. To this end, where foreign currencyassets are funded by borrowing, such borrowing is generally sourced in thecurrency of the related assets. We also hedge our currency exposure through theuse of currency swaps, options and forward contracts.

**Item 12.**                 Descriptionof Securities Other Than Equity Securities

Not applicable.

**Item 13.**                 Defaults,Dividends Arrearages and Delinquencies

None.

**Item 14.**                 MaterialModifications to Rights of Security Holders and Use of Proceeds

Not applicable.

**Item 15.**                 Controlsand Procedures

The Company’s management,including the Chief Executive Officer and Chief Financial Officer, haveconducted an evaluation of the effectiveness of the Company’s disclosurecontrols and procedures as of the end of the period covered by this report, ascontemplated by Securities Exchange Act Rule 13a-15. Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the disclosure controls and procedures are effective in ensuring that allmaterial information required to be filed in this annual report has been madeknown to them in a timely fashion. There have been no significant changes ininternal controls, or in factors that could significantly affect internalcontrols, subsequent to the date the Chief Executive Officer and ChiefFinancial Officer completed their evaluation.

**Item 16.**                 Reserved

**Item 16A.**         AuditCommittee Financial Expert

Mr. Thomas Souleles, amanaging director of Madison Dearborn,  serves as the Audit Committee financialexpert. He has been a member of the Audit Committee since it was established.

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**Item 16B.   Code of Ethics**

The company has adopted acode of ethics that applies to its Chief Executive Officer, Chief FinancialOfficer, principal accounting officer and other corporate and divisionalemployees. Our code of ethics is filed as an exhibit to this report. You canalso download a copy from our web site, which is www.smurfitkappa.com.

**Item16C.**        Principal Accountant Feesand Services

| ** **             | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|------------------------|------------|---------------|------------|---------------|------------|
| ** **             | ** ** | **€000** | ** ** | **€000** | ** ** |
| Audit Fees(1)          |       | 4,472         |       | 4,190         |       |
| Audit Related  Fees(2) |       | 263           |       | 318           |       |
| Tax Fees(3)            |       | 1,598         |       | 1,462         |       |
| All Other Fees         |       | 309           |       | 870           |       |
|                   | ** ** | **€**    | **6,642**  | ** **    | **€** | **6,840** | ** ** |
|                        |            |               |            |               |            |  |  |

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(1)          Audit fees consist ofaudit work performed in the preparation of financial statements as well as workgenerally only the independent auditor can reasonably be expected to provide,such as statutory audits and review of SEC filings.

(2)          Audit related feesconsist primarily of audits of subsidiaries requested by the Company which wasnot required by statute or regulation and due diligence relating to businesscombinations.

(3)          Taxfees for 2005 and 2004 represents fees related to tax compliance (tax returns,refunds and payment planning) and for tax consultation and planning whichprovided, or are expected to provide, benefits to the Company in excess of thefees paid.

***AuditCommittee Pre-Approval of Audit and Non-Audit Services***

The Audit Committee is responsible for appointment,compensation and oversight of the work of the independent auditor. The AuditCommittee has established, and the Board of Directors has ratified, a policyfor the pre-approval of all audit and permissible non-audit services. Thepolicy sets out the procedures and conditions subject to which servicesproposed to be performed by the independent auditor may be pre-approved. Underthe policy, the Audit Committee appoints the independent auditor and pre-approvesthe engagement of the independent auditor for the audit services, and relatedfees, to be provided for each fiscal year. In accordance with the policy, theAudit Committee has established detailed pre-approved categories of non-auditservices that may be performed by the independent auditor during each fiscalyear, subject to annual fee limitations set by the committee. All other non-auditservices must be pre-approved by the Audit Committee.

During 2005, all servicesby Ernst & Young were pre-approved by the audit committee in accordancewith this policy.

**Item 16D.**       Exemptionsfrom the Listing Standards for Audit Committees

Not applicable.

**Item 16E.**        Purchasesof Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.

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**Item 17.**                 FinancialStatements

Not applicable.

**Item 18.**                 FinancialStatements

Thefollowing financial statements and related schedules, together with the reportsthereon of Ernst & Young and PricewaterhouseCoopers, are filed as partof this annual report.
|                                                                                                                               | ** ** |        | **Page** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------|----------|------------|
| **JSG Funding**                                                                                                               |       |   |
| Report of Independent  Registered Public Accounting Firm—Ernst & Young                                               |       | F-2    |     |
| Report of Independent  Registered Public Accounting Firm—PricewaterhouseCoopers                                          |       | F-3    |     |
| Consolidated Statements of  Operations for the years ended December 31, 2005, 2004 and 2003                              |       | F-4    |     |
| Consolidated Statements of  Total Recognized Gains and Losses for the years ended  December 31, 2005, 2004 and 2003 |       | F-5    |     |
| Consolidated Balance Sheets as at  December 31, 2005 and 2004                                                            |       | F-6    |     |
| Consolidated Statements of  Changes in Shareholders’ Equity for the years ended December 31, 2005,  2004 and 2003   |       | F-7    |     |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2005, 2004 and 2003                              |       | F-8    |     |
| **JSG  Acquisitions**                                                                                                         |       |   |     |
| Report of Independent  Registered Public Accounting Firm—Ernst & Young                                               |       | F-78   |     |
| Report of Independent  Registered Public Accounting Firm—PricewaterhouseCoopers                                          |       | F-79   |     |
| Consolidated Statements of  Operations for the years ended December 31, 2005 2004 and 2003                               |       | F-80   |     |
| Consolidated Statements of  Total Recognized Gains and Losses for the years ended  December 31, 2005, 2004 and 2003 |       | F-81   |     |
| Consolidated Balance Sheets as at  December 31, 2005 and 2004                                                            |       | F-82   |     |
| Consolidated Statements of  Changes in Shareholders’ Equity for the years ended December 31, 2005,  2004 and 2003   |       | F-83   |     |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2005, 2004 and 2003                              |       | F-84   |     |
| **JSG  Funding**                                                                                                              |       |   |     |
| Schedule II-I—Valuation  and Qualifying Accounts for the years ended December 31, 2005, 2004 and  2003              |       | S-1    |     |
| **JSG  Acquisitions**                                                                                                         |       |   |     |
| Schedule II-II—Valuation and Qualifying Accounts for  the years ended December 31, 2005, 2004 and 2003              |       | S-2    |     |
|                                                                                                                               |            |        |          |            |  |

 

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**Item 19.**                 Exhibits

Thefollowing exhibits are filed as part of this annual report:
| 1.1 |   | Memorandum and Articles of Association of JSG  Funding plc (incorporated by reference to Exhibit 1.1 to the registrant’s  annual report on Form 20-F (File No. 333-101456), filed  on April 29, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1 |   | Euro Indenture, dated  January 31, 2005, among JSG Funding plc, Deutsche Bank Trust Company  Americas, as Trustee, Registrar and Paying Agent, Deutsche Bank Luxembourg  S.A., as Paying Agent and Transfer Agent and Deutsche Bank AG acting through  its London Branch, as Principal Paying Agent and Transfer Agent, relating to  the 7.75% euro senior subordinated notes (incorporated by reference to  Exhibit 2.1 to the registrant’s annual report on Form 20-F  (File No. 333-101456), filed on April 29, 2005).                                                                                              |
| 2.2 |   | Dollar Indenture, dated  January 31, 2005, among JSG Funding plc, Deutsche Bank Trust Company  Americas, as Trustee, Registrar and Paying Agent, and Deutsche Bank  Luxembourg S.A., as Paying Agent and Transfer Agent, relating to the 7.75%  dollar senior subordinated notes (incorporated by reference to  Exhibit 2.2 to the registrant’s annual report on Form 20-F  (File No. 333-101456), filed on April 29, 2005)                                                                                                                                                                                            |
| 2.3 |   | Euro Deposit and Custody  Agreement, dated January 31, 2005, among JSG Funding plc, Deutsche Bank  Trust Company Americas, as Book-Entry Depositary and Note Custodian, relating  to the 7.75% euro senior subordinated notes (incorporated by reference to  Exhibit 2.5 to the registrant’s annual report on Form 20-F  (File No. 333-101456), filed on April 29, 2005)                                                                                                                                                                                                                                               |
| 2.4 |   | Dollar Deposit and  Custody Agreement, dated January 31, 2005, among JSG Funding plc,  Deutsche Bank AG acting through its London Branch, as Book-Entry Depositary  and Note Custodian, relating to the 7.75% dollar senior subordinated notes  (incorporated by reference to Exhibit 2.6 to the registrant’s annual  report on Form 20-F (File No. 333-101456), filed on  April 29, 2005).                                                                                                                                                                                                                            |
| 2.5 |   | Euro Indenture, dated  September 30, 2002, among MDP Acquisitions plc (now known as JSG Funding  plc), MDCP Acquisitions I (now known as JSG Acquisitions), Deutsche Bank  Trust Company Americas, as Trustee, Registrar and Paying Agent, Deutsche Bank  Luxembourg S.A., as Paying Agent and Transfer Agent, and Deutsche Bank AG  London, as Principal Paying Agent and Transfer Agent, relating to the euro  senior notes issued on September 30, 2002 (incorporated by reference to  Exhibit 4.3 to the registrant’s registration statement on Form F-4  (File No. 333-101456), filed on November 25, 2002). |
| 2.6 |   | Dollar Indenture, dated  September 30, 2002, among MDP Acquisitions plc (now known as JSG Funding  plc), MDCP Acquisitions I (now known as JSG Acquisitions), Deutsche Bank  Trust Company Americas, as Trustee, Registrar and Paying Agent, and Deutsche  Bank Luxembourg S.A., as Paying Agent and Transfer Agent, relating to the  dollar senior notes issued on September 30, 2002 (incorporated by  reference to Exhibit 4.4 to the registrant’s registration statement on  Form F-4 (File No. 333-101456), filed on  November 25, 2002).                                                                    |
| 2.7 |   | Supplemental Indenture,  dated February 14, 2003, among MDP Acquisitions plc (now known as JSG  Funding plc), MDCP Acquisitions I (now known as JSG Acquisitions) and  Deutsche Bank Trust Company Americas, as Trustee, relating to the euro senior  notes (incorporated by reference to Exhibit 4.15 to the registrant’s  registration statement on Form F-4 (File No. 333-104617),  filed on April 17, 2003).                                                                                                                                                                                                       |

 

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| 2.8  |   | Supplemental Indenture,  dated February 14, 2003, among MDP Acquisitions plc (now known as JSG  Funding plc), MDCP Acquisitions I (now known as JSG Acquisitions), and  Deutsche Bank Trust Company Americas, as Trustee, relating to the dollar  senior notes (incorporated by reference to Exhibit 4.14 to the  registrant’s registration statement on Form F-4/A (File  No. 333-101456), filed on March 5, 2003).                                                                                                                                                                                                                          |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.9  |   | Euro Deposit and Custody  Agreement, dated September 30, 2002, between MDP Acquisitions plc (now  known as JSG Funding plc) and Deutsche Bank AG London as the Euro Book-entry  Depositary and the Euro Custodian, relating to the euro senior notes  (incorporated by reference to Exhibit 4.5 to the registrant’s  registration statement on Form F-4 (File No. 333-101456),  filed on November 25, 2002).                                                                                                                                                                                                                                  |
| 2.10 |   | Dollar Deposit and  Custody Agreement, dated September 30, 2002, between MDP Acquisitions  plc (now known as JSG Funding plc) and Deutsche Bank Trust Company Americas  as the Dollar Book-entry Depositary and the Dollar Custodian, relating to the  dollar senior notes (incorporated by reference to Exhibit 4.6 to the  registrant’s registration statement on Form F-4 (File No. 333-101456),  filed on November 25, 2002).                                                                                                                                                                                                             |
| 4.1  |   | Share Purchase  Agreement, dated November 23, 2005, among JSG Packaging Limited, JSG  Acquisitions, Smurfit Kappa Feeder G.P. Limited (in its capacity as general  partner of Smurfit Kappa Feeder L.P.), certain investment funds managed or  advised by Cinven Limited and certain investment funds managed or advised by  CVC Capital Partners Limited, which are the controlling shareholders of Kappa  Holding B.V. (“Kappa”), and the other Kappa shareholders (incorporated by  reference to Exhibit 1 to the registrant’s report of foreign private  issuer on Form 6-K (File No. 333-101456), filed on December 6,  2005). |
| 4.2  |   | Purchase Agreement,  dated January 12, 2005, among JSG Funding plc and Deutsche Bank AG  London and Citigroup Global Markets Limited, as initial purchasers, relating  to the 7.75% senior subordinated notes (incorporated by reference to the  registrant’s report of foreign private issuer on Form 6-K (File  No. 333-101456), filed on January 18, 2005).                                                                                                                                                                                                                                                                                     |
| 4.3  |   | Senior Credit Facility,  dated November 30, 2005, among Jefferson Smurfit Group Limited, JSG  Acquisitions, certain other subsidiaries of Jefferson Smurfit Group Limited  as borrowers or guarantors, Deutsche Bank AG, London Branch, Citigroup Global  Markets Limited, Credit Suisse First Boston International and JP Morgan PLC,  as arrangers, certain lenders named therein, and Deutsche Bank AG, London  Branch, as issuing bank, facility agent and security agent (incorporated by  reference to Exhibit 2 to the registrant’s report of foreign private  issuer on Form 6-K (File No. 333-101456), filed on  December 6, 2005).  |
| 4.4  |   | Bridge Facility dated  September 10, 2002 by and among MDP Acquisitions plc (now known as JSG  Funding plc), Deutsche Bank AG London, Merrill Lynch Capital Corporation,  JPMorgan Chase Bank, Lehman Commercial Paper Inc. and ABN AMRO Bank N.V.  (incorporated by reference to Exhibit 99(b)(2) to the Schedule TO/A  filed by Jefferson Smurfit Group plc on September 16, 2002 (File  No. 005-78329)).                                                                                                                                                                                                                                   |
| 4.5  |   | Priority Agreement,  dated November 30, 2005, among Jefferson Smurfit Group Limited, the  companies named therein as obligors, the banks and financial institutions  named therein as senior creditors, Deutsche Bank Trust Company Americas, as  bond trustee, Adavale (Netherlands) B.V., as junior creditor, the banks and  financial institutions named therein as hedging banks, and Deutsche Bank AG,  London Branch, as senior agent and security agent (incorporated by reference  to Exhibit 3 to the registrant’s report of foreign private issuer on  Form 6-K (File No. 333-101456), filed on  December 6, 2005).                 |

 

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| 4.6  |   | Intercompany Loan  Agreement, entered into on September 16, 2002, as amended  September 27, 2002, between MDP Acquisitions plc (now known as JSG  Funding plc) and MDCP Acquisitions I (now known as JSG Acquisitions)  (incorporated by reference to Exhibit 10.5 of the registrant’s  registration statement on Form F-4 (File No. 333-101456),  filed on November 25, 2002). |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.7  |   | Intercompany Loan  Agreement, dated February 14, 2003, between MDP Acquisitions plc (now  known as JSG Funding plc) and MDCP Acquisitions I (now known as JSG  Acquisitions) (incorporated by reference to Exhibit 4.6 to the  registrant’s annual report on Form 20-F (File No. 333-101456),  filed on April 29, 2005).                                                             |
| 4.8  |   | Intercompany Loan  Agreement, dated January 31, 2005, between JSG Funding plc, as Lender,  and JSG Acquisitions, as Borrower (incorporated by reference to  Exhibit 4.8 to the registrant’s annual report on Form 20-F  (File No. 333-101456), filed on April 29, 2005).                                                                                                             |
| 4.9  |   | Amended and Restated Management  Equity Agreement dated as of December 1, 2005 among JSG Packaging  Limited (now known as Smurfit Kappa Group Limited) and each of Gary McGann,  Anthony P.J. Smurfit, Ian J. Curley and Sir Michael  W.J. Smurfit.                                                                                                                                  |
| 4.10 |   | Registration Rights  Agreement dated as of December 1, 2005 among Smurfit Kappa Group Limited,  each of the MDCP co-investors, the CVC/Cinven Partnership and each of the  other investors listed on the schedule thereto.                                                                                                                                                                                    |
| 4.11 |   | Shareholders and  Corporate Governance Agreement dated as of December 1, 2005 among  Smurfit Kappa Group Limited, each of the MDCP co-investors, the CVC/Cinven  Partnership and each of the investors listed on the schedule thereto.                                                                                                                                                                        |
| 4.12 |   | JSG Packaging Limited  2004 Management Equity Plan, adopted by the board of directors of JSG  Packaging Ltd on February 6, 2004 (incorporated by reference to  Exhibit 4.13 to the reigstrant’s annual report on Form 20-F  (File No. 333-101456), filed on April 29, 2005).                                                                                                    |
| 4.13 |   | Letter Agreement  dated October 31, 2003 between Jefferson Smurfit Group Limited and  Dr. Michael W.J. Smurfit.                                                                                                                                                                                                                                                                                          |
| 4.14 |   | Letter Agreement  dated October 31, 2003 between S.I. Holdings Limited and Dr. Michael  W.J. Smurfit.                                                                                                                                                                                                                                                                                                    |
| 4.15 |   | Letter Agreement  dated as of February 6, 2004 between JSG Packaging Limited (now known as  Smurfit Kappa Group Limited), Jefferson Smurfit Group Limited and Anthony  P.J. Smurifit.                                                                                                                                                                                                                         |
| 4.16 |   | Letter Agreement  dated as of February 6, 2004 between JSG Packaging Limited (now known as  Smurfit Kappa Group Limited), Jefferson Smurfit Group Limited and Gary  McGann.                                                                                                                                                                                                                                   |
| 4.17 |   | Letter Agreement  dated as of February 6, 2004 between JSG Packaging Limited (now known as  Smurfit Kappa Group Limited), Jefferson Smurfit Group Limited and Ian Curley.                                                                                                                                                                                                                                     |
| 4.18 |   | Directorship  Agreement dated as of December 1, 2005 between JSC Packaging Limited  (now known as Smurfit Kappa Group Limited) and Frits Beurskens.                                                                                                                                                                                                                                                           |
| 8.1  |   | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                              |
| 11.1 |   | Code of Ethics  (incorporated by reference to Exhibit 11.1 to the registrant’s annual  report on Form 20-F (File No. 333-101456), filed on April 19, 2004).                                                                                                                                                                                                                                    |
| 12.1 |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to Rules 13a-14(a) or  15d-14(b) of the Exchange Act.                                                                                                                                                                                                                                                               |
| 13.1 |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to Rules 13a-14(b) or  15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the  United States Code.                                                                                                                                                                                                        |

 

94

----

**Signatures**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersignedto sign this annual report on its behalf.
| JSG FUNDING  PLC           |
|----------------------------|
| /s/ I. J. CURLEY           |   |
| I. J. Curley               |
| Chief Financial Officer    |
| Date: April 30, 2006. |

 

95

----

**INDEX TO FINANCIALSTATEMENTS**

**JSG FUNDING**

**AuditedConsolidated Financial Statements of JSG Funding plc and Subsidiary Companiesas of December 31, 2005 and 2004 and for the years ended December 31,2005, 2004 and 2003:**
|                                                                                      | ** ** |        | **Page** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------|----------|------------|
| Report of Independent Registered Public Accounting  Firm—Ernst & Young      |       |   | F-2      |       |
| Report of Independent Registered Public Accounting  Firm—PricewaterhouseCoopers |       |   | F-3      |       |
| Consolidated Statements of Operations                                                |       |   | F-4      |       |
| Consolidated Statements of Total Recognized Gains and  Losses                        |       |   | F-5      |       |
| Consolidated  Balance Sheets                                                         |       |   | F-6      |       |
| Consolidated Statements of Changes in Shareholders’  Equity                     |       |   | F-7      |       |
| Consolidated Statements of Cash Flows                                                |       |   | F-8      |       |
| Notes to the Consolidated Financial Statements                                       |       |   | F-9      |       |
|                                                                                      |            |        |          |            |  |  |

 

**JSG ACQUISITIONS**

**AuditedConsolidated Financial Statements of JSG Acquisitions and Subsidiary Companiesas of December 31, 2005 and 2004 and for the years ended December 31,2005, 2004 and 2003:**
|                                                                                      | ** ** | **Page** |
|--------------------------------------------------------------------------------------|------------|----------|
| Report of Independent  Registered Public Accounting Firm—Ernst & Young      |       |     | F-78 |   |
| Report of Independent Registered Public Accounting  Firm—PricewaterhouseCoopers |       |     | F-79 |   |
| Consolidated Statements of  Operations                                               |       |     | F-80 |   |
| Consolidated Statements of  Total Recognized Gains and Losses                        |       |     | F-81 |   |
| Consolidated Balance Sheets                                                          |       |     | F-82 |   |
| Consolidated Statements of  Changes in Shareholders’ Equity                     |       |     | F-83 |   |
| Consolidated Statements of  Cash Flows                                               |       |     | F-84 |   |
| Notes to  the Consolidated Financial Statements                                      |       |     | F-85 |   |

 

 

F-1

----

**JSG Funding plc andSubsidiary Companies**

**Report ofIndependent Registered Public Accounting Firm**

To the Board of DirectorsJSG Funding plc

We have audited the accompanying consolidated balancesheets of JSG Funding plc and subsidiary companies (the “Company”) as ofDecember 31, 2005 and 2004, and the related consolidated statements ofoperations, total recognized gains and losses, changes in shareholders’ equity,and cash flows for each of the three years in the period endedDecember 31, 2005. Our audits also included the financial statementschedule listed in the Index at Item 18. These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits. We did not audit the financial statements of Kappa Holding B.V., awholly-owned subsidiary, which statements reflect total assets constituting 35.5%as of December 31, 2005 and total revenues constituting 4.5% for the yearthen ended of the related consolidated totals. Those statements were audited byother auditors whose report has been furnished to us, and our opinion, insofaras it relates to the amounts included for Kappa Holding B.V., is based solelyon the report of the other auditors.

We conducted our audits in accordance with InternationalStandards on Auditing (UK and Ireland) and the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting.Our audit included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectivenessof the Company’s internal control over financial reporting. Accordingly weexpress no such opinion. An audit also includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Webelieve that our audits and the report of other auditors provide a reasonablebasis for our opinion.

In our opinion, based on our audits and the report ofother auditors, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of JSG Funding plcand subsidiary companies at December 31, 2005 and 2004, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2005, in conformity with accountingprinciples generally accepted in Ireland, which differ in certain respects fromU.S. generally accepted accounting principles (see Note 35 of the Notes to theConsolidated Financial Statements). Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

Asdiscussed in Note 35 of the Notes to the Consolidated Financial Statements,certain amounts in accordance with U.S. generally accepted accountingprinciples have been restated to account for certain currency translationadjustments.
| /s/ Ernst & Young               |   |
|------------------------------------------|--------|
| Ernst &  Young  Dublin, Ireland |   |
| April 30,  2006                     |   |

 

F-2

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsof JSG Funding plc

We have audited the combined balance sheet of Kappa Holding B.V. and itssubsidiaries (the “Company”) as of December 31, 2005 and the related combinedstatement of operations, combined statement of cash flows, total recognizedgains and losses and changes in shareholders’ equity for the one month endedDecember 31, 2005 (not presented separately herein). These combined financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these combined financial statementsbased on our audit.

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. We were not engagedto perform an audit of the Company’s internal control over financial reporting.Our audit included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordinglywe express no such opinion. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

In our opinion, the combined financial statements referred to abovepresent fairly, in all material respects, the financial position of the Companyat December 31, 2005 and the results of its operations and cash flows for theone month ended December 31, 2005, in conformity with accounting principlesgenerally accepted in Ireland.

Accounting principles generally accepted in Ireland vary in certainsignificant respects from accounting principles generally accepted in theUnited States of America. Information relating to the nature and effect of suchdifferences is presented in Note 31 to the combined financial statements.

/s/ PricewaterhouseCoopers

PricewaterhouseCoopersDublin, IrelandApril 30, 2006

F-3

----

**JSG Funding plc and Subsidiary CompaniesConsolidated Statements of Operations**

| ** **                                                | ** ** | **Note**   | ** ** | **2005**      | ** ** | **2004**      | ** **   | **2003**      | ** ** |
|-----------------------------------------------------------|------------|------------|------------|---------------|------------|---------------|--------------|---------------|------------|
| ** **                                                | ** ** | ** ** | ** ** | **€000** | ** ** | **€000** | ** **   | **€000** | ** ** |
| Net Sales                                                 |       |       | 3          |          |       |          |         |          |       |   |   |
| Continuing operations                                     |       |       |       |          |       | 4,212,514     |         | 4,278,439     |       | 4,146,061 |   |
| Continuing operations—acquisitions                   |       |       |       |          |       | 199,611       |         | —        |       | — |   |
| Discontinued operations                                   |       |       |       |          |       | 25,204        |         | 526,643       |       | 600,254 |   |
|                                                      |       |       |       |          |       | 4,437,329     |         | 4,805,082     |       | 4,746,315 |   |
| Cost of sales                                             |       |       |       |          |       | 3,222,705     |         | 3,473,299     |       | 3,419,820 |   |
| Impairment of  property, plant and equipment              |       |       | 5          |          |       | 45,214        |         | —        |       | — |   |
| Gross profit                                              |       |       |       |          |       | 1,169,410     |         | 1,331,783     |       | 1,326,495 |   |
| Net operating  expenses                                   |       |       | 4          |          |       | 977,292       |         | 1,010,564     |       | 982,345 |   |
| Reorganization  and restructuring costs                   |       |       | 5          |          |       | 25,090        |         | 39,430        |       | 35,006 |   |
| Operating income subsidiaries                             |       |       |       |          |       |          |         |          |       |   |   |
| Continuing operations                                     |       |       |       |          |       | 174,297       |         | 226,029       |       | 243,675 |   |
| Acquired operations                                       |       |       |       |          |       | (5,425        | )            | —        |       | — |   |
| Discontinued operations                                   |       |       |       |          |       | (1,844        | )            | 55,760        |       | 65,469 |   |
|                                                      |       |       |       |          |       | 167,028       |         | 281,789       |       | 309,144 |   |
| Share of  associates’ operating income               |       |       |       |          |       | 7,287         |         | 12,611        |       | 12,155 |   |
| Total operating  income                                   |       |       |       |          |       | 174,315       |         | 294,400       |       | 321,299 |   |
| Income on sale of  assets and businesses                  |       |       | 5          |          |       | 52,587        |         | 22,173        |       | 5,560 |   |
| Interest income                                           |       |       |       |          |       | 10,730        |         | 8,335         |       | 11,631 |   |
| Interest expense                                          |       |       | 7          |          |       | (255,351      | )            | (293,641      | )          | (309,368 | ) |
| Loss from early  extinguishment of debt                   |       |       | 7          |          |       | (104,658      | )            | (5,697        | )          | — |   |
| Other financial  expense                                  |       |       | 24         |          |       | (13,259       | )            | (15,718       | )          | (15,266 | ) |
| Share of  associates’ net interest                   |       |       |       |          |       | (1,336        | )            | (1,301        | )          | (2,062 | ) |
| (Loss)/income  before taxes and equity minority interests |       |       | 8          |          |       | (136,972      | )            | 8,551         |       | 11,794 |   |
| Taxes on income                                           |       |       | 9          |          |       | 21,561        |         | 26,973        |       | 62,354 |   |
| (Loss) before equity  minority interests                  |       |       |       |          |       | (158,533      | )            | (18,422       | )          | (50,560 | ) |
| Equity minority  interests                                |       |       |       |          |       | 18,813        |         | 16,067        |       | 16,768 |   |
| **Net (loss) for the year****(1)**                        |       |       |       |          | ** ** | **€**    | **(177,346** | **)**         | **€** | **(34,489** | **)** | **€** | **(67,328** | **)** |
|                                                           |            |            |            |               |            |               |              |               |            |  |  |  |  |  |

----

(1)          A summary of thesignificant adjustments to net (loss) which would be required if accountingprinciples generally accepted in the United States had been applied instead ofthose generally accepted in Ireland is given in Note 35.

The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.

F-4

----

**JSG Funding plc and Subsidiary CompaniesConsolidated Statements of Total Recognized Gains and Losses**

| ** **                                                        | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                        | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| (Loss) / income for the year                                      |       |          |         |          |       |          |       |
| Group                                                             |       | (179,515      | )            | (38,433       | )          | (71,927       | )          |
| Associates                                                        |       | 2,169         |         | 3,944         |       | 4,599         |       |
|                                                              |       | (177,346      | )            | (34,489       | )          | (67,328       | )          |
| Translation  adjustments on foreign currency net investments      |       |          |         |          |       |          |       |
| Group                                                             |       | 5,529         |         | 15,222        |       | 58,982        |       |
| Actuarial (loss) / gain recognized in retirement  benefit schemes |       | (17,281       | )            | (6,988        | )          | 25,603        |       |
| Minority share of  actuarial (loss)                               |       | (94           | )            | —        |       | —        |       |
| Total recognized  gains and losses                                |       |          |         |          |       |          |       |
| Group                                                             |       | (191,361      | )            | (30,199       | )          | 12,658        |       |
| Associates                                                        |       | 2,169         |         | 3,944         |       | 4,599         |       |
|                                                              | ** ** | **€**    | **(189,192** | **)**         | **€** | **(26,255**   | **)**      | **€** | **17,257** | ** ** |
|                                                                   |            |               |              |               |            |               |            |  |  |  |

 

**Note of HistoricalCost Profits and Losses**

The results disclosed in the Consolidated Statementsof Operations are not materially different to the results based on anunmodified historical basis.

The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.

F-5

----

**JSG Funding plc and Subsidiary CompaniesConsolidated Balance Sheets**

| ** **                                                               | ** ** | **Note**   | ** ** | **2005**      | ** ** | **2004**      | ** **    |
|--------------------------------------------------------------------------|------------|------------|------------|---------------|------------|---------------|---------------|
| ** **                                                               | ** ** | ** ** | ** ** | **€000** | ** ** | **€000** | ** **    |
| **Assets**                                                               |       |       |       |          |       |          |          |   |   |
| **Current assets**                                                       |       |       |       |          |       |          |          |   |   |
| Cash                                                                     |       |       | 10         |          |       | 247,807       |          | 248,033 |   |
| Restricted cash                                                          |       |       | 10         |          |       | 755,575       |          | — |   |
| Accounts receivable and  prepayments                                     |       |       | 11         |          |       | 1,314,728     |          | 925,048 |   |
| Assets held for sale and  inter-company balances                         |       |       |       |          |       | 54,404        |          | — |   |
| Amounts due by  affiliates                                               |       |       |       |          |       | 107           |          | 395 |   |
| Amounts due by  affiliates after more than one year                      |       |       |       |          |       | 262,936       |          | 270,552 |   |
| Inventories                                                              |       |       | 12         |          |       | 663,131       |          | 452,166 |   |
| **Total  current assets**                                                |       |       |       |          | ** ** | **3,298,688** | ** **    | **1,896,194** | ** ** |
| **Fixed assets**                                                         |       |       |       |          |       |          |          |   |   |
| Investments                                                              |       |       | 13         |          |       | 87,746        |          | 81,895 |   |
| Property, plant and  equipment                                           |       |       | 14         |          |       | 3,499,084     |          | 2,334,858 |   |
| Intangible assets                                                        |       |       | 15         |          |       | 2,490,259     |          | 1,455,130 |   |
| **Total  fixed assets**                                                  |       |       |       |          | ** ** | **6,077,089** | ** **    | **3,871,883** | ** ** |
| **Total  assets**                                                        |       |       |       |          | ** ** | **€**    | **9,375,777** | ** ** | **€** | **5,768,077** | ** ** |
| **Liabilities, minority interests and  shareholders’ equity**       |       |       |       |          |       |          |          |   |   |
| **Current liabilities**                                                  |       |       |       |          |       |          |          |   |   |
| Bank loans, overdrafts  and other borrowing                              |       |       | 19         |          |       | 103,777       |          | 104,841 |   |
| Kappa bonds outstanding                                                  |       |       | 19         |          |       | 755,575       |          | — |   |
| Accounts payable and  accrued liabilities                                |       |       | 16         |          |       | 1,500,413     |          | 1,064,831 |   |
| **Total  current liabilities**                                           |       |       |       |          | ** ** | **2,359,765** | ** **    | **1,169,672** | ** ** |
| **Non current liabilities**                                              |       |       |       |          |       |          |          |   |   |
| Long term debt and other  long term liabilities                          |       |       | 18         |          |       | 4,537,329     |          | 2,959,840 |   |
| Amounts due to  affiliates                                               |       |       |       |          |       | 10,876        |          | 7,372 |   |
| Provisions for  liabilities and charges                                  |       |       | 20         |          |       | 247,733       |          | 221,403 |   |
| Pension liabilities                                                      |       |       | 24         |          |       | 655,368       |          | 411,237 |   |
| Capital grants deferred                                                  |       |       |       |          |       | 14,460        |          | 14,260 |   |
| Minority interests  (equity interests)                                   |       |       |       |          |       | 131,384       |          | 115,192 |   |
| **Total  liabitilites and minority interests**                           |       |       |       |          | ** ** | **7,956,915** | ** **    | **4,898,976** | ** ** |
| **Shareholders equity****(1)**                                           |       |       |       |          |       |          |          |   |   |
| Share capital                                                            |       |       |       |          |       | 40            |          | 40 |   |
| Other reserves                                                           |       |       | 26         |          |       | 1,690,484     |          | 946,002 |   |
| Retained deficit                                                         |       |       |       |          |       | (271,662      | )             | (76,941 | ) |
| **Shareholders’  equity**                                           |       |       |       |          | ** ** | **1,418,862** | ** **    | **869,101** | ** ** |
| **Total liabilities, minority interests and  shareholders’ equity** |       |       |       |          | ** ** | **€**    | **9,375,777** | ** ** | **€** | **5,768,077** | ** ** |

----

(1)          A summary of thesignificant adjustments to shareholders’ equity which would be required ifaccounting principles generally accepted in the United States had been appliedinstead of those generally accepted in Ireland is given in Note 35.

The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.

F-6

----

**JSG Funding plc and Subsidiary CompaniesConsolidated Statements of Changes in Shareholders’ Equity**

| ** **                                                     | ** ** | **Share  capital** | ** ** | **Other  reserves** | ** ** | **Retained  earnings** | ** **          | **Total  shareholders’  equity** | ** ** |
|----------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|------------------------|---------------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **€000**      | ** ** | **€000**(1)    | ** ** | **€000**          | ** **          | **€000**                         | ** ** |
| Balance at  December 31, 2002                             |       |               | 40         |                |       | 871,798                |                | 6,261                                 |       |   | 878,099 |   |   |
| Loss                                                           |       |               | —     |                |       | —                 |                | (67,328                               | )          |   | (67,328 | ) |   |
| Actuarial gain  recognized in retirement benefit schemes       |       |               | —     |                |       | —                 |                | 25,603                                |       |   | 25,603 |   |   |
| Currency  translation adjustments                              |       |               | —     |                |       | 58,982                 |                | —                                |       |   | 58,982 |   |   |
| **Balance  at December 31, 2003**                         | ** ** | ** **         | **40**     |                | ** ** | **930,780**            | ** **          | **(35,464**                           | **)**      | ** ** | **895,356** |   |   |
| Loss                                                           |       |               | —     |                |       | —                 |                | (34,489                               | )          |   | (34,489 | ) |   |
| Actuarial loss  recognized in retirement benefit schemes  |       |               | —     |                |       | —                 |                | (6,988                                | )          |   | (6,988 | ) |   |
| Currency  translation adjustments                              |       |               | —     |                |       | 15,222                 |                | —                                |       |   | 15,222 |   |   |
| **Balance  at December 31, 2004**                         | ** ** | ** **         | **40**     |                | ** ** | **946,002**            | ** **          | **(76,941**                           | **)**      | ** ** | **869,101** |   |   |
| Capital contribution                                           |       |               | —     |                |       | 738,953                |                | —                                |       |   | 738,953 |   |   |
| Loss                                                           |       |               | —     |                |       | —                 |                | (177,346                              | )          |   | (177,346 | ) |   |
| Actuarial loss  recognized in retirement benefit schemes  |       |               | —     |                |       | —                 |                | (17,281                               | )          |   | (17,281 | ) |   |
| Minority share of  actuarial (loss)                            |       |               | —     |                |       | —                 |                | (94                                   | )          |   | (94 | ) |   |
| Currency  translation adjustments                              |       |               | —     |                |       | 5,529                  |                | —                                |       |   | 5,529 |   |   |
| **Balance at December 31,  2005**                         | ** ** | ** **         | **€** | **40**              |       | ** **             | **€1,690,484** | ** **                            | **€** | **(271,662** | **)** | ** ** | **€** | **1,418,862** |   |   |
|                                                                |            |                    |            |                     |            |                        |                     |                                       |            |  |  |  |  |  |  |  |

----

(1)   See Note 26for further detail.

The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.

F-7

----

**JSG Funding plc and Subsidiary CompaniesConsolidated Statements of Cash Flows**

| ** **                                                     | ** ** | **Note**   | ** ** | **2005**      | ** ** | **2004**      | ** **  | **2003**      | ** ** |
|----------------------------------------------------------------|------------|------------|------------|---------------|------------|---------------|-------------|---------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | **€000** | ** ** | **€000** | ** **  | **€000** | ** ** |
| **Net cash flow from operating activities**                    |       |       | 27         |          |       | 512,869       |        | 640,929       |       | 690,964 |   |
| **Dividends received from associates**                         |       |       |       |          |       | 3,062         |        | 2,989         |       | 1,258 |   |
| **Returns  on investments and servicing of finance**           |       |       |       |          |       |          |        |          |       |   |   |
| Interest received                                              |       |       |       |          |       | 10,730        |        | 8,370         |       | 11,689 |   |
| Interest paid                                                  |       |       |       |          |       | (281,114      | )           | (234,540      | )          | (252,382 | ) |
| Interest paid on finance leases                                |       |       |       |          |       | (1,138        | )           | (1,962        | )          | (2,164 | ) |
| Other financial interest paid                                  |       |       |       |          |       | (13,259       | )           | (15,718       | )          | (15,266 | ) |
| Dividends to minority interests                                |       |       |       |          |       | (6,152        | )           | (5,707        | )          | (7,496 | ) |
| Deferred debt issue costs                                      |       |       |       |          |       | (98,055       | )           | (5,814        | )          | (7,558 | ) |
|                                                           |       |       |       |          |       | (388,988      | )           | (255,371      | )          | (273,177 | ) |
| **Taxation**                                                   | ** ** |       |       |          | ** ** | ** **    | ** **  | ** **    | ** ** | ** ** | ** ** |
| Irish corporation tax paid                                     |       |       |       |          |       | (3,480        | )           | (8,515        | )          | 2,616 |   |
| Overseas tax paid                                              |       |       |       |          |       | (39,274       | )           | (50,249       | )          | (61,589 | ) |
| Overseas tax refunded                                          |       |       |       |          |       | —        |        | 21,433        |       | — |   |
|                                                           |       |       |       |          |       | (42,754       | )           | (37,331       | )          | (58,973 | ) |
| **Capital expenditure and financial investment**               | ** ** |       |       |          | ** ** | ** **    | ** **  | ** **    | ** ** | ** ** | ** ** |
| Purchase of tangible fixed assets                              |       |       |       |          |       | (192,434      | )           | (206,466      | )          | (207,518 | ) |
| Less new finance leases                                        |       |       |       |          |       | 4,053         |        | 2,963         |       | — |   |
|                                                           |       |       |       |          |       | (188,381      | )           | (203,503      | )          | (207,518 | ) |
| Capital grants received                                        |       |       |       |          |       | 3,390         |        | 1,874         |       | 1,995 |   |
| Purchase of other investments                                  |       |       |       |          |       | (87           | )           | (772          | )          | (1,052 | ) |
| Retirement of fixed assets                                     |       |       | 28         |          |       | 18,198        |        | 36,388        |       | 44,895 |   |
|                                                           |       |       |       |          |       | (166,880      | )           | (166,013      | )          | (161,680 | ) |
| **Acquisitions and disposals**                                 | ** ** |       |       |          | ** ** | ** **    | ** **  | ** **    | ** ** | ** ** | ** ** |
| Purchase of subsidiaries and minorities                        |       |       | 31         |          |       | (205,532      | )           | (2,731        | )          | (102,081 | ) |
| Deferred acquisition consideration                             |       |       |       |          |       | (1,520        | )           | (2,390        | )          | (54,773 | ) |
| Business disposals                                             |       |       |       |          |       | 572,174       |        | —        |       | 4,596 |   |
| Receipts / (advances) from / to affiliates                     |       |       |       |          |       | 9,899         |        | 11,934        |       | (28,206 | ) |
| Investments in and advances to associates                      |       |       |       |          |       | (351          | )           | (1,194        | )          | (82 | ) |
|                                                           |       |       |       |          |       | 374,670       |        | 5,619         |       | (180,546 | ) |
| **Cash inflow before use of  liquid resources and  financing** |       |       |       |          |       | 291,979       |        | 190,822       |       | 17,846 |   |
| **Management of liquid resources**                             |       |       |       |          |       | (789,791      | )           | (16,989       | )          | 18,889 |   |
| **Financing**                                                  | ** ** |       |       |          | ** ** | ** **    | ** **  | ** **    | ** ** | ** ** | ** ** |
| Issue of shares including minorities                           |       |       |       |          |       | 5             |        | 27            |       | — |   |
| Increase / (decrease) in term debt                             |       |       | 29         |          |       | 475,449       |        | (111,101      | )          | (2,142 | ) |
| Advances from affiliates                                       |       |       |       |          |       | 125           |        | 1,102         |       | 410 |   |
| Capital elements of finance leases repaid                      |       |       |       |          |       | (4,812        | )           | (13,576       | )          | (5,689 | ) |
|                                                           |       |       |       |          |       | 470,767       |        | (123,548      | )          | (7,421 | ) |
| **(Decrease)  / increase in cash**                             | ** ** |       | 29         |          | ** ** | **€**    | **(27,045** | **)**         | **€** | **50,285** | ** ** | **€** | **29,314** | ** ** |
|                                                                |            |            |            |               |            |               |             |               |            |  |  |  |  |  |

 

The significant differences between the cash flowstatement prepared under accounting principles generally accepted in the UnitedStates and that prepared under accounting principles generally accepted inIreland are given in Note 35.

The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.

F-8

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements**

**1**   Basisof Preparation

JSG Funding plc (“JSGFunding” or the “Group”) was incorporated on June 12, 2002. On October 2, 2002, JSG Acquisitions (“JSGAcquisitions”), a wholly owned subsidiary of JSG Funding acquired all of theordinary shares of Jefferson Smurfit Group plc in a take private transaction.Prior to this acquisition, JSG Funding had no operations. As part of theacquisition Jefferson Smurfit Group plc distributed its 29.3% interest inSmurfit-Stone Container Corporation (‘SSCC’), its U.S. affiliate, to itsshareholders.

On March 31, 2003 the Groupcompleted the acquisition of SSCC’s European Packaging assets. In thistransaction, which we refer to as the “SSCC Asset Swap”, JSG Funding exchangedits 50% ownership in Smurfit MBI, Canada and approximately €185 million incash for SSCC’s European assets.

On March 1, 2005 the Groupcompleted the sale of our Munksjö specialty paper business for approximately €450 million. On May 18,2005 we completed the sale of our Munksjö tissue business for approximately €28 million. Theproceeds from these disposals were used to pay down part of the term portion ofour senior credit facility. Together, theoperations sold had net sales of approximately €512 million forthe year to December 31, 2004 (2003: €483 million).

On June 16, 2005 the Group completed the sale ofThe Kildare Hotel & Country Club (The K Club), additional land nearThe K Club and surplus land near our Dublin head office for €115million to a company controlled by Sir Michael Smurfit. The proceeds fromthe sale were applied to debt reduction.

The Munksjö specialty businesses and The K Clubtogether with Smurfit MBI, which was sold as part of the SSCC Asset Swap in2003, are reported as discontinued operations in the Consolidated Statements of Operations.

On December 1, 2005 Smurfit Kappa Group Limited (“SKGL”),(formerly known as JSG Packaging Limited), the ultimate parent of JSG Funding,JSG Acquisitions and the shareholders of Kappa Holding BV (‘Kappa’) concludedan agreement resulting in a merger of the operations of both groups ofcompanies. The merger was completed through the issue of shares by SKGL and thepayment of consideration comprising cash of approximately €238 millionand an €89million subordinated promissory note, primarily to Kappa’s former shareholders.The ownership structure results in the existing shareholders of SKGL owningapproximately 58.3% of the combination while Kappa’s existing shareholders ownapproximately 41.7%. The transaction involved financing the cash considerationand refinancing the entire existing Kappa Packaging debt and the existing JSGAcquisitions senior credit facility by way of a new senior credit facility. Themerger required European Commission approval which was granted subject to thefulfilment of an agreed schedule of commitments to dispose of a number ofbusinesses. The financial statements reflect the combination with effect from December 1,2005 incorporating one month’s results for the enlarged business. Thecombination is accounted for as a purchase.

Under Irish GAAP fair value exercises are required tobe completed as soon as practicable after the date of acquisition with thefinal fair value adjustments incorporated in the financial statements for thefirst full financial year following the acquisition. The fair value exerciserelating to the acquisition of Kappa is preliminary. The significantadjustments expected were in respect of the fair value of land and buildings,plant and equipment, post retirement benefits, goodwill and deferred taxation.The actuarial valuations of the various post retirement plans have beensubstantially completed and we do not expect the vaulation result to bematerially different from the figures included in the 2005 Form 20-F. We have alsosubstantially completed the exercise in relation to land and buildings andplant and equipment, which has 

F-9

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**1**   Basis of Preparation—(continued)

resultedin an increase in fixed assets of €23 million. Theacquisition of Kappa resulted in a net increase in goodwill of €1.2 billion.

**2**   AccountingPolicies

***(a) Basis ofaccounting:***

The financial statementsare prepared under the historical cost convention and in accordance withgenerally accepted accounting principles in Ireland (Irish GAAP). They areprepared and presented in euro (€). In preparing thesefinancial statements, certain items have been included in order to comply withaccounting presentation and disclosure requirements applicable in the UnitedStates in respect of foreign registrants. An explanation of the significantdifferences between Irish and US GAAP as they apply to the Group and areconciliation to US GAAP are set out in Note 35. The financial statements donot constitute full group accounts within the meaning of Regulation 40(1) ofthe European Communities (Companies: Group Accounts) Regulations, 1992 ofIreland insofar as such group accounts would have to comply with all of thedisclosure and other requirements of those Regulations. The auditors have madereports without qualification and without reference to an emphasis of matterunder Section 193 of the Companies Act, 1990, in respect of theconsolidated financial statements for the years ended December 31, 2005and 2004.

***(b) Groupconsolidation:***

The financial statementscomprise a consolidation of the financial statements of JSG Funding and its subsidiaries.Associates are accounted for under the equity method of accounting. Whereaccounting policies followed by subsidiaries and associates differsignificantly from those adopted for the purpose of the consolidated financialstatements, appropriate adjustments are made in order to achieve a consistentbasis of accounting. The results of subsidiaries acquired or sold areconsolidated and the Group’s share of the results of associates are includedfor the periods from their effective date of acquisition until their effectivedate of sale.

***(c) Net salesand revenue recognition:***

Net sales consist of salesto third parties after trade discounts and exclude sales taxes. Revenue isrecognized at the time products are delivered or services rendered to externalcustomers.

***(d) Goodwilland other intangible assets:***

Goodwill represents theexcess of the cost of shares in subsidiaries over the fair value of their netassets acquired based on Group accounting policies. It is capitalized andamortized over a period of 40 years as the directors believe that thedurability of the business can be demonstrated and the value of goodwill iscapable of being continually reassessed. The carrying value of goodwill issubject to an impairment review at the end of the first full year following theyear of acquisition and annually thereafter.

Other intangible assets,namely the value of the Kappa brand name, are stated at fair value and amortizedover an estimated useful life of 10 years.

***(e) Property,plant and equipment:***

Property, plant andequipment is carried at cost less accumulated depreciation.

F-10

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**2**   Accounting Policies—(continued)

***(f) Depreciation:***

Freehold and longleasehold land are not depreciated. Short leasehold land and buildings aredepreciated over the remaining period of the lease, adjusted for estimatedresidual value. In the main, other tangible fixed assets are depreciated byequal annual installments over their estimated useful lives at the followingrates:

| Freehold and long  leasehold buildings |   | 1 - 5   | % |
|----------------------------------------|--------|---------|---|
| Fixtures and  fittings                 |   | 10 - 25 | % |
| Plant and  machinery                   |   | 3 - 33  | % |
| Motor vehicles                         |   | 20 - 25 | % |

 

***(g) Timberlands:***

The cost of acquiring,establishing and maintaining forestry plantations are classified astimberlands. Depletion of timberlands represents the charge to income relatingto the timber extracted in the year.

***(h) Leasing:***

Assets acquired underfinance leases are capitalized and included in property, plant and equipmentand depreciated in accordance with Group depreciation policy. Payments underoperating leases are expensed over the period of the lease.

***(i) Inventory valuation:***

Inventory is valued at thelower of cost on a first in first out basis or net realizable value. Costincludes direct costs plus applicable factory and other overheads. Netrealizable value is the actual or estimated selling price less all applicablecosts incurred or likely to be incurred in the realization of the sellingprice. Full provision is made for all damaged, deteriorated, obsolete andunusable materials.

***(j) Debt instruments:***

The finance costs of debtinstruments, which is the difference between the net proceeds and the totalamount payable under the instrument, are accounted for over the life of theinstrument at a constant rate of interest on the outstanding balance. Theproceeds of debt instruments, net of issue costs, are shown as liabilities onthe balance sheet.

***(k) Derivative instruments:***

The Group uses forwardcurrency contracts to reduce exposure to foreign exchange rates. The Group alsouses interest rate swaps to adjust interest rate exposures. The Group considersits derivative instruments qualify for hedge accounting when certain criteriaare met.

F-11

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**2**   Accounting Policies—(continued)

*Forward foreigncurrency contracts*

The criteria forforward foreign currency contracts are:

·       Theinstrument must be related to a foreign currency asset or liability that isprobable and whose characteristics have been identified; and

·       Itmust reduce the risk of foreign currency exchange movements on our operations.

The rates under suchcontracts are used to record the hedged item. As a result, gains and losses areoffset against the foreign exchange gains and losses on the related financialassets and liabilities, or where the instrument is used to hedge a committed,or probable, future transaction, are deferred until the transaction occurs. Gains/losseson hedges of anticipated transactions are recorded in the ConsolidatedStatements of Operations when such anticipated transactions are no longerlikely to occur.

*Interest rate swaps*

The Group’scriteria for interest rate swaps are:

·       Theinstrument must be related to an asset or a liability; and

·       Itmust change the character of the interest rate by converting a variable rate toa fixed rate or vice versa.

Interest differentials are recognized and included ininterest payable or receivable as appropriate.

Interest rate swaps arenot revalued to fair value and are not shown on the Group Balance Sheets.

*Currency swaps*

The Group enters currencyswap agreements to reduce the impact of foreign currency rate fluctuationsarising from unmatched foreign currency assets and liabilities. Related foreigncurrency assets and liabilities are accounted for in the currency of theunderlying swap agreement and translated at the closing rate.

***(l) Foreign Currencies:***

Foreign currency transactions are translated at therate of exchange ruling at the date of the transaction or, if hedged forward,at the rate of exchange under the related forward currency contract. Monetary assetsand liabilities denominated in foreign currencies are translated at the closingrate or, if hedged forward, at the rate of exchange under the related forwardcurrency contract. The resulting profits or losses are dealt with in theConsolidated Statements of Operations.

The balance sheets ofsubsidiaries are translated using the closing rate method. The statements ofoperations and cash flow statements are translated at average rates ruling forthe relevant period. Resulting currency differences, together with thosearising on hedging activities, are dealt with in reserves. The transactions ofoperations in hyper-inflationary economies are reported using a relativelystable currency as the functional currency. The translation gains and lossesarising are recognized in the Consolidated Statements of Operations.

F-12

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**2**   Accounting Policies—(continued)

***(m) Post Retirement Benefits:***

JSG Funding accounts forpost retirement benefits in accordance with FRS 17—“Retirement Benefits”. FRS17 applies to all types of benefits that an employer provides after employeeshave completed their service, including pensions and other post retirementbenefits. The expected increase in the present value of scheme liabilitiesarising from employee service in the current or prior periods is chargedagainst operating income. The expected returns on the schemes’ assets and theincrease during the period in the present value of the schemes’ liabilitiesarising from the passage of time are included in the Consolidated Statements ofOperations as “Other Financial Expense”. Differences between the expected andthe actual return on plan assets, together with the effect of changes in thecurrent or prior assumptions underlying the liabilities are recognized in theConsolidated Statements of Total Recognized Gains and Losses. Scheme assets arevalued at fair value and scheme liabilities are measured using the projectedunit credit method. Net scheme assets and liabilities, reduced by deferred taxamounts, are recorded on the Balance Sheets as a pension surplus or deficit asappropriate.

***(n) Deferred taxation:***

The Group providesdeferred tax in accordance with FRS 19—“Deferred Tax”. Under this standard fullprovision is made for deferred tax arising from timing differences between therecognition of gains and losses in the financial statements and theirrecognition in tax computations. We have chosen not to discount deferred taxassets and liabilities.

***(o) Research and development:***

Research and developmentexpenditure is written off as incurred.

***(p) Use of estimates:***

The preparation offinancial statements requires management to make estimates that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the balance sheet date and the reported amounts of revenuesand expenses for the reporting period. Actual results could differ from thoseestimates.

**3**   SegmentalAnalyses

The Group is an integrated paper and boardmanufacturer and converter. The Group has identified reportable segments on ageographic basis. In Europe, the Group has two reportable segments: (1) Packagingand (2) Specialties. The Packaging segment is highly integrated. Itincludes a system of mills and plants that produces a full line ofcontainerboard that is converted into corrugated containers. Our specialtiessegment, prior to the Munksjö Specialties disposal, was principally comprisedof décor base paper, other specialty papers and graphicboard production. Additionally,there are central costs which represent corporate governance costs, includingexecutive costs, and costs of the Group’s legal, company secretarial, pensionadministration, tax, treasury and controlling functions and otheradministrative costs.

Set out below aresegmental analyses of sales (by source), income before taxes and equityminority interests, total assets, long lived assets, net operating assets,capital expenditure, depreciation, depletion and amortization expense andinvestments in equity method investees. Sales by destination are not 

F-13

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**3**   Segmental Analyses—(continued)

materiallydifferent from sales by source. The analysis of income includes the Group’sshare of the income before exceptional items, interest and taxes of associates.A geographical analysis of employees can be found in Note 6 and of income taxesin Note 9.

**Sales—third party (external net sales)**

| ** **                      | ** ** | **2005**      | ** **    | **2004**      | ** ** | **2003**      | ** ** |
|---------------------------------|------------|---------------|---------------|---------------|------------|---------------|------------|
| ** **                      | ** ** | **€000** | ** **    | **€000** | ** ** | **€000** | ** ** |
| Packaging                       |       | 3,117,403     |          | 3,093,484     |       | 2,972,383     |       |
| Specialties                     |       | 530,629       |          | 1,009,038     |       | 988,275       |       |
| Europe                          |       | 3,648,032     |          | 4,102,522     |       | 3,960,658     |       |
| United States & Canada |       | —        |          | —        |       | 104,355       |       |
| Latin America                   |       | 789,297       |          | 702,560       |       | 681,302       |       |
|                            | ** ** | **€**    | **4,437,329** | ** **    | **€** | **4,805,082** | ** ** | **€** | **4,746,315** | ** ** |
|                                 |            |               |               |               |            |               |            |  |  |  |

 

Third party sales in Ireland were: €189,244,000for the year ended December 31, 2005; €196,346,000 for the yearended December 31, 2004 and €201,530,000 for the yearended December 31, 2003.

**Sales—Group and third party**

| ** **                 | ** ** | **2005**      | ** **    | **2004**      | ** ** | **2003**      | ** ** |
|----------------------------|------------|---------------|---------------|---------------|------------|---------------|------------|
| ** **                 | ** ** | **€000** | ** **    | **€000** | ** ** | **€000** | ** ** |
| Packaging                  |       | 4,338,640     |          | 4,255,869     |       | 3,969,405     |       |
| Specialties                |       | 651,972       |          | 1,138,767     |       | 1,108,017     |       |
| Europe                     |       | 4,990,612     |          | 5,394,636     |       | 5,077,422     |       |
| United States & Canada |       | —        |          | —        |       | 104,355       |       |
| Latin America              |       | 1,221,240     |          | 1,090,229     |       | 1,067,021     |       |
|                       | ** ** | **€**    | **6,211,852** | ** **    | **€** | **6,484,865** | ** ** | **€** | **6,248,798** | ** ** |
|                            |            |               |               |               |            |               |            |  |  |  |

 

F-14

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**3**   Segmental Analyses—(continued)

**Income before taxes and equityminority interests**

| ** **                                                                 | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|----------------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                                 | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Packaging                                                                  |       | 129,461       |         | 152,000       |       | 206,446       |       |
| Specialties                                                                |       | 33,154        |         | 98,256        |       | 95,136        |       |
| Associates                                                                 |       | 6,420         |         | 10,064        |       | 9,447         |       |
| Europe                                                                     |       | 169,035       |         | 260,320       |       | 311,029       |       |
| United States and Canada                                                   |       | —        |         | —        |       | 7,775         |       |
| Packaging                                                                  |       | 113,996       |         | 118,443       |       | 86,536        |       |
| Associates                                                                 |       | 867           |         | 2,546         |       | 506           |       |
| Latin America                                                              |       | 114,863       |         | 120,989       |       | 87,042        |       |
| Asia (Associates)                                                          |       | —        |         | —        |       | 2,202         |       |
| Unallocated centre costs                                                   |       | (23,335       | )            | (25,272       | )          | (22,461       | )          |
| Income before intangible amortization, interest and exceptional items |       | 260,563       |         | 356,037       |       | 385,587       |       |
| Amortization of intangible  assets                                         |       | (29,203       | )            | (37,925       | )          | (44,548       | )          |
| Group net interest                                                         |       | (244,621      | )            | (285,306      | )          | (297,737      | )          |
| Loss from early extinguishment of debt                                     |       | (104,658      | )            | (5,697        | )          | —        |       |
| Share of associates’ net interest                                     |       | (1,336        | )            | (1,301        | )          | (2,062        | )          |
| (Loss)/income before exceptional items                                     |       | (119,255      | )            | 25,808        |       | 41,240        |       |
| Reorganization and restructuring costs                                     |       | (25,090       | )            | (39,430       | )          | (35,006       | )          |
| Impairment of property, plant and equipment                                |       | (45,214       | )            | —        |       | —        |       |
| Income on sale of assets and businesses                                    |       | 52,587        |         | 22,173        |       | 5,560         |       |
|                                                                       | ** ** | **€**    | **(136,972** | **)**         | **€** | **8,551**     | ** ** | **€** | **11,794** | ** ** |
|                                                                            |            |               |              |               |            |               |            |  |  |  |

 

**Total assets**

| ** **                | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|---------------------------|------------|---------------|---------------|---------------|------------|
| ** **                | ** ** | **€000** | ** **    | **€000** | ** ** |
| Packaging                 |       | 5,065,437     |          | 2,404,855     |       |
| Specialties               |       | 654,357       |          | 805,023       |       |
| Europe                    |       | 5,719,794     |          | 3,209,878     |       |
| Latin America             |       | 774,708       |          | 669,743       |       |
| Group centre              |       | 127,973       |          | 162,379       |       |
|                      |       | 6,622,475     |          | 4,042,000     |       |
| Intangible assets         |       | 2,490,259     |          | 1,455,130     |       |
| Amounts due by affiliates |       | 263,043       |          | 270,947       |       |
|                      | ** ** | **€**    | **9,375,777** | ** **    | **€** | **5,768,077** | ** ** |
|                           |            |               |               |               |            |  |  |

 

F-15

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**3**   SegmentalAnalyses—(continued)

**Long lived assets**

| ** **        | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|-------------------|------------|---------------|---------------|---------------|------------|
| ** **        | ** ** | **€000** | ** **    | **€000** | ** ** |
| Packaging         |       | 2,647,603     |          | 1,403,645     |       |
| Specialties       |       | 375,213       |          | 512,959       |       |
| Europe            |       | 3,022,816     |          | 1,916,604     |       |
| Latin America     |       | 475,323       |          | 413,257       |       |
| Group centre      |       | 945           |          | 4,997         |       |
|              |       | 3,499,084     |          | 2,334,858     |       |
| Intangible assets |       | 2,490,259     |          | 1,455,130     |       |
|              | ** ** | **€**    | **5,989,343** | ** **    | **€** | **3,789,988** | ** ** |
|                   |            |               |               |               |            |  |  |

 

Long lived assets inIreland were €82,952,000 and €203,058,000 at December 31,2005 and 2004 respectively.

**Net operating assets**

| ** **                     | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|--------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                     | ** ** | **€000** | ** **    | **€000** | ** ** |
| Packaging                      |       | 3,091,799     |          | 1,630,279     |       |
| Specialities                   |       | 479,235       |          | 624,296       |       |
| Europe                         |       | 3,571,034     |          | 2,254,575     |       |
| Latin America                  |       | 627,697       |          | 520,224       |       |
| Group centre                   |       | (69,969       | )             | (12,152       | )          |
| Net operating assets           |       | 4,128,762     |          | 2,762,647     |       |
| Intangible assets              |       | 2,490,259     |          | 1,455,130     |       |
| Amounts due by affiliates      |       | 263,043       |          | 269,793       |       |
| Unallocated net liabilities    |       | (5,463,202    | )             | (3,618,469    | )          |
| **Shareholders’  equity** | ** ** | **€**    | **1,418,862** | ** **    | **€** | **869,101** | ** ** |
|                                |            |               |               |               |            |  |  |

 

F-16

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**3**   Segmental Analyses—(continued)

**A reconciliation of netoperating assets above to shareholders’ equity is as follows:**

| ** **                                     | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                     | ** ** | **€000** | ** **    | **€000** | ** ** |
| Per segmental analysis of net operating assets |       | 4,128,762     |          | 2,762,647     |       |
| Intangible assets                              |       | 2,490,259     |          | 1,455,130     |       |
| Amounts due by affiliates                      |       | 263,043       |          | 269,793       |       |
| Unallocated assets                             |       | 2,753,302     |          | 1,724,923     |       |
| Net borrowing                                  |       | (4,506,742    | )             | (2,895,346    | )          |
| Deferred debt issuance costs                   |       | 132,860       |          | 91,628        |       |
| Amounts due to affiliates                      |       | (10,876       | )             | (7,372        | )          |
| Corporation tax                                |       | (20,410       | )             | (42,147       | )          |
| Capital lease creditors                        |       | (23,549       | )             | (17,400       | )          |
| Provisions for liabilities and charges         |       | (247,733      | )             | (221,403      | )          |
| Pension liabilities                            |       | (655,368      | )             | (411,237      | )          |
| Minority interests (equity interests)          |       | (131,384      | )             | (115,192      | )          |
| Unallocated net liabilities                    |       | (5,463,202    | )             | (3,618,469    | )          |
| **Shareholders’  equity**                 | ** ** | **€**    | **1,418,862** | ** **    | **€** | **869,101** | ** ** |
|                                                |            |               |               |               |            |  |  |

 

Totalassets comprise fixed assets and current assets. Long lived assets compriseproperty, plant and equipment and intangible assets. Net operating assetscomprise total assets less total liabilities but excluding all assets andliabilities of a financing nature.

**Capital expenditure**

| ** **               | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **               | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Packaging                |       | 121,300       |        | 114,803       |       | 128,937       |       |
| Specialities             |       | 28,296        |        | 54,565        |       | 46,902        |       |
| Europe                   |       | 149,596       |        | 169,368       |       | 175,839       |       |
| United States and Canada |       | —        |        | —        |       | 1,365         |       |
| Latin America            |       | 42,432        |        | 36,689        |       | 30,308        |       |
| Group centre             |       | 406           |        | 409           |       | 6             |       |
|                     | ** ** | **€**    | **192,434** | ** **    | **€** | **206,466**   | ** ** | **€** | **207,518** | ** ** |
|                          |            |               |             |               |            |               |            |  |  |  |

 

F-17

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**3**   Segmental Analyses—(continued)

**Depreciation, depletion and amortization expense**

| ** **                            | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|---------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                            | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Packaging                             |       | 177,587       |        | 178,218       |       | 163,753       |       |
| Specialities                          |       | 21,907        |        | 43,375        |       | 44,709        |       |
| Europe                                |       | 199,494       |        | 221,593       |       | 208,462       |       |
| United States and Canada              |       | —        |        | —        |       | 2,244         |       |
| Latin America                         |       | 40,527        |        | 40,806        |       | 42,490        |       |
| Group centre                          |       | 155           |        | 218           |       | 270           |       |
| Depreciation and depletion            |       | 240,176       |        | 262,617       |       | 253,466       |       |
| Amortization of intangible  assets(1) |       | 29,203        |        | 37,925        |       | 44,548        |       |
|                                  | ** ** | **€**    | **269,379** | ** **    | **€** | **300,542**   | ** ** | **€** | **298,014** | ** ** |
|                                       |            |               |             |               |            |               |            |  |  |  |

----

(1)          2005excludes goodwill written off of €128,422,000 in relation tobusinesses disposed (2004: €2,586,000).These have been included within income on sale of assets and operations (Note5).

**Investments in equity method investees**

| ** **    | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|---------------|------------|---------------|------------|---------------|------------|
| ** **    | ** ** | **€000** | ** ** | **€000** | ** ** |
| Europe        |       | 62,264        |       | 60,051        |       |
| Latin America |       | 14,049        |       | 12,244        |       |
|          | ** ** | **€**    | **76,313** | ** **    | **€** | **72,295** | ** ** |
|               |            |               |            |               |            |  |  |

 

**4**   NetOperating Expenses

| ** **               | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **               | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Distribution  costs      |       | 366,515       |        | 349,047       |       | 337,489       |       |
| Administrative  expenses |       | 613,789       |        | 664,303       |       | 647,734       |       |
| Other operating  income  |       | (3,012        | )           | (2,786        | )          | (2,878        | )          |
|                     | ** ** | **€**    | **977,292** | ** **    | **€** | **1,010,564** | ** ** | **€** | **982,345** | ** ** |
|                          |            |               |             |               |            |               |            |  |  |  |

 

In 2003, a gain of €18million on the sale of development land at The K Club was netted againstadministrative expenses.

F-18

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**5**   ExceptionalItems

| ** **                                                            | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|-----------------------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                                            | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Reorganization  and restructuring costs                               |       | (25,090       | )           | (39,430       | )          | (35,006       | )          |
| Income on sale of  assets and operations                              |       | 13,458        | ** **  | 22,173        | ** ** | 5,560         |       |
| Income on sale of  assets and operations—discontinued operations |       | 39,129        | ** **  | —        | ** ** | —        |       |
| Impairment of  property, plant and equipment                          |       | (45,214       | )           | —        |       | —        |       |
| ** **                                                            | ** ** | **€**    | **(17,717** | **)**         | **€** | **(17,257**   | **)**      | **€** | **(29,446** | **)** |
|                                                                       |            |               |             |               |            |               |            |  |  |  |

 

The Group has recorded costs of €25,090,000in 2005 representing reorganization and restructuring costs mainly in theEuropean Packaging segment. This figure includes redundancy, closure andreorganization costs. The main closure costs relate to our Clonskeagh Mill inIreland, which was permanently closed in the first quarter of 2005, and to ourGravelines corrugated plant and Cevennes corrugated plant in France, for whichclosures were announced in the final quarter of 2005. The related tax relief of€5,360,000is included in Taxes on income.

The Group has also recorded costs of €45,214,000primarily in the European Packaging segment representing provisions forimpairment of property, plant and equipment. In measuring the value in use of therelated assets a discount rate of 7.6% was applied to future cash flows.

The Group has reported a net gain of €52,587,000in respect of the sale of assets and operations. The main profit was inrelation to the sale of Munksjo in the first quarter of 2005, partially offsetby a loss on the sale of our Tissues operation in the second quarter of 2005,in addition to the profit on the sale of The K Club in the second quarter of2005. The related tax charge of €156,000 is included inTaxes on income.

In 2004, the Group recorded costs of €39,430,000representing reorganization and restructuring costs mainly in the EuropeanPackaging segment. This figure included redundancy, closure and reorganizationcosts. The main closure costs related to our Cordoba mill in Spain, which waspermanently closed in the third quarter of 2004, and to our Tamworth corrugatedplant and Witham cartons plant in the United Kingdom, for which closures wereannounced in the final quarter of 2004. The related tax relief of €4,048,000was included in Taxes on income.

The Group reported a gain of €22,173,000in respect of the sale of the Botanic Road property in Dublin, the sale ofsurplus property in Italy and Spain and the disposal of our investment inCartonnerie de Valois. The related tax charge of €1,939,000 was included inTaxes on income.

In 2003, the Group recorded costs of €35,006,000representing reorganization and restructuring costs mainly in the EuropeanPackaging segment. This figure included redundancy, closure and reorganizationcosts. The main closure costs related to our Lestrem mill in France, which waspermanently closed in October 2003. The related tax relief of €9,367,000is included in Taxes on income.

The Group has reported again of €5,560,000 in respect of the disposal of itsMaltese box plant and the sale of land at Orsenigo and Asti in Italy. Therelated tax charge of €2,086,000 is included in Taxes on income.

F-19

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**6**   Employeesand Remuneration

The average number of persons employed by the Group bygeographical area in the financial year was:

| ** **               | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|------------|------------|
| Europe                   |       | 21,384     |       | 22,931     |       | 22,348     |       |
| United States and Canada |       | —     |       | —     |       | 639        |       |
| Latin America            |       | 7,828      |       | 7,440      |       | 7,318      |       |
|                     |       | **29,212** | ** ** | **30,371** | ** ** | **30,305** |       |

 

| ** **                     | ** ** | **2005**      | ** **    | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------------|------------|---------------|---------------|---------------|------------|---------------|------------|
| ** **                     | ** ** | **€000** | ** **    | **€000** | ** ** | **€000** | ** ** |
| **The staff  costs comprise:** |       |          |          |          |       |          |       |
| Wages and salaries             |       | 859,131       |          | 890,748       |       | 873,702       |       |
| Social welfare                 |       | 188,543       |          | 194,858       |       | 190,586       |       |
| Pensions                       |       | 66,204        |          | 71,623        |       | 73,200        |       |
|                           | ** ** | **€**    | **1,113,878** | ** **    | **€** | **1,157,229** | ** ** | **€** | **1,137,488** | ** ** |
|                                |            |               |               |               |            |               |            |  |  |  |

 

**7**   InterestExpense

| ** **                                                | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|-----------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                                | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Interest payable  and similar charges:                    |       |          |        |          |       |          |       |
| On bank loans and  overdrafts                             |       |          |        |          |       |          |       |
| —repayable within 5 years, by installment            |       | 41,857        |        | 25,123        |       | 26,614        |       |
| —repayable within 5 years, other than by installment |       | 17,277        |        | 2,965         |       | 3,207         |       |
|                                                      |       | 59,134        |        | 28,088        |       | 29,821        |       |
| On all other  loans                                       |       | 196,217       |        | 265,553       |       | 279,547       |       |
| ** **                                                | ** ** | **€**    | **255,351** | ** **    | **€** | **293,641**   | ** ** | **€** | **309,368** | ** ** |
|                                                           |            |               |             |               |            |               |            |  |  |  |

 

The loss of €105 million from the earlyextinguishment of debt arose mainly as a result of our refinancing and debtreduction activities during 2005. The early pay down of the original PIK debt,following the February 2005 refinancing, resulted in the write-off of €14 millionin debt issue and other costs as well as cash costs of €53 million,primarily the cash premium paid for early redemption. In addition, the Groupwrote off debt issue costs of €10 million in respectof the debt repaid with the Munksjö proceeds. The Group wrote off a further €4 million in respect ofthe debt repaid with The K Club proceeds and €24 million as a result ofthe early pay down of some debt in the former JSG as part of the financing ofthe merger with Kappa.

F-20

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**8**   IncomeBefore Taxes

| ** **                                                   | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                   | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Income before  taxes is stated after charging / (crediting): |       |          |       |          |       |          |       |
| Depreciation,  depletion and amortization expense            |       | 269,379       |       | 300,542       |       | 298,014       | ** ** |
| Auditors’  remuneration (including expenses)            |       | 4,472         |       | 4,073         |       | 3,675         | ** ** |
| Operating lease  rentals plant and machinery                 |       | 12,456        |       | 13,042        |       | 10,404        | ** ** |
| Operating lease  rentals other                               |       | 9,672         |       | 9,171         |       | 6,110         | ** ** |
| Loss / (gain) on  foreign currency borrowing less deposits   |       | 1,174         |       | (376          | )          | 6,401         | ** ** |
| Research and  development costs                              |       | 4,292         |       | 4,924         |       | 4,979         | ** ** |
| Government grants                                            |       | (3,012        | )          | (2,786        | )          | (2,878        | **)**      |

 

Directors’ emoluments, including pension contributionsamounted to €3,563,000 (2004: €4,894,000; 2003: €3,250,000)

The following amountsrelating to acquired/discontinued operations are included in arriving at Costof sales and Net operating expenses in the Consolidated Statements ofOperations.

| ** **                   | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                   | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Cost of  sales:**          |       |          |       |          |       |          |       |
| Acquired  operations         |       | 158,358       |       | —        |       | —        |       |
| Discontinued  operations     |       | 22,737        |       | 398,061       |       | 468,553       |       |
| **Net  operating expenses:** |       |          |       |          |       |          |       |
| Acquired  operations         |       | 45,452        |       | —        |       | —        |       |
| Discontinued operations      |       | 4,311         |       | 72,822        |       | 66,232        |       |

 

F-21

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**9**   Taxeson income

| ** **                                | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| **Current  Taxation**                     |       |          |        |          |       |          |       |
| Europe                                    |       | 18,801        |        | (7,219        | )          | 32,463        |       |
| United States and  Canada                 |       | (5,378        | )           | —        |       | (686          | )          |
| Latin America                             |       | 25,556        |        | 26,975        |       | 25,547        |       |
|                                      |       | 38,979        |        | 19,756        |       | 57,324        |       |
| **Deferred  Taxation**                    |       |          |        |          |       |          |       |
| Europe                                    |       | (13,924       | )           | 3,354         |       | 4,769         |       |
| United States and  Canada                 |       | —        |        | 8             |       | 5             |       |
| Latin America                             |       | (5,406        | )           | 1,257         |       | (2,811        | )          |
|                                      |       | (19,330       | )           | 4,619         |       | 1,963         |       |
| **Taxes  on income**                      |       |          |        |          |       |          |       |
| Holding Company  and subsidiaries         |       | 19,649        |        | 24,375        |       | 59,287        |       |
| Share of  associates                      |       | 1,912         |        | 2,598         |       | 3,067         |       |
|                                      | ** ** | **€**    | **21,561**  | ** **    | **€** | **26,973**    | ** ** | **€** | **62,354** | ** ** |
| **Deferred  taxation arises as follows:** |       |          |        |          |       |          |       |
| Capital  allowances                       |       | 788           |        | 3,873         |       | 1,068         |       |
| Other                                     |       | (20,118       | )           | 746           |       | 895           |       |
|                                      | ** ** | **€**    | **(19,330** | **)**         | **€** | **4,619**     | ** ** | **€** | **1,963** | ** ** |

 

Current taxation represents corporation tax or itsequivalent on the taxable income in each jurisdiction and unrelieved overseastax on dividends. In 2005, unrelieved overseas tax on dividends amounted to €559,000(2004: €486,000;2003: €474,000).In 2005, the amount of current taxation relating to Ireland was €1,593,000(2004: nil; 2003: a credit of €3,295,000). In 2005, theamount of deferred taxation relating to Ireland was a credit of €1,658,000(2004: a credit of €3,630,000;2003: a charge of €5,225,000).

The deferred taxation credit of €19,330,000for 2005 includes a charge of €2,172,000 (2004: €635,000;2003: €251,000)in respect of pensions. The balance of €21,502,000 (2004: €3,984,000;2003: €1,712,000)is shown as a movement in the liability for Deferred Income Taxes.

The Group has availed of areduced taxation rate of 10%, which applies to certain manufacturing andfinancial service operations in Ireland. This reduced rate expired at the endof 2005 for financial services operations and is due to expire formanufacturing operations at the end of 2010.

F-22

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**9**   Taxes on income —(continued)

**(Loss)/income before tax is analyzed as follows:**

| ** **                                     | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                     | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Ireland                                        |       | (102,679      | )            | (30,709       | )          | (35,622       | )          |
| Foreign                                        |       | 6,676         |         | 83,132        |       | 111,317       |       |
| Associates                                     |       | 5,951         |         | 11,310        |       | 10,093        |       |
| Unallocated amortization  of intangible assets |       | (29,203       | )            | (37,925       | )          | (44,548       | )          |
| Exceptional items  (Note 5)                    |       | (17,717       | )            | (17,257       | )          | (29,446       | )          |
|                                           | ** ** | **€**    | **(136,972** | **)**         | **€** | **8,551**     | ** ** | **€** | **11,794** | ** ** |
|                                                |            |               |              |               |            |               |            |  |  |  |

 

The total tax charge in future periods will beaffected by any changes to the corporation tax rates in force in the countriesin which the Group operates. The current tax charges will also be affected bychanges in the excess of tax depreciation over book depreciation and the use oftax credits. The total tax  charge for2004 included €12,771,000 in respect ofthe discontinued Munksjö specialties and tissue businesses.

No deferred taxation is recognized on the unremittedearnings of overseas subsidiaries, joint venture and associates; as earningsare continually reinvested by the Group, no taxation is expected to be payableon them in the foreseeable future.

Thefollowing table relates the applicable Republic of Ireland statutory tax rateto the effective tax rate of the Group, obtained by computing the tax charge asa percentage of income before taxes and minority shareholders’ interest:

| ** **                                                        | ** **   | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------------------------------|--------------|-----------|------------|-----------|------------|-----------|------------|
| ** **                                                        | ** **   | **%**     | ** ** | **%**     | ** ** | **%**     | ** ** |
| Corporation tax  at Irish statutory rate                          | * *     | 12.5      |       | 12.5      |       | 12.5      |       |
| Adjusted for:                                                     | * *     |      |       |      |       |      |       |
| Income subject to a higher rate of tax than Irish  statutory rate | * *     | (21.6     | )          | 639.6     |       | 387.6     |       |
| Expenditure not  deductible for tax purposes                      | * *     | 7.9       |       | 170.1     |       | 268.8     |       |
| Tax losses (utilised)/unutilised                                  | * *     | (4.4      | )          | 101.3     |       | (139.1    | )          |
| Adjustments to tax charge in respect of previous  periods         | * *     | (7.5      | )          | (485.3    | )          | 2.8       |       |
| Profits arising  not subject to tax                               | * *     | (2.6      | )          | (122.8    | )          | (3.9      | )          |
|                                                              | *** *** | **(15.7** | **)**      | **315.4** | ** ** | **528.7** | ** ** |

 

F-23

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**10**   NetBorrowing

| ** **                 | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|----------------------------|------------|---------------|---------------|---------------|------------|
| ** **                 | ** ** | **€000** | ** **    | **€000** | ** ** |
| Cash at bank and  in hand  |       | 247,807       |          | 248,033       |       |
| Restricted cash            |       | 755,575       |          | —        |       |
| Total borrowing  (Note 19) |       | 5,510,124     |          | 3,143,379     |       |
|                       | ** ** | **€**    | **4,506,742** | ** **    | **€** | **2,895,346** | ** ** |
|                            |            |               |               |               |            |  |  |

 

**11**   AccountsReceivable and Prepayments

| ** **                                     | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                     | ** ** | **€000** | ** **    | **€000** | ** ** |
| Amounts falling due  within one year:          |       |          |          |          |       |
| Trade receivables                              |       | 1,228,689     |          | 896,874       |       |
| Less: Provision  for bad and doubtful debts    |       | 45,831        |          | 52,910        |       |
|                                           |       | 1,182,858     |          | 843,964       |       |
| Amounts owed by associates                     |       | 8,089         |          | 5,764         |       |
| Other receivables                              |       | 79,763        |          | 37,740        |       |
| Prepayments and  accrued income                |       | 28,748        |          | 31,317        |       |
|                                           |       | 1,299,458     |          | 918,785       |       |
| Amounts falling  due after more than one year: |       |          |          |          |       |
| Other receivables                              |       | 15,270        |          | 6,263         |       |
| ** **                                     | ** ** | **€**    | **1,314,728** | ** **    | **€** | **925,048** | ** ** |
|                                                |            |               |               |               |            |  |  |

 

**12**   Inventories

| ** **       | ** ** | **2005**      | ** **  | **2004**      | ** ** |
|------------------|------------|---------------|-------------|---------------|------------|
| ** **       | ** ** | **€000** | ** **  | **€000** | ** ** |
| Raw materials    |       | 186,625       |        | 114,264       |       |
| Work in progress |       | 38,911        |        | 22,283        |       |
| Finished goods   |       | 297,029       |        | 184,060       |       |
| Other            |       | 140,566       |        | 131,559       |       |
|             | ** ** | **€**    | **663,131** | ** **    | **€** | **452,166** | ** ** |
|                  |            |               |             |               |            |  |  |

 

**13**   Investments

| ** **                        | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-----------------------------------|------------|---------------|------------|---------------|------------|
| ** **                        | ** ** | **€000** | ** ** | **€000** | ** ** |
| Associates (Note  13 (i))         |       | 76,313        |       | 72,295        |       |
| Other investments  (Note 13 (ii)) |       | 11,433        |       | 9,600         |       |
|                              | ** ** | **€**    | **87,746** | ** **    | **€** | **81,895** | ** ** |
|                                   |            |               |            |               |            |  |  |

 

F-24

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**13**   Investments—(continued)

**13**   (i): Associates

| ** **                       | ** ** | **Share of  net assets** | ** ** | **Loans**     | ** ** | **Total**     | ** ** |
|----------------------------------|------------|------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                       | ** ** | **€000**                      | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31,  2002          |       | 144,003                            |       | 7,036         |       | 151,039       |       |
| Fair value  adjustment           |       | (5,646                             | )          | —        |       | (5,646        | )          |
| Additions                        |       | 4,089                              |       | —        |       | 4,089         |       |
| Acquisitions                     |       | 763                                |       | —        |       | 763           |       |
| Retained earnings                |       | 4,603                              |       | —        |       | 4,603         |       |
| Sales                            |       | (41,656                            | )          | —        |       | (41,656       | )          |
| Repayment                        |       | —                             |       | (6,728        | )          | (6,728        | )          |
| Reclassification  on acquisition |       | (35,030                            | )          | —        |       | (35,030       | )          |
| Currency  adjustment             |       | (2,153                             | )          | 4             |       | (2,149        | )          |
| **December 31,  2003**      | ** ** | **68,973**                         | ** ** | **312**       | ** ** | **69,285**    | ** ** |
| Additions                        |       | 441                                |       | —        |       | 441           |       |
| Retained earnings                |       | 3,944                              |       | —        |       | 3,944         |       |
| Sales                            |       | (124                               | )          | —        |       | (124          | )          |
| Reclassification                 |       | (414                               | )          | —        |       | (414          | )          |
| Currency  adjustment             |       | (837                               | )          | —        |       | (837          | )          |
| **December 31,  2004**      | ** ** | **71,983**                         | ** ** | **312**       | ** ** | **72,295**    | ** ** |
| Additions                        |       | 305                                |       | —        |       | 305           |       |
| Acquisitions                     |       | 2,643                              |       | —        |       | 2,643         |       |
| Retained earnings                |       | 2,169                              |       | —        |       | 2,169         |       |
| Sales                            |       | (873                               | )          | —        |       | (873          | )          |
| Reclassification                 |       | (1,899                             | )          | (145          | )          | (2,044        | )          |
| Currency  adjustment             |       | 1,814                              |       | 4             |       | 1,818         |       |
| **December 31, 2005**       | ** ** | **€**                         | **76,142** | ** **    | **€** | **171**       | ** ** | **€** | **76,313** | ** ** |
|                                  |            |                                    |            |               |            |               |            |  |  |  |

 

We have one remainingsignificant associate—Duropack AG in Austria, of which we own 40%.

F-25

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**13**   Investments—(continued)

**13   (ii): Other Investments**

| ** **                            | ** ** | **Listed*  Cost** | ** ** | **Unlisted  Cost** | ** ** | **Total**     | ** ** |
|---------------------------------------|------------|-------------------|------------|--------------------|------------|---------------|------------|
| ** **                            | ** ** | **€000**     | ** ** | **€000**      | ** ** | **€000** | ** ** |
| December 31,  2002               |       | 6,926             |       | 7,278              |       | 14,204        |       |
| Additions                             |       | 392               |       | 269                |       | 661           |       |
| Acquisitions                          |       | 19                |       | 2,834              |       | 2,853         |       |
| Reclassification                      |       | 38                |       | (5,260             | )          | (5,222        | )          |
| Sales                                 |       | (787              | )          | (16                | )          | (803          | )          |
| Currency  adjustment                  |       | (15               | )          | (321               | )          | (336          | )          |
| **December 31,  2003**           | ** ** | **6,573**         | ** ** | **4,784**          | ** ** | **11,357**    | ** ** |
| Additions                             |       | 231               |       | 541                |       | 772           |       |
| Transfers                             |       | —            |       | (14                | )          | (14           | )          |
| Reclassification                      |       | —            |       | (1,426             | )          | (1,426        | )          |
| Sales                                 |       | (509              | )          | (465               | )          | (974          | )          |
| Currency  adjustment                  |       | 8                 |       | (123               | )          | (115          | )          |
| **December 31,  2004**           | ** ** | **6,303**         | ** ** | **3,297**          | ** ** | **9,600**     | ** ** |
| Additions                             |       | 75                |       | 12                 |       | 87            |       |
| Acquisitions                          |       | —            |       | 890                |       | 890           |       |
| Reclassification                      |       | —            |       | 921                |       | 921           |       |
| Sales                                 |       | (17               | )          | (219               | )          | (236          | )          |
| Write off to  statement of operations |       | —            |       | (56                | )          | (56           | )          |
| Currency  adjustment                  |       | —            |       | 227                |       | 227           |       |
| **December 31, 2005**            | ** ** | **€**        | **6,361**  | ** **         | **€** | **5,072**     | ** ** | **€** | **11,433** | ** ** |
|                                       |            |                   |            |                    |            |               |            |  |  |  |

----

*                    Listed on arecognized stock exchange

Other investments arestated at cost. The market value of the listed investments at December 31,2005 was €6,371,000 (2004: €6,304,000; 2003: €6,545,000).

F-26

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**14**   Property,Plant and Equipment 

| ** **                                  | ** ** | **Land & Buildings** | ** **    | **Plant and** | ** ** | ** **    | ** ** |
|---------------------------------------------|------------|------------------------------------|---------------|--------------------|------------|---------------|------------|
| ** **                                  | ** ** | **Freehold**                       | ** **    | **Leasehold**      | ** ** | **Equipment** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **€000**                      | ** **    | **€000**      | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Cost**                                    | ** ** | ** **                         | ** **    |               | ** ** | ** **    |       | ** ** | ** ** | ** ** | ** ** |
| December 31, 2002                      |       | 861,294                            |          |               | 33,716     |          |       | 2,913,998 |   | 3,809,008 |   |
| Fair value adjustment                       |       | 97,459                             |          |               | —     |          |       | 97,670 |   | 195,129 |   |
| Reclassification                            |       | 8,404                              |          |               | (329       | )             |       | (46,191 | ) | (38,116 | ) |
| Acquisitions                                |       | 93,412                             |          |               | 6,562      |          |       | 169,411 |   | 269,385 |   |
| Additions                                   |       | 21,354                             |          |               | —     |          |       | 179,652 |   | 201,006 |   |
| Businesses sold                             |       | —                             |          |               | —     |          |       | (165,386 | ) | (165,386 | ) |
| Retirements                                 |       | (16,217                            | )             |               | (302       | )             |       | (82,874 | ) | (99,393 | ) |
| Currency adjustment                         |       | (47,025                            | )             |               | (1,494     | )             |       | (153,406 | ) | (201,925 | ) |
| **December 31, 2003**                  | ** ** | **1,018,681**                      | ** **    |               | **38,153** | ** **    |       | **2,912,874** | ** ** | **3,969,708** | ** ** |
| Fair value adjustment                       |       | —                             |          |               | —     |          |       | 1,195 |   | 1,195 |   |
| Reclassification                            |       | 8,849                              |          |               | (8,305     | )             |       | (17,952 | ) | (17,408 | ) |
| Additions                                   |       | 27,076                             |          |               | 2,950      |          |       | 167,634 |   | 197,660 |   |
| Retirements                                 |       | (10,567                            | )             |               | (2,726     | )             |       | (66,863 | ) | (80,156 | ) |
| Currency adjustment                         |       | (14,254                            | )             |               | 158        |          |       | (44,416 | ) | (58,512 | ) |
| **December 31, 2004**                  | ** ** | **1,029,785**                      | ** **    |               | **30,230** | ** **    |       | **2,952,472** | ** ** | **4,012,487** | ** ** |
| Fair value adjustment                       |       | 40,438                             |          |               | —     |          |       | (17,449 | ) | 22,989 |   |
| Reclassification                            |       | 21,567                             |          |               | (2,659     | )             |       | (42,064 | ) | (23,156 | ) |
| Acquisitions                                |       | 525,146                            |          |               | —     |          |       | 1,031,986 |   | 1,557,132 |   |
| Additions                                   |       | 7,964                              |          |               | 2,315      |          |       | 173,314 |   | 183,593 |   |
| Businesses sold                             |       | (185,169                           | )             |               | (5,457     | )             |       | (301,857 | ) | (492,483 | ) |
| Retirements                                 |       | (30,506                            | )             |               | —     |          |       | (146,029 | ) | (176,535 | ) |
| Currency adjustment                         |       | 29,750                             |          |               | (288       | )             |       | 36,479 |   | 65,941 |   |
| **December 31, 2005**                  | ** ** | **1,438,975**                      | ** **    |               | **24,141** | ** **    |       | **3,686,852** | ** ** | **5,149,968** | ** ** |
| **Depreciation**                            | ** ** | ** **                         | ** **    |               | ** ** | ** **    |       | ** ** | ** ** | ** ** | ** ** |
| December 31, 2002                      |       | 141,917                            |          |               | 8,145      |          |       | 1,506,640 |   | 1,656,702 |   |
| Reclassification                            |       | (1,159                             | )             |               | (92        | )             |       | (43,525 | ) | (44,776 | ) |
| Charged                                     |       | 25,141                             |          |               | 1,231      |          |       | 220,438 |   | 246,810 |   |
| Businesses sold                             |       | —                             |          |               | —     |          |       | (96,144 | ) | (96,144 | ) |
| Retirements                                 |       | (4,494                             | )             |               | (316       | )             |       | (72,059 | ) | (76,869 | ) |
| Currency adjustment                         |       | (9,542                             | )             |               | (84        | )             |       | (91,825 | ) | (101,451 | ) |
| **December 31, 2003**                  | ** ** | **151,863**                        | ** **    |               | **8,884**  | ** **    |       | **1,423,525** | ** ** | **1,584,272** | ** ** |
| Reclassification                            |       | (4,787                             | )             |               | (2,621     | )             |       | (6,473 | ) | (13,881 | ) |
| Charged                                     |       | 27,895                             |          |               | 1,141      |          |       | 227,503 |   | 256,539 |   |
| Retirements                                 |       | (1,882                             | )             |               | (713       | )             |       | (64,287 | ) | (66,882 | ) |
| Currency adjustment                         |       | (3,487                             | )             |               | 141        |          |       | (29,731 | ) | (33,077 | ) |
| **December 31, 2004**                  | ** ** | **169,602**                        | ** **    |               | **6,832**  | ** **    |       | **1,550,537** | ** ** | **1,726,971** | ** ** |
| Impairment provision                        |       | 2,256                              |          |               | —     |          |       | 42,958 |   | 45,214 |   |
| Reclassification                            |       | 525                                |          |               | (1,027     | )             |       | (18,930 | ) | (19,432 | ) |
| Charged                                     |       | 31,596                             |          |               | 1,428      |          |       | 201,622 |   | 234,646 |   |
| Businesses sold                             |       | (17,020                            | )             |               | —     |          |       | (121,533 | ) | (138,553 | ) |
| Retirements                                 |       | (11,354                            | )             |               | —     |          |       | (128,297 | ) | (139,651 | ) |
| Currency adjustment                         |       | (48                                | )             |               | (306       | )             |       | 2,476 |   | 2,122 |   |
| **December 31, 2005**                  | ** ** | **175,557**                        | ** **    |               | **6,927**  | ** **    |       | **1,528,833** | ** ** | **1,711,317** | ** ** |
| **Net book amount  December 31, 2005** | ** ** | **€**                         | **1,263,420** | ** **         |       | **€**    | **17,214** | ** ** |   | **€** | **2,158,017** | ** ** | **€** | **3,438,651** | ** ** |
| **Net book amount  December 31, 2004** | ** ** | **€**                         | **860,183**   | ** **         |       | **€**    | **23,398** | ** ** |   | **€** | **1,401,935** | ** ** | **€** | **2,285,516** | ** ** |
| **Net book amount December 31, 2003**  | ** ** | **€**                         | **866,818**   | ** **         |       | **€**    | **29,269** | ** ** |   | **€** | **1,489,349** | ** ** | **€** | **2,385,436** | ** ** |

 

F-27

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**14**   Property, Plant andEquipment—(continued)

| ** **                                  | ** ** | **Timberland** | ** **    |
|---------------------------------------------|------------|----------------|---------------|
| ** **                                  | ** ** | **€000**  | ** **    |
| December 31,  2002                     |       | 61,948         |          |
| Additions                                   |       | 6,512          |          |
| Fair value  adjustment                      |       | (945           | )             |
| Depletion                                   |       | (6,656         | )             |
| Currency  adjustment                        |       | (10,349        | )             |
| **December 31,  2003**                 |       | **50,510**     |          |
| Additions                                   |       | 8,806          |          |
| Depletion                                   |       | (6,078         | )             |
| Currency  adjustment                        |       | (3,896         | )             |
| **December 31,  2004**                 | ** ** | **49,342**     | ** **    |
| Additions                                   |       | 8,841          |          |
| Disposals                                   |       | (12            | )             |
| Depletion                                   |       | (5,530         | )             |
| Currency adjustment                         |       | 7,792          |          |
| **December 31,  2005**                 | ** ** | **€**     | **60,433**    | ** ** |
| **Net book amount December 31, 2005**  | ** ** | **€**     | **3,499,084** | ** ** |
| **Net  book amount December 31, 2004** | ** ** | **€**     | **2,334,858** | ** ** |
| **Net book amount  December 31, 2003** | ** ** | **€**     | **2,435,946** | ** ** |

 

**Land and Buildings**

Included in tangibleassets is an amount for land of €410,140,000 (2004: €282,021,000;2003: €288,434,000)

**Capitalized leasedproperty, plant and equipment**

Included in the net bookamount of tangible assets is an amount for capitalized leased assets of €42,704,000(2004: €50,355,000;2003: €65,687,000).The depreciation charge for capitalized leased assets for 2005 was €6,832,000and the related finance charges amounted to €1,138,000 (2004: €10,139,000and €1,962,000; 2003: €10,794,000 and €2,164,000).

F-28

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**15**   IntangibleAssets

| ** **                  | ** ** | ** **    | ** **    | **Other**      | ** ** | **Total**      | ** ** |
|-----------------------------|------------|---------------|---------------|----------------|------------|----------------|------------|
| ** **                  | ** ** | ** **    | ** **    | **Intangible** | ** ** | **Intangible** | ** ** |
| ** **                  | ** ** | **Goodwill**  | ** **    | **Assets**     | ** ** | **Assets**     | ** ** |
| ** **                  | ** ** | **€000** | ** **    | **€000**  | ** ** | **€000**  | ** ** |
| December 31,  2002     |       | 1,543,545     |          |           | —     |           |       | 1,543,545 |   |
| Acquisitions                |       | 174,659       |          |           | —     |           |       | 174,659 |   |
| Disposals                   |       | (80,543       | )             |           | —     |           |       | (80,543 | ) |
| Fair value  adjustments     |       | (142,723      | )             |           | —     |           |       | (142,723 | ) |
| Amortization                |       | (44,548       | )             |           | —     |           |       | (44,548 | ) |
| Currency  adjustment        |       | 4,743         |          |           | —     |           |       | 4,743 |   |
| **December 31,  2003** | ** ** | **1,455,133** | ** **    | ** **     | **—** |           | ** ** | **1,455,133** | ** ** |
| Acquisitions                |       | 2,731         |          |           | —     |           |       | 2,731 |   |
| Disposals                   |       | (2,586        | )             |           | —     |           |       | (2,586 | ) |
| Fair value  adjustments     |       | 40,457        |          |           | —     |           |       | 40,457 |   |
| Amortization                |       | (37,925       | )             |           | —     |           |       | (37,925 | ) |
| Currency  adjustment        |       | (2,680        | )             |           | —     |           |       | (2,680 | ) |
| **December 31,  2004** | ** ** | **1,455,130** | ** **    | ** **     | **—** |           | ** ** | **1,455,130** | ** ** |
| Acquisitions                |       | 1,185,705     |          |           | 35,000     |           |       | 1,220,705 |   |
| Disposals                   |       | (128,422      | )             |           | —     |           |       | (128,422 | ) |
| Reclassification            |       | (31,247       | )             |           | —     |           |       | (31,247 | ) |
| Amortization                |       | (28,914       | )             |           | (289       | )              |       | (29,203 | ) |
| Currency  adjustment        |       | 3,296         |          |           | —     |           |       | 3,296 |   |
| **December 31, 2005**  | ** ** | **€**    | **2,455,548** | ** **     | ** ** | **€**     | **34,711** |   | ** ** | **€** | **2,490,259** | ** ** |
|                             |            |               |               |                |            |                |            |  |  |  |  |  |

 

Accumulated amortizationat December 31, 2005 and 2004 was €94,588,000and €75,110,000respectively.

**16**   Accounts Payableand Accrued Liabilities

| ** **                                        | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|---------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                        | ** ** | **€000** | ** **    | **€000** | ** ** |
| Trade payables                                    |       | 905,697       |          | 652,744       |       |
| Amounts owed to  associates—trading balances |       | 3,289         |          | 3,683         |       |
| Amounts due to affiliates                         |       | —        |          | 1,154         |       |
| Taxation  creditors (Note 17)                     |       | 72,859        |          | 70,829        |       |
| Deferred  acquisition consideration               |       | 33,713        |          | 2,330         |       |
| Social welfare                                    |       | 51,574        |          | 48,740        |       |
| Accruals                                          |       | 323,315       |          | 189,079       |       |
| Capital payables                                  |       | 50,261        |          | 29,305        |       |
| Other payables                                    |       | 55,573        |          | 62,497        |       |
| Capitalized lease  obligations                    |       | 4,132         |          | 4,470         |       |
|                                              | ** ** | **€**    | **1,500,413** | ** **    | **€** | **1,064,831** | ** ** |
|                                                   |            |               |               |               |            |  |  |

 

F-29

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**17**   TaxationCreditors

| ** **                 | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|----------------------------|------------|---------------|------------|---------------|------------|
| ** **                 | ** ** | **€000** | ** ** | **€000** | ** ** |
| Current taxation           |       | 20,410        | ** ** | 42,147        |       |
| Payroll taxes              |       | 41,020        | ** ** | 29,256        |       |
| VAT and other  sales taxes |       | 11,429        | ** ** | (574          | )          |
|                       | ** ** | **€**    | **72,859** | ** **    | **€** | **70,829** | ** ** |
|                            |            |               |            |               |            |  |  |

 

**18**   Long TermDebt and Other Long Term Liabilities

| ** **                                             | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|--------------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                             | ** ** | **€000** | ** **    | **€000** | ** ** |
| Borrowing—due  after more than one year (Note 19) |       | 4,650,772     |          | 3,038,538     |       |
| Deferred debt  issuance costs                          |       | (132,860      | )             | (91,628       | )          |
| Capitalized lease  obligations                         |       | 19,417        |          | 12,930        |       |
|                                                   | ** ** | **€**    | **4,537,329** | ** **    | **€** | **2,959,840** | ** ** |
|                                                        |            |               |               |               |            |  |  |

 

**19**   Borrowing

**Analysis of Net Debt**

| ** **                                                                       | ** ** | **2005**            | ** **    | **2004**            | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|---------------|---------------------|------------|
| ** **                                                                       | ** ** | **€’000** | ** **    | **€’000** | ** ** |
| Senior credit facility:                                                          |       |                |          |                |       |
| Revolving credit facility(1)—interest at relevant  interbank rate + 2.25%   |       | 9,210               |          | —              |       |
| Tranche A Term loan(2a)—interest at relevant  interbank rate + 2.25%        |       | 475,856             |          | 275,090             |       |
| Tranche B Term loan(2b)—interest at relevant  interbank rate + 2.75%(2d)    |       | 1,165,518           |          | 444,068             |       |
| Tranche C Term loan(2c)—interest at relevant  interbank rate + 3.25%(2d)    |       | 1,165,518           |          | 450,262             |       |
| Yankee bonds  including accrued interest(3)                                      |       | 251,497             |          | 416,245             |       |
| Kappa bonds(4)                                                                   |       | 755,575             |          | —              |       |
| Bank loans and  overdrafts / (cash)(5)                                           |       | (925,752            | )             | (155,812            | )          |
| 2011 Receivables  securitization floating rate notes (incl. accrued interest)(6) |       | 210,214             |          | 210,000             |       |
|                                                                             |       | 3,107,636           |          | 1,639,853           |       |
| 2012 Bonds  (including accrued interest)(7)                                      |       | 1,021,347           |          | 965,645             |       |
| 2015 Cash pay  subordinated notes (including accrued interest)(8)                |       | 377,759             |          | —              |       |
|                                                                             |       | 4,506,742           |          | 2,605,498           |       |
| 2013 PIK units  (including accrued interest)(9)                                  |       | —              |          | 289,848             |       |
| **Net debt**                                                                     | ** ** | **4,506,742**       | ** **    | **2,895,346**       | ** ** |
| Leases                                                                           |       | 23,549              |          | 17,400              |       |
| **Net debt including leases**                                                    | ** ** | **€**          | **4,530,291** | ** **          | **€** | **2,912,746** | ** ** |
|                                                                                  |            |                     |               |                     |            |  |  |

----

(1)          Revolving creditfacility of €600million (available under the senior credit facility) to be repaid in full in2012. Includes amounts drawn under ancillary facilities and amounts drawn underfacilities covered by letters of credit.

(2a)    Term loan A due to be repaidin certain instalments up to 2012.

F-30

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

(2b)   Term loan B due to be repaid infull in 2013.

(2c)    Term loan C due to be repaidin full in 2014.

(2d)   Margin on Tranches B &C reduced by 0.25% on euro term loans and by 0.375% on US Dollar term loans inFebruary 2006.

(3)          7.50% senior debenturesdue 2025 of $292.3 million (6.75% senior notes of $234 million due 2005 wererepaid in November 2005).

(4)          Various Kappa bondsrepaid on January 3, 2006.

(5)          Cash at December 31,2005 includes €756million which is placed as defeasance deposit with Kappa bond trustee.

(6)          Receivablessecuritization floating rate notes mature September 2011.

(7)          10.125% senior notes due2012 of €350million and 9.625% senior notes due 2012 of $750 million.

(8)          €217.5million of 7.75% senior subordinated notes due 2015 and US$200.0 million of7.75% senior subordinated notes due 2015.

(9)          100,000€units of 15.5% subordinated notes due 2013 and 150,000 US$ units of 15.5%subordinated notes due 2013.

| ** **                                 | ** ** | **2005**           | ** **    | **2004**      | ** ** |
|--------------------------------------------|------------|--------------------|---------------|---------------|------------|
| ** **                                 | ** ** | **Bank**           | ** **    | ** **    | ** ** | ** ** | ** ** | **Bank** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Loans and** | ** **    | **Other**     | ** ** | ** ** | ** ** | **Loans and** | ** ** | **Other** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Overdrafts**     | ** **    | **Borrowing** | ** ** | **Total** | ** ** | **Overdrafts** | ** ** | **Borrowing** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **€000**      | ** **    | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Analysis by year of repayment**          | ** ** | ** **         | ** **    | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bank loans, overdrafts and other borrowing |       | 67,609             |          | 36,168        |       | 103,777 |   | 78,283 |   | 26,558 |   | 104,841 |   |
| Kappa bonds outstanding                    |       | —             |          | 755,575       |       | 755,575 |   | — |   | — |   | — |   |
| Within one year                            |       | 67,609             |          | 791,743       |       | 859,352 |   | 78,283 |   | 26,558 |   | 104,841 |   |
| Between 1 and 2 years                      |       | 79,819             |          | 6,254         |       | 86,073 |   | 75,515 |   | 6,277 |   | 81,792 |   |
| Between 2 and 3  years                     |       | 56,270             |          | 2,172         |       | 58,442 |   | 171,966 |   | 2,429 |   | 174,395 |   |
| Between 3 and 4  years                     |       | 65,669             |          | 1,972         |       | 67,641 |   | 118,411 |   | 1,938 |   | 120,349 |   |
| Between 4 and 5  years                     |       | 67,397             |          | 1,761         |       | 69,158 |   | 163,427 |   | 1,738 |   | 165,165 |   |
| Thereafter                                 |       |               |          |          |       |   |   |   |   |   |   |   |   |
| By instalment                              |       | 218,874            |          | 2,928         |       | 221,802 |   | — |   | 3,970 |   | 3,970 |   |
| Other than by instalment                   |       | 2,316,851          |          | 1,830,805     |       | 4,147,656 |   | 837,491 |   | 1,655,376 |   | 2,492,867 |   |
| Due after more  than one year              |       | 2,804,880          |          | 1,845,892     |       | 4,650,772 |   | 1,366,810 |   | 1,671,728 |   | 3,038,538 |   |
| Total borrowing                            | ** ** | **€**         | **2,872,489** | ** **    | **€** | **2,637,635** | ** ** | **€** | **5,510,124** | ** ** | **€** | **1,445,093** | ** ** | **€** | **1,698,286** | ** ** | **€** | **3,143,379** | ** ** |
|                                            |            |                    |               |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-31

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

| ** **                            | ** ** | **2005**          | ** **  | **2004**          | ** ** |
|---------------------------------------|------------|-------------------|-------------|-------------------|------------|
| ** **                            | ** ** | **Within**        | ** **  | **After**         | ** ** | **Within** | ** ** | **After** | ** ** |
| ** **                            | ** ** | **One Year** | ** **  | **One Year** | ** ** | **One Year** | ** ** | **One Year** | ** ** |
| ** **                            | ** ** | **€000**     | ** **  | **€000**     | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Analysis  of borrowing**            |       |              |        |              |       |   |   |   |   |
| Secured bank loans and overdrafts:    |       |              |        |              |       |   |   |   |   |
| Overseas loans                        |       | 14,074            |        | 804,382           |       | 7,453 |   | 7,496 |   |
| Domestic loans                        |       | 12,150            |        | 1,996,648         |       | 29,514 |   | 1,355,521 |   |
|                                  |       | 26,224            |        | 2,801,030         |       | 36,967 |   | 1,363,017 |   |
| Unsecured bank  loans and overdrafts: |       |              |        |              |       |   |   |   |   |
| Overseas loans                        |       | 30,974            |        | 3,850             |       | 24,855 |   | 3,793 |   |
| Domestic loans                        |       | 10,411            |        | —            |       | 16,461 |   | — |   |
|                                  |       | 41,385            |        | 3,850             |       | 41,316 |   | 3,793 |   |
| Total bank loans and overdrafts       |       | 67,609            |        | 2,804,880         |       | 78,283 |   | 1,366,810 |   |
| Secured other loans                   |       | 384               |        | 455,581           |       | — |   | 462,912 |   |
| Unsecured other  loans                |       | 35,784            |        | 1,390,311         |       | 26,558 |   | 1,208,816 |   |
| Kappa bonds  outstanding              |       | 755,575           |        | —            |       | — |   | — |   |
| Total other loans                     |       | 791,743           |        | 1,845,892         |       | 26,558 |   | 1,671,728 |   |
| **Total  borrowing**                  | ** ** | **€**        | **859,352** | ** **        | **€** | **4,650,772** | ** ** | **€** | **104,841** | ** ** | **€** | **3,038,538** | ** ** |
|                                       |            |                   |             |                   |            |  |  |  |  |  |  |  |  |

 

Security comprises fixed and floating charges over theassets of certain subsidiaries and pledges over the Group’s shareholding incertain of its subsidiaries. The gross amount of receivables collateralizingthe receivables securitization at December 31, 2005 was €262,046,000(2004: €261,225,000).At December 31, 2005 cash of €14,085,000 (2004: €12,655,000)was in securitization bank accounts which was not available for transfer toother group subsidiaries.

Includedin secured other loans are the following long term obligations:

| ** **                                               | ** ** | **000** | ** ** |
|----------------------------------------------------------|------------|---------|------------|
| Guaranteed debentures  7.50% due 2025                    |       | $       | 292,300    |   |
| Receivables  securitization floating rate notes due 2011 |       | €  | 210,000    |   |

 

Included in unsecured other loans are the followinglong term obligations:

| ** **                                | ** ** | **000** | ** ** |
|-------------------------------------------|------------|---------|------------|
| Senior Notes  10.125% due 2012            |       | €  | 350,000    |   |
| Senior Notes  9.625% due 2012             |       | $       | 750,000    |   |
| Senior  Subordinated Notes 7.75% due 2015 |       | €  | 217,500    |   |
| Senior Subordinated  Notes 7.75% due 2015 |       | $       | 200,000    |   |

 

Committed facilitiesamounted to €5,577,642,000(2004: €3,497,533,000)of which €4,656,306,000(2004: €3,069,466,000)were utilized at December 31, 2005. The weighted average period untilmaturity of undrawn committed facilities is 5.3 years (2004: 4.6 years).

F-32

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

***Maturity of UndrawnCommitted Facilities***

| ** **            | ** ** | **2005**      | ** **  | **2004**      | ** ** |
|-----------------------|------------|---------------|-------------|---------------|------------|
| ** **            | ** ** | **€000** | ** **  | **€000** | ** ** |
| Within 1 year         |       | 55,546        |        | 3,067         |       |
| Between 1 and 2 years |       | —        |        | —        |       |
| More than 2 years     |       | 865,790       |        | 425,000       |       |
|                  | ** ** | **€**    | **921,336** | ** **    | **€** | **428,067** | ** ** |
|                       |            |               |             |               |            |  |  |

 

**Financialinstruments and risk management**

The operating parameters and policies of treasurymanagement are established under board authority. The formal treasury policycovers the areas of funding, counterparty risk, foreign exchange, controls andderivatives. Risk arising on counterparty default is controlled within aframework of dealing with high quality institutions that meet certain minimumcriteria. The Group uses derivative instruments in the management of interestrate and currency risk.

The Group’s financialinstruments, other than derivatives, comprise borrowing, cash and liquidresources, and various items, such as trade debtors, trade creditors etc, thatarise directly from its operations. The Group uses derivative financialinstruments primarily to manage its exposure to market risks from changes ininterest and foreign exchange rates. The Group does not enter into or issuederivative financial instruments for trading purposes. The Group’s policy is tocentrally manage interest rate and currency exposure.

**(a) Interestrate risk management**

The Group manages interest rate exposure to achieve anappropriate balance of fixed and variable rate funding. To achieve thisobjective, the Group enters into interest rate swaps, options and forward rateagreements. Interest rate swap agreements are used to change the interestreceivable or payable on the Group’s underlying cash and borrowing fromvariable to fixed rates or from fixed to variable rates. At the year end, 72%(2004: 73%) of the Group’s borrowing was at fixed rates after taking account ofinterest rate swaps. The weighted average interest rate on borrowingoutstanding at the year end was 6.87% (2004: 7.91%). The weighted averageinterest rate on short term borrowing was 5.48% (2004: 6.11%).

Outstandinginterest rate swap agreements at December 31, 2005 are summarized asfollows:

| **Currency** | ** ** | ** ** | ** ** | **Notional  Principal  (Millions)** | ** ** | **Termination  Dates** | ** ** | **% Fixed  Payable** | ** ** | **% Variable  Receivable** | ** ** | **% Fixed  Receivable** | ** ** | **% Variable  Payable** | ** ** |
|--------------|------------|------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| EUR          |       |       | 175        |                                |       |                   | 2006       |                      |       | 3.4775 - 3.67                   |       | Euribor(1)                   |       |                         | —     |   |   |   | — |   |   |
| EUR          |       |       | 425        |                                |       |                   | 2007       |                      |       | 3.455 - 3.67                    |       | Euribor                      |       |                         | —     |   |   |   | — |   |   |
| EUR          |       |       | 480        |                                |       |                   | 2008       |                      |       | 3.165 - 3.615                   |       | Euribor                      |       |                         | —     |   |   |   | — |   |   |
| EUR          |       |       | 1,100      |                                |       |                   | 2009       |                      |       | 3.035 - 3.62                    |       | Euribor                      |       |                         | —     |   |   |   | — |   |   |

----

(1)          European InterbankOffered Rate

F-33

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

Outstanding interest rateswap agreements at December 31, 2004 are summarized as follows:

| **Currency** | ** ** | ** ** | ** ** | **Notional  Principal  (Millions)** | ** ** | **Termination  Dates** | ** ** | **% Fixed  Payable** | ** ** | **% Variable  Receivable** | ** ** | **% Fixed  Receivable** | ** ** | **% Variable  Payable** | ** ** |
|--------------|------------|------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| EUR          |       |       | 200        |                                |       |                   | 2005       |                      |       | 3.43 - 3.485                    |       |                         | Euribor    |                         |       |   | — |   |   | — |   |
| EUR          |       |       | 110        |                                |       |                   | 2006       |                      |       | 3.49 - 4.37                     |       |                         | Euribor    |                         |       |   | — |   |   | — |   |
| SEK          |       |       | 94         |                                |       |                   | 2006       |                      |       | —                          |       |                         | —     |                         |       |   | 5.24 |   |   | Stibor | (2) |
| EUR          |       |       | 700        |                                |       |                   | 2007       |                      |       | 3.39 - 3.62                     |       |                         | Euribor    |                         |       |   | — |   |   | — |   |

----

(2)          Stockholm InterbankOffered Rate

After takinginto account the various interest rate swaps and currency swaps entered into bythe Group, the interest rate profile of the Group’s financial liabilities at December 31,2005 was:

| ** **    | ** ** | ** ** | ** ** | ** **                                     | ** ** | ** **                                  | ** ** | **Fixed Rate financial liabilities** | ** ** |
|---------------|------------|------------|------------|------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **    | ** ** | **Total**  | ** ** | **Floating rate  financial  liabilities** | ** ** | **Fixed rate  financial  liabilities** | ** ** | **Weighted  average  interest rate**           | ** ** | **Weighted average  period until  maturity** | ** ** |
| **Currency**  | ** ** | ** ** | ** ** | **€ Million**                        | ** ** | **€ Million**                     | ** ** | **€ Million**                             | ** ** | **%** | ** ** | **Years** | ** ** |
| Euro          |       |       | 4,098      |                                           |       |                                        | 1,154      |                                                |       |   | 2,944 |   |   |   | 7.05 |   |   |   | 4.2 |   |   |
| Sterling      |       |       | 84         |                                           |       |                                        | 84         |                                                |       |   | — |   |   |   |   |   |   |   |   |   |   |
| US Dollar     |       |       | 480        |                                           |       |                                        | 1          |                                                |       |   | 479 |   |   |   | 9.62 |   |   |   | 8.6 |   |   |
| Polish Zloty  |       |       | 12         |                                           |       |                                        | 11         |                                                |       |   | 1 |   |   |   | 6.17 |   |   |   | 2.4 |   |   |
| Swedish Krona |       |       | 82         |                                           |       |                                        | 82         |                                                |       |   | — |   |   |   |   |   |   |   |   |   |   |
| Other         |       |       | 22         |                                           |       |                                        | 18         |                                                |       |   | 4 |   |   |   |   |   |   |   |   |   |   |
| **Total**     | ** ** | ** ** | **€** | **4,778**                                      |       | ** **                                  | ** ** | **€**                                          | **1,350**  |   | ** ** | ** ** | **€** | **3,428** |   |   |   |   |   |   |   |   |   |   |
|               |            |            |            |                                                |            |                                             |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(b) Foreignexchange risk management**

The Group manages its balance sheet having regard tothe currency exposures arising from its assets being denominated in a widerange of currencies. To this end, where foreign currency assets are funded byborrowing, such borrowing is generally sourced in the currency of the relatedassets. The Group also hedges a portion of its currency exposure through theuse of currency swaps and forward contracts. At December 31, 2005 theGroup had entered into €278 million (2004: €163million) currency equivalent of forward contracts and there were no optionscontracts outstanding (2004: €66 million)  in respect of its day to day trading.

Outstandingcurrency swap agreements at December 31, 2005 are summarized as follows:

| **Currency swapped  (Millions)** | ** ** | ** ** | ** **    | **Currency received  (Millions)** | ** ** | **Maturity date** | ** ** | **Interest rate paid** | ** ** | **Interest rate received** | ** ** |
|---------------------------------------|------------|------------|---------------|----------------------------------------|------------|------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| USD 176                               |       |       | EUR 172       |                                   |       |                   | 2007       |                             |       | Euribor + 332                        |       |   | Libor(1) + 300 |   |   |
| USD 222                               |       |       | EUR 190       |                                   |       |                   | 2007       |                             |       | Euribor + 259                        |       |   | 7.50 |   |   |
| USD 70                                |       |       | SEK  574 |                                   |       |                   | 2007       |                             |       | Stibor + 260                         |       |   | 7.50 |   |   |
| USD 200                               |       |       | EUR 153       |                                   |       |                   | 2010       |                             |       | 6.61                                 |       |   | 7.75 |   |   |
| USD 204                               |       |       | EUR 183       |                                   |       |                   | 2012       |                             |       | 9.98                                 |       |   | 9.65 |   |   |

----

(1)          London Interbank OfferedRate

F-34

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

Outstanding currency swap agreements at December 31, 2004 are summarized as follows:

| **Currency swapped  (Millions)** | ** ** | ** ** | ** **   | **Currency received  (Millions)** | ** ** | **Maturity date** | ** ** | **Interest rate paid** | ** ** | **Interest rate received** | ** ** |
|---------------------------------------|------------|------------|--------------|----------------------------------------|------------|------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| USD 195                               |       |       | EUR 200      |                                   |       |                   | 2007       |                             |       | Euribor + 318                        |       |   | Libor + 300 |   |   |
| USD 204                               |       |       | EUR 190      |                                   |       |                   | 2012       |                             |       | 9.6481                               |       |   | 9.6491 |   |   |
| USD 231                               |       |       | EUR 199      |                                   |       |                   | 2005       |                             |       | Euribor + 464                        |       |   | 6.8238 |   |   |
| USD 136                               |       |       | EUR 101      |                                   |       |                   | 2005       |                             |       | Euribor + 81                         |       |   | Libor + 93 |   |   |
| USD 35                           |       |       | EUR  25 |                                   |       |                   | 2005       |                             |       | Euribor + 708                        |       |   | 7.55 |   |   |
| USD 113                               |       |       | SEK 749 |                                   |       |                   | 2005       |                             |       | Stibor + 597                         |       |   | 7.55 |   |   |
| USD 5                            |       |       | SEK 33  |                                   |       |                   | 2005       |                             |       | Stibor + 110                         |       |   | Libor + 93 |   |   |

 

At December 31, 2005 the Group had also enteredinto currency swaps of €374 million equivalent(2004: €90million) as part of its short term liquidity management.

Excluding the Group’sLatin American operations, there were no significant transactional currencyexposures at December 31, 2005, that gave rise to net currency gains andlosses recognized in the statement of operations. Such exposures comprise themonetary assets and liabilities of the Group that are not denominated in theoperating (or ‘functional’) currency of the operating unit involved. As at December 31,2005, transactional currency exposures in the Group’s Latin American operationsamounted to €35 million (2004: €19 million).

**(c) Fair valueof financial instruments**

Thecarrying amounts and estimated fair values of the material financialinstruments of the Group are as follows:

| ** **                                        | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|---------------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                        | ** ** | **Carrying**  | ** ** | **Fair**      | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                        | ** ** | **Amount**    | ** ** | **Value**     | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                        | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Assets**                                        | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, short term  deposits and liquid investments |       | 247,807       |       | 247,807       |       | 248,033 |   | 248,033 |   |
| Restricted cash                                   |       | 755,575       |       | 755,575       |       | — |   | — |   |
| Accounts  receivable and prepayments              |       | 1,299,458     |       | 1,299,458     |       | 918,785 |   | 918,785 |   |
| Publicly traded  investments                      |       | 6,361         |       | 6,371         |       | 6,303 |   | 6,304 |   |
| **Liabilities**                                   | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Short term debt                                   |       | 103,777       |       | 103,777       |       | 104,841 |   | 104,841 |   |
| Kappa bonds  outstanding                          |       | 755,575       |       | 755,575       |       | — |   | — |   |
| Accounts payable  and accrued liabilities         |       | 1,500,413     |       | 1,500,413     |       | 1,064,831 |   | 1,064,831 |   |
| Medium and long  term debt                        |       | 4,650,772     |       | 4,591,030     |       | 3,038,538 |   | 3,196,014 |   |
| **Derivative financial instruments**              | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate  swap agreements                    |       |          |       | (45,800       | )          |   |   | (57,397 | ) |
| Currency swap  agreements                         |       |          |       | (21,895       | )          |   |   | (125,743 | ) |
| Foreign exchange  contracts                       |       |          |       | 1,063         |       |   |   | 12,068 |   |
| Energy/Pulp hedging  contracts                    |       |          |       | 990           |       |   |   | (6,024 | ) |

 

F-35

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

The following methods andassumptions were used by the Group in estimating its fair value disclosures forfinancial instruments:

**Cash, short termdeposits and liquid investments, debtors and creditors:**

The carrying amountreported in the balance sheet approximates fair value because of the shortmaturity of these instruments.

**Listed investments:**

These are valued based onquoted prices.

**Short term debt andmedium and long term debt:**

The fair value of theGroup’s debt is estimated using either the replacement cost of equivalentinstruments or discounted cash flow analysis, based on the Group’s currentincremental borrowing rates for similar types of borrowing arrangements andmaturities.

**Interest rate swapagreements:**

The fair value of theGroup’s interest rate swap agreements is estimated using discounted cash flowanalysis. In addition the fair value amount includes the interest ratecomponent of currency swaps.

**Currency swapagreements and foreign exchange contracts:**

The fair value of theseinstruments is based on the estimated replacement cost of equivalentinstruments at the balance sheet date.

Gains and losses on instruments used for hedging are notrecognized until the exposure that is being hedged is itself recognized. Unrecognisedgains and losses on instruments used for hedging, and the movement therein, areas follows:

| ** **                                                                               | ** ** | **Gains**               | ** ** | **Losses**              | ** ** | **Total net  gains/(losses)** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                                                                               | ** ** | **€ Million** | ** ** | **€ Million** | ** ** | **€ Million**            | ** ** |
| Unrecognized  gains and losses on hedges at December 31, 2004                       |       |                    | 6          |                    |       |                               | 64         |   |   |   | (58 | ) |   |
| Gains and losses arising in previous years that were  recognized in 2005                 |       |                    | 5          |                    |       |                               | 22         |   |   |   | (17 | ) |   |
| Gains and losses arising before December 31,  2004 that were not recognized in 2005 |       |                    | 1          |                    |       |                               | 42         |   |   |   | (41 | ) |   |
| Gains and losses arising in 2005 that were not  recognized in 2005                       |       |                    | 2          |                    |       |                               | (5         | ) |   |   | 7 |   |   |
| **Unrecognized gains and losses on hedges at  December 31, 2005**                   | ** ** | ** **              | **€** | **3**                   |       | ** **                         | ** ** | **€** | **37** |   | ** ** | ** ** | **€** | **(34** | **)** | ** ** |
| Of which:                                                                                |       |                    |       |                    |       |                               |       |   |   |   |   |   |   |
| Gains and losses expected to be recognized in 2006                                       |       |                    | 1          |                    |       |                               | 9          |   |   |   | (8 | ) |   |
| Gains and losses  expected to be recognized in 2007  or later                            |       |                    | 2          |                    |       |                               | 28         |   |   |   | (26 | ) |   |
|                                                                                          |            |                         |            |                         |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

F-36

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

**(d) CreditRisk**

Potential concentrationsof credit risk to the Group consist principally of cash deposits, short terminvestments and trade debtors. The Group only deposits cash surpluses withquality credit rated banks and institutions that meet certain criteria and bypolicy limits the amount of credit exposure to any one bank or institution. Tradedebtors comprise a large, widespread customer base. The Group mitigates therisk that counterparties to derivatives will fail to perform by contractingwith major financial institutions having high credit ratings and considers thelikelihood of counterparty failure to be remote. At December 31, 2005 theGroup did not consider there to be any significant concentration of creditrisk.

**20   Provisionfor Liabilities and Charges**

| ** **                                     | ** ** | **Deferred**  | ** **  | **Other**      | ** ** | ** **    | ** ** |
|------------------------------------------------|------------|---------------|-------------|----------------|------------|---------------|------------|
| ** **                                     | ** ** | **Income**    | ** **  | **Deferred**   | ** ** | ** **    | ** ** |
| ** **                                     | ** ** | **Taxes**     | ** **  | **Provisions** | ** ** | **Total**     | ** ** |
| ** **                                     | ** ** | **€000** | ** **  | **€000**  | ** ** | **€000** | ** ** |
| December 31,  2002                        |       | 158,896       |        | 63,957         |       | 222,853       |       |
| Charge to  statement of operations(1)          |       | 1,712         |        | 5,628          |       | 7,340         |       |
| Paid in year                                   |       | —        |        | 3,253          |       | 3,253         |       |
| Acquisitions                                   |       | 3,626         |        | 2,571          |       | 6,197         |       |
| Reclassification                               |       | 18,001        |        | (14,787        | )          | 3,214         |       |
| Fair value  adjustments                        |       | 674           |        | —         |       | 674           |       |
| Currency  adjustment                           |       | (6,083        | )           | (2,496         | )          | (8,579        | )          |
| **December 31,  2003**                    | ** ** | **176,826**   | ** **  | **58,126**     | ** ** | **234,952**   | ** ** |
| Charge/(credit)  to statement of operations(1) |       | 3,984         |        | (42            | )          | 3,942         |       |
| Paid in year                                   |       | —        |        | (9,769         | )          | (9,769        | )          |
| Acquisitions                                   |       | 1             |        | —         |       | 1             |       |
| Fair value  adjustments                        |       | (7,134        | )           | —         |       | (7,134        | )          |
| Reclassification                               |       | 4,406         |        | (2,592         | )          | 1,814         |       |
| Currency  adjustment                           |       | (1,647        | )           | (756           | )          | (2,403        | )          |
| **December 31,  2004**                    | ** ** | **176,436**   | ** **  | **44,967**     | ** ** | **221,403**   | ** ** |
| (Credit)/charge  to statement of operations(1) |       | (21,502       | )           | 14,084         |       | (7,418        | )          |
| Paid in year                                   |       | —        |        | (5,512         | )          | (5,512        | )          |
| Acquisitions                                   |       | 65,729        |        | 2,392          |       | 68,121        |       |
| Subsidiaries  disposed                         |       | (26,269       | )           | —         |       | (26,269       | )          |
| Reclassification                               |       | (1,877        | )           | (5,924         | )          | (7,801        | )          |
| Currency  adjustment                           |       | 3,674         |        | 1,535          |       | 5,209         |       |
| **December 31,  2005**                    | ** ** | **€**    | **196,191** | ** **     | **€** | **51,542**    | ** ** | **€** | **247,733** | ** ** |
|                                                |            |               |             |                |            |               |            |  |  |  |

 

 

F-37

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**20   Provisionfor Liabilities and Charges—(continued)**

| ** **                               | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                               | ** ** | **€**000 | ** **  | **€**000 | ** ** | **€**000 | ** ** |
| **Deferred taxation arises as follows:** | ** ** |          |        |          |       |          |       |
| Accelerated  capital allowances          | ** ** | 260,686       |        | 158,246       |       | 112,672       |       |
| Other timing differences                 | ** ** | (64,495       | )           | 18,190        |       | 64,154        |       |
|                                     | ** ** | **€**    | **196,191** | ** **    | **€** | **176,436**   | ** ** | **€** | **176,826** | ** ** |
|                                          |            |               |             |               |            |               |            |  |  |  |

----

(1)          The 2005 deferred taxcredit to income of €21,502,000excludes the deferred tax charge relating to pensions of €2,172,000(2004: €635,000;2003:€251,000).The 2005 deferred tax credit to income in Note 9 ‘Taxes on income’ includesthis amount. The 2004 deferred tax charge to income of €3,984,000(2003:€1,712,000)excludes the deferred tax charge relating to pensions of €635,000(2003:€251,000).The 2004 and 2003 deferred tax charge to income in Note 9 “Taxes on Income”includes this amount.

At December 31, 2005, we had net operating losscarryforwards of €1,057 million, (2004: €200million), which are available indefinitely. These loss carryforwards have a taxvalue of €294million (2004: €61million). Valuation allowances of €167 million (2004: €30million) have been established for a portion of these deferred tax assets. Therealization of these deferred tax assets is dependent on future taxable income.Based upon recent levels of taxable income, we expect that our deferred taxassets, net of valuation allowances, will be fully utilized.

Other deferred provisionsincludes a number of items including deferred employee profit sharing provisionsin certain of the countries in which we operate.

**21**   ContingentLiabilities

In addition to litigation arising in the ordinarycourse of business, we are involved in certain civil and criminal proceedingsin Spain arising out of a past acquisition. In November 1988, a subsidiaryof JSG acquired Industrial Cartonera, S.A., or ICSA, a Spanish incorporatedcompany, from a subsidiary of Torras Hostench S.A., or Torras. In early 1989,JSG acquired a 35% interest in another Spanish company called Industrias delPapel y de la Celulosa, S.A., or INPACSA, a former parent of ICSA. A number ofindividuals associated with Torras were charged by the public prosecutor inMadrid with diverting, for their own use, a substantial part of the purchaseconsideration paid by JSG for ICSA. The public prosecutor, on behalf of the minorityshareholders of INPACSA, also claimed that certain transactions, including thetransfer of ICSA by INPACSA which took place prior to JSG’s acquisition ofICSA, caused damage to the minority shareholders of INPACSA. In 1998, thepublic prosecutor also charged JSG’s Chairman, Sir Michael W.J. Smurfit,as the representative of JSG, in these proceedings with respect to the allegeddamage to the minority shareholders of INPACSA and Torras. A JSG subsidiary isalso one of a number of parties against whom secondary civil liability has beenclaimed.

JSG and Smurfit International B.V. have eachindemnified Sir Michael Smurfit against loss or liability due to suchproceedings. Bonds were posted with the Spanish court in the amount of €47million, which equals the amount of alleged damages, excluding interest. Themaximum estimated current total exposure relating to the liabilities, includinginterest through December 31, 2002, is approximately €118million, for which no reserve has been taken and which amount will accrueinterest until payment of any final judgment. Preliminary proceedings commencedin late March 2003 and on April 11, 2003, the court dismissed theproceedings against Sir Michael Smurfit, the JSG subsidiary and others. Thebonds 

F-38

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**21**   Contingent Liabilities—(continued)

previously posted werereleased and the Spanish court has taken a lien over certain Spanish assetspending final resolution of the case. The final decision of the court washanded down in March 2004 and confirmed the earlier dismissal with respectto Sir Michael Smurfit and the JSG subsidiary. The decision is beingappealed to a higher court by two private complainants but not by the publicprosecutor. We cannot provide any assurances, however, that the consequences ofany adverse findings, if any, will not have a material adverse effect on ourfinancial position or results of operations.

We are also the subject of litigation in the DominicanRepublic arising from our acquisition in 1998 of a controlling interest in asmall local corrugator owned by Industria Cartonera Dominicana. The lawsuits,alleging damages in excess of $300 million, are brought by a local competitorwho is claiming loss of potential profits as a consequence of our entry to themarket. He is also alleging breach of contract. In June 2004 we receivedan adverse ruling in our main lawsuit, which found for the original plaintiffbut which made no determination as to damages. The damage amount has been leftfor another court to decide. We have appealed this ruling and are challenging anumber of due process irregularities surrounding the ruling.

We believe the foregoing lawsuits are without meritand are defending them vigorously.

In May 2004, Kappa Packaging’s subsidiary KappaZülpich was visited by the German “Bundes Kartellamt” regarding a suspicionabout possible price co-ordination of recovered paper purchases by paper andboard producers. We are cooperating fully with the investigation.

In July 2004, representatives of the Office ofFair Trading visited the Jefferson Smurfit UK operations in West Auckland andNorwich. We understand that the investigation, which centers on the sheetfeeding business, was prompted by consumer complaints, which were filed duringthe UK Competition Commission’s investigation of the March 2004acquisition proposal by David S. Smith Limited for Linpac Limited, a competitorof our sheet feeding business. The investigation is looking into high levels ofpricing transparency which exist in the sector and which are a function of,inter alia, vertical integration, SWAPs and market concentration. We areco-operating fully with the ongoing investigation.

We are subject to a widerange of environmental, health and safety laws and regulations in all thejurisdictions where we operate. These requirements are complex, frequentlychanging and have tended to become more stringent over time. In the event weincur unforeseen significant containment and clean-up expenses, our operatingresults could be adversely affected.

F-39

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**22**   LeaseObligations

Obligationsunder finance leases:

| ** **                                       | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|--------------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                       | ** ** | **€000** | ** ** | **€000** | ** ** |
| Payable within one year                          |       | 4,832         |       | 5,283         |       |
| Payable in one to two  years                     |       | 6,323         |       | 3,902         |       |
| Payable in two to three  years                   |       | 4,197         |       | 3,406         |       |
| Payable in three to four  years                  |       | 3,456         |       | 2,884         |       |
| Payable in four to five  years                   |       | 1,289         |       | 2,475         |       |
| Payable thereafter                               |       | 5,947         |       | 1,974         |       |
| Total minimum lease payments                     |       | 26,044        |       | 19,924        |       |
| Less amount representing interest                |       | (2,495        | )          | (2,524        | )          |
| Present value of minimum lease payments          | ** ** | **€**    | **23,549** | ** **    | **€** | **17,400** | ** ** |
| Current portion of capital lease obligations     |       | 4,132         |       | 4,470         |       |
| Non-current portion of capital lease obligations |       | 19,417        |       | 12,930        |       |
|                                             | ** ** | **€**    | **23,549** | ** **    | **€** | **17,400** | ** ** |

 

Commitmentsunder operating leases, payable in the coming year, relate to leases expiringin the following periods:

| ** **                          | ** ** | **Land and** | ** ** | ** **    | ** ** | ** **    | ** ** |
|-------------------------------------|------------|-------------------|------------|---------------|------------|---------------|------------|
| ** **                          | ** ** | **Buildings**     | ** ** | **Other**     | ** ** | **Total**     | ** ** |
| ** **                          | ** ** | **€000**     | ** ** | **€000** | ** ** | **€000** | ** ** |
| Within one year                     |       |              | 1,044      |          |       | 6,911         |       | 7,955 |   |
| Within two to five years  inclusive |       |              | 8,365      |          |       | 13,109        |       | 21,474 |   |
| Over five years                     |       |              | 9,170      |          |       | 2,279         |       | 11,449 |   |
|                                |       | ** **        | **€** | **18,579**    |       | ** **    | **€** | **22,299** |   | **€** | **40,878** |   |
|                                     |            |                   |            |               |            |               |            |  |  |  |  |  |

 

The total commitmentsunder non-cancellable operating leases at December 31, 2005 are asfollows:

| ** **                      | ** ** | **2005**      | ** **  |
|---------------------------------|------------|---------------|-------------|
| ** **                      | ** ** | **€000** | ** **  |
| Payable within one year         |       | 40,878        |        |
| Payable in one to two  years    |       | 32,031        |        |
| Payable in two to three  years  |       | 26,105        |        |
| Payable in three to four  years |       | 20,456        |        |
| Payable in four to five  years  |       | 16,655        |        |
| Payable thereafter              |       | 53,999        |        |
|                            |       | **€**    | **190,124** |   |
|                                 |            |               |             |  |

 

F-40

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**23   CapitalCommitments**

Thefollowing capital commitments authorized by the directors had not been providedfor in the Group financial statements:

| ** **         | ** ** | **2005**      | ** **  | **2004**      | ** ** |
|--------------------|------------|---------------|-------------|---------------|------------|
| ** **         | ** ** | **€000** | ** **  | **€000** | ** ** |
| Contracted for     |       | 124,280       |        | 41,813        |       |
| Not contracted for |       | 143,035       |        | 76,172        |       |
|               | ** ** | **€**    | **267,315** | ** **    | **€** | **117,985** | ** ** |
|                    |            |               |             |               |            |  |  |

 

**24**   EmployeePension Plans and Similar Obligations

The Group has pension plans forits employees in many of the countries in which it operates. The majoroccupational pension plans are of the defined benefit type. The Group’s pensionplans are accounted for in accordance with Financial Reporting Standard (FRS)17—“Retirement Benefits”. FRS 17 applies to all types of benefitsthat an employer provides after employees have completed their service,including pensions and other post retirement benefits. The pension cost for the Group's major occupational pension plans hasbeen determined using the projected unit credit method. The currentagreed rates of contribution for future years are comparable to current levels.

Periodic actuarial valuations were performed on all ofthe major plans, by independent professionally qualified actuaries, betweenJanuary 1, 2003 and December 31, 2005.

In general, actuarial valuations are not available forpublic inspection; however, the results of valuations are advised to members ofthe various schemes.

The Group also operates plans inthe U.S., which provide certain employees with post retirement health carebenefits. Actuarial valuations of these plans were performed as atDecember 31, 2005 using the projected unit credit method. The principal assumption made by the actuarieswas that the per capita weighted average assumed rate of increase in coveredbenefits was 9% (2004: 10%), reducing by 1% per annum until reaching theultimate of 5% in 2009. The effect of a 1% increase or decrease in thehealth care trend rate would not materially increase the accumulated postretirement benefit obligation as at December 31, 2005.

The main financialassumptions used to calculate scheme liabilities under FRS 17 are set outbelow:

***Major Assumptions***

| ** **                               | ** ** | **Europe**  | ** ** | **USA**     | ** ** | **Latin America** | ** **   |
|------------------------------------------|------------|-------------|------------|-------------|------------|------------------------|--------------|
| ** **                               | ** ** | **%**       | ** ** | **%**       | ** ** | **%**                  | ** **   |
| **December 2005**                        |       |        |       |        |       |                   |         |   |   |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 3.50 - 3.75 |       |                   | 3.25 - 6.08  |   |   |
| Rate of increase  to pensions in payment |       | Nil - 3.00  |       | Nil         |       |                   | Nil          |   |   |
| Discount rate for  scheme liabilities    |       | 4.25 - 5.00 |       | 5.50        |       |                   | 5.25 - 11.17 |   |   |
| Inflation                                |       | 1.25 - 2.75 |       | 1.75        |       |                   | 2.50 - 3.50  |   |   |

** **

F-41

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

                                                                                                                                                

| ** **                               | ** ** | **Europe**  | ** ** | **USA**     | ** ** | **Latin America** | ** **   |
|------------------------------------------|------------|-------------|------------|-------------|------------|------------------------|--------------|
| ** **                               | ** ** | **%**       | ** ** | **%**       | ** ** | **%**                  | ** **   |
| **December 2004**                        |       |        |       |        |       |                   |         |   |   |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 3.75 - 4.00 |       |                   | 3.50 - 6.85  |   |   |
| Rate of increase  to pensions in payment |       | Nil - 4.00  |       | Nil         |       |                   | Nil          |   |   |
| Discount rate for  scheme liabilities    |       | 4.50 - 6.50 |       | 6.00 - 6.25 |       |                   | 5.25 - 12.00 |   |   |
| Inflation                                |       | 1.25 - 4.00 |       | 2.00        |       |                   | 2.75 - 3.50  |   |   |

 

| ** **                               | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin America** | ** **   |
|------------------------------------------|------------|-------------|------------|---------|------------|------------------------|--------------|
| ** **                               | ** ** | **%**       | ** ** | **%**   | ** ** | **%**                  | ** **   |
| **December 2003**                        |       |        |       |    |       |                   |         |   |   |
| Rate of increase in  salaries            |       | 1.50 - 4.00 |       | 4.00    |       |                   | 2.00 - 7.50  |   |   |
| Rate of increase to  pensions in payment |       | Nil - 4.00  |       | Nil     |       |                   | Nil          |   |   |
| Discount rate for scheme  liabilities    |       | 5.00 - 6.50 |       | 6.25    |       |                   | 6.25 - 12.66 |   |   |
| Inflation                                |       | 1.00 - 4.00 |       | 2.25    |       |                   | 2.75 - 4.00  |   |   |

 

Theexpected long term rates of return on the assets of the significant plans wereas follows:

| ** **        | ** ** | **Europe**  | ** ** | **USA**    | ** ** | **Latin America** | ** **  |
|-------------------|------------|-------------|------------|------------|------------|------------------------|-------------|
| ** **        | ** ** | **%**       | ** ** | **%**      | ** ** | **%**                  | ** **  |
| **December 2005** | ** ** | ** **  | ** ** | ** ** | ** ** |                   | ** **  | ** ** |   |
| Equities          |       | 7.25 - 8.00 |       | 8.50       |       |                   | 8.25 -10.50 | ** ** |   |
| Bonds             |       | 3.25 - 7.00 |       | 4.50       |       |                   | 4.25 - 5.25 | ** ** |   |
| Property          |       | 6.50 - 7.00 |       | n/a        |       |                   | n/a         | ** ** |   |
| Other             |       | 2.50 - 7.14 |       | 3.50       |       |                   | 3.25 - 3.50 | ** ** |   |

 

| ** **        | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin America** | ** **  |
|-------------------|------------|-------------|------------|---------|------------|------------------------|-------------|
| ** **        | ** ** | **%**       | ** ** | **%**   | ** ** | **%**                  | ** **  |
| **December 2004** |       |        |       |    |       |                   |        |   |   |
| Equities          |       | 7.50 - 8.00 |       | 8.50    |       |                   | 8.25 -10.50 |   |   |
| Bonds             |       | 3.75 - 7.00 |       | 4.50    |       |                   | 4.25 - 5.25 |   |   |
| Property          |       | 6.50 - 7.00 |       | n/a     |       |                   | n/a         |   |   |
| Other             |       | 2.75 - 7.36 |       | 3.50    |       |                   | 3.25 - 3.50 |   |   |

 

| ** **        | ** ** | **Europe**  | ** ** | **USA**    | ** ** | **Latin America** | ** **   |
|-------------------|------------|-------------|------------|------------|------------|------------------------|--------------|
| ** **        | ** ** | **%**       | ** ** | **%**      | ** ** | **%**                  | ** **   |
| **December 2003** | ** ** | ** **  | ** ** | ** ** | ** ** |                   | ** **   | ** ** |   |
| Equities          |       | 8.00        |       | 8.50       |       |                   | 8.50 - 13.00 | ** ** |   |
| Bonds             |       | 4.51 - 7.00 |       | 4.50       |       |                   | 4.50 - 10.00 | ** ** |   |
| Other             |       | 3.00 - 7.00 |       | 3.50       |       |                   | Nil - 3.50   | ** ** |   |

 

F-42

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

The market values of theassets of the schemes were as follows:

| ** **                           | ** ** | **Europe**    | ** **   | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|--------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2005**                    |       |          |         |          |       |                   |       |          |       |   |   |
| Equities                             |       | 628,843       |         | 15,717        |       |                   | 10,018     |          |       | 654,578 |   |
| Bonds                                |       | 487,089       |         | 9,118         |       |                   | 9,822      |          |       | 506,029 |   |
| Property                             |       | 77,451        |         | —        |       |                   | —     |          |       | 77,451 |   |
| Other                                |       | 78,622        |         | 1,016         |       |                   | 531        |          |       | 80,169 |   |
| Total market  value                  |       | 1,272,005     |         | 25,851        |       |                   | 20,371     |          |       | 1,318,227 |   |
| Present value of  scheme liabilities |       | 1,929,671     |         | 46,506        |       |                   | 50,194     |          |       | 2,026,371 |   |
| (Deficit) in the  plans              |       | (657,666      | )            | (20,655       | )          |                   | (29,823    | )             |       | (708,144 | ) |
| Deferred tax  asset                  |       | 51,483        |         | —        |       |                   | 1,293      |          |       | 52,776 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(606,183** | **)**         | **€** | **(20,655**            | **)**      | ** **    | **€** | **(28,530** | **)** | ** ** | **€** | **(655,368** | **)** |
|                                      |            |               |              |               |            |                        |            |               |            |  |  |  |  |  |  |

 

| ** **                           | ** ** | **Europe**    | ** **   | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|--------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2004**                    |       |          |         |          |       |                   |       |          |       |   |   |
| Equities                             |       | 299,530       |         | 16,391        |       |                   | 8,006      |          |       | 323,927 |   |
| Bonds                                |       | 237,519       |         | 8,890         |       |                   | 5,999      |          |       | 252,408 |   |
| Property                             |       | 40,117        |         | —        |       |                   | —     |          |       | 40,117 |   |
| Other                                |       | 36,536        |         | 737           |       |                   | 1,380      |          |       | 38,653 |   |
| Total market  value                  |       | 613,702       |         | 26,018        |       |                   | 15,385     |          |       | 655,105 |   |
| Present value of  scheme liabilities |       | 1,027,593     |         | 42,844        |       |                   | 40,224     |          |       | 1,110,661 |   |
| (Deficit) in the  plans              |       | (413,891      | )            | (16,826       | )          |                   | (24,839    | )             |       | (455,556 | ) |
| Deferred tax  asset                  |       | 42,835        |         | —        |       |                   | 1,484      |          |       | 44,319 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(371,056** | **)**         | **€** | **(16,826**            | **)**      | ** **    | **€** | **(23,355** | **)** | ** ** | **€** | **(411,237** | **)** |
|                                      |            |               |              |               |            |                        |            |               |            |  |  |  |  |  |  |

 

| ** **                           | ** ** | **Europe**    | ** **   | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|--------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2003**                    |       |          |         |          |       |                   |       |          |       |   |   |
| Equities                             |       | 294,891       |         | 14,208        |       |                   | 11,641     |          |       | 320,740 |   |
| Bonds                                |       | 220,760       |         | 7,932         |       |                   | 10,195     |          |       | 238,887 |   |
| Other                                |       | 60,599        |         | 1,049         |       |                   | 557        |          |       | 62,205 |   |
| Total market  value                  |       | 576,250       |         | 23,189        |       |                   | 22,393     |          |       | 621,832 |   |
| Present value of  scheme liabilities |       | 977,308       |         | 45,437        |       |                   | 45,627     |          |       | 1,068,372 |   |
| (Deficit) in the  plans              |       | (401,058      | )            | (22,248       | )          |                   | (23,234    | )             |       | (446,540 | ) |
| Deferred tax  asset                  |       | 83,285        |         | —        |       |                   | 7,946      |          |       | 91,231 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(317,773** | **)**         | **€** | **(22,248**            | **)**      | ** **    | **€** | **(15,288** | **)** | ** ** | **€** | **(355,309** | **)** |
|                                      |            |               |              |               |            |                        |            |               |            |  |  |  |  |  |  |

 

F-43

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

Thefollowing tables set out the components of the defined benefit cost:

***Analysis of the amount charged to operating income***

| ** **                            | ** ** | **€000** | ** ** |
|---------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2005**     | ** ** | ** **    | ** ** |
| Current service cost                  |       | 36,697        |       |
| Past service cost                     |       | 1,527         |       |
| Gain on  settlements and curtailments |       | (6,129        | )          |
| **Total  operating charge**           | ** ** | **€**    | **32,095** | ** ** |
|                                       |            |               |            |  |

 

| ** **                            | ** ** | **€000** | ** ** |
|---------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2004**     | ** ** | ** **    | ** ** |
| Current service cost                  |       | 37,163        |       |
| Past service benefit                  |       | (1,793        | )          |
| Gain on  settlements and curtailments |       | (542          | )          |
| **Total  operating charge**           | ** ** | **€**    | **34,828** | ** ** |
|                                       |            |               |            |  |

 

| ** **                        | ** ** | **€000** | ** ** |
|-----------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2003** | ** ** | ** **    | ** ** |
| Current service cost              |       | 36,593        |       |
| Past service cost                 |       | 655           |       |
| **Total  operating charge**       | ** ** | **€**    | **37,248** | ** ** |
|                                   |            |               |            |  |

 

***Analysis of theamount charged to other financial expense***

| ** **                                   | ** ** | **€000** | ** ** |
|----------------------------------------------|------------|---------------|------------|
| **Year ended December 31, 2005**             |       |          |       |
| Expected  return on pension scheme assets    |       | (43,974       | )          |
| Interest  cost on pension scheme liabilities |       | 57,233        |       |
| **Net  charge**                              | ** ** | **€**    | **13,259** | ** ** |
|                                              |            |               |            |  |

 

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year ended December 31, 2004**            |       |          |       |
| Expected return on pension scheme assets    |       | (40,137       | )          |
| Interest cost on pension scheme liabilities |       | 55,855        |       |
| **Net  charge**                             | ** ** | **€**    | **15,718** | ** ** |
|                                             |            |               |            |  |

 

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year ended December 31, 2003**            |       |          |       |
| Expected return on pension scheme assets    |       | (39,460       | )          |
| Interest cost on pension scheme liabilities |       | 54,726        |       |
| **Net  charge**                             | ** ** | **€**    | **15,266** | ** ** |
|                                             |            |               |            |  |

 

F-44

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

***Analysis of theamount recognized in the statement of total recognized gains and losses***

| ** **                                                                     | ** ** | **€000** | ** **  |
|--------------------------------------------------------------------------------|------------|---------------|-------------|
| **Year ended December 31, 2005**                                               | ** ** | ** **    | ** **  |
| Actual return less expected return on pension scheme assets                    |       | 78,779        |        |
| Net experience gains on scheme liabilities                                     |       | 4,440         |        |
| Changes in financial assumptions underlying the scheme liabilities             |       | (98,104       | )           |
| **Actuarial  loss recognized in the statement of recognized gains and losses** | ** ** | **€**    | **(14,885** | **)** |
|                                                                                |            |               |             |  |

 

| ** **                                                                     | ** ** | **€000** | ** **  |
|--------------------------------------------------------------------------------|------------|---------------|-------------|
| **Year ended December 31, 2004**                                               | ** ** | ** **    | ** **  |
| Actual return less expected return on pension scheme assets                    |       | 9,573         |        |
| Net experience (losses) on scheme liabilities                                  |       | (5,901        | )           |
| Changes in financial assumptions underlying the scheme liabilities             |       | (13,963       | )           |
| **Actuarial  loss recognized in the statement of recognized gains and losses** | ** ** | **€**    | **(10,291** | **)** |
|                                                                                |            |               |             |  |

 

| ** **                                                                     | ** ** | **€000** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------|------------|
| **Year ended December 31, 2003**                                               | ** ** | ** **    | ** ** |
| Actual return less expected return on pension scheme assets                    |       | 20,475        |       |
| Net experience gains on scheme liabilities                                     |       | 8,901         |       |
| Changes in financial assumptions underlying the scheme liabilities             |       | (1,576        | )          |
| **Actuarial  gain recognized in the statement of recognized gains and losses** | ** ** | **€**    | **27,800** | ** ** |
|                                                                                |            |               |            |  |

 

The analysis of the amount recognized in the statementof recognized gains and losses above excludes deferred tax.

F-45

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

***Movement in pensionliability***

| ** **                                           | ** ** | **€000** | ** **  |
|------------------------------------------------------|------------|---------------|-------------|
| Deficit in scheme at December 31, 2002               |       | 352,037       |        |
| Current service cost                                 |       | 36,593        |        |
| Past service cost                                    |       | 655           |        |
| Contributions                                        |       | (52,253       | )           |
| Other finance expense                                |       | 15,266        |        |
| Actuarial gain                                       |       | (27,800       | )           |
| Fair value adjustment                                |       | 68,431        |        |
| Acquisitions                                         |       | 133,137       |        |
| Disposals                                            |       | (59,614       | )           |
| Currency adjustment                                  |       | (19,912       | )           |
| **Deficit in scheme at December 31, 2003**           | ** ** | **446,540**   | ** **  |
| Current service cost                                 |       | 37,163        |        |
| Past service benefit                                 |       | (1,793        | )           |
| Recognition of  gain on settlement and curtailments  |       | (542          | )           |
| Contributions                                        |       | (51,921       | )           |
| Other finance expense                                |       | 15,718        |        |
| Actuarial loss                                       |       | 10,291        |        |
| Reclassification                                     |       | 2,291         |        |
| Disposals                                            |       | (101          | )           |
| Currency adjustment                                  |       | (2,090        | )           |
| **Deficit  in scheme at December 31, 2004**          | ** ** | **455,556**   | ** **  |
| Current service  cost                                |       | 36,697        |        |
| Past service cost                                    |       | 1,527         |        |
| Recognition of  gain on settlements and curtailments |       | (6,129        | )           |
| Contributions                                        |       | (51,309       | )           |
| Other finance  expense                               |       | 13,259        |        |
| Actuarial loss                                       |       | 14,885        |        |
| Acquisitions                                         |       | 256,680       |        |
| Disposals                                            |       | (22,040       | )           |
| Currency  adjustment                                 |       | 9,018         |        |
| **Deficit in scheme at December,  31 2005**          | ** ** | **€**    | **708,144** | ** ** |
|                                                      |            |               |             |  |

 

F-46

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**24**   EmployeePension Plans and Similar Obligations—(continued)

***History of amounts recognized in the statement ofrecognized gains and losses***

*Difference between actual and expected return onpension scheme assets*

| **Year ended December 31,  2005**                                |       |       |       |
|-----------------------------------------------------------------------|------------|------------|------------|
| Amount                                                                |       | 78,779,000 |       |
| Percentage of scheme assets                                           |       | 6          | %          |
| **Year  ended December 31, 2004**                                | ** ** | ** ** | ** ** |
| Amount                                                                |       | 9,573,000  |       |
| Percentage of scheme assets                                           |       | 1          | %          |
| **Year  ended December 31, 2003**                                | ** ** | ** ** | ** ** |
| Amount                                                                |       | 20,475,000 |       |
| Percentage of scheme assets                                           |       | 3          | %          |
| **Period from September 3, 2002 through December 31, 2002** | ** ** | ** ** | ** ** |
| Amount                                                                |       | 7,218,000  |       |
| Percentage  of scheme assets                                          |       | 1          | %          |

 

*Experience gains and losses on scheme liabilities*

| **Year ended December 31,  2005**                                | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|
| Amount                                                                |       | 4,440,000  |       |
| Percentage of the present value of scheme liabilities                 |       | 0          | %          |
| **Year ended  December 31, 2004**                                | ** ** | ** ** | ** ** |
| Amount                                                                |       | 5,901,000  |       |
| Percentage of the present value of scheme liabilities                 |       | 1          | %          |
| **Year  ended December 31, 2003**                                | ** ** | ** ** | ** ** |
| Amount                                                                |       | 8,901,000  |       |
| Percentage of the present value of scheme liabilities                 |       | 1          | %          |
| **Period from September 3, 2002 through December 31, 2002** | ** ** | ** ** | ** ** |
| Amount                                                                |       | 27,515,000 |       |
| Percentage of the  present value of scheme liabilities                |       | 3          | %          |

 

F-47

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

*Total actuarial gains and losses recognized in thestatement of recognized gains and losses*

| **Year  ended December 31, 2005**                                |       |       |       |
|-----------------------------------------------------------------------|------------|------------|------------|
| Amount                                                                |       | 14,885,000 |       |
| Percentage of the present value of scheme liabilities                 |       | 1          | %          |
| **Year ended December 31, 2004**                                 |       |       |       |
| Amount                                                                |       | 10,291,000 |       |
| Percentage of the present value of scheme liabilities                 |       | 1          | %          |
| **Year ended December 31, 2003**                                 |       |       |       |
| Amount                                                                |       | 27,800,000 |       |
| Percentage of the present value of scheme liabilities                 |       | 3          | %          |
| **Period from September 3, 2002 through December 31, 2002** | ** ** | ** ** | ** ** |
| Amount                                                                |       | 12,507,000 |       |
| Percentage  of the present value of scheme liabilities                |       | 1          | %          |

 

Some of the schemes are closed schemes and thereforeunder the projected unit method the current service cost would be expected toincrease as the members of the scheme approach retirement and reduce as membersretire or leave service.

In certain countries, in accordance with localpractice, plans are financed internally and the provisions relating to suchcases are included in pension liabilities. At December 31, 2005 theseamount to €431,862,000 (2004: €277,274,000;2003: €263,165,000).

Thedefined contribution pension scheme expense for the year ended December 31,2005 was €20,850,000 (2004: €21,077,000; 2003: €20,686,000).

**25**   RelatedParty Transactions

**Transactions withassociates**

We conduct certain transactions with associates in thenormal course of business.

Thetransactions with associates for each period are summarized below.

| ** **             | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **             | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Sale of goods          |       | 31,277        |       | 28,725        |       | 41,612        |       |
| Purchase of goods      |       | 13,813        |       | 9,930         |       | 11,484        |       |
| Receiving of  services |       | 633           |       | 922           |       | 265           |       |
| Rendering of services  |       | 1,544         |       | 776           |       | 697           |       |

 

F-48

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**25**   Related Party Transactions—(continued)

**Transactions withrelated parties**

Inconnection with the acquisition, certain non-operating assets and non-coreoperating assets of JSG were transferred to the newcos, in exchange forintercompany notes.

| ** **                                 | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                 | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Rendering and  receiving of services (net) |       | —        |       | —        |       | 679           |       |
| Transfer of cash from  business disposals  |       | 9,899         |       | 11,934        |       | 28,206        |       |

 

**On June 16, 2005, assets comprisingThe K Club, additional land near The K Club and the site of the former Clonskeaghpaper mill were disposed for an amount of**€115million to a group of investors which included Sir Michael Smurfit, ourChairman.

In 2005 the Grouppurchased in the normal course of business approximately 28,000 metric tonnesof  paper amounting to approximately €11million from Savon Sellu, a company controlled by Dr. Dermot Smurfit togetherwith his brothers Sir Michael Smurfit, our Chairman, and Dr. Alan Smurfit. At December 31,2005, an amount of €3.2million was owing by SKG to Savon Sellu.

**26.**   Shareholders’ Equity

**Other reserves include thefollowing:**

A capital contribution in 2002 of €864,354,000which is comprised of an investment of €731,960,000 by MadisonDearborn Partners LLC and its affiliates, certain other co-investors andcertain members of management by way of capital contributions; a capitalcontribution by JSL of €125,000,000. JSL obtained the funds for this contribution by way of a loan from thenewcos which they borrowed under a bank credit facility. The newcos borrowingwas non recourse to JSG Funding and was fully paid in December 2003; theremaining €7,394,000represents the value ascribed to the warrants to purchase shares in JSL issuedas part of the PIK units (see Note 19).

Investments in 2005 by SKGL of €738,953,000by way of capital contribution.

JSG Funding has an authorized share capital of 100,000shares of €1 each, of which 40,000 were issued. OnSeptember 2, 2002, the shares were redesignated as 100,000,000 ordinaryshares of €0.001each.

Certain members ofmanagement subscribed cash for convertible shares of JSL at nominal value.Pursuant to the completion of the exchange offer on February 6, 2004, thesewere exchanged for convertible shares of JSG Packaging (the ‘UnvestedConvertible Equity’). Subject to the terms and conditions of the Management EquityAgreement, the Unvested Convertible Equity will, upon vesting, be convertibleinto ordinary shares of JSG Packaging upon payment in cash of a further amountequal to the fair market value of an ordinary share of JSG Packaging on thedate of grant adjusted to reflect the capital reduction in February 2005 andinterest as it accrues on the inter company debt with JSG Holdings. In the caseof the initially allocated Unvested Convertible Equity the additional cashpayment is equal to the subscription price plus capital contributions perordinary share paid by Madison Dearborn Partners LLC and affiliates prior tothe offer becoming or being declared unconditional, adjusted to reflect thecapital reduction in February 2005 and interest as it accrues on the intercompany debt with JSG Holdings, net of the nominal subscription pricepreviously paid by the holder. The ordinary shares into which Unvested 

F-49

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**26.**   Shareholders’ Equity—(continued)

Convertible Equity can,subject to vesting, be converted will represent a maximum of approximately 7per cent. of JSG Packaging’s outstanding ordinary shares.

Pursuant to the terms of the Management EquityAgreement, the Unvested Convertible Equity will vest as follows:

·  Time vesting.  40 per cent. of the Unvested Convertible Equity will vest in three equaltranches as of December 31 in each of 2005, 2006 and 2007, provided that theholder remains actively employed by JSG Packaging or any of its subsidiaries onthe relevant date.

·  Performance vesting.   40 per cent. of the Unvested ConvertibleEquity will vest in one, two or three tranches as of December 31 in each of2005, 2006 and 2007, provided that the holder remains actively employed by JSGPackaging or any of its subsidiaries as of such date, subject to the attainmentas of each such date of specified performance criteria, which criteria will becumulative, such that attainment of criteria with respect to any of theforegoing dates will trigger vesting in respect of all previous such dates. Theperformance criteria will be based on the achievement of a valuation of JSGPackaging measured by notional return on investment achieved by MadisonDearborn Partners LLC from the date of its investments in JSL, calculated byreference to the price paid for JSL and expressed as a compounded percentagerate per annum.

·  Time/performance vesting.   20 per cent. of the Unvested ConvertibleEquity will vest on December 31, 2007 if return on investment of 30 percent. or more is achieved up to such date, provided the holder remains activelyemployed by JSG Packaging or any of its subsidiaries on the relevant date.

·  Early vesting. The board of directors of JSGPackaging will have discretion as to early vesting in certain circumstances.

The Unvested ConvertibleEquity will vest immediately upon the closing of an initial public offering ofJSG Packaging’s equity. However, the convertible shares are subject to certaincontractual restrictions on transfer following their acquisition upon exerciseof the underlying convertible equity. At December 31, 2005, JSG Packaging hadissued 10,404,610 convertible shares.

**27**   Net Cash Flow from Operating Activities andMovement in Working Capital

| ** **                                                      | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|-----------------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                                      | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Operating income                                                |       | 167,028       |        | 281,789       |       | 309,144       |       |
| Reorganization and restructuring costs                          |       | 8,421         |        | 23,231        |       | 16,357        |       |
| Depreciation and depletion (net of government grants amortized) |       | 282,378       |        | 259,831       |       | 250,590       |       |
| Amortizations of intangible assets                              |       | 29,203        |        | 37,925        |       | 44,548        |       |
| Finance lease interest paid                                     |       | 1,138         |        | 1,962         |       | 2,164         |       |
| (Decrease) / increase in other payables and provisions          |       | (14,291       | )           | (12,891       | )          | 6,451         |       |
| Decrease in working capital                                     |       | 40,252        |        | 47,419        |       | 62,832        |       |
| Currency adjustment                                             |       | (1,260        | )           | 1,663         |       | (1,122        | )          |
|                                                            | ** ** | **€**    | **512,869** | ** **    | **€** | **640,929**   | ** ** | **€** | **690,964** | ** ** |
|                                                                 |            |               |             |               |            |               |            |  |  |  |

 

F-50

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**27**   Net Cash Flow fromOperating Activities and Movement in Working Capital—(continued)

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** ** |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31, 2004             |       |            | 452,166    |            |       | 925,048       |       | (1,017,060    | )          | 360,154 |   |
| Acquisitions                       |       |            | 275,804    |            |       | 572,415       |       | (535,081      | )          | 313,138 |   |
| Disposed                           |       |            | (68,698    | )               |       | (62,196       | )          | 69,217        |       | (61,677 | ) |
| Reclassification                   |       |            | (5,282     | )               |       | 16,328        |       | (16,486       | )          | (5,440 | ) |
| Assets held for sale               |       |            | —     |            |       | (79,810       | )          | 25,406        |       | (54,404 | ) |
| Deferred acquisition consideration |       |            | —     |            |       | —        |       | (31,384       | )          | (31,384 | ) |
| Decrease in working capital        |       |            | (7,051     | )               |       | (76,262       | )          | 43,061        |       | (40,252 | ) |
| Currency adjustment                |       |            | 16,192     |            |       | 19,205        |       | (13,544       | )          | 21,853 |   |
| **December 31,  2005**        | ** ** | ** **      | **€** | **663,131**     |       | ** **    | **€** | **1,314,728** | ** ** | **€** | **(1,475,871** | **)** | **€** | **501,988** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |            |  |  |  |  |  |  |

 

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** **  |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|-------------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** **  |
| December 31, 2003             |       |            | 477,432    |            |       |          | 911,443    |          |        | (967,141 | ) | 421,734 |   |
| Reclassification                   |       |            | 4,151      |            |       |          | (15,903    | )             |        | 3,202 |   | (8,550 | ) |
| Deferred acquisition consideration |       |            | —     |            |       |          | —     |          |        | 854 |   | 854 |   |
| Decrease in working capital        |       |            | (22,434    | )               |       |          | 38,291     |          |        | (63,276 | ) | (47,419 | ) |
| Currency adjustment                |       |            | (6,983     | )               |       |          | (8,783     | )             |        | 9,301 |   | (6,465 | ) |
| **December 31,  2004**        | ** ** | ** **      | **€** | **452,166**     |       | ** **    | ** ** | **€**    | **925,048** |   | ** ** | **€** | **(1,017,060** | **)** | **€** | **360,154** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |             |  |  |  |  |  |  |  |  |

 

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** ** |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31, 2002             |       |            | 470,207    |            |       | 1,016,181     |       | (1,018,286    | )          | 468,102 |   |
| Acquisitions                       |       |            | 59,724     |            |       | 115,628       |       | (109,936      | )          | 65,416 |   |
| Disposed                           |       |            | (33,890    | )               |       | (72,899       | )          | 44,173        |       | (62,616 | ) |
| Reclassification                   |       |            | (1,267     | )               |       | (12,566       | )          | 57,676        |       | 43,843 |   |
| Deferred acquisition consideration |       |            | —     |            |       | —        |       | (3,178        | )          | (3,178 | ) |
| Decrease in working capital        |       |            | 4,638      |            |       | (102,680      | )          | 35,210        |       | (62,832 | ) |
| Currency adjustment                |       |            | (21,980    | )               |       | (32,221       | )          | 27,200        |       | (27,001 | ) |
| **December 31,  2003**        | ** ** | ** **      | **€** | **477,432**     |       | ** **    | **€** | **911,443**   | ** ** | **€** | **(967,141** | **)** | **€** | **421,734** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |            |  |  |  |  |  |  |

----

*                    Amounts falling due within one year not includingborrowing due within one year, corporation tax, capitalized lease obligationsand amounts due to affiliates.

**28**   Retirementof Fixed Assets

| ** **                    | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                    | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Property, plant and equipment |       | 17,756        |       | 33,860        |       | 12,351        |       |
| Investments                   |       | 442           |       | 2,528         |       | 32,544        |       |
|                          | ** ** | **€**    | **18,198** | ** **    | **€** | **36,388**    | ** ** | **€** | **44,895** | ** ** |
|                               |            |               |            |               |            |               |            |  |  |  |

 

F-51

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**29   Reconciliationof Net Cash Flow to Movement in Net Debt**

| ** **                                   | ** ** | **2005**      | ** **     | **2004**      | ** ** | **2003**       | ** ** |
|----------------------------------------------|------------|---------------|----------------|---------------|------------|----------------|------------|
| ** **                                   | ** ** | **€000** | ** **     | **€000** | ** ** | **€000**  | ** ** |
| (Decrease) / increase in cash                |       | (27,045       | )              | 50,285        |       | 29,314         |       |
| (Increase) / decrease in term debt           |       | (475,449      | )              | 111,101       |       | 2,142          |       |
| Increase / (decrease) in liquid resources    |       | 789,791       |           | 16,989        |       | (18,889        | )          |
| Capital elements of finance leases repaid    |       | 4,812         |           | 13,576        |       | 5,689          |       |
| Change in net debt resulting from cash flows |       | 292,109       |           | 191,951       |       | 18,256         |       |
| New finance leases                           |       | (4,053        | )              | (2,963        | )          | —         |       |
| Loans and finance leases acquired            |       | (1,814,470    | )              | —        |       | (122,952       | )          |
| Loans and finance leases disposed            |       | 1,471         |           | —        |       | 23,695         |       |
| Other non cash movements                     |       | (19,665       | )              | (40,876       | )          | (38,537        | )          |
| Currency adjustment                          |       | (72,937       | )              | 40,244        |       | 153,282        |       |
| Movement in net debt                         |       | (1,617,545    | )              | 188,356       |       | 33,744         |       |
| Net debt at beginning of period              |       | (2,912,746    | )              | (3,101,102    | )          | (3,134,846     | )          |
| **Net debt  at end of period**               | ** ** | **€**    | **(4,530,291** | **)**         | **€** | **(2,912,746** | **)**      | **€** | **(3,101,102** | **)** |
|                                              |            |               |                |               |            |                |            |  |  |  |

 

**30**   Analysis of Net Debt

| ** **                               | ** ** | **December  2004** | ** **     | **Cash Flow** | ** ** | **Acquisitions  and  Disposals** | ** ** | **Non Cash** | ** **     | **Currency**  | ** ** | **December  2005** | ** ** |
|------------------------------------------|------------|--------------------|----------------|--------------------|------------|----------------------------------|------------|-------------------|----------------|---------------|------------|--------------------|------------|
| ** **                               | ** ** | **€000**      | ** **     | **€000**      | ** ** | **€000**                    | ** ** | **€000**     | ** **     | **€000** | ** ** | **€000**      | ** ** |
| Cash                                     |       | 140,149            |           | (44,246            | )          | —                           |       | —            |           | 3,639         |       | 99,542             |       |
| Short term deposits and liquid resources |       | 107,884            |           | 34,216             |       | —                           |       | —            |           | 6,165         |       | 148,265            |       |
| Restricted cash                          |       | —             |           | 755,575            |       | —                           |       | —            |           | —        |       | 755,575            |       |
| Cash and investments                     |       | 248,033            |           | 745,545            |       | —                           |       | —            |           | 9,804         |       | 1,003,382          |       |
| Bank overdrafts and demand  loans        |       | (28,668            | )              | 17,201             |       | —                           |       | —            |           | (8,551        | )          | (20,018            | )          |
| Loans repayable within one year          |       | (76,173            | )              | (21,548            | )          | —                           |       | (8,911            | )              | 22,873        |       | (83,759            | )          |
| Kappa bonds outstanding                  |       | —             |           | (755,575           | )          | —                           |       | —            |           | —        |       | (755,575           | )          |
| Short term borrowing                     |       | (104,841           | )              | (759,922           | )          | —                           |       | (8,911            | )              | 14,322        |       | (859,352           | )          |
| Long and medium term borrowing           |       | (3,038,538         | )              | 301,674            |       | (1,805,992                       | )          | (10,754           | )              | (97,162       | )          | (4,650,772         | )          |
| Net borrowing                            |       | (2,895,346         | )              | 287,297            |       | (1,805,992                       | )          | (19,665           | )              | (73,036       | )          | (4,506,742         | )          |
| Finance leases                           |       | (17,400            | )              | 4,812              |       | (7,007                           | )          | (4,053            | )              | 99            |       | (23,549            | )          |
| **Net debt**                             | ** ** | **€**         | **(2,912,746** | **)**              | **€** | **292,109**                      | ** ** | **€**        | **(1,812,999** | **)**         | **€** | **(23,718**        | **)**      | **€** | **(72,937** | **)** | **€** | **(4,530,291** | **)** |
|                                          |            |                    |                |                    |            |                                  |            |                   |                |               |            |                    |            |  |  |  |  |  |  |

 

F-52

----

**JSG Funding plc and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**30**   Analysis of Net Debt—(continued)

| ** **                               | ** ** | **December  2003** | ** **     | **Cash Flow** | ** ** | **Acquisitions  and  Disposals** | ** ** | **Non Cash** | ** ** | **Currency**  | ** ** | **December  2004** | ** **  |
|------------------------------------------|------------|--------------------|----------------|--------------------|------------|----------------------------------|------------|-------------------|------------|---------------|------------|--------------------|-------------|
| ** **                               | ** ** | **€000**      | ** **     | **€000**      | ** ** | **€000**                    | ** ** | **€000**     | ** ** | **€000** | ** ** | **€000**      | ** **  |
| Cash                                     |       | 86,137             |           | 55,623             |       |                             | —     |              |       | —        |       | (1,611             | )           | 140,149 |   |
| Short term deposits and liquid resources |       | 92,930             |           | 16,989             |       |                             | —     |              |       | (35           | )          | (2,000             | )           | 107,884 |   |
| Cash and investments                     |       | 179,067            |           | 72,612             |       |                             | —     |              |       | (35           | )          | (3,611             | )           | 248,033 |   |
| Bank overdrafts and demand  loans        |       | (22,368            | )              | (5,338             | )          |                             | —     |              |       | —        |       | (962               | )           | (28,668 | ) |
| Loans repayable within one  year         |       | (111,447           | )              | 54,348             |       |                             | —     |              |       | 3,698         |       | (22,772            | )           | (76,173 | ) |
| Short term borrowing                     |       | (133,815           | )              | 49,010             |       |                             | —     |              |       | 3,698         |       | (23,734            | )           | (104,841 | ) |
| Long and medium term borrowing           |       | (3,118,074         | )              | 56,753             |       |                             | —     |              |       | (44,539       | )          | 67,322             |        | (3,038,538 | ) |
| Net borrowing                            |       | (3,072,822         | )              | 178,375            |       |                             | —     |              |       | (40,876       | )          | 39,977             |        | (2,895,346 | ) |
| Finance leases                           |       | (28,280            | )              | 13,576             |       |                             | —     |              |       | (2,963        | )          | 267                |        | (17,400 | ) |
| **Net debt**                             | ** ** | **€**         | **(3,101,102** | )                  | **€** | **191,951**                      | ** ** | ** **        | **—** |          | ** ** | **€**         | **(43,839** | **)** | **€** | **40,244** | ** ** | **€** | **(2,912,746** | ) |
|                                          |            |                    |                |                    |            |                                  |            |                   |            |               |            |                    |             |  |  |  |  |  |  |  |

 

| ** **                               | ** ** | **December  2002** | ** **     | **Cash Flow** | ** ** | **Acquisitions  and  Disposals** | ** ** | **Non Cash** | ** ** | **Currency**  | ** ** | **December  2003** | ** ** |
|------------------------------------------|------------|--------------------|----------------|--------------------|------------|----------------------------------|------------|-------------------|------------|---------------|------------|--------------------|------------|
| ** **                               | ** ** | **€000**      | ** **     | **€000**      | ** ** | **€000**                    | ** ** | **€000**     | ** ** | **€000** | ** ** | **€000**      | ** ** |
| Cash                                     |       | 69,224             |           | 22,493             |       |                             | —     |              |       | —        |       | (5,580             | )          | 86,137 |   |
| Short term deposits and liquid resources |       | 115,107            |           | (18,889            | )          |                             | —     |              |       | (58           | )          | (3,230             | )          | 92,930 |   |
| Cash and investments                     |       | 184,331            |           | 3,604              |       |                             | —     |              |       | (58           | )          | (8,810             | )          | 179,067 |   |
| Bank overdrafts and demand  loans        |       | (51,378            | )              | 6,821              |       |                             | —     |              |       | —        |       | 22,189             |       | (22,368 | ) |
| Loans repayable within one year     |       | (110,776           | )              | 36,206             |       |                             | —     |              |       | 2,279         |       | (39,156            | )          | (111,447 | ) |
| Short term borrowing                     |       | (162,154           | )              | 43,027             |       |                             | —     |              |       | 2,279         |       | (16,967            | )          | (133,815 | ) |
| Long and medium term borrowing           |       | (3,134,436         | )              | (34,064            | )          |                             | (86,119    | )                 |       | (40,758       | )          | 177,303            |       | (3,118,074 | ) |
| Net borrowing                            |       | (3,112,259         | )              | 12,567             |       |                             | (86,119    | )                 |       | (38,537       | )          | 151,526            |       | (3,072,822 | ) |
| Finance leases                           |       | (22,587            | )              | 5,689              |       |                             | (13,138    | )                 |       | —        |       | 1,756              |       | (28,280 | ) |
| **Net debt**                             | ** ** | **€**         | **(3,134,846** | **)**              | **€** | **18,256**                       | ** ** | ** **        | **€** | **(99,257**   | **)**      | ** **         | **€** | **(38,537** | **)** | **€** | **153,282** | ** ** | **€** | **(3,101,102** | **)** |
|                                          |            |                    |                |                    |            |                                  |            |                   |            |               |            |                    |            |  |  |  |  |  |  |  |  |

 

Cashcomprises cash in hand and overnight deposits. The movement in liquid resourcesrepresents movement in all monetary assets (excluding cash, short term depositsand overnight borrowing) which are convertible into cash at, or close to, theircarrying value in the balance sheet. These specifically comprise governmentgilts, commercial paper and deposits, with maturities of less than one yearwhen acquired. They are categorized as held-to-maturity because the Group hasboth the intent and the ability to hold these investments until maturity.

F-53

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**31**   Acquisitionsand Disposals

| ** **                                       | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                       | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Net (liabilities)  / assets acquired (see below) |       | (203,598      | )           | —        |       | 6,180         |       |
| Reclassification  from associates                |       | —        |        | —        |       | (35,030       | )          |
| Goodwill                                         |       | 1,185,705     |        | 2,731         |       | 174,659       |       |
|                                             | ** ** | **€**    | **982,107** | ** **    | **€** | **2,731**     | ** ** | **€** | **145,809** | ** ** |
| **Satisfied by:**                                | ** ** | ** **    | ** **  | ** **    | ** ** | ** **    | ** ** |
| Shareholders loan  contributed                   |       | 738,953       |        | —        |       | —        |       |
| Cash payments                                    |       | 209,608       |        | 2,731         |       | 145,809       |       |
| Deferred  consideration                          |       | 33,546        |        | —        |       | —        |       |
|                                             | ** ** | **€**    | **982,107** | ** **    | **€** | **2,731**     | ** ** | **€** | **145,809** | ** ** |
| **Net cash outflows**                            | ** ** | ** **    | ** **  | ** **    | ** ** | ** **    | ** ** |
| Cash payments                                    |       | 209,608       |        | 2,731         |       | 145,809       |       |
| Cash acquired                                    |       | (48,887       | )           | —        |       | (52,683       | )          |
| Bank overdrafts  acquired                        |       | 44,811        |        | —        |       | 8,955         |       |
| ** **                                       | ** ** | **€**    | **205,532** | ** **    | **€** | **2,731**     | ** ** | **€** | **102,081** | ** ** |

 

Summary of net(liabilities) / assets acquired:

| ** **                                                          | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|---------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                          | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Net assets acquired:                                                | ** ** | ** **    | ** **   |          | ** ** | ** **    |       | ** ** | ** ** |
| Fixed assets:                                                       | ** ** | ** **    | ** **   |          | ** ** | ** **    |       | ** ** | ** ** |
| Property, plant  and equipment                                      |       | 1,557,132     |         |          | —     | ** **    |       | 269,385 |   |
| Investments                                                         |       | 3,533         |         |          | —     | ** **    |       | 3,616 |   |
| Current assets:                                                     | ** ** | ** **    |         |          |       | ** **    |       | ** ** | ** ** |
| Inventories                                                         |       | 275,804       |         |          | —     | ** **    |       | 59,724 |   |
| Accounts receivable and prepayments                                 |       | 572,415       |         |          | —     | ** **    |       | 115,628 |   |
| Cash and  investments held as current assets                        |       | 48,887        |         |          | —     | ** **    |       | 52,683 |   |
| Total assets                                                        |       | 2,457,771     |         |          | —     | ** **    |       | 501,036 |   |
| Accounts payable  and accrued liabilities                           |       | (587,196      | )            |          | —     | ** **    |       | (135,268 | ) |
| Long term debt  and other payables                                  |       | (1,805,992    | )            |          | —     | ** **    |       | (113,896 | ) |
| Provisions for  liabilities and charges                             |       | (312,151      | )            |          | —     | ** **    |       | (6,197 | ) |
| Fair value  adjustment                                              |       | 45,467        |         |          | —     | ** **    |       | (239,495 | ) |
| Minority  interests                                                 |       | (1,497        | )            |          | —     | ** **    |       | — |   |
| **Net (liabilities) / assets  acquired at fair value to the Group** | ** ** | **€**    | **(203,598** | **)**         |       | **€**    | **—** | ** ** |   | **€** | **6,180** | ** ** |
|                                                                     |            |               |              |               |            |               |            |  |  |  |  |  |

 

F-54

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**31**   Acquisitions and Disposals—(continued)

**Summary of effectsof the acquisition of Kappa**

The acquisition of Kappawas completed on December 1, 2005. The fair value exercise relating to theacquisition is preliminary and is reflected in the schedule below although thefair value exercise on fixed and intangible assets has been substantiallycompleted and the fair value exercise on pensions has also been substantiallycompleted, and no significant adjustment is expected in relation to these amounts.

| ** **                                      | ** ** | **Book Value**      | ** ** | **Policy   Alignment** | ** ** | **Revaluations**        | ** ** | **Fair Value**     | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **€ millions** | ** ** | **€ millions**    | ** ** | **€ million** | ** ** | **€ million** | ** ** |
| Cash                                            |       |                     | 49         |                        |       |                    | —     |                    |       |   | — |   |   |   | 49 |   |   |
| Accounts receivable and  prepayments            |       |                     | 575        |                        |       |                    | (2         | )                       |       |   | (1 | ) |   |   | 572 |   |   |
| Inventories                                     |       |                     | 258        |                        |       |                    | 18         |                    |       |   | — |   |   |   | 276 |   |   |
| Financial assets                                |       |                     | 3          |                        |       |                    | —     |                    |       |   | — |   |   |   | 3 |   |   |
| Property, plant and  equipment                  |       |                     | 1,574      |                        |       |                    | (17        | )                       |       |   | 23 |   |   |   | 1,580 |   |   |
| Intangible assets                               |       |                     | —     |                        |       |                    | —     |                    |       |   | 35 |   |   |   | 35 |   |   |
| Total assets                                    |       |                     | 2,459      |                        |       |                    | (1         | )                       |       |   | 57 |   |   |   | 2,515 |   |   |
|                                            |       |                     |       |                        |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Accounts payable and  accruals                  |       |                     | (581       | )                           |       |                    | (6         | )                       |       |   | (8 | ) |   |   | (595 | ) |   |
| Long term debt and other  long term liabilities |       |                     | (1,806     | )                           |       |                    | —     |                    |       |   | (4 | ) |   |   | (1,810 | ) |   |
| Provisions for  liabilities and charges         |       |                     | (385       | )                           |       |                    | 73         |                    |       |   | — |   |   |   | (312 | ) |   |
| Minorities                                      |       |                     | (2         | )                           |       |                    | —     |                    |       |   | — |   |   |   | (2 | ) |   |
| Net (liabilities)/assets  acquired              |       |                     | (315       | )                           |       |                    | 66         |                    |       |   | 45 |   |   |   | (204 | ) |   |
| Shareholders loans  acquired                    |       |                     |       |                        |       |                    |       |                    |       |   |   |   |   |   | (739 | ) |   |
| Goodwill                                        |       |                     |       |                        |       |                    |       |                    |       |   |   |   |   |   | 1,186 |   |   |
| **Total consideration**                         | ** ** |                     |       |                        |       |                    |       |                    |       |   |   |   | ** ** | ** ** | **243** |   |   |
| Deferred consideration                          |       |                     |       |                        |       |                    |       |                    |       |   |   |   |   |   | (33 | ) |   |
| **Cash payments**                               | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **€** | **210** | ** ** | ** ** |
|                                                 |            |                          |            |                             |            |                         |            |                         |            |  |  |  |  |  |  |  |  |  |

 

The consolidated financial statements of cash flows for2005 includes the following significant cash flows in relation to Kappa

| ** **                               | ** ** | **€ million** | ** ** |
|------------------------------------------|------------|--------------------|------------|
| Net cash flow from operating  activities |       |               | 71         |   |   |
| Interest paid                            |       |               | (20        | ) |   |
| Purchase of tangible fixed assets        |       |               | (25        | ) |   |

 

The summarized statements of operations and statements of totalrecognized gains and losses for Kappa from the beginning of its financial yearon January 1, 2005 to November 30, 2005 are set out below. These figures arereported in accordance with accounting standards generally accepted in TheNetherlands and are unaudited.

F-55

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**31**   Acquisitions and Disposals—(continued)

**Summarized statements of operations**

| ** **                  | ** ** | **Jan. 1, 2005  through  Nov. 30, 2005** | ** ** |
|-----------------------------|------------|------------------------------------------|------------|
| ** **                  | ** ** | **€ millions**                      | ** ** |
| Net Sales                   |       |                                     | 2,585      |   |   |
| Operating Income            |       |                                     | 154        |   |   |
| Exceptional items           |       |                                     | (11        | ) |   |
| Profit before  interest     |       |                                     | 143        |   |   |
| Net interest                |       |                                     | (208       | ) |   |
| Loss before taxes           |       |                                     | (65        | ) |   |
| Tax                         |       |                                     | (11        | ) |   |
| **Net loss for the period** | ** ** | ** **                               | **€** | **(76** | **)** | ** ** |
|                             |            |                                          |            |  |  |  |

 

**Statements of total recognized gains and losses**

| ** **                                                  | ** ** | **Jan. 1, 2005  through  Nov. 30, 2005** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **€ **millions                                     | ** ** |
| Net loss for the  period                                    |       |                                                         | (76        | ) |   |
| Translation  adjustment on foreign currency net investments |       |                                                         | (8         | ) |   |
| **Total recognized gains and  losses**                      | ** ** | ** **                                                   | **€** | **(84** | **)** | ** ** |
|                                                             |            |                                                              |            |  |  |  |

 

The net loss for Kappa for the year ended December 31, 2004 was €79 million.

**Summary of effects of theacquisition of the SSCC European assets in 2003**

| ** **                                     | ** ** | **Book Value**      | ** ** | **Revaluations**         | ** ** | **Fair Value**      | ** ** |
|------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **€ millions** | ** ** | **€ millions** | ** ** | **€ millions** | ** ** |
| Cash                                           |       |                     | 29         |                     |       |                     | —     |   |   |   | 29 |   |   |
| Accounts receivable and prepayments            |       |                     | 103        |                     |       |                     | —     |   |   |   | 103 |   |   |
| Inventories                                    |       |                     | 49         |                     |       |                     | —     |   |   |   | 49 |   |   |
| Property, plant and equipment                  |       |                     | 103        |                     |       |                     | 115        |   |   |   | 218 |   |   |
| Accounts payable and accruals                  |       |                     | (98        | )                        |       |                     | —     |   |   |   | (98 | ) |   |
| Long term debt and other long term liabilities |       |                     | (115       | )                        |       |                     | —     |   |   |   | (115 | ) |   |
| Other liabilities                              |       |                     | (95        | )                        |       |                     | (59        | ) |   |   | (154 | ) |   |
| Net assets acquired                            |       |                     | €     | (24                      | )          |                     |       | € | 56 |   |   |   | 32 |   |   |
| Goodwill                                       |       |                     |       |                     |       |                     |       |   |   |   | 174 |   |   |
| **Consideration**                              |       |                     |       |                     |       |                     |       |   | ** ** | ** ** | **€** | **206** | ** ** | ** ** |
|                                                |            |                          |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |

 

**32**   Parent Undertakings and Controlling Parties

The immediate parent ofthe company is JSL. The ultimate controlling party and parent undertaking ofthe largest group of which the company is a member, and for which groupfinancial statements are 

F-56

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**32**   Parent Undertakings and Controlling Parties—(continued)

prepared,is SKGL. The parent undertaking of the smallest group of which the company is amember, and for which group financial statements are prepared, is JSG Holdings.SKGL, JSG Holdings and JSL are companies incorporated in Ireland.

We are subject to the reporting requirements of theSecurities Exchange Act of 1934, as amended, and file reports, including AnnualReports on Form 20-F, and other information with the SEC. You mayread and copy any document we file with the SEC at its public reference roomsat 100 F Street, N.E. Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330for more information on the public reference rooms and their copy charges. Inaddition, the SEC maintains an Internet site at *http://www.sec.gov*that contains reports and otherinformation regarding issuers that file electronically with the SEC. Thesefilings are also available to the public from commercial document retrievalservices.

JSG Funding’s annualreport on Form 20-F, current reports on Form 6-K, and allamendments to those reports are made available free of charge through our website(www.smurfitkappa.com) as soon as practicable after such material iselectronically filed with or furnished to the Securities and ExchangeCommission.

**33**   Companies (Amendment) Act, 1963 to 2005

The financial statementsin this report do not comprise ‘full group accounts’ within the meaning ofRegulation 40(1) of the European Communities (Companies: Group Accounts)Regulations, 1992 of Ireland in so far as such group accounts would have tocomply with the disclosure and other requirements of those Regulations. Theauditors have made reports without qualification and without reference to anemphasis of matter under Section 193 of the Companies Act, 1990, in respect ofthe consolidated financial statements for the years ended December 31, 2004 and2003. Full group accounts for JSL for theyear ended December 31, 2003 have been filed with the Irish Registrar ofCompanies. Full accounts for SKGL for the year ended December 31,2004 have also been filed with the Registrar of Companies. Full accounts for SKGLfor the year ended December 31, 2005 will be filed with the Registrar indue course.

**34**   Comparative Figures

Certain figures for theprior years have been adjusted to conform with 2005 classifications anddisclosure requirements.

**35**   Differences Between Accounting Principles GenerallyAccepted in Ireland and in the United States 

The Group’s consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in Ireland (“Irish GAAP”), which differ in certain respectsfrom accounting principles generally accepted in the United States (“US GAAP”).The significant differences as they apply to the Group and the necessaryadjustments are summarized below.

**Goodwill**

Irish GAAP, FRS 10—“Goodwilland Intangible Assets,” requires goodwill to be capitalized as an intangiblefixed asset and amortized in the statement of operations over its estimateduseful life. For US GAAP, the Group applies SFAS No. 142 “Goodwilland Other Intangible Assets”. Under SFAS No. 142, goodwill is nolonger amortized, but is tested for impairment on an annual basis and 

F-57

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences BetweenAccounting Principles Generally Accepted in Ireland and in the United States—(continued)

whenever indicators ofimpairment arise. The Group’s identified indicators of impairment under SFAS No. 142are the same as under SAB No. 100, “Restructuring and Impairment Charges”.

The goodwill impairmenttest, which is based on fair value, is to be performed on a reporting unitlevel using a two-step impairment test. A reporting unit is an operatingsegment as defined by SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information”, or one level lower. In the first step, thefair value of a reporting unit is compared with its carrying amount, includinggoodwill. If the fair value of the reporting unit exceeds its carrying value,goodwill is not deemed to be impaired and step two of the impairment test isnot required. If the fair value of the reporting unit is lower than thecarrying value of long term assets and net working capital, step two needs tobe performed to measure the amount of impairment. The second step of thegoodwill impairment test, used to measure the amount of impairment loss,compares the implied fair value of reporting unit goodwill with the carryingamount of that goodwill. If the carrying amount of reporting unit goodwillexceeds the implied fair value of that goodwill, an impairment loss shall berecognized in an amount equal to that excess. The loss recognized cannot exceedthe carrying amount of goodwill.

The fair value of eachreporting unit was determined based upon JSG’s segment reporting. According tothese calculations, the fair value of the reporting units exceeded the carryingvalue of their net assets. Therefore, the additional analysis was not requiredand there was no impairment of goodwill upon adoption of SFAS No. 142. TheGroup performed an annual impairment test in the last quarter of 2003, 2004 and2005. No indicators of impairment were identified.

Under Irish GAAP, theGroup account for goodwill arising on the acquisition of a foreign entity as aeuro functional asset. Under U.S. GAAP, SFAS No. 52 requires goodwill andany fair value adjustments arising out of the purchase of a foreign entity tobe treated as currency assets and liabilities of the foreign operation andtranslated at the closing rates with differences taken to the currencytranslation adjustment recorded in other comprehensive income as a component ofshareholders’ equity.

**Intangible Assets**

Under US GAAP, €141 million representing the allocated value for customerrelationships has been accounted for as intangible assets under US GAAP. IrishGAAP does not permit the separate recognition of such assets and thus hasincluded the €141 millionamount in goodwill. Such goodwill is amortized under Irish GAAP on astraight-line basis over 40 years. The separately identified intangible assetshave been amortized on a straight-line basis over 5 - 8 years under US GAAP.

**Deferred taxation**

Irish GAAP, FRS 19—“DeferredTax” requires full provision to be made for deferred tax arising from timingdifferences between the recognition of gains and losses in the financialstatements and their recognition in tax computations. In adopting FRS 19, wehave chosen not to discount deferred tax assets and liabilities. This standardeliminated a number of the differences between accounting for deferred taxunder Irish and US GAAP. However, under SFAS No. 109—“Accounting forIncome Taxes”, deferred taxation would also be provided under US GAAP on thedifference between the accounting and taxation bases of assetsand liabilities of subsidiaries acquired. Deferred income taxes on the taxableUS GAAP adjustments are included within the reconciliations.

F-58

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between AccountingPrinciples Generally Accepted in Ireland and in the United States—(continued)

**Retirement benefits**

Under Irish GAAP, FRS 17—“Retirement Benefits”requires that scheme assets are valued at fair value and scheme liabilities aremeasured using the Projected Unit Credit method. Net scheme assets andliabilities, reduced by deferred tax amounts, are required to be shown on theface of the balance sheet as a pension asset or liability as appropriate. JSGFunding has also adopted Urgent Issues Task Force abstract 35—“Death-in-serviceand incapacity benefits” (“UITF 35”). Under US GAAP the main differences withIrish GAAP arise in relation to the recognition of actuarial gains and lossesand the treatment of death-in-service and incapacity benefits. Under US GAAP,net scheme assets and liabilities are required to be shown gross of deferredtax amounts.

**Hyper-inflationaryeconomies**

The Group accounts for the activities of itssubsidiaries in Mexico, Colombia, Venezuela and Argentina, which historicallyhave high rates of inflation, using the US dollar as the functional currency. 

Under US GAAP for each ofthe periods presented, Mexico, Colombia, Argentina and Venezuela would not beregarded as hyper-inflationary and the Mexican Peso, the Colombian Peso, theArgentinean Peso and the Venezuelan Bolivar respectively would have been usedas the functional currency. The application of US GAAP has no materialeffect on the reported net income of these subsidiaries.

**Stock-basedemployee compensation expense**

SFAS No. 123—“Accounting for Stock-BasedCompensation” encourages, but does not require, compensation expense foremployee stock options to be measured based on their fair value at the date ofgrant, determined using option valuation models. JSG Funding elected tocontinue to account for stock based employee compensation in accordance withAPB Opinion No. 25—“Accounting for Stock Issued to Employees” (“APB 25”)and related interpretations and to provide the pro forma information requiredby SFAS No. 123.

UnderUS GAAP, following the measurement principles of APB 25, compensation expensewould be accrued and booked to income over the vesting period. The vestingperiod commences when it becomes probable that theunderlying targets attaching to the options will be achieved and the number ofshares will be known and ends with the date when thegranting of the shares is not contingent upon the performance of additionalservices or other conditions. Compensation expense would be booked on a periodby period basis to reflect the difference between the price an employee mustpay to acquire the shares underlying the option and the market price of theshares, at the end of each accounting period until the final vesting date.

**Debt instrumentsissue costs**

Under Irish GAAP debtissue costs are deducted from the proceeds of the relevant debt instruments.Under US GAAP such costs would be shown as deferred charges in the balancesheet. In both cases the amount of such costs are expensed at a constant rateof interest on the outstanding balance of the debt.

F-59

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

**Accounting forassociates**

Irish GAAP requiresseparate disclosure of operating earnings, net interest, exceptional items andthe taxation charge arising in associates. Under US GAAP earnings ofassociates, net of taxation would be shown as a single line item in arriving atnet income.

**Financialinstruments**

Under Irish GAAP all hedging instruments are matchedwith their underlying hedged item. Each instrument’s gain or loss is broughtinto the profit and loss account and its fair value into the balance sheet atthe same time as is the matched underlying asset, liability, income or cost.

Under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” all derivative instrumentsare recognized on the balance sheet at their fair values. Changes in fair valueare either recognized periodically in income or in shareholders’ equity as acomponent of comprehensive income depending on whether the derivative qualifiesfor hedge accounting in accordance with the requirements of SFAS No. 133,and if so, whether it qualifies as a fair value hedge or cash flow hedge.Changes in fair value of derivatives accounted for as fair value hedges arerecorded in income along with the corresponding portions of the changes in thefair value of the hedged items, to the extent they are effective as hedges.Changes in fair value of derivatives accounted for as cash flow hedges, to theextent they are effective as hedges, are recorded in other comprehensive incomenet of deferred taxes. Changes in fair values of derivatives not qualifying ashedges are reported in net income.

**Currency swaps**

Under Irish GAAP, the fairvalue of currency swaps relating to outstanding debt is an adjustment to thecarrying value of debt. Under US GAAP, it would be separately recorded as partof other assets or liabilities.

**Impairmentwritedowns**

Under Irish GAAP, impairment writedowns are includedin accumulated depreciation. Under US GAAP they would be deducted from thecost of the assets identified as being impaired. 

Under US GAAP, SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” establishes a singleaccounting model for long-lived assets to be disposed of by sale consistentwith the fundamental provisions of SFAS No. 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed of”. While it supersedes portions of APB Opinion 30, “Reporting theResults of Operations-Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions”, it retains the discontinued operations presentation, yet itbroadens that presentation to include a component of an entity (rather than asegment of a business). However, discontinued operations are no longer recordedat net realizable value and future operating losses are no longer recognizedbefore they occur. Under SFAS No. 144, it is no longer necessary to allocategoodwill to long-lived assets and then perform impairment testing. Furthermore,it has been stipulated that in situations where it is expected that certainflows of capital will be accumulated in areas subject to impairment testing,these can be calculated on the basis of a probability-weighted cash flow 

F-60

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted in Ireland and in the United States—(continued)

estimate. SFAS No. 144 also establishes criteriafor determining when an asset should be treated as held for sale.

**Insurance Receipts**

Under Irish GAAP insurance receipts related to theinterruption of business are deferred and released to income against therelated costs.

Under US GAAP, FIN 30, SOP96-1 and EITF 01-13 require insurance receipts to be recognized on receipt.

**Restructuring andintegration costs**

Therules for recognizing restructuring and integration costs in the statementof operations are generally consistent between Irish and US GAAP. However,under Irish GAAP, on the acquisition of a business, costs in connection withrestructuring would not be recorded in purchase accounting but would beexpensed as incurred post acquisition. Under US GAAP, a purchase accountingliability would be recorded for qualifying costs and goodwill increased ifcertain requirements are satisfied as prescribed by EITF 95-3.

**Leveraged buyout transactions**

Under US GAAP, because ofthe application of the EITF issue 88-16, “Basis in Leveraged BuyoutTransactions”, only partial purchase accounting applied to the acquisition ofJSG in 2002. The approximate 8% rollover investment by senior management shareholderswould be valued at their predecessor basis in JSG as opposed to the inherentnew basis in successor. The primary effect of that adjustment was to reducegoodwill and shareholders’ equity. Under Irish GAAP, no such adjustment isrequired. 

**Composition of JSGFunding Group—consolidation of companies sold to affiliates**

As part of the MDPacquisition, certain assets were transferred to newcos, wholly ownedsubsidiaries of JSL. The newcos borrowed **€**125million which was lent to JSL to fund a **€**125 millioncapital contribution in JSG Funding. Under US GAAP, the newcos would beconsolidated in JSG Funding’s financial statements, causing debt of JSG Fundingto increase and equity of JSG Funding to decrease. Eventhough JSG Funding under US GAAP would consolidate the newcos, JSG Funding hadno repayment obligations relating to the newco debt, which was recourse only tothe assets of the newcos. The newcos facility was fully paid beforeDecember 31, 2003.

**Consolidation ofassets held for sale**

The European Commission approval of the Kappa mergerrequired the divestment by the Group of certain Kappa and Smurfit plants. UnderIrish GAAP the Smurfit plants continue to be consolidated until they are soldand the Kappa plants are included as available for sale and are shown ascurrent assets recorded at the lower of cost or net realizable value.

F-61

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

Under US GAAP both the Kappa and the Smurfit plantsare consolidated but treated as held for sale under SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets”. The assetsand liabilities are included at fair value less costs to sell and are shown ascurrent assets and liabilities. Any fair value adjustment on the Kappa plantsis treated as part of purchase price accounting but any subsequent adjustmentsto fair value will be taken to the income statement. Assets held for saleincludes assets of €92,901,000 and liabilitiesof €38,497,000which are included in the European Specialties segment.

Under US GAAP, the results from operations for assetsheld for sale are included in the consolidated statement of operations whereasthey are excluded under Irish GAAP.  

Furthermore, the resultsfor assets held for sale have been classified as discontinued operations underboth Irish and US GAAP.

**Inventory valuation—fairvalue**

Under Irish GAAP the fair value of inventory in anacquisition would be based either, on the current cost to the acquired entityof reproducing the inventory or on the historical cost of the inventory(including the interest cost of holding the inventory) where it is difficult tofind replacement cost as replacement would be impossible. 

Under US GAAP, inventoryacquired in a transaction accounted for under the purchase method is asfollows: (a) finished are valued at estimated selling prices less the sum ofthe costs of disposal and a normal profit; (b) work in process inventories arevalued at estimated selling prices less the sum of the costs of completion,costs of disposal, and a normal profit; and (c) raw material inventories arevalued at current replacement cost. The differences in valuation of inventoryacquired in the Kappa transaction under Irish GAAP and US GAAP will result inan adjustment to goodwill in the reconciliations.

**Longterm receivables**

Under Irish GAAP, certainlong term receivables are included in current assets. Under US GAAP, they areincluded in long term assets. 

**CurrencyTranslation Adjustment**

Adjustments arising ontranslation of the results of non-euro entities operations at average rates andon restatement of the opening net assets at closing rates into the consolidatedfinancial statements are dealt with in the consolidated statement of totalrecognized gains and losses under Irish GAAP and in the statement of othercomprehensive income under US GAAP.  Thecurrency translation adjustment included in other comprehensive income includesthe translation impact of the adjustments to net loss under US GAAP for eachyear.  Furthermore, the currencytranslation adjustment for each Irish GAAP to US GAAP reconciling item has beenincluded in their respective line items in the shareholders’ reconciliationitself.

F-62

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

**Composition of JSGFunding Group–consolidation of parent company debt**

JSG Holdings plc completed an offering of €325million in aggregate principle amount of 11.5% senior PIK notes due 2015 (the“PIK notes”), through a series of transactions substantially all of the netproceeds were paid to shareholders by mean of a capital share reduction underIrish law.

Under Irish GAAP, JSG Holdings plc is not consoldiatedin the Group’s consolidated financial statements.

Under US GAAP, FIN 46(R), “Consolidation of VariableInterest Entities”, requires a variable interest entity (“VIE”) to beconsolidated if a party with an ownership, contractual or other financialinterest in the VIE is obligated to absorb a majority of the risk of loss fromthe VIE’s activities, is entitled to receive a majority of the VIE’s residualreturns (if no party absorbs a majority of the VIE’s losses), or both. Avariable interest holder that consolidates the VIE is called the primarybeneficiary. Upon consolidation, the primary beneficiary generally mustinitially record all of the VIE’s assets, liabilities and noncontrollinginterests at fair value and subsequently account for the VIE as if it wereconsolidated based on majority voting interest. 

Effectively, JSGAcquisitions is deemed the primary beneficiary of JSG Holdings plc under thedefinitions of FIN 46(R), as such, JSG Acquisitions is included in theconsolidated financial statements as of December 31, 2005 and will be reflectedas an increase of outstanding debt with the resulting proceeds as adistribution to shareholders as a dividend. The accrued interest associated with the PIK notes has been recorded inthe statement of operations.  Even thoughJSG Funding would consolidate the PIK notes under US GAAP, JSG Funding has norepayment obligations related to the PIK notes, which was recourse only to theassets of JSG Holdings plc.

**Gain on Munksjo Disposal**

The Company disposed of its Munksjo pulp, specialtypaper and tissue operations during the year ended December 31, 2005.  As the carrying value of these entitiesdiffered under Irish GAAP and US GAAP, the reconciliation of income includes anadjustment to the gain on disposal accordingly.

F-63

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

The following is a summaryof the significant adjustments to net loss and shareholders’ equity which wouldbe required if US GAAP were to be applied instead of Irish GAAP.

| ** **                                                                          | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                                          | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| **Income**                                                                          |       |          |         |          |       |          |       |
| Net loss reported in the consolidated statement of operations                       |       | (177,346      | )            | (34,489       | )          | (67,328       | )          |
| Adjustments:                                                                        |       |          |         |          |       |          |       |
| Goodwill amortization                                                               |       | 28,914        |         | 37,925        |       | 33,817        |       |
| Other intangibles amortization                                                      |       | (2,038        | )            | —        |       | —        |       |
| Retirement benefits                                                                 |       | (8,118        | )            | (3,061        | )          | (3,999        | )          |
| Deferred taxation                                                                   |       | 4,936         |         | 9,309         |       | 22,699        |       |
| Stock based compensation  expense                                                   |       | (17,696       | )            | (330          | )          | (493          | )          |
| Inventory valuation—fair value                                                 |       | (5,451        | )            | —        |       | (5,264        | )          |
| Management rollover investment                                                      |       | 614           |         | 616           |       | 894           |       |
| Financial instruments—fair  value                                              |       | 11,414        |         | (33,275       | )          | (13,779       | )          |
| Consolidation of companies  sold to affiliates                                      |       | (34,053       | )            | (8,195        | )          | (3,295        | )          |
| Adjustment to gain on Munksjö  disposal                                        |       | 2,597         |         | —        |       | —        |       |
| Consolidation of assets held  for sale                                              |       | 163           |         | —        |       | —        |       |
| Insurance receipts                                                                  |       | (398          | )            | —        |       | —        |       |
| PIK Interest                                                                        |       | (35,541       | )            | —        |       | —        |       |
|                                                                                |       | (54,657       | )            | 2,989         |       | 30,580        |       |
| **Net loss as adjusted to accord with US GAAP**                                     | ** ** | **€**    | **(232,003** | **)**         | **€** | **(31,500**   | **)**      | **€** | **(36,748** | **)** |
| Arising from:                                                                       |       |          |         |          |       |          |       |
| Continuing operations                                                               |       | (203,578      | )            | (65,388       | )          | (82,706       | )          |
| Acquired activities                                                                 |       | (26,181       | )            | —        |       | —        |       |
| Discontinued activities                                                             |       | (2,244        | )            | 33,888        |       | 45,958        |       |
| **Net loss available  to ordinary shareholders as adjusted to accord with US GAAP** | ** ** | **€**    | **(232,003** | **)**         | **€** | **(31,500**   | **)**      | **€** | **(36,748** | **)** |

 

F-64

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   DifferencesBetween Accounting Principles Generally Accepted in Ireland and in the UnitedStates—(continued)

**Total Comprehensive Income**

| ** **                                                                            | ** ** | ** **    | ** **   | **Restated**  | ** ** | **Restated**  | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                                            | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
| ** **                                                                            | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| **Net (loss) available to ordinary shareholders as adjusted to accord  with US GAAP** | ** ** | **(232,003**  | **)**        | **(31,500**   | **)**      | **(36,748**   | **)**      |
| Other comprehensive income / (loss):                                                  |       | ** **    | ** **   |          |       |          |       |
| Financial instruments—fair value(1)                                              |       | 7,268         |         | (19,365       | )          | (1,757        | )          |
| Unrealized foreign currency translation adjustments                                   |       | 18,123        |         | 23,091        |       | 6,072         |       |
| Retirement benefits                                                                   |       | (77           | )            | (4,824        | )          | 6,533         |       |
| **Comprehensive  loss**                                                               | ** ** | **€**    | **(206,689** | **)**         | **€** | **(32,598**   | **)**      | **€** | **(25,900)** | ** ** |
|                                                                                       |            |               |              |               |            |               |            |  |  |  |

----

(1)   Financialinstruments—fair value of €7,268,000 in 2005 is net of the tax benefit of €773,000.

Netlosses of €3,075,000 of the accumulated adjustments to totalcomprehensive income in respect of the fair value of financial instruments areexpected to be reclassified into earnings in the next twelve months. Theseinstruments derive from gains and losses on derivatives hedging cash flows onforecasted transactions (the maximum period for which is two years) and oninterest rate swaps qualifying as cash flow hedges.

**Shareholders’ Equity**

| ** **                                                              | ** ** | ** **    | ** **  | **Restated**  | ** ** |
|-------------------------------------------------------------------------|------------|---------------|-------------|---------------|------------|
| ** **                                                              | ** ** | **2005**      | ** **  | **2004**      | ** ** |
| ** **                                                              | ** ** | **€000** | ** **  | **€000** | ** ** |
| Shareholders’ equity as reported in the consolidated balance sheet |       | 1,418,862     |        | 869,101       |       |
| Adjustments:                                                            |       |          |        |          |       |
| Goodwill—Gross                                                     |       | 106,985       |        | 44,005        |       |
| —Aggregate amortization                                            |       | 101,606       |        | 81,695        |       |
| Other intangibles amortization                                          |       | (2,038        | )           | —        |       |
| Hyper-inflationary  economies—property, plant and equipment        |       |          |        |          |       |
| —Cost                                                              |       | 103,026       |        | 140,133       |       |
| —Aggregate depreciation                                            |       | (49,707       | )           | (63,141       | )          |
| Hyper-inflationary economies—investments                           |       | 310           |        | 3,013         |       |
| Retirement benefits                                                     |       | (30,597       | )           | (34,147       | )          |
| Deferred taxation                                                       |       | (137,896      | )           | (127,194      | )          |
| Financial instruments—fair value                                   |       | (30,059       | )           | (48,741       | )          |
| Minority share of US GAAP adjustments                                   |       | (6,376        | )           | (8,615        | )          |
| Consolidate newcos                                                      |       | (176,859      | )           | (146,519      | )          |
| Rollover investment by JSG management                                   |       | (74,961       | )           | (75,574       | )          |
| Insurance receipts                                                      |       | (398          | )           | —        |       |
| Consolidation of assets held  for sale                                  |       | 163           |        | —        |       |
| PIK                                                                     |       | (360,541      | )           | —        |       |
|                                                                    |       | (557,342      | )           | (235,085      | )          |
| **Shareholders’ equity as  adjusted to accord with US GAAP**       | ** ** | **€**    | **861,520** | ** **    | **€** | **634,016** | ** ** |
|                                                                         |            |               |             |               |            |  |  |

 

F-65

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted in Ireland and in the United States—(continued)

Shareholders’ equity underUS GAAP includes assets amounting to €157,285,000 andliabilities amounting to €57,403,000 held for sale at December 31,2005.

Certain amounts in the USGAAP reconciliation and related footnote disclosures have been restated toreflect the currency translation adjustment associated with the goodwillarising from the acquisition of the Jefferson Smurfit Group in 2002. SFAS No.52 requires goodwill and any fair value adjustments arising out of the purchaseof a foreign entity to be treated as currency assets and liabilities of theforeign operation and translated at the closing rates with differences taken tothe currency translation adjustment recorded in other comprehensive income as acomponent of shareholders’ equity. Accordingly, in performing this goodwillallocation to subsidiaries and applicable currency translation, the Group hasrestated financial statement amounts presented in accordance with US GAAP toreflect the currency movement associated with goodwill in the years 2003 and2004. This resulted in a cumulative increase in currency translation adjustmentof €93,533,000as of December 31, 2004 leading to a reduction in both goodwill andshareholders’ equity reported under US GAAP for an identical amount.Consequently, the currency translation adjustment in other comprehensive lossfor the years ended December 31, 2004 and 2003 increased by €8,409,000and €85,124,000,respectively, thereby increasing other comprehensive loss by identical amountsin both years. This restatement did not impact the consolidated statement ofoperations or cash flows for the years ended December 31, 2004 and 2003 aspresented in accordance with US GAAP.

**Accumulated Other Comprehensive Income Amounts—Restated**

| ** **                             | ** ** | **Currency  Translation  Adjustments** | ** ** | **Financial  Instruments  (Losses)/Gains** | ** ** | **Retirement   Benefits** | ** ** | **Total**     | ** **  |
|----------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|--------------------------------|------------|---------------|-------------|
| ** **                             | ** ** | **€000**                          | ** ** | **€000**                              | ** ** | **€000**                  | ** ** | **€000** | ** **  |
| Balance at December 31, 2002      |       |                                   | 16,900     |                                       |       |                           | (4,534     | )             |        |   | 3,773 |   |   | 16,139 |   |
| Movement in the year                   |       |                                   | 6,072      |                                       |       |                           | (1,757     | )             |        |   | 6,533 |   |   | 10,848 |   |
| Balance at  December 31, 2003     | ** ** |                                   | 22,972     |                                       |       |                           | (6,291     | )             |        |   | 10,306 |   |   | 26,987 |   |
| Movement in the  year                  |       |                                   | 23,091     |                                       |       |                           | (19,365    | )             |        |   | (4,824 | ) |   | (1,098 | ) |
| Balance at  December 31, 2004     | ** ** |                                   | 46,063     |                                       |       |                           | (25,656    | )             |        |   | 5,482 |   |   | 25,889 |   |
| Movement in the  year                  | ** ** |                                   | 18,123     |                                       |       |                           | 7,268      |          |        |   | (77 | ) |   | 25,314 |   |
| **Balance at December 31,  2005** | ** ** |                                   | **€** | **64,186**                                 | ** ** | ** **                     | ** ** | **€**    | **(18,388** | **)** | ** ** | ** ** | **€** | **5,405** | ** ** | ** ** | **€** | **51,203** | ** ** |
|                                        |            |                                        |            |                                            |            |                                |            |               |             |  |  |  |  |  |  |  |  |  |  |

 

**Cash Flows**

The consolidated statement of cash flows preparedunder Irish GAAP presents substantially the same information as that requiredunder US GAAP by SFAS No. 95—“Statement of Cash Flows”. This standarddiffers, however, with regard to the classification of items within thestatements and as regards the definition of cash and cash equivalents. Under USGAAP, cash would not include bank overdrafts. The movements on such bank overdraftsare required to be included in financing activities under SFAS No. 95.Under US GAAP only short term investments with a maturity of three months orless at the date of acquisition are included in cash equivalents. Under USGAAP, movements on restricted cash are included as investing activities. UnderIrish GAAP movements in short term maturity investments and restricted cash areclassified as management of liquid resources. Under Irish GAAP, cash flows arepresented separately for operating activities, dividends received fromassociates, returns on investments and servicing 

F-66

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

of finance, taxation,capital expenditure and financial investment, acquisitions and disposals,equity dividends paid, management of liquid resources and financing. US GAAP,however, requires only three categories of cash flow activity to be reported:operating, investing and financing.

Cash flows from taxationand returns on investments and servicing of finance shown under Irish GAAPwould be included as operating activities under US GAAP. Cash flows fromcapital expenditure, financial investment and acquisitions and disposals wouldbe included as investing activities under US GAAP. The payment ofdividends would be included as a financing activity under US GAAP. Under USGAAP, capitalized interest is treated as part of the cost of the asset to whichit relates and is thus included as part of investing cash flows; under IrishGAAP all interest is treated as part of returns on investments and servicing offinance.

The categories of cashflow activity under US GAAP are summarized as follows:

| ** **                                        | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|---------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                        | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Cash inflow from operating activities             |       | 188,396       |        | 362,737       |       | 375,126       |       |
| Cash (outflow) on investing activities            |       | (530,701      | )           | (174,770      | )          | (333,626      | )          |
| Cash inflow / (outflow) from financing activities |       | 349,360       |        | (129,731      | )          | (29,296       | )          |
| Increase in cash and cash equivalents             |       | 7,055         |        | 58,236        |       | 12,204        |       |
| Currency adjustment on cash and cash equivalents  |       | 9,804         |        | (3,611        | )          | (8,810        | )          |
| Cash and cash equivalents at beginning of period  |       | 230,948       |        | 176,323       |       | 172,929       |       |
| **Cash and  cash equivalents at end of period**   | ** ** | **€**    | **247,807** | ** **    | **€** | **230,948**   | ** ** | **€** | **176,323** | ** ** |
|                                                   |            |               |             |               |            |               |            |  |  |  |

 

**BusinessCombinations—Additional Information Required**

Pro-forma sales and net income/(loss) for Group underUS GAAP for the year ended December 31, 2005 were €7,022million (unaudited) and (€141.6) million (unaudited), respectively (2004:€7,649million (unaudited) and net income of €63.8 million (unaudited),respectively). Pro forma net income for 2005 includes early debt extinguishmentcosts of €104.7million (unaudited) which are not expected to reoccur.

Other intangiblesamortization charge is projected to be approximately €24million annually for the next 5 years.

F-67

----

**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

**Deferred taxation—additionalinformation required by SFAS No. 109**

The analysis of the USGAAP deferred taxation liability required by SFAS No. 109 is as follows:

| ** **                                           | ** ** | **2005**      | ** **  | **2004**      | ** ** |
|------------------------------------------------------|------------|---------------|-------------|---------------|------------|
| ** **                                           | ** ** | **€000** | ** **  | **€000** | ** ** |
| **Deferred  taxation liabilities:**                  |       |          |        |          |       |
| Excess  of book value over tax value of fixed assets |       | 386,203       |        | 295,702       |       |
| Other  timing differences                            |       | 81,974        |        | 83,526        |       |
|                                                 |       | 468,177       |        | 379,228       |       |
| **Deferred  taxation assets:**                       |       |          |        |          |       |
| Net  operating loss carry forwards                   |       | (293,035      | )           | (61,422       | )          |
| Valuation  allowances                                |       | 167,005       |        | 29,631        |       |
| Retirement  benefits                                 |       | (58,264       | )           | (45,679       | )(1)       |
| Other  timing differences                            |       | (2,573        | )           | (42,447       | )          |
|                                                 |       | (186,867      | )           | (119,917      | )          |
|                                                 |       | **€**    | **281,310** | ** **    | **€** | **259,311** | ** ** |
| **Split as  follows:**                               |       |          |        |          |       |
| Current                                              |       | (14,418       | )           | (20,177       | )          |
| Non  current                                         |       | 295,728       |        | 279,488       |       |
|                                                 |       | **€**    | **281,310** | ** **    | **€** | **259,311** | ** ** |

----

(1)          Retirement benefits includes€52,776,000(2004: €44,319,000)in relation to deferred tax which has been recorded within ‘Pensionliabilities’ (note 24).

Valuation allowances areset up for losses carried forward in those jurisdictions in which it is morelikely than not that the losses carried forward will not be utilized to offsetfuture taxable income or in which there is no deferred tax liability againstwhich the related asset can be offset prior to expiry.

**Share optionschemes—additional information required by SFAS No. 123**

As permitted by SFAS No. 123, “Accounting forStock-Based Compensation” and amended by SFAS No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure,” the Group has electedto account for shares to be issued under the Management Participation Agreementunder Accounting Principles Board (“APB”) Opinion No. 25, “Accounting forStock Issued to Employees,” and adopt the disclosure only provisions of SFAS No. 123and SFAS No. 148. Under SFAS No. 123, options are valued at the grantdate using the Black-Scholes valuation model and compensation expenses arerecognized ratably over the vesting period. Had compensation expenses beendetermined as prescribed by SFAS No. 123, the Group’s net loss for theperiod presented would have been as shown in the table below.

F-68

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions which have no vesting restrictions and are fully transferable. Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected share price volatility. Because the Group’semployees share options have characteristics significantly different from thoseof traded options and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of its employee share options. For purposes of pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting period (see “Stock based employee compensationexpense” above for a description of the vesting period).

| ** **                                                                                                             | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                                                                             | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Net loss attributable to common shareholders  under US GAAP                                                            |       |          |         |          |       |          |       |
| As reported                                                                                                            |       | (232,003      | )            | (31,500       | )          | (36,748       | )          |
| Add: Stock-based employee compensation expense included in reported net  loss                                          |       | 17,696        |         | 259           |       | 394           |       |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards  |       | (1,316        | )            | (1,073        | )          | (769          | )          |
| **Pro forma**                                                                                                          | ** ** | **€**    | **(215,623** | **)**         | **€** | **(32,314**   | **)**      | **€** | **(37,123** | **)** |
|                                                                                                                        |            |               |              |               |            |               |            |  |  |  |

 

In September 2002, Jefferson Smurfit Group Ltd.(f/k/a MDCP Acquisitions plc) (“JSGL”) adopted the 2002 Management Equity Plan(the “2002 Plan”). The Plan provides for the issuance of equity purchase rightsfor a nominal value of €0.001 each throughlong-term equity incentive awards to our eligible employees, officers, anddirectors (“Participants”). Each award is comprised of Series A,Series B and Series C convertible shares in JSGL and is proportionedas 40%, 40% and 20%, respectively. Series A convertible shares vest over athree year period ending on December 31, 2007. Series B andSeries C convertible shares will convert over the same time period ifcertain Internal Rate of Return performance requirements are met. Each seriesof convertible share would automatically convert into Series D convertibleshares upon vesting. Subject to certain criteria, these Series Dconvertible shares then could be converted into Ordinary Shares of JSGL uponpayments of an agreed upon conversion price, usually fair market value of JSGLshares at the date of the original award grant. Each award has a life of ten yearsfrom the date of grant. Also, there are certain restrictions on transferringconvertible or ordinary shares. When a Participant terminates employment fromJSGL, JSGL reserves the right to redeem or purchase the convertible shares andany Ordinary Shares acquired as a result of the conversion thereof.

In February 2004, the 2002 Plan was amended (the“2004 Plan”) and restated to, among other things, to provide a clause thatprovides variability in the exercise price for the aforementioned equity awardsbased upon accrued interest for the senior PIK notes in JSG Holdings plc.Furthermore, the awards were exchanged for an identical number of shares in JSGPackaging Ltd. (subsequently renamed to Smurfit Kappa Group Ltd. (“SKG”) in2005). These changes to the 2002 Plan did not take affect untilFebruary 2005 when a corporate restructuring occurred. All othersignificant terms and conditions of the 2002 Plan remained unchanged with theamendment.

F-69

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

In December 2005, the 2004 Plan was amended (the“2005 Plan”) in which SKG gave Participants the opportunity to exchange theirawards of Series A, Series B and Series C convertible sharesinto an equal number of Series E, Series F and Series Gconvertible shares having basically the same terms and conditions. Participantshad to exchange their entire award, not just a particular series of convertibleshares. The main changes to the convertible shares were that vesting dates werechanged to the three years ended December 31, 2010 and the performancecriteria for the Series F and Series G convertible shares wereslightly different to those for the Series B and Series C convertibleshares, which they replaced. Additionally, SKG introduced Series Hconvertible shares, which automatically convert into Series I convertibleshares upon vesting then can be converted into Ordinary Shares of SKG. Thevesting provisions for Series H convertible shares are similar toSeries F convertible shares except that once converted into Series Iconvertible shares, they are not subject to the variable exercise price thatthe other series of convertible shares possess. All other significant terms andconditions of the 2004 Plan remained unchanged with the amendment.

The opportunity to exchange the convertible sharesunder the 2005 Plan did not occur until the first quarter of 2006. Accordingly,as of December 31, 2005, no Series E, Series F or Series Gconvertible shares were outstanding.

Asummary of the activity under the 2002 Plan, as amended, for the three yearsended December 31, 2005 is presented below:

| ** **                                 | ** ** | **A Convertible** | ** **    | **B Convertible** | ** ** | **C Convertible** | ** **    | **H Convertible** | ** ** | **Total**  | ** **    |
|--------------------------------------------|------------|------------------------|---------------|------------------------|------------|------------------------|---------------|------------------------|------------|------------|---------------|
| April 16, 2003 Shares  allotted            |       |                   | 3,118,907     |                   |       |                   | 3,118,907     |                   |       |       | 1,559,449     |   |   |   | — |   |   | 7,797,263 |   |
| October 21, 2003 Shares  allotted          |       |                   | 176,253       |                   |       |                   | 176,253       |                   |       |       | 88,126        |   |   |   | — |   |   | 440,632 |   |
| **Balance  at December 31, 2003**          | ** ** | ** **             | **3,295,160** |                   | ** ** | ** **             | **3,295,160** |                   | ** ** | ** ** | **1,647,575** |   |   |   | — |   | ** ** | **8,237,895** | ** ** |
| March 5, 2004 Shares  allotted             |       |                   | 41,534        |                   |       |                   | 41,534        |                   |       |       | 20,767        |   |   |   | — |   |   | 103,835 |   |
| **Balance  at December 31, 2004**          | ** ** | ** **             | **3,336,694** |                   | ** ** | ** **             | **3,336,694** |                   | ** ** | ** ** | **1,668,342** |   |   |   | — |   | ** ** | **8,341,730** | ** ** |
| December 5, 2005 Shares  allotted          |       |                   | —        |                   |       |                   | —        |                   |       |       | —        |   |   |   | 2,062,880 |   |   | 2,062,880 |   |
| December 31, 2005 Shares cancelled         |       |                   | —        |                   |       |                   | (1,112,231    | )                      |       |       | —        |   |   |   | — |   |   | (1,112,231 | ) |
| **Balance at December 31, 2005**           | ** ** | ** **             | **3,336,694** |                   | ** ** | ** **             | **2,224,463** |                   | ** ** | ** ** | **1,668,342** |   | ** ** | ** ** | **2,062,880** |   | ** ** | **9,292,379** | ** ** |
| **Exercisable at  December 31, 2005** | ** ** | ** **             | **1,112,231** |                   | ** ** | ** **             | **—**    |                   | ** ** | ** ** | **—**    |   | ** ** | ** ** | **—** |   | ** ** | **1,112,231** | ** ** |

 

**Theexercise price for all convertible shares at December 31, 2005 was**€5.12.

F-70

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between AccountingPrinciples Generally Accepted in Ireland and in the United States—(continued)

**Pension costs andtermination indemnities—information required by SFAS No. 87 and SFAS No. 132**

The components of thedefined benefit net pension expense for the Group’s defined benefit plans,termination indemnities and post retirement healthcare defined benefit plansfor the years ended December 31, 2005, 2004 and 2003 under SFAS No. 87amended by SFAS No. 132 are estimated to be as follows:

| ** **                                                         | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                         | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Service  cost                                                      |       | 37,450        |       | 38,470        |       | 36,885        |       |
| Interest  cost                                                     |       | 57,731        |       | 56,282        |       | 55,573        |       |
| Expected  return on plan assets                                    |       | (44,259       | )          | (40,627       | )          | (39,669       | )          |
| Amortization of unrecognized  transition obligation or asset  |       | 112           |       | —        |       | —        |       |
| Recognized  gains and losses                                       |       | 5,453         |       | 61            |       | 4,118         |       |
| Recognized  prior service cost                                     |       | (451          | )          | 57            |       | 655           |       |
| Loss  due to settlement or curtailment                             |       | (2,564        | )          | (636          | )          | —        |       |
|                                                               |       | **€**    | **53,472** | ** **    | **€** | **53,607**    | ** ** | **€** | **57,562** | ** ** |
|                                                                    |            |               |            |               |            |               |            |  |  |  |

 

F-71

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

The estimated fund statusof the Group’s defined benefit plans, termination indemnities and postretirement healthcare defined benefit schemes under SFAS No. 87 amended bySFAS No. 132 was as follows:

| ** **                                                                             | ** ** | **2005**      | ** **   | **2004**      | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|
| ** **                                                                             | ** ** | **€000** | ** **   | **€000** | ** ** |
| **Change in benefit obligation**                                                       | ** ** | ** **    | ** **   | ** **    | ** ** |
| Benefit  obligation at beginning of period                                             |       | 1,123,272     |         | 1,081,891     |       |
| Service  cost                                                                          |       | 37,450        |         | 38,470        |       |
| Interest  cost                                                                         |       | 57,731        |         | 56,282        |       |
| Contributions  by plan participants                                                    |       | 7,180         |         | 7,908         |       |
| Actuarial  gains and losses                                                            |       | 89,686        |         | 8,486         |       |
| Benefits  paid                                                                         |       | (58,201       | )            | (60,748       | )          |
| Divestitures,  curtailments or settlements                                             |       | (8,997        | )            | (542          | )          |
| Plan  amendments                                                                       |       | (61           | )            | (1,793        | )          |
| Reclassification                                                                       |       | —        |         | 2,291         |       |
| Acquisitions                                                                           |       | 799,806       |         | —        |       |
| Disposals                                                                              |       | (29,741       | )            | (101          | )          |
| Currency  adjustments                                                                  |       | 25,249        |         | (8,872        | )          |
| Benefit  obligation at end of period                                                   |       | 2,043,374     |         | 1,123,272     |       |
| **Change in  plan assets**                                                             | ** ** | ** **    | ** **   | ** **    | ** ** |
| Fair  value of plan assets at beginning of period                                      |       | 655,105       |         | 621,833       |       |
| Actual  return on assets                                                               |       | 121,834       |         | 40,999        |       |
| Contributions  by employer                                                             |       | 51,077        |         | 51,921        |       |
| Contributions  by plan participants                                                    |       | 7,180         |         | 7,908         |       |
| Benefits  paid                                                                         |       | (58,201       | )            | (60,748       | )          |
| Divestitures,  curtailments or settlements                                             |       | (3,048        | )            | —        |       |
| Acquisitions                                                                           |       | 536,793       |         | —        |       |
| Disposals                                                                              |       | (7,705        | )            | —        |       |
| Currency  adjustment                                                                   |       | 16,156        |         | (6,808        | )          |
| Fair  value of plan assets at end of period                                            |       | 1,319,191     |         | 655,105       |       |
| Funded  status of the plans                                                            |       | (724,183      | )            | (468,167      | )          |
| Amounts  available to be applied as an increase / (reduction) of future pension costs: |       |          |         |          |       |
| Unrecognized  actuarial gains or losses                                                |       | (7,003        | )            | (13,162       | )          |
| Unrecognized  prior service cost                                                       |       | (1,535        | )            | (1,680        | )          |
| Minimum pension liability                                                              |       | (6,020        | )            | (6,694        | )          |
| **(Accrued)  pension costs**                                                           | ** ** | **€**    | **(738,741** | **)**         | **€** | **(489,703** | **)** |
|                                                                                        |            |               |              |               |            |  |  |

 

The Group’s postretirementhealthcare defined benefit schemes are in the US. The estimated fund status ofthese schemes at December 31, 2005 were €2,412,000(2004: €2,245,000).

F-72

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted in Ireland and in the United States—(continued)

Plan assets less thanprojected benefit obligations include overfunded plans at December 31,2005, €3,200,000(2004: nil) and underfunded plans at December 31, 2005 of €727,383,000(2004: €468,167,000).Thefollowing assumptions were used to determine the defined benefit expense forthe Group.

| ** **                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted  average assumed discount rate                              |       |     | 4.9        | %        |       |     | 5.5        | % |   |   | 5.4 | % |   |
| Weighted  average rates of compensation increase                     |       |     | 3.1        | %        |       |     | 3.3        | % |   |   | 3.2 | % |   |
| Weighted  average expected long term rates of return  on plan assets |       |     | 6.1        | %        |       |     | 6.7        | % |   |   | 6.5 | % |   |

 

The calculation of the projected benefit obligation atDecember 31, 2005 assumed a discount rate of approximately 4.6% (2004:5.1%).

The assets of the plans are invested primarily inequities, fixed interest securities, insurance contracts and real estate.

Theweighted-average asset allocations at December 31, 2005 and 2004 by assetcategory of the defined benefit pension schemes is shown below:

| ** **        | ** ** | **Plan assets**   | ** ** |
|-------------------|------------|------------------------|------------|
| ** **        | ** ** | **Target  Allocation** | ** ** | **Percentage of Plan  Assets at December 31,** | ** ** |
| ** **        | ** ** | ** **             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Equity securities |       | 15 - 80%               |       |   | 50 | % |   |   | 49 | % |   |
| Debt securities   |       | 20 - 85%               |       |   | 38 | % |   |   | 39 | % |   |
| Real Estate       |       | 0 - 10%                |       |   | 6 | % |   |   | 6 | % |   |
| Other             |       | 0 - 10%                |       |   | 6 | % |   |   | 6 | % |   |
| Total             |       |                   |       |   | 100 | % |   |   | 100 | % |   |

 

The Group maintains target allocation percentagesamong various asset classes based on an investment policy established for thepension plans which is designed to achieve long term rate of return objectives,while mitigating against downside risk and considering expected cash flows. Ourinvestment policy is reviewed from time to time to ensure consistency with ourlong term objective of funding 100% of the projected benefit obligation.

The expected long term rate of return on plan assetsreflects the average return rates expected on the funds invested or to beinvested to provide for the benefits included in the projected benefitobligation. In estimating those rates, appropriate consideration is given tothe current returns being earned by the plan assets in the fund and the ratesof return expected to be available for reinvestment.

The Group’s expected return on assets of the definedbenefit schemes is based on recommendations from the plan actuary, havingconsidered anticipated future long term performance of individual assetclasses. Consideration is also given to the appropriate asset allocationstrategy, given the anticipated requirements of the plan to determine theaverage rate of return expected on the funds invested to provide for thepension plan benefits. While appropriate consideration is given to recent fundperformance and 

F-73

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

historical returns, theassumption is primarily a long-term, prospective rate. Based on our most recentstudy, the expected long term return assumption effective January 1, 2006will be 6.1%.

The expected contributions to the defined benefitplans is anticipated to be €80,330,000 in the yearended December 31, 2006. The accumulated benefit obligation of all schemesat December 31, 2005 is €1,819,813,000.

Expected future benefitpayments for each of the next five fiscal years and in the aggregate for thefive fiscal years thereafter are shown below:

| **Year**     | ** ** | ** **    | ** ** | **Benefit Payments** | ** ** |
|--------------|------------|---------------|------------|---------------------------|------------|
| ** **   | ** ** | **€000** | ** ** |
| 2006         |       |          | 80,748     |                      |       |
| 2007         |       |          | 82,077     |                      |       |
| 2008         |       |          | 83,584     |                      |       |
| 2009         |       |          | 88,015     |                      |       |
| 2010         |       |          | 91,278     |                      |       |
| 2011  - 2015 |       |          | 514,856    |                      |       |

 

**36   New AccountingStandards**

**U.S. GAAP**

In November 2004, the FASBissued SFAS 151, ‘‘Inventory Costs—An Amendment of ARB No. 43, Chapter 4.’’SFAS 151 amends the guidance in ARB No. 43, Chapter 4, ‘‘InventoryPricing,’’ to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material. Among other provisions,the new rule requires that items such as idle facility expense, excessivespoilage, double freight and rehandling costs be recognized as current-periodcharges. Additionally, SFAS 151 requires that the allocation of fixedproduction overheads to the costs of conversion be based on the normalcapacity of the production facilities. SFAS 151 is effective for fiscal yearsbeginning after June 15, 2005 and we are required to adopt it in the firstquarter of fiscal year 2006. We do not expect that the adoption ofSFAS 151 will have a material impact on our consolidated results ofoperations and financial condition.

In December 2004, the FASB issued SFAS 123(revised 2004), ‘‘Share-Based Payment’’ which replaces SFAS 123, ‘‘Accountingfor Stock-Based Compensation,’’ and supercedes APB Opinion 25, ‘‘Accounting forStock Issued to Employees.’’ SFAS 123R requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on their fair values. This statement iseffective for accounting periods starting January 1, 2006. We arecurrently evaluating the effect that the adoption of SFAS 123R will have on ourconsolidated results of operations and financial condition.

In December 2004, the FASB issued SFAS 153, ‘‘Exchangesof Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting forNonmonetary Transactions.’’ SFAS 153 eliminates the exception from fairvalue measurement for nonmonetary exchanges of similar productive assets inparagraph 21(b) of APB Opinion 29, ‘‘Accounting for NonmonetaryTransactions,’’ and replaces it with an exception for exchanges that do nothave commercial substance. SFAS 153 specifies that a nonmonetary exchange has 

F-74

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**36**   New Accounting Standards—(continued)

commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS 153 is effective for the fiscalperiods beginning after June 15, 2005 and is required to be adopted by usin the first quarter of fiscal year 2006. We are currently evaluating theeffect that the adoption of SFAS 153 will have on our consolidated results ofoperations and financial condition but we do not expect that it will have amaterial impact.

In May 2005, the FASBissued SFAS 154, “Accounting Changes and Error Corrections” (“SFAS 154”)which replaces Accounting Principles Board Opinions 20 “Accounting Changes” andSFAS 3, “Reporting Accounting Changes in Interim Financial Statements—AnAmendment of APB Opinion No. 28.” SFAS 154 provides guidance on theaccounting for and reporting of accounting changes and error corrections. Itrequires retrospective application for changes in accounting principle and thecorrection of errors. SFAS 154 is effective for fiscal years beginning after December 15,2005. The adoption of this standard is not expected to have a material effecton our results of operations or financial position.

In February 2006, theFASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments”(“SFAS 155”), an amendment of SFAS 140 and SFAS 133. SFAS 155 permits electionto measure any hybrid financial instrument at fair value (with changes in fairvalue recognised in earnings) if the hybrid instruments contains an embeddedderivative that would otherwise be required to be bifurcated and accounted forseparately under SFAS 133. The election to measure the hybrid instrument atfair value is made on an instrument-by-instrument basis and is irreversible. TheStatement is effective for all instruments acquired, issued, or subject to aremeasurement event after the beginning of fiscal years begin after September 15,2006 provided that financial statements for any interim period of that fiscalyear have not been issued. We are currently evaluating the effect that theadoption of SFAS 155 will have on our consolidated results of operations andfinancial condition.

In April 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets, anAmendment to FASB Statement No. 140.”  SFASNo. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities,” to permit servicingrights to either be: (1) measured at fair value with changes in fair valuereported through earnings; or, (2) amortise servicing rights in proportion toand over the estimated net servicing income or loss and assess the rights forimpairment or the need for an increased obligation.  SFAS No. 156 is effective for fiscal yearsbeginning after September 15, 2006.  TheCompany is currently evaluating the impact of adopting SFAS No. 156, but doesnot expect that the adoption will have a material impact on our consolidatedresults of operations or financial condition.

**International Financial Reporting Standards**

In 2002 the European Unionissued regulations requiring all companies with securities admitted to tradingon a regulated market in any European Economic Area (EEA) State to preparetheir financial statements in accordance with accounting standards issued bythe International Accounting Standards Board (‘‘*IASB*’’). For Irish public limited companies with equitysecurities publicly traded, the regulations apply for accounting periodsstarting on or after January 1, 2005. For Irish public limitedcompanies whose debt securities only are publicly traded the regulations may beapplied for accounting periods starting on or after January 1, 2007. Ourequity and debt securities are not admitted to trading on a regulated market ofany EEA Member State, however we intend to prepare financial statements inaccordance with standards issued by the IASB with effect from January 1,2007.

F-75

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37**   OrganizationalStructure

Eachof SKGL, JSG Holdings, JSL, JSG Funding, JSG Acquisitions and JSG are holdingcompanies with no operations of their own. A listing of SKG’s principalsubsidiaries is set out below.

| **Subsidiaries**                                                                                                                           | ** ** | ** **                                                                                                                                                   | ** ** | **Principal Activities** | ** ** | **Country of   Incorporation** | ** ** | **Holding %** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|---------------|------------|
| **Carton de Colombia, S.A.******Apartado Aereo 219, Cali,   Colombia                                                                       |       | Manufacture of   paperboard and packaging products                                                                                                           | ** ** | **Colombia**             |       |                           | 70         |          |       |
| **Carton de Venezuela, S.A******Apartado Aereo 609, Caracas,   Venezuela                                                                   |       | Manufacture of   paperboard and packaging products                                                                                                           | ** ** | **Venezuela**            |       |                           | 88         |          |       |
| **Grupo Smurfit Mexico, S.A. de C.V.******Jaime Balmes, No. 11   Torre D. 7 Piso, Col. Los Morales Polanco 11510, Mexico D.F., Mexico |       | Manufacture of   paperboard and packaging products                                                                                                           | ** ** | **Mexico**               |       |                           | 100        |          |       |
| **Kappa Kraftliner**** ****AB******SE-941 86, Piteå,   Sweden                                                                    |       | Manufacture of   containerboard and holding company for operations in Sweden and other   countries which manufacture specialty papers and packaging products | ** ** | **Sweden**               |       |                           | 100        |          |       |
| **Smurfit****Kappa   Nederland B.V.******Dr. Holtroplaan 5, 5652   Eindhoven The Netherlands                                          |       | Holding company   for Dutch operations which manufacture containerboard, solid board and   packaging products                                                | ** ** | **The Netherlands**      |       |                           | 100        |          |       |
| **Nettingsdorfer   Papierfabrik AG & Co KG******A-4054   Nettingsdorf-Fabrik, Austria                                                  |       | Manufacture of   containerboard and holding company for Austrian operations which manufacture   corrugated board                                             | ** ** | **Austria**              |       |                           | 100        |          |       |
| **Smurfit,   S.A.******Paque Saenz Pena 308—8th Floor, Buenos Aires, Argentina                                                        |       | Manufacture of   paperboard and packaging products                                                                                                           | ** ** | **Argentina**            |       |                           | 100        |          |       |
| **Smurfit   Capital Funding Limited******Beech Hill, Clonskeagh, Dublin 4, Ireland                                                         |       | Finance company                                                                                                                                              | ** ** | **Ireland**              |       |                           | 100        |          |       |
| **Smurfit Deutschland GmbH & Co KG******Tilsiter Strasse 144, 22047   Hamburg, Germany                                                 |       | Holding company   for German operations which manufacture paperboard and packaging products                                                                  | ** ** | **Germany**              |       |                           | 100        |          |       |
| **Smurfit   International B.V.******Fred Roeskestraat 123, 1076   EE Amsterdam, The Netherlands                                       |       | Principal   international holding company                                                                                                                    | ** ** | **The Netherlands**      |       |                           | 100        |          |       |

 

F-76

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**JSG Funding plc and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37**   Organizational Structure—(continued)

| **Subsidiaries**                                                                                                                          | ** ** | ** **                                                                                                                                                                                                 | ** ** | **Principal Activities** | ** ** | **Country of   Incorporation** | ** ** | **Holding %** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|---------------|------------|
| **Smurfit   International France S.A.******2 rue Goethe, 75116 Paris, France                                                              |       | Holding company for   French operations whose activities are the manufacture of paperboard and   packaging products                                                                                        | ** ** | **France**               |       |                           | 100        |          |       |
| **Smurfit   Investments UK Limited******Darlington Road, West Auckland,   Bishop Auckland, Co. Durham   DL14** **9PE, United Kingdom |       | Holding company   for UK operations whose principal activities are the manufacture of   paperboard and packaging products                                                                                  | ** ** | **United Kingdom**       |       |                           | 100        |          |       |
| **Smurfit   Kappa Ireland Limited******Beech Hill, Clonskeagh, Dublin 4,   Ireland                                                        |       | Manufacture of   paperboard and packaging products and printing                                                                                                                                            | ** ** | **Ireland**              |       |                           | 100        |          |       |
| **Smurfit   Nervion, S.A.******B Arriandi s/n, 48215 lurreta, Vizcaya, Spain                                                              |       | Manufacture of   sack paper and holding company for Spanish, Portuguese and sack converting   operations whose principal activities are the manufacture of paperboard,   packaging and paper sack products | ** ** | **Spain**                |       |                           | 99         |          |       |
| **Smurfit   SISA, S.p.A******Strada Serravalle 30, 15067   Novi Ligure (AL), Italy                                                        |       | Manufacture of   paperboard and packaging products                                                                                                                                                         | ** ** | **Italy**                |       |                           | 90         |          |       |

 

F-77

----

**JSGAcquisitions and Subsidiary Companies**

**Report ofIndependent Registered Public Accounting Firm**

To the Board of DirectorsJSG Acquisitions

We have audited the accompanying consolidated balancesheets of JSG Acquisitions and subsidiary companies (the “Company”) as ofDecember 31, 2005 and 2004, and the related consolidated statements ofoperations, total recognized gains and losses, changes in shareholders’ equity,and cash flows for each of the three years in the period endedDecember 31, 2005. Our audits also included the financial statementschedule listed in the Index at Item 18. These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits. We did not audit the financial statements of Kappa Holding B.V., awholly-owned subsidiary, which statements reflect total assets constituting 35.5%as of December 31, 2005 and total revenues constituting 4.5% for the yearthen ended of the related consolidated totals. Those statements were audited byother auditors whose report has been furnished to us, and our opinion, insofaras it relates to the amounts included for Kappa Holding B.V., is based solelyon the report of the other auditors.

We conducted our audits in accordance with InternationalStandards on Auditing (UK and Ireland) and the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting.Our audit included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits and the report of other auditorsprovide a reasonable basis for our opinion.

In our opinion, based on our audits and the report ofother auditors, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of JSG Acquisitionsand subsidiary companies at December 31, 2005 and 2004, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2005, in conformity with accountingprinciples generally accepted in Ireland, which differ in certain respects fromU.S. generally accepted accounting principles (see Note 35 of the Notes to theConsolidated Financial Statements). Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

Asdiscussed in Note 35 of the Notes to the Consolidated Financial Statements,certain amounts in accordance with U.S. generally accepted accountingprinciples have been restated to account for certain currency translationadjustments.
| /s/ Ernst & Young               |   |
|------------------------------------------|--------|
| Ernst &  Young  Dublin, Ireland |   |
| April 30,  2006                     |   |

 

F-78

----

** **

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsof JSG Acquisitions

We have audited the combined balance sheet of KappaHolding B.V. and its subsidiaries (the “Company”) as of December 31, 2005and the related combined statement of operations, combined statement of cashflows, total recognized gains and losses and changes in shareholders’ equityfor the one month ended December 31, 2005 (not presented separatelyherein). These combined financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesecombined financial statements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly we express no such opinion. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

In our opinion, the combined financial statementsreferred to above present fairly, in all material respects, the financialposition of the Company at December 31, 2005 and the results of itsoperations and cash flows for the one month ended December 31, 2005, inconformity with accounting principles generally accepted in Ireland.

Accounting principles generally accepted in Irelandvary in certain significant respects from accounting principles generallyaccepted in the United States of America. Information relating to the natureand effect of such differences is presented in Note 31 to the combinedfinancial statements.

/s/ PricewaterhouseCoopers

PricewaterhouseCoopersDublin, IrelandApril 30, 2006

 

F-79

----

**JSG Acquisitions and Subsidiary CompaniesConsolidated Statements of Operations**

| ** **                                                | ** ** | **Note**   | ** ** | **2005**      | ** ** | **2004**      | ** **   | **2003**      | ** ** |
|-----------------------------------------------------------|------------|------------|------------|---------------|------------|---------------|--------------|---------------|------------|
| ** **                                                | ** ** | ** ** | ** ** | **€000** | ** ** | **€000** | ** **   | **€000** | ** ** |
| Net Sales                                                 |       |       | 3          | ** **    |       | ** **    | ** **   | ** **    | ** ** | ** ** | ** ** |
| Continuing  operations                                    |       |       |       | ** **    |       | 4,212,514     |         | 4,278,439     |       | 4,146,061 |   |
| Continuing operations—acquisitions                   |       |       |       | ** **    |       | 199,611       |         | —        |       | — |   |
| Discontinued  operations                                  |       |       |       | ** **    |       | 25,204        |         | 526,643       |       | 600,254 |   |
|                                                      |       |       |       | ** **    |       | 4,437,329     |         | 4,805,082     |       | 4,746,315 |   |
| Cost of sales                                             |       |       |       | ** **    |       | 3,222,705     |         | 3,473,299     |       | 3,419,820 |   |
| Impairment of property,  plant and equipment              |       |       | 5          | ** **    |       | 45,214        |         | —        |       | — |   |
| Gross profit                                              |       |       |       | ** **    |       | 1,169,410     |         | 1,331,783     |       | 1,326,495 |   |
| Net operating  expenses                                   |       |       | 4          | ** **    |       | 977,292       |         | 1,010,565     |       | 982,296 |   |
| Reorganization  and restructuring costs                   |       |       | 5          | ** **    |       | 25,090        |         | 39,430        |       | 35,006 |   |
| Operating income  subsidiaries                            |       |       |       | ** **    |       |          |         |          |       |   |   |
| Continuing  operations                                    |       |       |       | ** **    |       | 174,297       |         | 226,028       |       | 243,724 |   |
| Acquired  operations                                      |       |       |       | ** **    |       | (5,425        | )            | —        |       | — |   |
| Discontinued  operations                                  |       |       |       | ** **    |       | (1,844        | )            | 55,760        |       | 65,469 |   |
|                                                      |       |       |       | ** **    |       | 167,028       |         | 281,788       |       | 309,193 |   |
| Share of  associates’ operating income               |       |       |       | ** **    |       | 7,287         |         | 12,611        |       | 12,155 |   |
| Total operating  income                                   |       |       |       | ** **    |       | 174,315       |         | 294,399       |       | 321,348 |   |
| Income on sale of  assets and businesses                  |       |       | 5          | ** **    |       | 52,587        |         | 22,173        |       | 5,560 |   |
| Interest income                                           |       |       |       | ** **    |       | 10,730        |         | 8,335         |       | 11,631 |   |
| Interest expense                                          |       |       | 7          | ** **    |       | (249,475      | )            | (293,009      | )          | (308,754 | ) |
| Loss from early  extinguishment of debt                   |       |       | 7          | ** **    |       | (104,658      | )            | (5,697        | )          | — |   |
| Other financial  expense                                  |       |       | 24         | ** **    |       | (13,259       | )            | (15,718       | )          | (15,266 | ) |
| Share of  associates’ net interest                   |       |       |       | ** **    |       | (1,336        | )            | (1,301        | )          | (2,062 | ) |
| (Loss)/income  before taxes and equity minority interests |       |       | 8          | ** **    |       | (131,096      | )            | 9,182         |       | 12,457 |   |
| Taxes on income                                           |       |       | 9          | ** **    |       | 21,561        |         | 26,973        |       | 62,354 |   |
| (Loss) before  equity minority interests                  |       |       |       | ** **    |       | (152,657      | )            | (17,791       | )          | (49,897 | ) |
| Equity minority  interests                                |       |       |       | ** **    |       | 18,813        |         | 16,067        |       | 16,768 |   |
| **Net (loss) for the year****(1)**                        | ** ** | ** ** | ** ** | ** **    | ** ** | **€**    | **(171,470** | **)**         | **€** | **(33,858** | **)** | **€** | **(66,665** | **)** |
|                                                           |            |            |            |               |            |               |              |               |            |  |  |  |  |  |

 

----

(1)          A summary of thesignificant adjustments to net (loss) which would be required if accountingprinciples generally accepted in the United States had been applied instead ofthose generally accepted in Ireland is given in Note 35.

The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.

F-80

----

**JSG Acquisitions and Subsidiary CompaniesConsolidated Statements of Total Recognized Gains and Losses**

| ** **                                                        | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                        | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| (Loss) / income for the year                                      |       |          |         |          |       |          |       |
| Group                                                             |       | (173,639      | )            | (37,802       | )          | (71,264       | )          |
| Associates                                                        |       | 2,169         |         | 3,944         |       | 4,599         |       |
|                                                              |       | (171,470      | )            | (33,858       | )          | (66,665       | )          |
| Translation  adjustments on foreign currency net investments      |       |          |         |          |       |          |       |
| Group                                                             |       | 5,529         |         | 15,222        |       | 58,982        |       |
| Actuarial (loss) / gain recognized in retirement  benefit schemes |       | (17,281       | )            | (6,988        | )          | 25,603        |       |
| Minority share of  actuarial (loss)                               |       | (94           | )            | —        |       |          |       |
| Total recognized  gains and losses                                |       |          |         |          |       |          |       |
| Group                                                             |       | (185,485      | )            | (29,569       | )          | 13,321        |       |
| Associates                                                        |       | 2,169         |         | 3,945         |       | 4,599         |       |
|                                                              | ** ** | **€**    | **(183,316** | **)**         | **€** | **(25,624**   | **)**      | **€** | **17,920** | ** ** |
|                                                                   |            |               |              |               |            |               |            |  |  |  |

 

**Note of HistoricalCost Profits and Losses**

The results disclosed in the Consolidated Statementsof Operations are not materially different to the results based on anunmodified historical basis.

The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.

F-81

----

**JSG Acquistions and Subsidiary CompaniesConsolidated Balance Sheets**

| ** **                                                               | ** ** | **Note**   | ** ** | **2005**      | ** ** | **2004**      | ** **    |
|--------------------------------------------------------------------------|------------|------------|------------|---------------|------------|---------------|---------------|
| ** **                                                               | ** ** | ** ** | ** ** | **€000** | ** ** | **€000** | ** **    |
| **Assets**                                                               |       |       |       |          |       |          |          |   |   |
| **Current assets**                                                       |       |       |       |          |       |          |          |   |   |
| Cash                                                                     |       |       | 10         |          |       | 247,727       |          | 247,958 |   |
| Restricted cash                                                          |       |       | 10         |          |       | 755,575       |          | — |   |
| Accounts receivable and  prepayments                                     |       |       | 11         |          |       | 1,314,728     |          | 925,048 |   |
| Assets held for sale and  inter-company balances                         |       |       |       |          |       | 54,404        |          | — |   |
| Amounts due by  affiliates                                               |       |       |       |          |       | 107           |          | 395 |   |
| Amounts due by  affiliates after more than one year                      |       |       |       |          |       | 263,115       |          | 270,698 |   |
| Inventories                                                              |       |       | 12         |          |       | 663,131       |          | 452,166 |   |
| **Total  current assets**                                                |       |       |       |          | ** ** | **3,298,787** | ** **    | **1,896,265** | ** ** |
| **Fixed assets**                                                         |       |       |       |          |       |          |          |   |   |
| Investments                                                              |       |       | 13         |          |       | 87,746        |          | 81,895 |   |
| Property, plant and  equipment                                           |       |       | 14         |          |       | 3,499,084     |          | 2,334,858 |   |
| Intangible assets                                                        |       |       | 15         |          |       | 2,490,245     |          | 1,455,116 |   |
| **Total  fixed assets**                                                  |       |       |       |          | ** ** | **6,077,075** | ** **    | **3,871,869** | ** ** |
| **Total  assets**                                                        |       |       |       |          | ** ** | **€**    | **9,375,862** | ** ** | **€** | **5,768,134** | ** ** |
| **Liabilities,  minority interests and shareholders’ equity**       |       |       |       |          |       |          |          |   |   |
| **Current  liabilities**                                                 |       |       |       |          |       |          |          |   |   |
| Bank loans, overdrafts  and other borrowing                              |       |       | 19         |          |       | 72,555        |          | 82,550 |   |
| Kappa bonds outstanding                                                  |       |       | 19         |          |       | 755,575       |          | — |   |
| Accounts payable and  accrued liabilities                                |       |       | 16         |          |       | 1,500,413     |          | 1,064,831 |   |
| **Total  current liabilities**                                           |       |       |       |          | ** ** | **2,328,543** | ** **    | **1,147,381** | ** ** |
| **Non current liabilities**                                              |       |       |       |          |       |          |          |   |   |
| Long term debt and other  long term liabilities                          |       |       | 18         |          |       | 3,164,540     |          | 1,769,376 |   |
| Amounts due to  affiliates                                               |       |       |       |          |       | 1,414,925     |          | 1,226,013 |   |
| Provisions for  liabilities and charges                                  |       |       | 20         |          |       | 247,733       |          | 221,403 |   |
| Pension liabilities                                                      |       |       | 24         |          |       | 655,368       |          | 411,237 |   |
| Capital grants deferred                                                  |       |       |       |          |       | 14,460        |          | 14,260 |   |
| Minority interests  (equity interests)                                   |       |       |       |          |       | 131,384       |          | 115,192 |   |
| **Total  liabitilites and minority interests**                           |       |       |       |          | ** ** | **7,956,953** | ** **    | **4,904,862** | ** ** |
| **Shareholders equity****(1)**                                           |       |       |       |          |       |          |          |   |   |
| Share capital                                                            |       |       |       |          |       | 40            |          | 40 |   |
| Other reserves                                                           |       |       | 26         |          |       | 1,683,090     |          | 938,608 |   |
| Retained deficit                                                         |       |       |       |          |       | (264,221      | )             | (75,376 | ) |
| **Shareholders’ equity**                                            |       |       |       |          | ** ** | **1,418,909** | ** **    | **863,272** | ** ** |
| **Total liabilities, minority interests and  shareholders’ equity** |       |       |       |          | ** ** | **€**    | **9,375,862** | ** ** | **€** | **5,768,134** | ** ** |

----

(1)          A summary of thesignificant adjustments to shareholder’s equity which would be required ifaccounting principles generally accepted in the United States had been appliedinstead of those generally accepted in Ireland is given in Note 35.

The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.

F-82

----

**JSG Acquistions and Subsidiary CompaniesConsolidated Statements of Changes in Shareholders’ Equity**

| ** **                                               | ** ** | **Share  capital** | ** ** | **Other  reserves** | ** ** | **Retained  earnings** | ** ** | **Total  shareholders’  equity** | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|---------------------|------------|------------------------|------------|---------------------------------------|------------|
| ** **                                               | ** ** | **€000**(1)   | ** ** | **€000**(1)    | ** ** | **€000**          | ** ** | **€000**                         | ** ** |
| **Balance  at December 31, 2002**                   | ** ** |               | **40**     | ** **          |       | **864,404**            | ** ** | **6,532**                             |       |   | **870,976** | ** ** |   |
| Loss                                                     |       |               | —     | ** **          |       | —                 | ** ** | (66,665                               | )          |   | (66,665 | ) |   |
| Actuarial gain  recognized in retirement benefit schemes |       |               | —     | ** **          |       | —                 | ** ** | 25,603                                |       |   | 25,603 |   |   |
| Currency  translation adjustments                        |       |               | —     | ** **          |       | 58,982                 | ** ** | —                                |       |   | 58,982 |   |   |
| **Balance  at December 31, 2003**                   | ** ** |               | **40**     | ** **          |       | **923,386**            | ** ** | **(34,530**                           | **)**      |   | **888,896** | ** ** |   |
| Loss                                                     |       |               | —     | ** **          |       | —                 | ** ** | (33,858                               | )          |   | (33,858 | ) |   |
| Actuarial loss  recognized in retirement benefit schemes |       |               | —     | ** **          |       | —                 | ** ** | (6,988                                | )          |   | (6,988 | ) |   |
| Currency  translation adjustments                        |       |               | —     | ** **          |       | 15,222                 | ** ** | —                                |       |   | 15,222 |   |   |
| **Balance  at December 31, 2004**                   | ** ** |               | **40**     | ** **          |       | **938,608**            | ** ** | **(75,376**                           | **)**      |   | **863,272** | ** ** |   |
| Capital contribution                                     |       |               |       | ** **          |       | 738,953                | ** ** |                                  |       |   | 738,953 |   |   |
| Loss                                                     |       |               | —     | ** **          |       | —                 | ** ** | (171,470                              | )          |   | (171,470 | ) |   |
| Actuarial loss  recognized in retirement benefit schemes |       |               | —     | ** **          |       | —                 | ** ** | (17,281                               | )          |   | (17,281 | ) |   |
| Minority share of  actuarial (loss)                      |       |               |       | ** **          |       | ** **             | ** ** | (94                                   | )          |   | (94 | ) |   |
| Currency  translation adjustments                        |       |               | —     | ** **          |       | 5,529                  | ** ** | —                                |       |   | 5,529 |   |   |
| **Balance at December 31,  2005**                   | ** ** |               | **€** | **40**              | ** ** |                   | **€** | **1,683,090**                         | ** ** | **€** | **(264,221** | ) |   | **€** | **1,418,909** | ** ** |   |
|                                                          |            |                    |            |                     |            |                        |            |                                       |            |  |  |  |  |  |  |  |  |

----

(1)   See Note 26for further detail.

The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.

F-83

----

**JSG Acquisitions and Subsidiary CompaniesConsolidated Statements of Cash Flows**

| ** **                                                   | ** ** | **Note**   | ** ** | **2005**      | ** ** | **2004**      | ** **  | **2003**      | ** ** |
|--------------------------------------------------------------|------------|------------|------------|---------------|------------|---------------|-------------|---------------|------------|
| ** **                                                   | ** ** | ** ** | ** ** | **€000** | ** ** | **€000** | ** **  | **€000** | ** ** |
| **Net cash  flow from operating activities**                 |       |       | 27         |          |       | 512,871       |        | 640,928       |       | 691,027 |   |
| **Dividends  received from associates**                      | ** ** |       |       |          |       | 3,062         |        | 2,989         |       | 1,258 |   |
| **Returns on investments and servicing of finance**          |       |       |       |          |       |          |        |          |       |   |   |
| Interest  received                                           |       |       |       |          |       | 10,730        |        | 8,370         |       | 11,687 |   |
| Interest  paid                                               |       |       |       |          |       | (286,814      | )           | (278,449      | )          | (292,701 | ) |
| Interest  paid on finance leases                             |       |       |       |          |       | (1,138        | )           | (1,962        | )          | (2,164 | ) |
| Other  financial interest paid                               |       |       |       |          |       | (13,259       | )           | (15,718       | )          | (15,266 | ) |
| Dividends  to minority interests                             |       |       |       |          |       | (6,152        | )           | (5,707        | )          | (7,496 | ) |
| Deferred  debt issue costs                                   |       |       |       |          |       | (98,055       | )           | (5,814        | )          | (7,558 | ) |
|                                                         |       |       |       |          |       | (394,688      | )           | (299,280      | )          | (313,498 | ) |
| **Taxation**                                                 | ** ** |       |       |          |       |          |        |          |       |   |   |
| Irish  corporation tax (paid) / refunded                     |       |       |       |          |       | (3,480        | )           | (8,515        | )          | 2,616 |   |
| Overseas  tax paid                                           |       |       |       |          |       | (39,274       | )           | (50,249       | )          | (61,589 | ) |
| Overseas  tax refunded                                       |       |       |       |          |       | —        |        | 21,433        |       | — |   |
|                                                         |       |       |       |          |       | (42,754       | )           | (37,331       | )          | (58,973 | ) |
| **Capital expenditure and financial investment**             |       |       |       |          |       |          |        |          |       |   |   |
| Purchase  of tangible fixed assets                           |       |       |       |          |       | (192,434      | )           | (206,466      | )          | (207,518 | ) |
| Less  new finance leases                                     |       |       |       |          |       | 4,053         |        | 2,963         |       | — |   |
|                                                         |       |       |       |          |       | (188,381      | )           | (203,503      | )          | (207,518 | ) |
| Capital  grants received                                     |       |       |       |          |       | 3,390         |        | 1,874         |       | 1,995 |   |
| Purchase  of other investments                               |       |       |       |          |       | (87           | )           | (772          | )          | (1,052 | ) |
| Purchase  of fixed assets                                    |       |       | 28         |          |       | 18,198        |        | 36,388        |       | 44,895 |   |
|                                                         |       |       |       |          |       | (166,880      | )           | (166,013      | )          | (161,680 | ) |
| **Acquisitions and disposals**                               | ** ** |       |       |          |       |          |        |          |       |   |   |
| Purchase  of subsidiaries and minorities                     |       |       | 31         |          |       | (205,532      | )           | (2,731        | )          | (102,081 | ) |
| Deferred  acquisition consideration                          |       |       |       |          |       | (1,520        | )           | (2,390        | )          | (54,773 | ) |
| Business  disposals                                          |       |       |       |          |       | 572,174       |        | —        |       | 4,596 |   |
| Receipts  / (advances) from / to affiliates                  |       |       |       |          |       | 9,899         |        | 11,934        |       | (28,206 | ) |
| Investments  in and advances to associates                   |       |       |       |          |       | (351          | )           | (1,194        | )          | (82 | ) |
|                                                         |       |       |       |          |       | 374,670       |        | 5,619         |       | (180,546 | ) |
| **Cash inflow before use of liquid resources and financing** | ** ** |       |       |          |       | 286,281       |        | 146,912       |       | (22,412 | ) |
| **Management  of liquid resources**                          | ** ** |       |       |          |       | (789,786      | )           | (16,914       | )          | 18,812 |   |
| **Financing**                                                | ** ** |       |       |          |       |          |        |          |       |   |   |
| Issue  of shares including minorities                        |       |       |       |          |       | 5             |        | 27            |       | — |   |
| Increase/(decrease)  in term debt                            |       |       | 29         |          |       | 481,142       |        | (67,266       | )          | (49,789 | ) |
| Advances  from affiliates                                    |       |       |       |          |       | 125           |        | 1,102         |       | 88,392 |   |
| Capital  elements of finance leases repaid                   |       |       |       |          |       | (4,812        | )           | (13,576       | )          | (5,689 | ) |
|                                                         |       |       |       |          |       | 476,460       |        | (79,713       | )          | 32,914 |   |
| **(Decrease) / increase in  cash**                           |       |       | 29         |          | ** ** | **€**    | **(27,045** | **)**         | **€** | **50,285** | ** ** | **€** | **29,314** | ** ** |
|                                                              |            |            |            |               |            |               |             |               |            |  |  |  |  |  |

 

The significant differences between the cash flowstatement prepared under accounting principles generally accepted in the UnitedStates and that prepared under accounting principles generally accepted inIreland are given in Note 35.

The Notes to the Consolidated Financial Statements are an integral part of these Financial Statements.

F-84

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements**

**1   Basisof Preparation**

JSG Acquisitions (“JSGAcquisitions”) is a wholly owned subsidiary of JSG Funding plc. On October 2, 2002, JSG Acquisitions acquiredall of the ordinary shares of Jefferson Smurfit Group plc in a take privatetransaction. Prior to this acquisition, JSG Acquisitions had no operations. 

On March 31, 2003 the Groupcompleted the acquisition of SSCC’s European Packaging assets. In thistransaction, which we refer to as the “SSCC Asset Swap”, JSG Funding exchangedits 50% ownership in Smurfit MBI, Canada and approximately €185 million incash for SSCC’s European assets.

On March 1, 2005 the Groupcompleted the sale of our Munksjö specialty paper business for approximately €450 million. On May 18,2005 we completed the sale of our Munksjö tissue business for approximately €28 million. Theproceeds from these disposals were used to pay down part of the term portion ofour senior credit facility. Together, theoperations sold had net sales of approximately €512 million forthe year to December 31, 2004 (2003: €483 million). 

On June 16, 2005 the Group completed the sale ofThe Kildare Hotel & Country Club (The K Club), additional land nearThe K Club and surplus land near our Dublin head office for €115million to a company controlled by Sir Michael Smurfit. The proceeds fromthe sale were applied to debt reduction.

The Munksjö specialty businesses and The K Clubtogether with Smurfit MBI, which was sold as part of the SSCC Asset Swap in2003, are reported as discontinued operations in the Consolidated Statements of Operations. 

On December 1, 2005 Smurfit Kappa Group Limited (“SKGL”),(formerly known as JSG Packaging Limited), the ultimate parent of JSG Funding,JSG Acquisitions and the shareholders of Kappa Holding BV (‘Kappa’) concludedan agreement resulting in a merger of the operations of both groups ofcompanies. The merger was completed through the issue of shares by SKGL and thepayment of consideration comprising cash of approximately €238 millionand an €89million subordinated promissory note, primarily to Kappa’s former shareholders.The ownership structure results in the existing shareholders of SKGL owningapproximately 58.3% of the combination while Kappa’s existing shareholders ownapproximately 41.7%. The transaction involved financing the cash considerationand refinancing the entire existing Kappa Packaging debt and the existing JSGAcquisitions senior credit facility by way of a new senior credit facility. Themerger required European Commission approval, which was granted subject to thefulfilment of an agreed schedule of commitments to dispose of a number ofbusinesses. The financial statements reflect the combination with effect from December 1,2005 incorporating one month’s results for the enlarged business. Thecombination is accounted for as a purchase. 

Under Irish GAAP fairvalue exercises are required to be completed as soon as practicable after thedate of acquisition with the final fair value adjustments incorporated in thefinancial statements for the first full financial year following the acquisition.The fair value exercise relating to the acquisition of Kappa is preliminary.The significant adjustments expected were in respect of the fair value of landand buildings, plant and equipment, post retirement benefits, goodwill anddeferred taxation. The actuarial valuations of the various post retirementplans have been substantially completed and we do not expect the valuationresult to be materially different from the figures included in the 2005 Form 20-F.We have also substantially completed the exercise in relation to land andbuildings and plant and equipment, which has resulted in an increase in fixedassets of €23 million. The acquisition of Kapparesulted in a net increase in goodwill of €1.2 billion.

F-85

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**2   AccountingPolicies**

***(a) Basis of accounting:***

The financial statementsare prepared under the historical cost convention and in accordance withgenerally accepted accounting principles in Ireland (Irish GAAP). They areprepared and presented in euro (€). In preparing thesefinancial statements, certain items have been included in order to comply withaccounting presentation and disclosure requirements applicable in the UnitedStates in respect of foreign registrants. An explanation of the significantdifferences between Irish and US GAAP as they apply to the Group and areconciliation to US GAAP are set out in Note 35. The financial statements donot constitute full group accounts within the meaning of Regulation 40(1) ofthe European Communities (Companies: Group Accounts) Regulations, 1992 ofIreland insofar as such group accounts would have to comply with all of thedisclosure and other requirements of those Regulations. The auditors have madereports without qualification and without reference to an emphasis of matterunder Section 193 of the Companies Act, 1990, in respect of the consolidated financialstatements for the years ended December 31, 2005 and 2004.

***(b) Group consolidation:***

The financial statementscomprise a consolidation of the financial statements of JSG Acquisitions and itsrespective subsidiaries. Associates are accounted for under the equity methodof accounting. Where accounting policies followed by subsidiaries andassociates differ significantly from those adopted for the purpose of theconsolidated financial statements, appropriate adjustments are made in order toachieve a consistent basis of accounting. The results of subsidiaries acquiredor sold are consolidated and the Group’s share of the results of associates areincluded for the periods from their effective date of acquisition until theireffective date of sale.

***(c) Net sales and revenue recognition:***

Net sales consist of salesto third parties after trade discounts and exclude sales taxes. Revenue isrecognized at the time products are delivered or services rendered to externalcustomers.

***(d) Goodwill and other intangible assets:***

Goodwill represents the excess of the cost of sharesin subsidiaries over the fair value of their net assets acquired based on Groupaccounting policies. It is capitalized and amortized over a period of 40 yearsas the directors believe that the durability of the business can bedemonstrated and the value of goodwill is capable of being continuallyreassessed. The carrying value of goodwill is subject to an impairment reviewat the end of the first full year following the year of acquisition andannually thereafter. 

Other intangible assets, namelythe value of the Kappa brand name, are stated at fair value and amortised over anestimated useful life of 10 years.

***(e) Property, plant and equipment:***

Property, plant andequipment is carried at cost less accumulated depreciation. 

F-86

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**2**   Accounting Policies—(continued)

***(f) Depreciation:***

Freehold and longleasehold land are not depreciated. Short leasehold land and buildings aredepreciated over the remaining period of the lease, adjusted for estimatedresidual value. In the main, other tangible fixed assets are depreciated byequal annual installments over their estimated useful lives at the followingrates:

| Freehold and long  leasehold buildings |   | 1 - 5   | % |
|----------------------------------------|--------|---------|---|
| Fixtures and  fittings                 |   | 10 - 25 | % |
| Plant and  machinery                   |   | 3 - 33  | % |
| Motor vehicles                         |   | 20 - 25 | % |

 

***(g) Timberlands:***

The cost of acquiring,establishing and maintaining forestry plantations are classified astimberlands. Depletion of timberlands represents the charge to income relatingto the timber extracted in the year.

***(h) Leasing:***

Assets acquired underfinance leases are capitalized and included in property, plant and equipmentand depreciated in accordance with Group depreciation policy. Payments underoperating leases are expensed over the period of the lease.

***(i) Inventory valuation:***

Inventory is valued at thelower of cost on a first in first out basis or net realizable value. Costincludes direct costs plus applicable factory and other overheads. Netrealizable value is the actual or estimated selling price less all applicablecosts incurred or likely to be incurred in the realization of the sellingprice. Full provision is made for all damaged, deteriorated, obsolete and unusablematerials.

***(j) Debt instruments:***

The finance costs of debtinstruments, which is the difference between the net proceeds and the totalamount payable under the instrument, are accounted for over the life of theinstrument at a constant rate of interest on the outstanding balance. Theproceeds of debt instruments, net of issue costs, are shown as liabilities onthe balance sheet.

***(k) Derivative instruments:***

The Group uses forwardcurrency contracts to reduce exposure to foreign exchange rates. The Group alsouses interest rate swaps to adjust interest rate exposures. The Group considersits derivative instruments qualify for hedge accounting when certain criteriaare met.

F-87

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**2**   Accounting Policies—(continued)

*Forward foreigncurrency contracts*

The criteria forforward foreign currency contracts are:

·       Theinstrument must be related to a foreign currency asset or liability that isprobable and whose characteristics have been identified; and

·       Itmust reduce the risk of foreign currency exchange movements on our operations.

The rates under suchcontracts are used to record the hedged item. As a result, gains and losses areoffset against the foreign exchange gains and losses on the related financialassets and liabilities, or where the instrument is used to hedge a committed,or probable, future transaction, are deferred until the transaction occurs. Gains/losseson hedges of anticipated transactions are recorded in the ConsolidatedStatements of Operations when such anticipated transactions are no longerlikely to occur.

*Interest rate swaps*

The Group’scriteria for interest rate swaps are:

·       Theinstrument must be related to an asset or a liability; and

·       Itmust change the character of the interest rate by converting a variable rate toa fixed rate or vice versa.

Interest differentials are recognized and included ininterest payable or receivable as appropriate.

Interest rate swaps arenot revalued to fair value and are not shown on the Group Balance Sheets.

*Currency swaps*

The Group enters currencyswap agreements to reduce the impact of foreign currency rate fluctuationsarising from unmatched foreign currency assets and liabilities. Related foreigncurrency assets and liabilities are accounted for in the currency of theunderlying swap agreement and translated at the closing rate.

***(l) Foreign Currencies:***

Foreign currency transactions are translated at therate of exchange ruling at the date of the transaction or, if hedged forward,at the rate of exchange under the related forward currency contract. Monetary assetsand liabilities denominated in foreign currencies are translated at the closingrate or, if hedged forward, at the rate of exchange under the related forwardcurrency contract. The resulting profits or losses are dealt with in theConsolidated Statements of Operations.

The balance sheets ofsubsidiaries are translated using the closing rate method. The statements ofoperations and cash flow statements are translated at average rates ruling forthe relevant period. Resulting currency differences, together with thosearising on hedging activities, are dealt with in reserves. The transactions ofoperations in hyper-inflationary economies are reported using a relativelystable currency as the functional currency. The translation gains and lossesarising are recognized in the Consolidated Statements of Operations.

F-88

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**2**   Accounting Policies—(continued)

***(m) Post Retirement Benefits:***

JSG Acquisitions accountsfor post retirement benefits in accordance with FRS 17—“Retirement Benefits”.FRS 17 applies to all types of benefits that an employer provides afteremployees have completed their service, including pensions and other postretirement benefits. The expected increase in the present value of schemeliabilities arising from employee service in the current or prior periods ischarged against operating income. The expected returns on the schemes’ assetsand the increase during the period in the present value of the schemes’liabilities arising from the passage of time are included in the ConsolidatedStatements of Operations as “Other Financial Expense”. Differences between theexpected and the actual return on plan assets, together with the effect ofchanges in the current or prior assumptions underlying the liabilities arerecognized in the Consolidated Statements of Total Recognized Gains and Losses.Scheme assets are valued at fair value and scheme liabilities are measuredusing the projected unit credit method. Net scheme assets and liabilities,reduced by deferred tax amounts, are recorded on the Balance Sheets as apension surplus or deficit as appropriate.

***(n) Deferred taxation:***

The Group providesdeferred tax in accordance with FRS 19—“Deferred Tax”. Under this standard fullprovision is made for deferred tax arising from timing differences between therecognition of gains and losses in the financial statements and theirrecognition in tax computations. We have chosen not to discount deferred taxassets and liabilities. 

***(o) Research and development:***

Research and developmentexpenditure is written off as incurred.

***(p) Use of estimates:***

The preparation offinancial statements requires management to make estimates that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the balance sheet date and the reported amounts of revenuesand expenses for the reporting period. Actual results could differ from thoseestimates.

**3   Segmental Analyses**

The Group is an integrated paper and boardmanufacturer and converter. The Group has identified reportable segments on ageographic basis. In Europe, the Group has two reportable segments: (1) Packagingand (2) Specialties. The Packaging segment is highly integrated. Itincludes a system of mills and plants that produces a full line ofcontainerboard that is converted into corrugated containers. Our specialtiessegment, prior to the Munksjö Specialties disposal, was principally comprisedof décor base paper, other specialty papers and graphicboard production.Additionally, there are central costs which represent corporate governancecosts, including executive costs, and costs of the Group’s legal, companysecretarial, pension administration, tax, treasury and controlling functionsand other administrative costs.

Set out below aresegmental analyses of sales (by source), income before taxes and equityminority interests, total assets, long lived assets, net operating assets,capital expenditure, depreciation, depletion and amortization expense andinvestments in equity method investees. Sales by destination are not 

F-89

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**3**   Segmental Analyses—(continued)

materiallydifferent from sales by source. The analysis of income includes the Group’sshare of the income before exceptional items, interest and taxes of associates.A geographical analysis of employees can be found in Note 6 and of income taxesin Note 9.

**Sales—third party (external net sales)**

| ** **                       | ** ** | **2005**      | ** **    | **2004**      | ** ** | **2003**      | ** ** |
|----------------------------------|------------|---------------|---------------|---------------|------------|---------------|------------|
| ** **                       | ** ** | **€000** | ** **    | **€000** | ** ** | **€000** | ** ** |
| Packaging                        |       | 3,117,403     |          | 3,093,484     |       | 2,972,383     |       |
| Specialties                      |       | 530,629       |          | 1,009,038     |       | 988,275       |       |
| Europe                           |       | 3,648,032     |          | 4,102,522     |       | 3,960,658     |       |
| United  States & Canada |       | —        |          | —        |       | 104,355       |       |
| Latin America                    |       | 789,297       |          | 702,560       |       | 681,302       |       |
|                             | ** ** | **€**    | **4,437,329** | ** **    | **€** | **4,805,082** | ** ** | **€** | **4,746,315** | ** ** |
|                                  |            |               |               |               |            |               |            |  |  |  |

 

Third party sales inIreland were: €189,244,000 for the yearended December 31, 2005; €196,346,000 for the yearended December 31, 2004 and €201,530,000 for the yearended December 31, 2003.

**Sales—Group and third party**

| ** **                      | ** ** | **2005**      | ** **    | **2004**      | ** ** | **2003**      | ** ** |
|---------------------------------|------------|---------------|---------------|---------------|------------|---------------|------------|
| ** **                      | ** ** | **€000** | ** **    | **€000** | ** ** | **€000** | ** ** |
| Packaging                       |       | 4,338,640     |          | 4,255,869     |       | 3,969,405     |       |
| Specialties                     |       | 651,972       |          | 1,138,767     |       | 1,108,017     |       |
| Europe                          |       | 4,990,612     |          | 5,394,636     |       | 5,077,422     |       |
| United States & Canada |       | —        |          | —        |       | 104,355       |       |
| Latin America                   |       | 1,221,240     |          | 1,090,229     |       | 1,067,021     |       |
|                            | ** ** | **€**    | **6,211,852** | ** **    | **€** | **6,484,865** | ** ** | **€** | **6,248,798** | ** ** |
|                                 |            |               |               |               |            |               |            |  |  |  |

 

F-90

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**3**   Segmental Analyses—(continued)

**Income before taxes and equityminority interests**

| ** **                                                            | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|-----------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                            | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Packaging                                                             |       | 129,461       |         | 152,000       |       | 206,446       |       |
| Specialties                                                           |       | 33,154        |         | 98,256        |       | 95,136        |       |
| Associates                                                            |       | 6,420         |         | 10,064        |       | 9,447         |       |
| Europe                                                                |       | 169,035       |         | 260,320       |       | 311,029       |       |
| United States and Canada                                              |       | —        |         | —        |       | 7,775         |       |
| Packaging                                                             |       | 113,996       |         | 118,443       |       | 86,536        |       |
| Associates                                                            |       | 867           |         | 2,546         |       | 506           |       |
| Latin America                                                         |       | 114,863       |         | 120,989       |       | 87,042        |       |
| Asia (Associates)                                                     |       | —        |         | —        |       | 2,202         |       |
| Unallocated centre costs                                              |       | (23,335       | )            | (25,273       | )          | (22,412       | )          |
| Income before intangible amortization, interest and exceptional items |       | 260,563       |         | 356,036       |       | 385,636       |       |
| Amortization of intangible  assets                                    |       | (29,203       | )            | (37,925       | )          | (44,548       | )          |
| Group net interest                                                    |       | (238,745      | )            | (284,674      | )          | (297,123      | )          |
| Loss from early extinguishment of debt                                |       | (104,658      | )            | (5,697        | )          | —        |       |
| Share of associates’ net interest                                |       | (1,336        | )            | (1,301        | )          | (2,062        | )          |
| (Loss)/income before exceptional items                                |       | (113,379      | )            | 26,439        |       | 41,903        |       |
| Reorganization and restructuring costs                                |       | (25,090       | )            | (39,430       | )          | (35,006       | )          |
| Impairment of property, plant and equipment                           |       | (45,214       | )            | —        |       | —        |       |
| Income on sale of assets and businesses                               |       | 52,587        |         | 22,173        |       | 5,560         |       |
|                                                                  | ** ** | **€**    | **(131,096** | **)**         | **€** | **9,182**     | ** ** | **€** | **12,457** | ** ** |
|                                                                       |            |               |              |               |            |               |            |  |  |  |

 

**Total assets**

| ** **                | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|---------------------------|------------|---------------|---------------|---------------|------------|
| ** **                | ** ** | **€000** | ** **    | **€000** | ** ** |
| Packaging                 |       | 5,065,437     |          | 2,404,855     |       |
| Specialties               |       | 654,357       |          | 805,023       |       |
| Europe                    |       | 5,719,794     |          | 3,209,878     |       |
| Latin America             |       | 774,708       |          | 669,743       |       |
| Group centre              |       | 127,893       |          | 162,304       |       |
|                      |       | 6,622,395     |          | 4,041,925     |       |
| Intangible assets         |       | 2,490,245     |          | 1,455,116     |       |
| Amounts due by affiliates |       | 263,222       |          | 271,093       |       |
|                      | ** ** | **€**    | **9,375,862** | ** **    | **€** | **5,768,134** | ** ** |
|                           |            |               |               |               |            |  |  |

 

F-91

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**3**   SegmentalAnalyses—(continued)

**Long lived assets**

| ** **        | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|-------------------|------------|---------------|---------------|---------------|------------|
| ** **        | ** ** | **€000** | ** **    | **€000** | ** ** |
| Packaging         |       | 2,647,603     |          | 1,403,645     |       |
| Specialties       |       | 375,213       |          | 512,959       |       |
| Europe            |       | 3,022,816     |          | 1,916,604     |       |
| Latin America     |       | 475,323       |          | 413,257       |       |
| Group centre      |       | 945           |          | 4,997         |       |
|              |       | 3,499,084     |          | 2,334,858     |       |
| Intangible assets |       | 2,490,245     |          | 1,455,116     |       |
|              | ** ** | **€**    | **5,989,329** | ** **    | **€** | **3,789,974** | ** ** |
|                   |            |               |               |               |            |  |  |

 

Long lived assets inIreland were €82,952,000 and €203,058,000 at December 312005 and 2004 respectively.

**Net operating assets**

| ** **                    | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|-------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                    | ** ** | **€000** | ** **    | **€000** | ** ** |
| Packaging                     |       | 3,091,799     |          | 1,630,279     |       |
| Specialities                  |       | 479,235       |          | 624,296       |       |
| Europe                        |       | 3,571,034     |          | 2,254,575     |       |
| Latin America                 |       | 627,697       |          | 520,224       |       |
| Group centre                  |       | (69,969       | )             | (12,152       | )          |
| Net operating assets          |       | 4,128,762     |          | 2,762,647     |       |
| Intangible assets             |       | 2,490,245     |          | 1,455,116     |       |
| Amounts due by affiliates     |       | 263,222       |          | 269,939       |       |
| Unallocated net liabilities   |       | (5,463,320    | )             | (3,624,430    | )          |
| **Shareholders’ equity** | ** ** | **€**    | **1,418,909** | ** **    | **€** | **863,272** | ** ** |
|                               |            |               |               |               |            |  |  |

 

F-92

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**3**   Segmental Analyses—(continued)

**A reconciliation of netoperating assets above to shareholders’ equity is as follows:**

| ** **                                     | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                     | ** ** | **€000** | ** **    | **€000** | ** ** |
| Per segmental analysis of net operating assets |       | 4,128,762     |          | 2,762,647     |       |
| Intangible assets                              |       | 2,490,245     |          | 1,455,116     |       |
| Amounts due by affiliates                      |       | 263,222       |          | 269,939       |       |
| Unallocated assets                             |       | 2,753,467     |          | 1,725,055     |       |
| Net borrowing                                  |       | (3,102,811    | )             | (1,682,666    | )          |
| Deferred debt issuance costs                   |       | 132,860       |          | 91,628        |       |
| Amounts due to affiliates                      |       | (1,414,925    | )             | (1,226,013    | )          |
| Corporation tax                                |       | (20,410       | )             | (42,147       | )          |
| Capital lease creditors                        |       | (23,549       | )             | (17,400       | )          |
| Provisions for liabilities and charges         |       | (247,733      | )             | (221,403      | )          |
| Pension liabilities                            |       | (655,368      | )             | (411,237      | )          |
| Minority interests (equity interests)          |       | (131,384      | )             | (115,192      | )          |
| Unallocated net liabilities                    |       | (5,463,320    | )             | (3,624,430    | )          |
| **Shareholders’  equity**                 | ** ** | **€**    | **1,418,909** | ** **    | **€** | **863,272** | ** ** |
|                                                |            |               |               |               |            |  |  |

 

Total assets comprisefixed assets and current assets. Long lived assets comprise property, plant andequipment and intangible assets. Net operating assets comprise total assetsless total liabilities but excluding all assets and liabilities of a financingnature.

**Capital expenditure**

| ** **               | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **               | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Packaging                |       | 121,300       |        | 114,803       |       | 128,937       |       |
| Specialities             |       | 28,296        |        | 54,565        |       | 46,902        |       |
| Europe                   |       | 149,596       |        | 169,368       |       | 175,839       |       |
| United States and Canada |       | —        |        | —        |       | 1,365         |       |
| Latin America            |       | 42,432        |        | 36,689        |       | 30,308        |       |
| Group centre             |       | 406           |        | 409           |       | 6             |       |
|                     | ** ** | **€**    | **192,434** | ** **    | **€** | **206,466**   | ** ** | **€** | **207,518** | ** ** |
|                          |            |               |             |               |            |               |            |  |  |  |

 

F-93

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**3**   Segmental Analyses—(continued)

**Depreciation, depletion and amortization expense**

| ** **                            | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|---------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                            | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Packaging                             |       | 177,587       |        | 178,218       |       | 163,753       |       |
| Specialities                          |       | 21,907        |        | 43,375        |       | 44,709        |       |
| Europe                                |       | 199,494       |        | 221,593       |       | 208,462       |       |
| United States and Canada              |       | —        |        | —        |       | 2,244         |       |
| Latin America                         |       | 40,527        |        | 40,806        |       | 42,490        |       |
| Group centre                          |       | 155           |        | 218           |       | 270           |       |
| Depreciation and depletion            |       | 240,176       |        | 262,617       |       | 253,466       |       |
| Amortization of intangible  assets(1) |       | 29,203        |        | 37,925        |       | 44,548        |       |
|                                  | ** ** | **€**    | **269,379** | ** **    | **€** | **300,542**   | ** ** | **€** | **298,014** | ** ** |
|                                       |            |               |             |               |            |               |            |  |  |  |

----

(1)          2005excludes goodwill written off of €128,422,000 in relation tobusinesses disposed (2004: €2,586,000). These havebeen included within income on sale of assets and operations (Note 5).

**Investments in equity method investees**

| ** **    | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|---------------|------------|---------------|------------|---------------|------------|
| ** **    | ** ** | **€000** | ** ** | **€000** | ** ** |
| Europe        |       | 62,264        |       | 60,051        |       |
| Latin America |       | 14,049        |       | 12,244        |       |
|          | ** ** | **€**    | **76,313** | ** **    | **€** | **72,295** | ** ** |
|               |            |               |            |               |            |  |  |

 

**4**   NetOperating Expenses

| ** **              | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **              | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Distribution costs      |       | 366,515       |        | 349,047       |       | 337,489       |       |
| Administrative expenses |       | 613,789       |        | 664,304       |       | 647,685       |       |
| Other operating income  |       | (3,012        | )           | (2,786        | )          | (2,878        | )          |
|                    | ** ** | **€**    | **977,292** | ** **    | **€** | **1,010,565** | ** ** | **€** | **982,296** | ** ** |
|                         |            |               |             |               |            |               |            |  |  |  |

 

In 2003, a gain of €18million on the sale of development land at The K Club was netted againstadministrative expenses.

F-94

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**5**   ExceptionalItems

| ** **                                                            | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|-----------------------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                                            | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| *Group*                                                               | * *   | * *      | * *    | * *      | * *   | * *      | * *   |
| Reorganization and restructuring costs                                |       | (25,090       | )           | (39,430       | )          | (35,006       | )          |
| Income on sale of operations                                          |       | 13,458        |        | 22,173        |       | 5,560         |       |
| Income on sale of assets and operations—discontinued  operations |       | 39,129        |        | —        |       | —        |       |
| Impairment of property, plant and equipment                           |       | (45,214       | )           | —        |       | —        |       |
|                                                                  | ** ** | **€**    | **(17,717** | **)**         | **€** | **(17,257**   | **)**      | **€** | **(29,446** | **)** |
|                                                                       |            |               |             |               |            |               |            |  |  |  |

 

***Group***

The Group has recorded costs of €25,090,000in 2005 representing reorganization and restructuring costs mainly in theEuropean Packaging segment. This figure includes redundancy, closure andreorganization costs. The main closure costs relate to our Clonskeagh Mill inIreland, which was permanently closed in the first quarter of 2005, and to ourGravelines corrugated plant and Cevennes corrugated plant in France, for whichclosures were announced in the final quarter of 2005. The related tax relief of€5,360,000is included in Taxes on income.

The Group has also recorded costs of €45,214,000mainly in the European Packaging segment primarily representing provisions forimpairment of property, plant and equipment. In measuring the value in use ofthe related assets a discount rate of 7.6% was applied to future cash flows.

The Group has reported a net gain of €52,587,000in respect of the sale of assets and operations. The main profit was inrelation to the sale of Munksjo in the first quarter of 2005, partially offsetby a loss on the sale of our Tissues operation in the second quarter of 2005,in addition to the profit on the sale of The K Club in the second quarter of2005. The related tax charge of €156,000 is included inTaxes on income.

In 2004, the Group recorded costs of €39,430,000representing reorganization and restructuring costs mainly in the EuropeanPackaging segment. This figure included redundancy, closure and reorganizationcosts. The main closure costs related to our Cordoba mill in Spain, which waspermanently closed in the third quarter of 2004, and to our Tamworth corrugatedplant and Witham cartons plant in the United Kingdom, for which closures wereannounced in the final quarter of 2004. The related tax relief of €4,048,000was included in Taxes on income.

The Group reported a gain of €22,173,000in respect of the sale of the Botanic Road property in Dublin, the sale of surplusproperty in Italy and Spain and the disposal of our investment in Cartonneriede Valois. The related tax charge of €1,939,000 was included inTaxes on income.

In 2003, the Group recorded costs of €35,006,000representing reorganization and restructuring costs mainly in the EuropeanPackaging segment. This figure included redundancy, closure and reorganizationcosts. The main closure costs related to our Lestrem mill in France, which waspermanently closed in October 2003. The related tax relief of €9,367,000is included in Taxes on income. 

The Group has reported a gain of €5,560,000in respect of the disposal of its Maltese box plant and the sale of land atOrsenigo and Asti in Italy. The related tax charge of €2,086,000is included in Taxes on income.

F-95

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**6**   Employeesand Remuneration

Theaverage number of persons employed by the Group by geographical area in thefinancial year was:

| ** **    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------|------------|------------|------------|------------|------------|------------|------------|
| Europe        |       | 21,384     |       | 22,931     |       | 22,348     |       |
| United States |       | —     |       | —     |       | 639        |       |
| Latin America |       | 7,828      |       | 7,440      |       | 7,318      |       |
|          | ** ** | **29,212** | ** ** | **30,371** | ** ** | **30,305** | ** ** |

 

| ** **                     | ** ** | **2005**      | ** **    | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------------|------------|---------------|---------------|---------------|------------|---------------|------------|
| ** **                     | ** ** | **€000** | ** **    | **€000** | ** ** | **€000** | ** ** |
| **The staff  costs comprise:** |       |          |          |          |       |          |       |
| Wages and salaries             |       | 859,131       |          | 890,748       |       | 873,702       |       |
| Social welfare                 |       | 188,543       |          | 194,858       |       | 190,586       |       |
| Pensions                       |       | 66,204        |          | 71,623        |       | 73,200        |       |
|                           | ** ** | **€**    | **1,113,878** | ** **    | **€** | **1,157,229** | ** ** | **€** | **1,137,488** | ** ** |
|                                |            |               |               |               |            |               |            |  |  |  |

 

**7**   InterestExpense

| ** **                                                | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|-----------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                                | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Interest payable and similar charges:                     |       |          |        |          |       |          |       |
| On bank loans and overdrafts                              |       |          |        |          |       |          |       |
| —repayable within 5  years, by instalment            |       | 41,857        |        | 25,123        |       | 26,614        |       |
| —repayable within 5  years, other than by instalment |       | 17,277        |        | 2,965         |       | 3,207         |       |
|                                                      |       | 59,134        |        | 28,088        |       | 29,821        |       |
| Payable to affiliates                                     |       | 125,204       |        | 137,730       |       | 136,941       |       |
| On all other loans                                        |       | 65,137        |        | 127,191       |       | 141,992       |       |
| ** **                                                | ** ** | **€**    | **249,475** | ** **    | **€** | **293,009**   | ** ** | **€** | **308,754** | ** ** |
|                                                           |            |               |             |               |            |               |            |  |  |  |

 

**The loss of**€105 million from theearly extinguishment of debt arose mainly as a result of our refinancing anddebt reduction activities during 2005. The early pay down of the original PIKdebt, following the February refinancing, resulted in the write-off of €14 million in debtissue and other costs as well as cash costs of €53 million, primarilythe cash premium paid for early redemption. In addition, the Group wrote offdebt issue costs of €10 million in respect of the debt repaid with the Munksjöproceeds.  The Group wrote off a further €4 million in respect ofthe debt repaid with The K Club proceeds and €24 million as a result of the early pay down ofsome debt in the former JSG as part of the financing of the merger. 

F-96

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**8**   IncomeBefore Taxes

| ** **                                                 | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                 | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Income before taxes is stated after charging/(crediting):  | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Depreciation, depletion  and amortization expense          |       | 269,379       |       | 300,542       |       | 298,014       |       |
| Auditors’ remuneration  (including expenses)          |       | 4,388         |       | 4,059         |       | 3,654         |       |
| Operating lease rentals  plant and machinery               |       | 12,456        |       | 13,042        |       | 10,404        |       |
| Operating lease rentals  other                             |       | 9,672         |       | 9,171         |       | 6,110         |       |
| Loss / (gain) on foreign  currency borrowing less deposits |       | 1,174         |       | (376          | )          | 6,401         |       |
| Research and development  costs                            |       | 4,292         |       | 4,924         |       | 4,979         |       |
| Government grants                                          |       | (3,012        | )          | (2,786        | )          | (2,878        | )          |

 

Directors’ emoluments,including pension contributions amounted to €7,757,000(2004: €10,005,000;2003: €7,048,000).

The following amountsrelating to acquired/discontinued operations and acquired operations areincluded in arriving at Cost of sales and Net operating expenses in theConsolidated Statements of Operations.

| ** **                  | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                  | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Cost of sales:**          |       |          |       |          |       |          |       |
| Acquisitons                 |       | 160,685       |       | —        |       | —        |       |
| Disposals                   |       | 22,737        |       | 398,061       |       | 468,553       |       |
| **Net operating expenses:** |       |          |       |          |       |          |       |
| Acquisitons                 |       | 45,452        |       | —        |       | —        |       |
| Disposals                   |       | 4,311         |       | 72,822        |       | 66,232        |       |

 

F-97

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**9**   Taxeson income

| ** **                               | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                               | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| **Current Taxation**                     |       |          |        |          |       |          |       |
| Europe                                   |       | 18,801        |        | (7,219        | )          | 32,463        |       |
| United States and Canada                 |       | (5,378        | )           | —        |       | (686          | )          |
| Latin America                            |       | 25,556        |        | 26,975        |       | 25,547        |       |
|                                     |       | 38,979        |        | 19,756        |       | 57,324        |       |
| **Deferred Taxation**                    |       |          |        |          |       |          |       |
| Europe                                   |       | (13,924       | )           | 3,354         |       | 4,769         |       |
| United States and Canada                 |       | —        |        | 8             |       | 5             |       |
| Latin America                            |       | (5,406        | )           | 1,257         |       | (2,811        | )          |
|                                     |       | (19,330       | )           | 4,619         |       | 1,963         |       |
| **Taxes on income**                      |       |          |        |          |       |          |       |
| Holding Company and  subsidiaries        |       | 19,649        |        | 24,375        |       | 59,287        |       |
| Share of associates                      |       | 1,912         |        | 2,598         |       | 3,067         |       |
|                                     | ** ** | **€**    | **21,561**  | ** **    | **€** | **26,973**    | ** ** | **€** | **62,354** | ** ** |
| **Deferred taxation arises as follows:** |       |          |        |          |       |          |       |
| Capital allowances                       |       | 788           |        | 3,873         |       | 1,068         |       |
| Other                                    |       | (20,118       | )           | 746           |       | 895           |       |
|                                     | ** ** | **€**    | **(19,330** | **)**         | **€** | **4,619**     | ** ** | **€** | **1,963** | ** ** |

 

Current taxation represents corporation tax or itsequivalent on the taxable income in each jurisdiction and unrelieved overseastax on dividends. In 2005, unrelieved overseas tax on dividends amounted to €559,000(2004: €486,000;2003: €474,000).In 2005, the amount of current taxation relating to Ireland was €1,593,000(2004: nil; 2003: a credit of €3,295,000). In 2005, theamount of deferred taxation relating to Ireland was a credit of €1,658,000(2004: a credit of €3,630,000;2003: a charge of €5,225,000).

The deferred taxation credit of €19,330,000for 2005 includes a charge of €2,172,000 (2004: €635,000;2003: €251,000)in respect of pensions. The balance of €21,502,000 (2004: €3,984,000;2003: €1,712,000)is shown as a movement in the liability for Deferred Income Taxes.

The Group has availed of areduced taxation rate of 10%, which applies to certain manufacturing andfinancial service operations in Ireland. This reduced rate expired at the endof 2005 for financial services operations and is due to expire for manufacturingoperations at the end of 2010.

**(Loss)/income before tax is analyzed as follows:**

| ** **                                     | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                     | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Ireland                                        |       | (96,803       | )            | (30,078       | )          | (34,959       | )          |
| Foreign                                        |       | 6,676         |         | 83,132        |       | 111,317       |       |
| Associates                                     |       | 5,951         |         | 11,310        |       | 10,093        |       |
| Unallocated amortization  of intangible assets |       | (29,203       | )            | (37,925       | )          | (44,548       | )          |
| Exceptional items  (Note 5)                    |       | (17,717       | )            | (17,257       | )          | (29,446       | )          |
|                                           | ** ** | **€**    | **(131,096** | **)**         | **€** | **9,182**     | ** ** | **€** | **12,457** | ** ** |
|                                                |            |               |              |               |            |               |            |  |  |  |

 

F-98

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**9**   Taxes on income—(continued)

The total tax charge in future periods will beaffected by any changes to the corporation tax rates in force in the countriesin which the Group operates. The current tax charges will also be affected bychanges in the excess of tax depreciation over book depreciation and the use oftax credits. The total tax charge for 2004 included €12,771,000in respect of discontinued Munksjöspecialties and tissue businesses.

No deferred taxation is recognized on the unremittedearnings of overseas subsidiaries, joint venture and associates; as earningsare continually reinvested by the Group, no taxation is expected to be payableon them in the foreseeable future.

Thefollowing table relates the applicable Republic of Ireland statutory tax rateto the effective tax rate of the Group, obtained by computing the tax charge asa percentage of income before taxes and minority shareholders’ interest:

| ** **                                                        | ** **   | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------------------------------|--------------|-----------|------------|-----------|------------|-----------|------------|
| ** **                                                        | ** **   | **%**     | ** ** | **%**     | ** ** | **%**     | ** ** |
| Corporation tax at Irish  statutory rate                          | * *     | 12.5      |       | 12.5      |       | 12.5      |       |
| Adjusted for:                                                     | * *     |      |       |      |       |      |       |
| Income subject to a  higher rate of tax than Irish statutory rate | * *     | (22.5     | )          | 595.6     |       | 367.4     |       |
| Expenditure not  deductible for tax purposes                      | * *     | 8.2       |       | 157.6     |       | 253.2     |       |
| Tax losses (utilised)/unutilised                                  | * *     | (4.0      | )          | 94.3      |       | (131.5    | )          |
| Adjustments to tax  charge in respect of previous periods         | * *     | (7.9      | )          | (451.9    | )          | 2.7       |       |
| Profits arising not  subject to tax                               | * *     | (2.7      | )          | (114.3    | )          | (3.7      | )          |
|                                                              | *** *** | **(16.4** | **)**      | **293.8** | ** ** | **500.6** | ** ** |

 

**10**   NetBorrowing

| ** **                 | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|----------------------------|------------|---------------|---------------|---------------|------------|
| ** **                 | ** ** | **€000** | ** **    | **€000** | ** ** |
| Cash at bank and in hand   |       | 247,727       |          | 247,958       |       |
| Restricted cash            |       | 755,575       |          | —        |       |
| Total borrowing (Note  19) |       | 4,106,113     |          | 1,930,624     |       |
|                       | ** ** | **€**    | **3,102,811** | ** **    | **€** | **1,682,666** | ** ** |
|                            |            |               |               |               |            |  |  |

 

F-99

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**11**   AccountsReceivable and Prepayments

| ** **                                     | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                     | ** ** | **€000** | ** **    | **€000** | ** ** |
| Amounts falling due  within one year:          | ** ** | ** **    | ** **    | ** **    |       |
| Trade receivables                              |       | 1,228,689     | ** **    | 896,874       |       |
| Less: Provision  for bad and doubtful debts    |       | 45,831        |          | 52,910        |       |
|                                           |       | 1,182,858     | ** **    | 843,964       |       |
| Amounts owed by  associates                    |       | 8,089         | ** **    | 5,764         |       |
| Other receivables                              |       | 79,763        | ** **    | 37,740        |       |
| Prepayments and  accrued income                |       | 28,748        |          | 31,317        |       |
|                                           |       | 1,299,458     | ** **    | 918,785       |       |
| Amounts falling due  after more than one year: |       |          | ** **    | ** **    |       |
| Other receivables                              |       | 15,270        |          | 6,263         |       |
| ** **                                     |       | **€**    | **1,314,728** |          | **€** | **925,048** |   |
|                                                |            |               |               |               |            |  |  |

 

**12**   Inventories

| ** **       | ** ** | **2005**      | ** **  | **2004**      | ** ** |
|------------------|------------|---------------|-------------|---------------|------------|
| ** **       | ** ** | **€000** | ** **  | **€000** | ** ** |
| Raw materials    |       | 186,625       | ** **  | 114,264       |       |
| Work in progress |       | 38,911        | ** **  | 22,283        |       |
| Finished goods   |       | 297,029       | ** **  | 184,060       |       |
| Other            |       | 140,566       | ** **  | 131,559       |       |
| ** **       | ** ** | **€**    | **663,131** | ** **    | **€** | **452,166** | ** ** |
|                  |            |               |             |               |            |  |  |

 

**13**   Investments

| ** **                        | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-----------------------------------|------------|---------------|------------|---------------|------------|
| ** **                        | ** ** | **€000** | ** ** | **€000** | ** ** |
| Associates (Note  13 (i))         |       | 76,313        |       | 72,295        |       |
| Other investments  (Note 13 (ii)) |       | 11,433        |       | 9,600         |       |
|                              | ** ** | **€**    | **87,746** | ** **    | **€** | **81,895** | ** ** |
|                                   |            |               |            |               |            |  |  |

 

F-100

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**13**   (i): Associates

| ** **                       | ** ** | **Share of**   | ** ** | ** **    | ** ** | ** **    | ** ** |
|----------------------------------|------------|---------------------|------------|---------------|------------|---------------|------------|
| ** **                       | ** ** | **net assets** | ** ** | **Loans**     | ** ** | **Total**     | ** ** |
| ** **                       | ** ** | **€000**       | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31, 2002           |       | 144,003             |       | 7,036         |       | 151,039       |       |
| Fair value adjustment            |       | (5,646              | )          | —        |       | (5,646        | )          |
| Additions                        |       | 4,089               |       | —        |       | 4,089         |       |
| Acquisitions                     |       | 763                 |       | —        |       | 763           |       |
| Retained earnings                |       | 4,603               |       | —        |       | 4,603         |       |
| Sales                            |       | (41,656             | )          | —        |       | (41,656       | )          |
| Repayment                        |       | —              |       | (6,728        | )          | (6,728        | )          |
| Reclassification on  acquisition |       | (35,030             | )          | —        |       | (35,030       | )          |
| Currency adjustment              |       | (2,153              | )          | 4             |       | (2,149        | )          |
| **December 31, 2003**       | ** ** | **68,973**          | ** ** | **312**       | ** ** | **69,285**    | ** ** |
| Additions                        |       | 441                 |       | —        |       | 441           |       |
| Retained earnings                |       | 3,944               |       | —        |       | 3,944         |       |
| Sales                            |       | (124                | )          | —        |       | (124          | )          |
| Reclassification                 |       | (414                | )          | —        |       | (414          | )          |
| Currency adjustment              |       | (837                | )          | —        |       | (837          | )          |
| **December 31, 2004**       | ** ** | **71,983**          | ** ** | **312**       | ** ** | **72,295**    | ** ** |
| Additions                        |       | 305                 |       | —        |       | 305           |       |
| Acquisitions                     |       | 2,643               |       | —        |       | 2,643         |       |
| Retained earnings                |       | 2,169               |       | —        |       | 2,169         |       |
| Sales                            |       | (873                | )          | —        |       | (873          | )          |
| Reclassification                 |       | (1,899              | )          | (145          | )          | (2,044        | )          |
| Currency adjustment              |       | 1,814               |       | 4             |       | 1,818         |       |
| **December 31, 2005**       | ** ** | **€**          | **76,142** | ** **    | **€** | **171**       | ** ** | **€** | **76,313** | ** ** |
|                                  |            |                     |            |               |            |               |            |  |  |  |

 

We have one remainingsignificant associate—Duropack AG in Austria, of which we own 40%.

F-101

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**13**   Investments—(continued)

**13**   (ii): OtherInvestments

| ** **                            | ** ** | **Listed***   | ** ** | **Unlisted**  | ** ** | ** **    | ** ** |
|---------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                            | ** ** | **Cost**      | ** ** | **Cost**      | ** ** | **Total**     | ** ** |
| ** **                            | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31,  2002               |       | 6,926         |       | 7,278         |       | 14,204        |       |
| Additions                             |       | 392           |       | 269           |       | 661           |       |
| Acquisitions                          |       | 19            |       | 2,834         |       | 2,853         |       |
| Reclassification                      |       | 38            |       | (5,260        | )          | (5,222        | )          |
| Sales                                 |       | (787          | )          | (16           | )          | (803          | )          |
| Currency  adjustment                  |       | (15           | )          | (321          | )          | (336          | )          |
| **December 31,  2003**           | ** ** | **6,573**     | ** ** | **4,784**     | ** ** | **11,357**    | ** ** |
| Additions                             |       | 231           |       | 541           |       | 772           |       |
| Transfers                             |       | —        |       | (14           | )          | (14           | )          |
| Reclassification                      |       | —        |       | (1,426        | )          | (1,426        | )          |
| Sales                                 |       | (509          | )          | (465          | )          | (974          | )          |
| Currency  adjustment                  |       | 8             |       | (123          | )          | (115          | )          |
| **December 31,  2004**           | ** ** | **6,303**     | ** ** | **3,297**     | ** ** | **9,600**     | ** ** |
| Additions                             |       | 75            |       | 12            |       | 87            |       |
| Acquisitions                          |       | —        |       | 890           |       | 890           |       |
| Reclassification                      |       | —        |       | 921           |       | 921           |       |
| Sales                                 |       | (17           | )          | (219          | )          | (236          | )          |
| Write off to  statement of operations |       | —        |       | (56           | )          | (56           | )          |
| Currency  adjustment                  |       | —        |       | 227           |       | 227           |       |
| **December 31, 2005**            | ** ** | **€**    | **6,361**  | ** **    | **€** | **5,072**     | ** ** | **€** | **11,433** | ** ** |
|                                       |            |               |            |               |            |               |            |  |  |  |

----

*                    Listed on arecognized stock exchange

Other investments are stated at cost. The market valueof the listed investments at December 31, 2005 was €6,371,000  (2004: €6,304,000; 2003: €6,545,000).

F-102

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**14**   Property,Plant and Equipment

| ** **                                  | ** ** | **Land & Buildings** | ** **    | **Plant and** | ** ** | ** **    | ** ** |
|---------------------------------------------|------------|------------------------------------|---------------|--------------------|------------|---------------|------------|
| ** **                                  | ** ** | **Freehold**                       | ** **    | **Leasehold**      | ** ** | **Equipment** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **€000**                      | ** **    | **€000**      | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Cost**                                    | ** ** | ** **                         | ** **    |               | ** ** | ** **    |       | ** ** | ** ** | ** ** | ** ** |
| December 31,  2002                     |       | 861,294                            | ** **    | ** **         | 33,716     | ** **    | ** ** | 2,913,998 | ** ** | 3,809,008 |   |
| Fair value  adjustment                      |       | 97,459                             |          |               | —     |          |       | 97,670 |   | 195,129 |   |
| Reclassification                            |       | 8,404                              |          |               | (329       | )             |       | (46,191 | ) | (38,116 | ) |
| Acquisitions                                |       | 93,412                             |          |               | 6,562      |          |       | 169,411 |   | 269,385 |   |
| Additions                                   |       | 21,354                             |          |               | —     |          |       | 179,652 |   | 201,006 |   |
| Businesses sold                             |       | —                             |          |               | —     |          |       | (165,386 | ) | (165,386 | ) |
| Retirements                                 |       | (16,217                            | )             |               | (302       | )             |       | (82,874 | ) | (99,393 | ) |
| Currency  adjustment                        |       | (47,025                            | )             |               | (1,494     | )             |       | (153,406 | ) | (201,925 | ) |
| **December 31,  2003**                 | ** ** | **1,018,681**                      | ** **    |               | **38,153** | ** **    |       | **2,912,874** | ** ** | **3,969,708** | ** ** |
| Fair value  adjustment                      |       | —                             |          |               | —     |          |       | 1,195 |   | 1,195 |   |
| Reclassification                            |       | 8,849                              |          |               | (8,305     | )             |       | (17,952 | ) | (17,408 | ) |
| Additions                                   |       | 27,076                             |          |               | 2,950      |          |       | 167,634 |   | 197,660 |   |
| Retirements                                 |       | (10,567                            | )             |               | (2,726     | )             |       | (66,863 | ) | (80,156 | ) |
| Currency  adjustment                        |       | (14,254                            | )             |               | 158        |          |       | (44,416 | ) | (58,512 | ) |
| **December 31,  2004**                 | ** ** | **1,029,785**                      | ** **    |               | **30,230** | ** **    |       | **2,952,472** | ** ** | **4,012,487** | ** ** |
| Fair value  adjustment                      |       | 40,438                             |          |               | —     |          |       | (17,449 | ) | 22,989 |   |
| Reclassification                            |       | 21,567                             |          |               | (2,659     | )             |       | (42,064 | ) | (23,156 | ) |
| Acquisitions                                |       | 525,146                            |          |               | —     |          |       | 1,031,986 |   | 1,557,132 |   |
| Additions                                   |       | 7,964                              |          |               | 2,315      |          |       | 173,314 |   | 183,593 |   |
| Businesses sold                             |       | (185,169                           | )             |               | (5,457     | )             |       | (301,857 | ) | (492,483 | ) |
| Retirements                                 |       | (30,506                            | )             |               | —     |          |       | (146,029 | ) | (176,535 | ) |
| Currency  adjustment                        |       | 29,750                             |          |               | (288       | )             |       | 36,479 |   | 65,941 |   |
| **December 31,  2005**                 | ** ** | **1,438,975**                      | ** **    |               | **24,141** | ** **    |       | **3,686,852** | ** ** | **5,149,968** | ** ** |
| **Depreciation**                            | ** ** | ** **                         | ** **    |               | ** ** | ** **    |       | ** ** | ** ** | ** ** | ** ** |
| December 31,  2002                     |       | 141,917                            |          |               | 8,145      |          |       | 1,506,640 |   | 1,656,702 |   |
| Reclassification                            |       | (1,159                             | )             |               | (92        | )             |       | (43,525 | ) | (44,776 | ) |
| Charged                                     |       | 25,141                             |          |               | 1,231      |          |       | 220,438 |   | 246,810 |   |
| Businesses sold                             |       | —                             |          |               | —     |          |       | (96,144 | ) | (96,144 | ) |
| Retirements                                 |       | (4,494                             | )             |               | (316       | )             |       | (72,059 | ) | (76,869 | ) |
| Currency  adjustment                        |       | (9,542                             | )             |               | (84        | )             |       | (91,825 | ) | (101,451 | ) |
| **December 31,  2003**                 | ** ** | **151,863**                        | ** **    |               | **8,884**  | ** **    |       | **1,423,525** | ** ** | **1,584,272** | ** ** |
| Reclassification                            |       | (4,787                             | )             |               | (2,621     | )             |       | (6,473 | ) | (13,881 | ) |
| Charged                                     |       | 27,895                             |          |               | 1,141      |          |       | 227,503 |   | 256,539 |   |
| Retirements                                 |       | (1,882                             | )             |               | (713       | )             |       | (64,287 | ) | (66,882 | ) |
| Currency  adjustment                        |       | (3,487                             | )             |               | 141        |          |       | (29,731 | ) | (33,077 | ) |
| **December 31,  2004**                 | ** ** | **169,602**                        | ** **    |               | **6,832**  | ** **    |       | **1,550,537** | ** ** | **1,726,971** | ** ** |
| Impairment provision                        |       | 2,256                              |          |               | —     |          |       | 42,958 |   | 45,214 |   |
| Reclassification                            |       | 525                                |          |               | (1,027     | )             |       | (18,930 | ) | (19,432 | ) |
| Charged                                     |       | 31,596                             |          |               | 1,428      |          |       | 201,622 |   | 234,646 |   |
| Businesses sold                             |       | (17,020                            | )             |               | —     |          |       | (121,533 | ) | (138,553 | ) |
| Retirements                                 |       | (11,354                            | )             |               | —     |          |       | (128,297 | ) | (139,651 | ) |
| Currency  adjustment                        |       | (48                                | )             |               | (306       | )             |       | 2,476 |   | 2,122 |   |
| **December 31,  2005**                 | ** ** | **175,557**                        | ** **    |               | **6,927**  | ** **    |       | **1,528,833** | ** ** | **1,711,317** | ** ** |
| **Net book  amount December 31, 2005** | ** ** | **€**                         | **1,263,420** | ** **         |       | **€**    | **17,214** | ** ** |   | **€** | **2,158,017** | ** ** | **€** | **3,438,651** | ** ** |
| **Net book  amount December 31, 2004** | ** ** | **€**                         | **860,183**   | ** **         |       | **€**    | **23,398** | ** ** |   | **€** | **1,401,935** | ** ** | **€** | **2,285,516** | ** ** |
| **Net book  amount December 31, 2003** | ** ** | **€**                         | **866,818**   | ** **         |       | **€**    | **29,269** | ** ** |   | **€** | **1,489,349** | ** ** | **€** | **2,385,436** | ** ** |

 

F-103

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**14**   Property, Plant and Equipment—(continued)

| ** **                                  | ** ** | **Timberland** | ** **    |
|---------------------------------------------|------------|----------------|---------------|
| ** **                                  | ** ** | **€000**  | ** **    |
| December 31,  2002                     |       | 61,948         |          |
| Additions                                   |       | 6,512          |          |
| Fair value  adjustment                      |       | (945           | )             |
| Depletion                                   |       | (6,656         | )             |
| Currency  adjustment                        |       | (10,349        | )             |
| **December 31,  2003**                 |       | **50,510**     |          |
| Additions                                   |       | 8,806          |          |
| Depletion                                   |       | (6,078         | )             |
| Currency  adjustment                        |       | (3,896         | )             |
| **December 31,  2004**                 | ** ** | **49,342**     | ** **    |
| Additions                                   |       | 8,841          |          |
| Disposals                                   |       | (12            | )             |
| Depletion                                   |       | (5,530         | )             |
| Currency  adjustment                        |       | 7,792          |          |
| **December 31,  2005**                 | ** ** | **€**     | **60,433**    | ** ** |
| **Net book amount December 31, 2005**  | ** ** | **€**     | **3,499,084** | ** ** |
| **Net book amount December 31, 2004**  | ** ** | **€**     | **2,334,858** | ** ** |
| **Net  book amount December 31, 2003** | ** ** | **€**     | **2,435,946** | ** ** |

 

**Land and Buildings**

Included in tangibleassets is an amount for land of €410,140,000 (2004: €282,021,000;2003: €288,434,000).

**Capitalized leasedproperty, plant and equipment**

Included in the net bookamount of tangible assets is an amount for capitalized leased assets of €42,704,000(2004: €50,355,000;2003: €65,687,000).The depreciation charge for capitalized leased assets for 2005 was €6,832,000and the related finance charges amounted to €1,138,000 (2004: €10,139,000and €1,962,000;2003: €10,794,000and €2,164,000).

F-104

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**15**   IntangibleAssets

| ** **                  | ** ** | ** **    | ** **    | **Other**      | ** ** | **Total**        | ** ** |
|-----------------------------|------------|---------------|---------------|----------------|------------|------------------|------------|
| ** **                  | ** ** | ** **    | ** **    | **Intangible** | ** ** | **Intangible**   | ** ** |
| ** **                  | ** ** | **Goodwill**  | ** **    | **Assets**     | ** ** | **Assets**       | ** ** |
| ** **                  | ** ** | **€000** | ** **    | **€000**  | ** ** | **€000**    | ** ** |
| December 31,  2002     |       | 1,543,531     |          |           | —     |             |       | 1,543,531 |   |
| Acquisitions                |       | 174,659       |          |           | —     |             |       | 174,659 |   |
| Disposals                   |       | (80,543       | )             |           | —     |             |       | (80,543 | ) |
| Fair value  adjustments     |       | (142,723      | )             |           | —     |             |       | (142,723 | ) |
| Amortization                |       | (44,548       | )             |           | —     |             |       | (44,548 | ) |
| Currency  adjustment        |       | 4,743         |          |           | —     |             |       | 4,743 |   |
| **December 31, 2003**  | ** ** | **1,455,119** | ** **    | ** **     | —     |             | ** ** | **1,455,119** | ** ** |
| Acquisitions                |       | 2,731         |          |           | —     |             |       | 2,731 |   |
| Disposals                   |       | (2,586        | )             |           | —     |             |       | (2,586 | ) |
| Fair value  adjustments     |       | 40,457        |          |           | —     |             |       | 40,457 |   |
| Amortization                |       | (37,925       | )             |           | —     |             |       | (37,925 | ) |
| Currency  adjustment        |       | (2,680        | )             |           | —     |             |       | (2,680 | ) |
| **December 31, 2004**  | ** ** | **1,455,116** | ** **    | ** **     | —     |             | ** ** | **1,455,116** | ** ** |
| Acquisitions                |       | 1,185,705     |          |           | 35,000     |             |       | 1,220,705 |   |
| Disposals                   |       | (128,422      | )             |           | —     |             |       | (128,422 | ) |
| Reclassification            |       | (31,247       | )             |           | —     |             |       | (31,247 | ) |
| Amortization                |       | (28,914       | )             |           | (289       | )                |       | (29,203 | ) |
| Currency  adjustment        |       | 3,296         |          |           | —     |             |       | 3,296 |   |
| **December 31,  2005** | ** ** | **€**    | **2,455,534** | ** **     | ** ** | **€34,711** |       | ** ** | **€** | **2,490,245** | ** ** |
|                             |            |               |               |                |            |                  |            |  |  |  |  |

 

Accumulated amortization at December 31, 2005 and2004 was €94,588,000 and €75,110,000 respectively.

 

**16**   AccountsPayable and Accrued Liabilities

| ** **                                        | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|---------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                        | ** ** | **€000** | ** **    | **€000** | ** ** |
| Trade payables                                    |       | 905,697       |          | 652,744       |       |
| Amounts owed to  associates—trading balances |       | 3,289         |          | 3,683         |       |
| Amounts due to  affiliates                        |       | —        |          | 1,154         |       |
| Taxation  creditors (Note 17)                     |       | 72,859        |          | 70,829        |       |
| Deferred  acquisition consideration               |       | 33,713        |          | 2,330         |       |
| Social welfare                                    |       | 51,574        |          | 48,740        |       |
| Accruals                                          |       | 323,315       |          | 189,079       |       |
| Capital payables                                  |       | 50,261        |          | 29,305        |       |
| Other payables                                    |       | 55,573        |          | 62,497        |       |
| Capitalized lease  obligations                    |       | 4,132         |          | 4,470         |       |
|                                              | ** ** | **€**    | **1,500,413** | ** **    | **€** | **1,064,831** | ** ** |
|                                                   |            |               |               |               |            |  |  |

 

F-105

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**17**   TaxationCreditors

| ** **                 | ** ** | **2005**         | ** ** | **2004**      | ** ** |
|----------------------------|------------|------------------|------------|---------------|------------|
| ** **                 | ** ** | **€000**    | ** ** | **€000** | ** ** |
| Current taxation           |       | 20,410           |       | 42,147        |       |
| Payroll taxes              |       | 41,020           |       | 29,256        |       |
| VAT and other  sales taxes |       | 11,429           |       | (574          | )          |
|                       | ** ** | **€72,859** | ** ** | **€**    | **70,829** | ** ** |
|                            |            |                  |            |               |            |  |

 

**18**   LongTerm Debt and Other Long Term Liabilities

| ** **                                             | ** ** | **2005**            | ** ** | **2004**      | ** **    |
|--------------------------------------------------------|------------|---------------------|------------|---------------|---------------|
| ** **                                             | ** ** | **€000**       | ** ** | **€000** | ** **    |
| Borrowing—due  after more than one year (Note 19) |       | 3,277,983           |       | 1,848,074     |          |
| Deferred debt issuance  costs                          |       | (132,860            | )          | (91,628       | )             |
| Capitalized lease  obligations                         |       | 19,417              |       | 12,930        |          |
|                                                   | ** ** | **€3,164,540** | ** ** | **€**    | **1,769,376** | ** ** |
|                                                        |            |                     |            |               |               |  |

 

**19**   Borrowing

**Analysis of Net Debt**

| ** **                                                                               | ** ** | **2005**      | ** **    | **2004**      | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                                                               | ** ** | **€000** | ** **    | **€000** | ** ** |
| Senior credit facility:                                                                  |       |          |          |          |       |
| Revolving credit facility(1)—interest at relevant  interbank rate + 2.25% |       | 9,210         |          | —        |       |
| Tranche A Term loan(2a)—interest at relevant  inter bank  rate + 2.25%         |       | 475,856       |          | 275,090       |       |
| Tranche B Term loan(2b)—interest at relevant  inter bank rate +  2.75%(2d)     |       | 1,165,518     |          | 444,068       |       |
| Tranche C Term loan(2c)—interest at relevant  inter bank rate +  3.25%(2d)          |       | 1,165,518     |          | 450,262       |       |
| Yankee bonds including  accrued interest(3)                                              |       | 251,497       |          | 416,245       |       |
| Kappa bonds(4)                                                                           |       | 755,575       |          | —        |       |
| Bank loans and  overdrafts / (cash)(5)                                                   |       | (930,577      | )             | (112,999      | )          |
| 2011 Receivables  securitization floating rate notes (incl. accrued  interest)(6)        |       | 210,214       |          | 210,000       |       |
| **Net debt**                                                                             | ** ** | **3,102,811** | ** **    | **1,682,666** | ** ** |
| Leases                                                                                   |       | 23,549        |          | 17,400        |       |
| **Net debt including leases**                                                            | ** ** | **€**    | **3,126,360** | ** **    | **€** | **1,700,066** | ** ** |
|                                                                                          |            |               |               |               |            |  |  |

----

(1)                Revolvingcredit facility of **€**600 million (availableunder the senior credit facility) to be repaid in full in 2012. Includes amounts drawn under ancillaryfacilities and amounts drawn under facilities covered by letters of credit.

(2a)          Term loan A due to berepaid in certain instalments up to 2012.

(2b)         Termloan B due to be repaid in full in 2013.

(2c)          Termloan C due to be repaid in full in 2014.

F-106

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

(2d)         Margin on Tranches B& C reduced by 0.25% on euro term loans and by 0.375% on US Dollar term loansin February 2006.

(3)                7.50% seniordebentures due 2025 of $292.3 million (6.75% senior notes of $234 million due2005 were repaid in November 2005).

(4)                Various Kappa bondsrepaid on January 3, 2006.

(5)                Cash at December 31,2005 includes **€**756 million which isplaced as defeasance deposit with Kappa bond trustee.

(6)                Receivablessecuritization floating rate notes mature September 2011

| ** **                                 | ** ** | **2005**           | ** **    | **2004**      | ** ** |
|--------------------------------------------|------------|--------------------|---------------|---------------|------------|
| ** **                                 | ** ** | **Bank**           | ** **    | ** **    | ** ** | ** ** | ** ** | **Bank** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Loans and** | ** **    | **Other**     | ** ** | ** ** | ** ** | **Loans and** | ** ** | **Other** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Overdrafts**     | ** **    | **Borrowing** | ** ** | **Total** | ** ** | **Overdrafts** | ** ** | **Borrowing** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **€000**      | ** **    | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Analysis  by year of repayment**         | ** ** | ** **         | ** **    | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bank loans, overdrafts and other borrowing |       | 67,609             |          | 4,946         |       | 72,555 |   | 78,283 |   | 4,267 |   | 82,550 |   |
| Kappa bonds  outstanding                   |       | —             |          | 755,575       |       | 755,575 |   | — |   | — |   | — |   |
| Within one year                            |       | 67,609             |          | 760,521       |       | 828,130 |   | 78,283 |   | 4,267 |   | 82,550 |   |
| Between 1 and 2  years                     |       | 79,819             |          | 6,254         |       | 86,073 |   | 75,515 |   | 6,277 |   | 81,792 |   |
| Between 2 and 3  years                     |       | 56,270             |          | 2,172         |       | 58,442 |   | 171,966 |   | 2,429 |   | 174,395 |   |
| Between 3 and 4  years                     |       | 65,669             |          | 1,972         |       | 67,641 |   | 118,411 |   | 1,938 |   | 120,349 |   |
| Between 4 and 5  years                     |       | 67,397             |          | 1,761         |       | 69,158 |   | 163,427 |   | 1,738 |   | 165,165 |   |
| Thereafter                                 |       |               |          |          |       |   |   |   |   |   |   |   |   |
| By instalment                              |       | 218,874            |          | 2,928         |       | 221,802 |   | — |   | 3,970 |   | 3,970 |   |
| Other than by instalment                   |       | 2,316,851          |          | 458,016       |       | 2,774,867 |   | 837,491 |   | 464,912 |   | 1,302,403 |   |
| Due after more  than one year              |       | 2,804,880          |          | 473,103       |       | 3,277,983 |   | 1,366,810 |   | 481,264 |   | 1,848,074 |   |
| Total borrowing                            | ** ** | **€**         | **2,872,489** | ** **    | **€** | **1,233,624** | ** ** | **€** | **4,106,113** | ** ** | **€** | **1,445,093** |   | **€** | **485,531** |   | **€** | **1,930,624** |   |
|                                            |            |                    |               |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                            | ** ** | **2005**          | ** **  | **2004**          | ** ** |
|---------------------------------------|------------|-------------------|-------------|-------------------|------------|
| ** **                            | ** ** | **Within**        | ** **  | **After**         | ** ** | **Within** | ** ** | **After** | ** ** |
| ** **                            | ** ** | **One Year** | ** **  | **One Year** | ** ** | **One Year** | ** ** | **One Year** | ** ** |
| ** **                            | ** ** | **€000**     | ** **  | **€000**     | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Analysis of borrowing**   |       |              |        |              |       |   |   |   |   |
| Secured bank loans and  overdrafts:   |       |              |        |              |       |   |   |   |   |
| Overseas loans                        |       | 14,074            |        | 804,382           |       | 7,453 |   | 7,496 |   |
| Domestic loans                        |       | 12,150            |        | 1,996,648         |       | 29,514 |   | 1,355,521 |   |
|                                  |       | 26,224            |        | 2,801,030         |       | 36,967 |   | 1,363,017 |   |
| Unsecured bank loans and  overdrafts: |       |              |        |              |       |   |   |   |   |
| Overseas loans                        |       | 30,974            |        | 3,850             |       | 24,855 |   | 3,793 |   |
| Domestic loans                        |       | 10,411            |        | —            |       | 16,461 |   | — |   |
|                                  |       | 41,385            |        | 3,850             |       | 41,316 |   | 3,793 |   |
| Total bank loans and  overdrafts      |       | 67,609            |        | 2,804,880         |       | 78,283 |   | 1,366,810 |   |
| Secured other loans                   |       | 384               |        | 455,581           |       | — |   | 462,912 |   |
| Unsecured other loans                 |       | 4,562             |        | 17,522            |       | 4,267 |   | 18,352 |   |
| Kappa bonds outstanding               |       | 755,575           |        | —            |       | — |   | — |   |
| Total other loans                     |       | 760,521           |        | 473,103           |       | 4,267 |   | 481,264 |   |
| **Total borrowing**                   | ** ** | **€**        | **828,130** | ** **        | **€** | **3,277,983** | ** ** | **€** | **82,550** | ** ** | **€** | **1,848,074** | ** ** |
|                                       |            |                   |             |                   |            |  |  |  |  |  |  |  |  |

 

F-107

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

Security comprises fixedand floating charges over the assets of certain subsidiaries and pledges overthe Group’s shareholding in certain of its subsidiaries. The gross amount ofreceivables collateralizing the receivables securitization at December 31, 2005was €262,046,000(2004: €261,225,000).At December 31, 2005 cash of €14,085,000 (2004: €12,655,000)was in securitization bank accounts which was not available for transfer toother group subsidiaries.

Includedin secured other loans are the following long term obligations:

| ** **                                               | ** ** | **000** | ** ** |
|----------------------------------------------------------|------------|---------|------------|
| Guaranteed debentures 7.50% due 2025                     |       | $       | 292,300    |   |
| Receivables  securitization floating rate notes due 2011 |       | €  | 210,000    |   |

 

Committed facilitiesamounted to €4,204,853,000 (2004: €2,307,064,000)of which €3,283,517,000(2004: €1,878,997,000)were utilized at December 31, 2005. The weighted average period until maturityof undrawn committed facilities is 5.3 years (2004: 4.6 years).

***Maturity of UndrawnCommitted Facilities***

| ** **            | ** ** | **2005**      | ** **  | **2004**      | ** ** |
|-----------------------|------------|---------------|-------------|---------------|------------|
| ** **            | ** ** | **€000** | ** **  | **€000** | ** ** |
| Within 1 year         |       | 55,546        |        | 3,067         |       |
| Between 1 and 2 years |       | —        |        | —        |       |
| More than 2 years     |       | 865,790       |        | 425,000       |       |
|                  | ** ** | **€**    | **921,336** | ** **    | **€** | **428,067** | ** ** |
|                       |            |               |             |               |            |  |  |

 

**Financial instruments and risk management**

The operating parameters and policies of treasurymanagement are established under board authority.  The formal treasury policy covers the areasof funding, counterparty risk, foreign exchange, controls and derivatives.  Risk arising on counterparty default iscontrolled within a framework of dealing with high quality institutions thatmeet certain minimum criteria.  The Groupuses derivative instruments in the management of interest rate and currencyrisk.

The Group’s financialinstruments, other than derivatives, comprise borrowing, cash and liquidresources, and various items, such as trade debtors, trade creditors etc, thatarise directly from its operations. The Group uses derivative financialinstruments primarily to manage its exposure to market risks from changes ininterest and foreign exchange rates. The Group does not enter into or issuederivative financial instruments for trading purposes. The Group’s policy is tocentrally manage interest rate and currency exposure.

**(a) Interest raterisk management**

The Group manages interest rate exposure to achieve anappropriate balance of fixed and variable rate funding. To achieve thisobjective, the Group enters into interest rate swaps, options and forward rateagreements. Interest rate swap agreements are used to change the interestreceivable or payable on the Group’s underlying cash and borrowing fromvariable to fixed rates or from fixed to variable rates. At the year end, 60%(2004: 55%) of the Group’s borrowing was at fixed rates after taking account ofinterest rate 

F-108

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

swaps. The weightedaverage interest rate on borrowing outstanding at the year end was 6.0% (2004: 6.1%).The weighted average interest rate on short term borrowing was 5.48% (2004: 6.11%).

Outstanding interest rateswap agreements at December 31, 2005 are summarized as follows:

| **Currency** | ** ** | ** ** | ** ** | **Notional  Principal  (Millions)** | ** ** | **Termination  Dates** | ** ** | **% Fixed  Payable** | ** ** | **% Variable  Receivable** | ** ** | **% Fixed  Receivable** | ** ** | **% Variable  Payable** | ** ** |
|--------------|------------|------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| EUR          |       |       | 175        |                                |       |                   | 2006       |                      |       | 3.4775 - 3.67                   |       |                         | Euribor    | (1)                          |       |   | — |   |   |   | — |   |   |
| EUR          |       |       | 425        |                                |       |                   | 2007       |                      |       | 3.455 - 3.67                    |       |                         | Euribor    |                         |       |   | — |   |   |   | — |   |   |
| EUR          |       |       | 480        |                                |       |                   | 2008       |                      |       | 3.165 - 3.615                   |       |                         | Euribor    |                         |       |   | — |   |   |   | — |   |   |
| EUR          |       |       | 1,100      |                                |       |                   | 2009       |                      |       | 3.035 - 3.62                    |       |                         | Euribor    |                         |       |   | — |   |   |   | — |   |   |

----

(1)          European InterbankOffered Rate

Outstandinginterest rate swap agreements at December 31, 2004 are summarized as follows:

| **Currency** | ** ** | ** ** | ** ** | **Notional  Principal  (Millions)** | ** ** | **Termination  Dates** | ** ** | **% Fixed  Payable** | ** ** | **% Variable  Receivable** | ** ** | **% Fixed  Receivable** | ** ** | **% Variable  Payable** | ** ** |
|--------------|------------|------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| EUR          |       |       | 200        |                                |       |                   | 2005       |                      |       | 3.43 - 3.485                    |       |                         | Euribor    |                         |       |   | — |   |   |   | — |   |   |
| EUR          |       |       | 110        |                                |       |                   | 2006       |                      |       | 3.49 - 4.37                     |       |                         | Euribor    |                         |       |   | — |   |   |   | — |   |   |
| SEK          |       |       | 94         |                                |       |                   | 2006       |                      |       | —                          |       |                         | —     |                         |       |   | 5.24 |   |   |   | Stibor | (2) |   |
| EUR          |       |       | 700        |                                |       |                   | 2007       |                      |       | 3.39 - 3.62                     |       |                         | Euribor    |                         |       |   | — |   |   |   | — |   |   |

----

(2)          Stockholm InterbankOffered Rate

**Aftertaking into account the various interest rate swaps and currency swaps enteredinto by the Group, the interest rate profile of the Group’s financialliabilities at December 31, 2005 was:**

| ** **    | ** ** | ** **                   | ** ** | ** **                                                        | ** ** | ** **                                                     | ** ** | **Fixed Rate financial liabilities** | ** ** |
|---------------|------------|------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **    | ** ** | **Total**€ Million | ** ** | **Floating rate  financial  liabilities**€ Million | ** ** | **Fixed rate  financial  liabilities**€ Million | ** ** | **Weighted  average  interest rate  %**        | ** ** | **Weighted average  period until  maturity  Years** | ** ** |
| **Currency**  | ** ** | ** **                   | ** ** | ** **                                                        | ** ** | ** **                                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Euro          |       |                         | 3,518      |                                                              |       |                                                           | 1,154      |                                                |       |   | 2,364 |   |   |   | 6.53 |   |   |   | 3.3 |   |   |
| Sterling      |       |                         | 84         |                                                              |       |                                                           | 84         |                                                |       |   | — |   |   |   |   |   |   |   |   |   |   |
| US Dollar     |       |                         | (344       | )                                                                 |       |                                                           | 1          |                                                |       |   | (345 | ) |   |   | 8.71 |   |   |   | 5.5 |   |   |
| Polish Zloty  |       |                         | 12         |                                                              |       |                                                           | 11         |                                                |       |   | 1 |   |   |   | 6.17 |   |   |   | 2.4 |   |   |
| Swedish Krona |       |                         | 82         |                                                              |       |                                                           | 82         |                                                |       |   | — |   |   |   |   |   |   |   |   |   |   |
| Other         |       |                         | 22         |                                                              |       |                                                           | 18         |                                                |       |   | 4 |   |   |   |   |   |   |   |   |   |   |
| **Total**     | ** ** | ** **                   | **€** | **3,374**                                                         |       | ** **                                                     | ** ** | **€**                                          | **1,350**  |   | ** ** | ** ** | **€** | **2,024** |   |   |   |   |   |   |   |   |   |   |
|               |            |                              |            |                                                                   |            |                                                                |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-109

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

**(b) **Foreign exchangerisk management****

The Group manages its balance sheet having regard tothe currency exposures arising from its assets being denominated in a widerange of currencies. To this end, where foreign currency assets are funded byborrowing, such borrowing is generally sourced in the currency of the relatedassets. The Group also hedges a portion of its currency exposure through theuse of currency swaps and forward contracts. At December 31, 2005 theGroup had entered into €278 million (2004: €163million) currency equivalent of forward contracts and there were no optionscontracts outstanding (2004: €66 million)  in respect of its day to day trading.

Outstandingcurrency swap agreements at December 31, 2005 are summarized as follows:

| **Currency swapped**

**(Millions)** | ** ** | ** ** | ** **   | **Currency received  (Millions)** | ** ** | **Maturity date** | ** ** | **Interest rate paid** | ** ** | **Interest rate received** | ** ** |
|-------------------------------------------|------------|------------|--------------|----------------------------------------|------------|------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| USD 176                              |       |       | EUR 172 |                                   |       |                   | 2007       |                             |       | Euribor + 332                        |       |   | Libor(1) + 300 |   |   |
| USD 222                              |       |       | EUR 190 |                                   |       |                   | 2007       |                             |       | Euribor + 259                        |       |   | 7.50 |   |   |
| USD 70                               |       |       | SEK 574 |                                   |       |                   | 2007       |                             |       | Stibor + 260                         |       |   | 7.50 |   |   |
| USD 200                              |       |       | EUR 153 |                                   |       |                   | 2010       |                             |       | 6.61                                 |       |   | 7.75 |   |   |
| USD 204                              |       |       | EUR 183 |                                   |       |                   | 2012       |                             |       | 9.98                                 |       |   | 9.65 |   |   |

----

(1)             London InterbankOffered Rate

Outstanding currency swapagreements at December 31, 2004 are summarized as follows:

| **Currency swapped  (Millions)** | ** ** | ** ** | ** **   | **Currency received  (Millions)** | ** ** | **Maturity date** | ** ** | **Interest rate paid** | ** ** | **Interest rate received** | ** ** |
|---------------------------------------|------------|------------|--------------|----------------------------------------|------------|------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| USD 195                          |       |       | EUR 200 |                                   |       |                   | 2007       |                             |       | Euribor + 318                        |       |   | Libor + 300 |   |   |
| USD 204                          |       |       | EUR 190 |                                   |       |                   | 2012       |                             |       | 9.6481                               |       |   | 9.6491 |   |   |
| USD 231                          |       |       | EUR 199 |                                   |       |                   | 2005       |                             |       | Euribor + 464                        |       |   | 6.8238 |   |   |
| USD 136                          |       |       | EUR 101 |                                   |       |                   | 2005       |                             |       | Euribor +81                          |       |   | Libor + 93 |   |   |
| USD 35                           |       |       | EUR 25  |                                   |       |                   | 2005       |                             |       | Euribor + 708                        |       |   | 7.55 |   |   |
| USD 113                          |       |       | SEK 749 |                                   |       |                   | 2005       |                             |       | Stibor + 597                         |       |   | 7.55 |   |   |
| USD 5                            |       |       | SEK 33  |                                   |       |                   | 2005       |                             |       | Stibor + 110                         |       |   | Libor + 93 |   |   |

 

At December 31, 2005 the Group had also enteredinto currency swaps of €374 million equivalent(2004: €90million) as part of its short term liquidity management.

Excluding the Group’sLatin American operations, there were no significant transactional currencyexposures at December 31, 2005, that gave rise to net currency gains andlosses recognised in the profit and loss account. Such exposures comprise themonetary assets and liabilities of the Group that are not denominated in theoperating (or ‘functional’) currency of the operating unit involved. As at December 31,2005, transactional currency exposures in the Group’s Latin American operationsamounted to €35 million (2004: €19 million).

F-110

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

**(c) Fair valueof financial instruments**

Thecarrying amounts and estimated fair values of the material financialinstruments of the Group are as follows:

| ** **                                        | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|---------------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                        | ** ** | **Carrying**  | ** ** | **Fair**      | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                        | ** ** | **Amount**    | ** ** | **Value**     | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                        | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Assets**                                        | ** ** | ** **    |       |          |       |   |   |   |   |
| Cash, short term  deposits and liquid investments |       | 247,727       |       | 247,727       |       | 247,958 |   | 247,958 |   |
| Restricted cash                                   |       | 755,575       |       | 755,575       |       | — |   | — |   |
| Accounts  receivable and prepayments              |       | 1,299,458     |       | 1,299,458     |       | 918,785 |   | 918,785 |   |
| Publicly traded  investments                      |       | 6,361         |       | 6,371         |       | 6,303 |   | 6,304 |   |
| **Liabilities**                                   |       |          |       |          |       |   |   |   |   |
| Short term debt                                   |       | 72,555        |       | 72,555        |       | 82,550 |   | 82,550 |   |
| Kappa bonds  outstanding                          |       | 755,575       |       | 755,575       |       | — |   | — |   |
| Accounts payable  and accrued liabilities         |       | 1,500,413     |       | 1,500,413     |       | 1,064,831 |   | 1,064,831 |   |
| Medium and long  term debt                        |       | 3,277,983     |       | 3,218,241     |       | 1,848,074 |   | 1,846,788 |   |
| **Derivative  financial instruments**             |       |          |       |          |       |   |   |   |   |
| Interest rate  swap agreements                    |       |          |       | (45,800       | )          |   |   | (57,397 | ) |
| Currency swap  agreements                         |       |          |       | (21,895       | )          |   |   | (125,743 | ) |
| Foreign exchange  contracts                       |       |          |       | 1,063         |       |   |   | 12,068 |   |
| Energy/Pulp hedging  contracts                    |       |          | ** ** | 990           | ** ** |   |   | (6,024 | ) |

 

The following methods andassumptions were used by the Group in estimating its fair value disclosures forfinancial instruments:

**Cash, short termdeposits and liquid investments, debtors and creditors:**

The carrying amountreported in the balance sheet approximates fair value because of the shortmaturity of these instruments.

**Listed investments:**

These are valued based onquoted prices.

**Short term debt andmedium and long term debt:**

The fair value of theGroup’s debt is estimated using either the replacement cost of equivalentinstruments or discounted cash flow analysis, based on the Group’s currentincremental borrowing rates for similar types of borrowing arrangements andmaturities.

**Interest rate swapagreements:**

The fair value of theGroup’s interest rate swap agreements is estimated using discounted cash flowanalysis. In addition the fair value amount includes the interest rate componentof currency swaps.

F-111

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19**   Borrowing—(continued)

**Currency swapagreements and foreign exchange contracts:**

The fair value of theseinstruments is based on the estimated replacement cost of equivalentinstruments at the balance sheet date.

Gains and losses on instrumentsused for hedging are not recognized until the exposure that is being hedged isitself recognized. Unrecognised gains and losses on instruments used forhedging, and the movement therein, are as follows:

| ** **                                                                               | ** ** | **Gains**               | ** ** | **Losses**              | ** ** | **Total net  gains/(losses)** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                                                                               | ** ** | **€ Million** | ** ** | **€ Million** | ** ** | **€ Million**            | ** ** |
| Unrecognized  gains and losses on hedges at December 31, 2004                       |       |                    | 6          |                    |       |                               | 64         |   |   |   | (58 | ) |   |
| Gains and losses  arising in previous years that were recognized in 2005            |       |                    | 5          |                    |       |                               | 22         |   |   |   | (17 | ) |   |
| Gains and losses  arising before December 31, 2004 that were not recognized in 2005 |       |                    | 1          |                    |       |                               | 42         |   |   |   | (41 | ) |   |
| Gains and losses  arising in 2005 that were not recognized in 2005                       |       |                    | 2          |                    |       |                               | (5         | ) |   |   | 7 |   |   |
| **Unrecognized  gains and losses on hedges at December 31, 2005**                   | ** ** | ** **              | **€** | **3**                   |       | ** **                         | ** ** | **€** | **37** |   | ** ** | ** ** | **€** | **(34** | **)** | ** ** |
| Of which:                                                                                |       |                    |       |                    |       |                               |       |   |   |   |   |   |   |
| Gains and losses  expected to be recognized in 2006                                      |       |                    | 1          |                    |       |                               | 9          |   |   |   | (8 | ) |   |
| Gains and losses  expected to be recognized in 2007 or later                             |       |                    | 2          |                    |       |                               | 28         |   |   |   | (26 | ) |   |
|                                                                                          |            |                         |            |                         |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

**(d) CreditRisk**

Potential concentrationsof credit risk to the Group consist principally of cash deposits, short terminvestments and trade debtors. The Group only deposits cash surpluses withquality credit rated banks and institutions that meet certain criteria and bypolicy limits the amount of credit exposure to any one bank or institution. Tradedebtors comprise a large, widespread customer base. The Group mitigates therisk that counterparties to derivatives will fail to perform by contractingwith major financial institutions having high credit ratings and considers thelikelihood of counterparty failure to be remote. At December 31, 2005 theGroup did not consider there to be any significant concentration of creditrisk.

F-112

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**20**   Provisionfor Liabilities and Charges

| ** **                                     | ** ** | **Deferred**  | ** **  | **Other**      | ** ** | ** **    | ** ** |
|------------------------------------------------|------------|---------------|-------------|----------------|------------|---------------|------------|
| ** **                                     | ** ** | **Income**    | ** **  | **Deferred**   | ** ** | ** **    | ** ** |
| ** **                                     | ** ** | **Taxes**     | ** **  | **Provisions** | ** ** | **Total**     | ** ** |
| ** **                                     | ** ** | **€000** | ** **  | **€000**  | ** ** | **€000** | ** ** |
| December 31, 2002                         |       | 158,896       |        | 63,957         |       | 222,853       |       |
| Charge to statement of  operations(1)          |       | 1,712         |        | 5,628          |       | 7,340         |       |
| Paid in year                                   |       | —        |        | 3,253          |       | 3,253         |       |
| Acquisitions                                   |       | 3,626         |        | 2,571          |       | 6,197         |       |
| Reclassification                               |       | 18,001        |        | (14,787        | )          | 3,214         |       |
| Fair value adjustments                         |       | 674           |        | —         |       | 674           |       |
| Currency adjustment                            |       | (6,083        | )           | (2,496         | )          | (8,579        | )          |
| **December 31, 2003**                     | ** ** | **176,826**   | ** **  | **58,126**     | ** ** | **234,952**   | ** ** |
| Charge/(credit) to  statement of operations(1) |       | 3,984         |        | (42            | )          | 3,942         |       |
| Paid in year                                   |       | —        |        | (9,769         | )          | (9,769        | )          |
| Acquisitions                                   |       | 1             |        | —         |       | 1             |       |
| Fair value adjustments                         |       | (7,134        | )           | —         |       | (7,134        | )          |
| Reclassification                               |       | 4,406         |        | (2,592         | )          | 1,814         |       |
| Currency adjustment                            |       | (1,647        | )           | (756           | )          | (2,403        | )          |
| **December 31, 2004**                     | ** ** | **176,436**   | ** **  | **44,967**     | ** ** | **221,403**   | ** ** |
| (Credit)/charge to  statement of operations(1) |       | (21,502       | )           | 14,084         |       | (7,418        | )          |
| Paid in year                                   |       | —        |        | (5,512         | )          | (5,512        | )          |
| Acquisitions                                   |       | 65,729        |        | 2,392          |       | 68,121        |       |
| Subsidiaries disposed                          |       | (26,269       | )           | —         |       | (26,269       | )          |
| Reclassification                               |       | (1,877        | )           | (5,924         | )          | (7,801        | )          |
| Currency adjustment                            |       | 3,674         |        | 1,535          |       | 5,209         |       |
| **December 31, 2005**                     | ** ** | **€**    | **196,191** | ** **     | **€** | **51,542**    | ** ** | **€** | **247,733** | ** ** |
|                                                |            |               |             |                |            |               |            |  |  |  |

 

| ** **                                | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| **Deferred  taxation arises as follows:** |       |          |        |          |       |          |       |
| Accelerated capital allowances            |       | 260,686       |        | 158,246       |       | 112,672       |       |
| Other timing differences                  |       | (64,495       | )           | 18,190        |       | 64,154        |       |
| ** **                                | ** ** | **€**    | **196,191** | ** **    | **€** | **176,436**   | ** ** | **€** | **176,826** | ** ** |
|                                           |            |               |             |               |            |               |            |  |  |  |

----

(1)          The2005 deferred tax credit to income of €21,502,000 excludes thedeferred tax charge relating to pensions of €2,172,000 (2004: €635,000;2003:€251,000).The 2005 deferred tax credit to income in Note 9 ‘Taxes on income’ includesthis amount. The 2004 deferred tax charge to income of €3,984,000(2003:€1,712,000)excludes the deferred tax charge relating to pensions of €635,000(2003:€251,000).The 2004 and 2003 deferred tax charge to income in Note 9 “Taxes on Income”includes this amount.

At December 31, 2005,we had net operating loss carryforwards of €1,057million (2004: €200million), which are available indefinitely. These loss carryforwards have a taxvalue of €294million (2004: €61 million).Valuation allowances of €167 million (2004: €30million) have been established for a portion of these deferred tax assets. Therealization of these deferred tax assets is dependent on future taxable income.Based upon recent levels of taxable income, we expect that our deferred taxassets, net of valuation allowances, will be fully utilized.

Other deferred provisionsincludes a number of items including deferred employee profit sharingprovisions in certain of the countries in which we operate.

F-113

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**21**   ContingentLiabilities

In addition to litigation arising in the ordinarycourse of business, we are involved in certain civil and criminal proceedingsin Spain arising out of a past acquisition. In November 1988, a subsidiaryof JSG acquired Industrial Cartonera, S.A., or ICSA, a Spanish incorporatedcompany, from a subsidiary of Torras Hostench S.A., or Torras. In early 1989,JSG acquired a 35% interest in another Spanish company called Industrias delPapel y de la Celulosa, S.A., or INPACSA, a former parent of ICSA. A number ofindividuals associated with Torras were charged by the public prosecutor inMadrid with diverting, for their own use, a substantial part of the purchaseconsideration paid by JSG for ICSA. The public prosecutor, on behalf of the minorityshareholders of INPACSA, also claimed that certain transactions, including thetransfer of ICSA by INPACSA which took place prior to JSG’s acquisition ofICSA, caused damage to the minority shareholders of INPACSA. In 1998, thepublic prosecutor also charged JSG’s Chairman, Sir Michael W.J. Smurfit,as the representative of JSG, in these proceedings with respect to the allegeddamage to the minority shareholders of INPACSA and Torras. A JSG subsidiary isalso one of a number of parties against whom secondary civil liability has beenclaimed.

JSG and Smurfit International B.V. have eachindemnified Sir Michael Smurfit against loss or liability due to suchproceedings. Bonds were posted with the Spanish court in the amount of €47million, which equals the amount of alleged damages, excluding interest. Themaximum estimated current total exposure relating to the liabilities, includinginterest through December 31, 2002, is approximately €118million, for which no reserve has been taken and which amount will accrueinterest until payment of any final judgment. Preliminary proceedings commencedin late March 2003 and on April 11, 2003, the court dismissed theproceedings against Sir Michael Smurfit, the JSG subsidiary and others. Thebonds previously posted were released and the Spanish court has taken a lienover certain Spanish assets pending final resolution of the case. The finaldecision of the court was handed down in March 2004 and confirmed theearlier dismissal with respect to Sir Michael Smurfit and the JSGsubsidiary. The decision is being appealed to a higher court by two privatecomplainants but not by the public prosecutor. We cannot provide any assurances,however, that the consequences of any adverse findings, if any, will not have amaterial adverse effect on our financial position or results of operations.

We are also the subject of litigation in the DominicanRepublic arising from our acquisition in 1998 of a controlling interest in asmall local corrugator owned by Industria Cartonera Dominicana. The lawsuits,alleging damages in excess of $300 million, are brought by a local competitorwho is claiming loss of potential profits as a consequence of our entry to themarket. He is also alleging breach of contract. In June 2004 we receivedan adverse ruling in our main lawsuit, which found for the original plaintiffbut which made no determination as to damages. The damage amount has been leftfor another court to decide. We have appealed this ruling and are challenging anumber of due process irregularities surrounding the ruling.

We believe the foregoing lawsuits are without meritand are defending them vigorously.

In May 2004, Kappa Packaging’s subsidiary KappaZülpich was visited by the German “Bundes Kartellamt” regarding a suspicionabout possible price co-ordination of recovered paper purchases by paper andboard producers. We are cooperating fully with the investigation.

In July 2004,representatives of the Office of Fair Trading visited the Jefferson Smurfit UKoperations in West Auckland and Norwich. We understand that the investigation,which centers on the sheet feeding business, was prompted by consumercomplaints, which were filed during the UK Competition Commission’sinvestigation of the March 2004 acquisition proposal by David S. SmithLimited for Linpac 

F-114

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**21**   Contingent Liabilities—(continued)

Limited, a competitor ofour sheet feeding business. The investigation is looking into high levels ofpricing transparency which exist in the sector and which are a function of,inter alia, vertical integration, SWAPs and market concentration. We areco-operating fully with the ongoing investigation.

We are subject to a wide range of environmental,health and safety laws and regulations in all the jurisdictions where weoperate. These requirements are complex, frequently changing and have tended tobecome more stringent over time. In the event we incur unforeseen significantcontainment and clean-up expenses, our operating results could be adverselyaffected.

**22**   LeaseObligations

Obligationsunder finance leases:

| ** **                                       | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|--------------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                       | ** ** | **€000** | ** ** | **€000** | ** ** |
| Payable within  one year                         |       | 4,832         |       | 5,283         |       |
| Payable in one to  two years                     |       | 6,323         |       | 3,902         |       |
| Payable in two to  three years                   |       | 4,197         |       | 3,406         |       |
| Payable in three  to four years                  |       | 3,456         |       | 2,884         |       |
| Payable in four  to five years                   |       | 1,289         |       | 2,475         |       |
| Payable  thereafter                              |       | 5,947         |       | 1,974         |       |
| Total minimum lease payments                     |       | **26,044**    | ** ** | **19,924**    | ** ** |
| Less amount representing interest                |       | (2,495        | )          | (2,524        | )          |
| Present value of minimum lease payments          |       | **€**    | **23,549** | ** **    | **€** | **17,400** | ** ** |
| Current portion of capital lease obligations     |       | 4,132         |       | 4,470         |       |
| Non-current portion of capital lease obligations |       | 19,417        |       | 12,930        |       |
|                                             |       | **€**    | **23,549** | ** **    | **€** | **17,400** | ** ** |

 

Commitmentsunder operating leases, payable in the coming year, relate to leases expiring inthe following periods:

| ** **                          | ** ** | **Land and** | ** ** | ** **    | ** ** | ** **    | ** ** |
|-------------------------------------|------------|-------------------|------------|---------------|------------|---------------|------------|
| ** **                          | ** ** | **Buildings**     | ** ** | **Other**     | ** ** | **Total**     | ** ** |
| ** **                          | ** ** | **€000**     | ** ** | **€000** | ** ** | **€000** | ** ** |
| Within one year                     |       |              | 1,044      |          |       | 6,911         |       | 7,955 |   |
| Within two to  five years inclusive |       |              | 8,365      |          |       | 13,109        |       | 21,474 |   |
| Over five years                     |       |              | 9,170      |          |       | 2,279         |       | 11,449 |   |
|                                |       |              | **€** | **18,579**    | ** ** | ** **    | **€** | **22,299** | ** ** | **€** | **40,878** |   |
|                                     |            |                   |            |               |            |               |            |  |  |  |  |  |

 

F-115

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**21**   Contingent Liabilities—(continued)

The total commitmentsunder non-cancellable operating leases at December 31, 2005 are as follows:

| ** **                      | ** ** | **2005**      | ** **  |
|---------------------------------|------------|---------------|-------------|
| ** **                      | ** ** | **€000** | ** **  |
| Payable within  one year        |       | 40,878        |        |
| Payable in one to  two years    |       | 32,031        |        |
| Payable in two to  three years  |       | 26,105        |        |
| Payable in three  to four years |       | 20,456        |        |
| Payable in four  to five years  |       | 16,655        |        |
| Payable thereafter              |       | 53,999        |        |
|                            |       | **€**    | **190,124** |   |
|                                 |            |               |             |  |

 

**23**   CapitalCommitments

Thefollowing capital commitments authorized by the directors had not been providedfor in the Group financial statements:

| ** **          | ** ** | **2005**      | ** **  | **2004**      | ** ** |
|---------------------|------------|---------------|-------------|---------------|------------|
| ** **          | ** ** | **€000** | ** **  | **€000** | ** ** |
| Contracted for      |       | 124,280       |        | 41,813        |       |   |
| Not contracted  for |       | 143,035       |        | 76,172        |       |   |
|                | ** ** | **€**    | **267,315** | ** **    | **€** | **117,985** | ** ** |   |
|                     |            |               |             |               |            |  |  |  |  |  |  |

 

**24**   EmployeePension Plans and Similar Obligations

The Group has pension plans forits employees in many of the countries in which it operates. The majoroccupational pension plans are of the defined benefit type. The Group’s pensionplans are accounted for in accordance with Financial Reporting Standard (FRS)17—“Retirement Benefits”. FRS 17 applies to all types of benefitsthat an employer provides after employees have completed their service,including pensions and other post retirement benefits. The pension cost for the Group’s major occupational pension plans hasbeen determined using the projected unit credit method. The currentagreed rates of contribution for future years are comparable to current levels.

Periodic actuarial valuations were performed on all ofthe major plans, by independent professionally qualified actuaries, between January 1,2003 and December 31, 2005.

In general, actuarial valuations are not available forpublic inspection; however, the results of valuations are advised to members ofthe various schemes.

The Group also operates plans inthe U.S., which provide certain employees with post retirement health carebenefits. Actuarial valuations of these plans were performed as at December 31,2005 using the projected unit credit method. The principal assumption made by the actuaries was that the per capitaweighted average assumed rate of increase in covered benefits was 9% (2004:10%), reducing by 1% per annum until reaching the ultimate of 5% in 2009. Theeffect of a 1% increase or decrease in the health care trend rate would notmaterially increase the accumulated post retirement benefit obligation as at December 31,2005.

F-116

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

The main financialassumptions used to calculate scheme liabilities under FRS 17 are set outbelow:

***Major Assumptions***

| ** **                               | ** ** | **Europe**  | ** ** | **USA**     | ** ** | **Latin America** | ** **   |
|------------------------------------------|------------|-------------|------------|-------------|------------|------------------------|--------------|
| ** **                               | ** ** | **%**       | ** ** | **%**       | ** ** | **%**                  | ** **   |
| **December  2005**                       |       |        |       |        |       |                   |         |   |   |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 3.50 - 3.75 |       |                   | 3.25 - 6.08  |   |   |
| Rate of increase  to pensions in payment |       | Nil - 3.00  |       | Nil         |       |                   | Nil          |   |   |
| Discount rate for  scheme liabilities    |       | 4.25 - 5.00 |       | 5.50        |       |                   | 5.25 - 11.17 |   |   |
| Inflation                                |       | 1.25 - 2.75 |       | 1.75        |       |                   | 2.50 - 3.50  |   |   |

 

| ** **                               | ** ** | **Europe**  | ** ** | **USA**     | ** ** | **Latin America** | ** **   |
|------------------------------------------|------------|-------------|------------|-------------|------------|------------------------|--------------|
| ** **                               | ** ** | **%**       | ** ** | **%**       | ** ** | **%**                  | ** **   |
| **December  2004**                       |       |        |       |        |       |                   |         |   |   |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 3.75 - 4.00 |       |                   | 3.50 - 6.85  |   |   |
| Rate of increase  to pensions in payment |       | Nil - 4.00  |       | Nil         |       |                   | Nil          |   |   |
| Discount rate for  scheme liabilities    |       | 4.50 - 6.50 |       | 6.00 - 6.25 |       |                   | 5.25 - 12.00 |   |   |
| Inflation                                |       | 1.25 - 4.00 |       | 2.00        |       |                   | 2.75 - 3.50  |   |   |

 

| ** **                               | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin America** | ** **   |
|------------------------------------------|------------|-------------|------------|---------|------------|------------------------|--------------|
| ** **                               | ** ** | **%**       | ** ** | **%**   | ** ** | **%**                  | ** **   |
| **December  2003**                       |       |        |       |    |       |                   |         |   |   |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 4.00    |       |                   | 2.00 - 7.50  |   |   |
| Rate of increase  to pensions in payment |       | Nil - 4.00  |       | Nil     |       |                   | Nil          |   |   |
| Discount rate for  scheme liabilities    |       | 5.00 - 6.50 |       | 6.25    |       |                   | 6.25 - 12.66 |   |   |
| Inflation                                |       | 1.00 - 4.00 |       | 2.25    |       |                   | 2.75 - 4.00  |   |   |

 

Theexpected long term rates of return on the assets of the significant plans wereas follows:

| ** **         | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin America** | ** **   |
|--------------------|------------|-------------|------------|---------|------------|------------------------|--------------|
| ** **         | ** ** | **%**       | ** ** | **%**   | ** ** | **%**                  | ** **   |
| **December  2005** |       |        |       |    |       |                   |         |   |   |
| Equities           |       | 7.25 - 8.00 |       | 8.50    |       |                   | 8.25 - 10.50 |   |   |
| Bonds              |       | 3.25 - 7.00 |       | 4.50    |       |                   | 4.25 - 5.25  |   |   |
| Property           |       | 6.50 - 7.00 |       | n/a     |       |                   | n/a          |   |   |
| Other              |       | 2.50 - 7.14 |       | 3.50    |       |                   | 3.25 - 3.50  |   |   |

 

| ** **         | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin America** | ** **  |
|--------------------|------------|-------------|------------|---------|------------|------------------------|-------------|
| ** **         | ** ** | **%**       | ** ** | **%**   | ** ** | **%**                  | ** **  |
| **December  2004** |       |        |       |    |       |                   |        |   |   |
| Equities           |       | 7.50 - 8.00 |       | 8.50    |       |                   | 8.25 -10.50 |   |   |
| Bonds              |       | 3.75 - 7.00 |       | 4.50    |       |                   | 4.25 - 5.25 |   |   |
| Property           |       | 6.50 - 7.00 |       | n/a     |       |                   | n/a         |   |   |
| Other              |       | 2.75 - 7.36 |       | 3.50    |       |                   | 3.25 - 3.50 |   |   |

 

F-117

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24**   EmployeePension Plans and Similar Obligations—(continued)

| ** **         | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin America** | ** **   |
|--------------------|------------|-------------|------------|---------|------------|------------------------|--------------|
| ** **         | ** ** | **%**       | ** ** | **%**   | ** ** | **%**                  | ** **   |
| **December  2003** |       |        |       |    |       |                   |         |   |   |
| Equities           |       | 8.00        |       | 8.50    |       |                   | 8.50 - 13.00 |   |   |
| Bonds              |       | 4.51 - 7.00 |       | 4.50    |       |                   | 4.50 - 10.00 |   |   |
| Other              |       | 3.00 - 7.00 |       | 3.50    |       |                   | Nil - 3.50   |   |   |

 

The market values of the assets of the schemes were asfollows:

| ** **                           | ** ** | **Europe**    | ** **   | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|--------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2005**               |       |          |         |          |       |                   |       |          |       |   |   |
| Equities                             |       | 628,843       |         | 15,717        |       |                   | 10,018     |          |       | 654,578 |   |
| Bonds                                |       | 487,089       |         | 9,118         |       |                   | 9,822      |          |       | 506,029 |   |
| Property                             |       | 77,451        |         | —        |       |                   | —     |          |       | 77,451 |   |
| Other                                |       | 78,622        |         | 1,016         |       |                   | 531        |          |       | 80,169 |   |
| Total market  value                  |       | 1,272,005     |         | 25,851        |       |                   | 20,371     |          |       | 1,318,227 |   |
| Present value of  scheme liabilities |       | 1,929,671     |         | 46,506        |       |                   | 50,194     |          |       | 2,026,371 |   |
| (Deficit) in the  plans              |       | (657,666      | )            | (20,655       | )          |                   | (29,823    | )             |       | (708,144 | ) |
| Deferred tax  asset                  |       | 51,483        |         | —        |       |                   | 1,293      |          |       | 52,776 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(606,183** | **)**         | **€** | **(20,655**            | **)**      | ** **    | **€** | **(28,530** | **)** | ** ** | **€** | **(655,368** | **)** |
|                                      |            |               |              |               |            |                        |            |               |            |  |  |  |  |  |  |

 

| ** **                           | ** ** | **Europe**    | ** **   | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|--------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2004**               |       |          |         |          |       |                   |       |          |       |   |   |
| Equities                             |       | 299,530       |         | 16,391        |       |                   | 8,006      |          |       | 323,927 |   |
| Bonds                                |       | 237,519       |         | 8,890         |       |                   | 5,999      |          |       | 252,408 |   |
| Property                             |       | 40,117        |         | —        |       |                   | —     |          |       | 40,117 |   |
| Other                                |       | 36,536        |         | 737           |       |                   | 1,380      |          |       | 38,653 |   |
| Total market  value                  |       | 613,702       |         | 26,018        |       |                   | 15,385     |          |       | 655,105 |   |
| Present value of  scheme liabilities |       | 1,027,593     |         | 42,844        |       |                   | 40,224     |          |       | 1,110,661 |   |
| (Deficit) in the  plans              |       | (413,891      | )            | (16,826       | )          |                   | (24,839    | )             |       | (455,556 | ) |
| Deferred tax  asset                  |       | 42,835        |         | —        |       |                   | 1,484      |          |       | 44,319 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(371,056** | **)**         | **€** | **(16,826**            | **)**      | ** **    | **€** | **(23,355** | **)** | ** ** | **€** | **(411,237** | **)** |
|                                      |            |               |              |               |            |                        |            |               |            |  |  |  |  |  |  |

 

| ** **                           | ** ** | **Europe**    | ** **   | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|--------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2003**               |       |          |         |          |       |                   |       |          |       |   |   |
| Equities                             |       | 294,891       |         | 14,208        |       |                   | 11,641     |          |       | 320,740 |   |
| Bonds                                |       | 220,760       |         | 7,932         |       |                   | 10,195     |          |       | 238,887 |   |
| Other                                |       | 60,599        |         | 1,049         |       |                   | 557        |          |       | 62,205 |   |
| Total market  value                  |       | 576,250       |         | 23,189        |       |                   | 22,393     |          |       | 621,832 |   |
| Present value of  scheme liabilities |       | 977,308       |         | 45,437        |       |                   | 45,627     |          |       | 1,068,372 |   |
| (Deficit) in the  plans              |       | (401,058      | )            | (22,248       | )          |                   | (23,234    | )             |       | (446,540 | ) |
| Deferred tax  asset                  |       | 83,285        |         | —        |       |                   | 7,946      |          |       | 91,231 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(317,773** | **)**         | **€** | **(22,248**            | **)**      | ** **    | **€** | **(15,288** | **)** | ** ** | **€** | **(355,309** | **)** |
|                                      |            |               |              |               |            |                        |            |               |            |  |  |  |  |  |  |

** **

F-118

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans andSimilar Obligations—(continued)

The following tables set out thecomponents of the defined benefit cost:

***Analysis of the amount charged to operating income***

| ** **                             | ** ** | **€000** | ** ** |
|----------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2005** |       |          |       |
| Current service cost                   |       | 36,697        |       |
| Past service cost                      |       | 1,527         |       |
| Gain on  settlements and curtailments  |       | (6,129        | )          |
| **Total  operating charge**            | ** ** | **€**    | **32,095** | ** ** |
|                                        |            |               |            |  |

 

| ** **                             | ** ** | **€000** | ** ** |
|----------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2004** |       |          |       |
| Current service cost                   |       | 37,163        |       |
| Past service benefit                   |       | (1,793        | )          |
| Gain on  settlements and curtailments  |       | (542          | )          |
| **Total  operating charge**            | ** ** | **€**    | **34,828** | ** ** |
|                                        |            |               |            |  |

 

| ** **                             | ** ** | **€000** | ** ** |
|----------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2003** |       |          |       |
| Current service cost                   |       | 36,593        |       |
| Past service cost                      |       | 655           |       |
| **Total  operating charge**            | ** ** | **€**    | **37,248** | ** ** |
|                                        |            |               |            |  |

 

***Analysis of theamount charged to other financial expense***

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year ended December 31,  2005**      |       |          |       |
| Expected return on pension scheme assets    |       | (43,974       | )          |
| Interest cost on pension scheme liabilities |       | 57,233        |       |
| **Net  charge**                             | ** ** | **€**    | **13,259** | ** ** |
|                                             |            |               |            |  |

 

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year ended December 31,  2004**      |       |          |       |
| Expected return on pension scheme assets    |       | (40,137       | )          |
| Interest cost on pension scheme liabilities |       | 55,855        |       |
| **Net  charge**                             | ** ** | **€**    | **15,718** | ** ** |
|                                             |            |               |            |  |

 

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year ended December 31,  2003**      |       |          |       |
| Expected return on pension scheme assets    |       | (39,460       | )          |
| Interest cost on pension scheme liabilities |       | 54,726        |       |
| **Net  charge**                             | ** ** | **€**    | **15,266** | ** ** |
|                                             |            |               |            |  |

 

F-119

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

***Analysis of theamount recognized in the statement of total recognized gains and losses***

| ** **                                                                     | ** ** | **€000** | ** **  |
|--------------------------------------------------------------------------------|------------|---------------|-------------|
| **Year ended December 31, 2005**                                          |       |          |        |
| Actual  return less expected return on pension scheme assets                   |       | 78,779        |        |
| Net  experience gains on scheme liabilities                                    |       | 4,440         |        |
| Changes  in financial assumptions underlying the scheme liabilities            |       | (98,104       | )           |
| **Actuarial loss recognized  in the statement of recognized gains and losses** | ** ** | **€**    | **(14,885** | **)** |
|                                                                                |            |               |             |  |

 

| ** **                                                                     | ** ** | **€000** | ** **  |
|--------------------------------------------------------------------------------|------------|---------------|-------------|
| **Year ended December 31, 2004**                                          |       |          |        |
| Actual  return less expected return on pension scheme assets                   |       | 9,573         |        |
| Net  experience (losses) on scheme liabilities                                 |       | (5,901        | )           |
| Changes  in financial assumptions underlying the scheme liabilities            |       | (13,963       | )           |
| **Actuarial loss recognized  in the statement of recognized gains and losses** | ** ** | **€**    | **(10,291** | **)** |
|                                                                                |            |               |             |  |

 

| ** **                                                                     | ** ** | **€000** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------|------------|
| **Year ended December 31, 2003**                                          |       |          |       |
| Actual  return less expected return on pension scheme assets                   |       | 20,475        |       |
| Net  experience gains on scheme liabilities                                    |       | 8,901         |       |
| Changes  in financial assumptions underlying the scheme liabilities            |       | (1,576        | )          |
| **Actuarial gain recognized  in the statement of recognized gains and losses** | ** ** | **€**    | **27,800** | ** ** |
|                                                                                |            |               |            |  |

 

The analysis of the amount recognized in the statementof recognized gains and losses excludes deferred tax.

F-120

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

***Movement in pensionliability***

| ** **                                           | ** ** | **€000** | ** **  |
|------------------------------------------------------|------------|---------------|-------------|
| Deficit in scheme at December 31, 2002               |       | 352,037       |        |
| Current service cost                                 |       | 36,593        |        |
| Past service cost                                    |       | 655           |        |
| Contributions                                        |       | (52,253       | )           |
| Other finance expense                                |       | 15,266        |        |
| Actuarial gain                                       |       | (27,800       | )           |
| Fair value adjustment                                |       | 68,431        |        |
| Acquisitions                                         |       | 133,137       |        |
| Disposals                                            |       | (59,614       | )           |
| Currency adjustment                                  |       | (19,912       | )           |
| **Deficit in scheme at December 31, 2003**           | ** ** | **446,540**   | ** **  |
| Current service cost                                 |       | 37,163        |        |
| Past service benefit                                 |       | (1,793        | )           |
| Recognition of  gain on settlement and curtailments  |       | (542          | )           |
| Contributions                                        |       | (51,921       | )           |
| Other finance expense                                |       | 15,718        |        |
| Actuarial loss                                       |       | 10,291        |        |
| Reclassification                                     |       | 2,291         |        |
| Disposals                                            |       | (101          | )           |
| Currency adjustment                                  |       | (2,090        | )           |
| **Deficit  in scheme at December 31, 2004**          | ** ** | **455,556**   | ** **  |
| Current service  cost                                |       | 36,697        |        |
| Past service cost                                    |       | 1,527         |        |
| Recognition of  gain on settlements and curtailments |       | (6,129        | )           |
| Contributions                                        |       | (51,309       | )           |
| Other finance  expense                               |       | 13,259        |        |
| Actuarial loss                                       |       | 14,885        |        |
| Acquisitions                                         |       | 256,680       |        |
| Disposals                                            |       | (22,040       | )           |
| Currency  adjustment                                 |       | 9,018         |        |
| **Deficit in scheme at December,  31 2005**          | ** ** | **€**    | **708,144** | ** ** |
|                                                      |            |               |             |  |

 

F-121

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

***History of amounts recognized in the statement ofrecognized gains and losses***

*Difference between actual and expected return onpension scheme assets*

| **Year ended December 31,  2005**                                |       |       |       |
|-----------------------------------------------------------------------|------------|------------|------------|
| Amount                                                                |       | 78,779,000 |       |
| Percentage of scheme assets                                           |       | 6          | %          |
| **Year  ended December 31, 2004**                                |       |       |       |
| Amount                                                                |       | 9,573,000  |       |
| Percentage of scheme assets                                           |       | 1          | %          |
| **Year  ended December 31, 2003**                                |       |       |       |
| Amount                                                                |       | 20,475,000 |       |
| Percentage of scheme assets                                           |       | 3          | %          |
| **Period from September 3, 2002 through December 31, 2002** | ** ** | ** ** | ** ** |
| Amount                                                                |       | 7,218,000  |       |
| Percentage  of scheme assets                                          |       | 1          | %          |

 

*Experience gains and losses on scheme liabilities*

| **Year ended December 31,  2005**                                |   |       |   |
|-----------------------------------------------------------------------|--------|------------|--------|
| Amount                                                                |   | 4,440,000  |   |
| Percentage of the present value of scheme liabilities                 |   | 0          | %      |
| **Year  ended December 31, 2004**                                |   |       |   |
| Amount                                                                |   | 5,901,000  |   |
| Percentage of the present value of scheme liabilities                 |   | 1          | %      |
| **Year  ended December 31, 2003**                                |   |       |   |
| Amount                                                                |   | 8,901,000  |   |
| Percentage of the present value of scheme liabilities                 |   | 1          | %      |
| **Period from September 3, 2002 through December 31, 2002** |   |       |   |
| Amount                                                                |   | 27,515,000 |   |
| Percentage of the  present value of scheme liabilities                |   | 3          | %      |

 

F-122

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24**   Employee Pension Plans and Similar Obligations—(continued)

*Total actuarial gains and lossesrecognized in the statement of recognized gains and losses*

| **Year  ended December 31, 2005**                                |   |       |   |
|-----------------------------------------------------------------------|--------|------------|--------|
| Amount                                                                |   | 14,885,000 |   |
| Percentage of the present value of scheme liabilities                 |   | 1          | %      |
| **Year ended December 31, 2004**                                 |   |       |   |
| Amount                                                                |   | 10,291,000 |   |
| Percentage of the present value of scheme liabilities                 |   | 1          | %      |
| **Year ended December 31, 2003**                                 |   |       |   |
| Amount                                                                |   | 27,800,000 |   |
| Percentage of the present value of scheme liabilities                 |   | 3          | %      |
| **Period from September 3, 2002 through December 31, 2002** |   |       |   |
| Amount                                                                |   | 12,507,000 |   |
| Percentage  of the present value of scheme liabilities                |   | 1          | %      |

 

Some of the schemes are closed schemes and thereforeunder the projected unit method the current service cost would be expected toincrease as the members of the scheme approach retirement and reduce as membersretire or leave service.

In certain countries, in accordance with localpractice, plans are financed internally and the provisions relating to suchcases are included in pension liabilities. At December 31, 2005 theseamount to €431,862,000 (2004: €277,274,000;2003: €263,165,000).

The defined contributionpension scheme expense for the year ended December 31, 2005 was €20,850,000(2004: €21,077,000;2003: €20,686,000).

**25**   RelatedParty Transactions

**Transactions withassociates**

We conduct certain transactions with associates in thenormal course of business.

The transactions with associates for each period aresummarized as follows:

| ** **             | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **             | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Sale of goods          |       | 31,277        | ** ** | 28,725        |       | 41,612        |       |
| Purchase of goods      |       | 13,813        | ** ** | 9,930         |       | 11,484        |       |
| Receiving of  services |       | 633           | ** ** | 922           |       | 265           |       |
| Rendering of services  |       | 1,544         | ** ** | 776           |       | 697           |       |

 

F-123

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**25**   Related Party Transactions—(continued)

**Transactions with related parties**

In connection withthe acquisition, certain non-operating assets and non-core operating assets ofJSG were transferred to the newcos, in exchange for intercompany notes.

| ** **                                 | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                 | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Rendering and  receiving of services (net) |       | —        |       | —        |       | 679           |       |
| Transfer of cash from  business disposals  |       | 9,899         | ** ** | 11,934        |       | 28,206        |       |

 

**On June 16, 2005, assets comprisingThe K Club, additional land near The K Club and the site of the former Clonskeaghpaper mill were disposed for an amount of**€115 million to a group of investors which included Sir Michael Smurfit,our Chairman.

In 2005 the Group purchased in the normal course of businessapproximately 28,000 metric tons of****paperamounting to approximately €11 million from Savon Sellu**,** a company controlled by Dr**.**Dermot Smurfit together with his****brothers****Sir Michael Smurfit**,** our Chairman**,** and Dr**.** Alan Smurfit.At December 31,** **2005, anamount of **€**3.2 million was owing by SKG toSavon Sellu.

**26**   Shareholders’ Equity

Other reserves include the following:

JSG Acquisitions has an authorized share capital of100,000 shares of €1 each, of which 40,000were issued.

Other reserves includes €856,960,000of investments by JSG Funding by way of capital contributions in 2002 andinvestments by SKGL of €738,953,000 by way of capital contributionsin 2005.

Certain members of management subscribed cash forconvertible shares of JSL at nominal value. Pursuant to the completion of theexchange offer on February 6, 2004, these were exchanged for convertible sharesof JSG Packaging (the ‘Unvested Convertible Equity’). Subject to the terms andconditions of the Management Equity Agreement, the Unvested Convertible Equitywill, upon vesting, be convertible into ordinary shares of JSG Packaging uponpayment in cash of a further amount equal to the fair market value of anordinary share of JSG Packaging on the date of grant adjusted to reflect thecapital reduction in February 2005 and interest as it accrues on the intercompany debt with JSG Holdings. In the case of the initially allocated UnvestedConvertible Equity the additional cash payment is equal to the subscriptionprice plus capital contributions per ordinary share paid by Madison DearbornPartners LLC and affiliates prior to the offer becoming or being declared unconditional,adjusted to reflect the capital reduction in February 2005 and interest as itaccrues on the inter company debt with JSG Holdings, net of the nominalsubscription price previously paid by the holder. The ordinary shares intowhich Unvested Convertible Equity can, subject to vesting, be converted willrepresent a maximum of approximately 7 per cent. of JSG Packaging’s outstandingordinary shares.

Pursuant to the terms of the Management EquityAgreement, the Unvested Convertible Equity will vest as follows:

·  Time vesting. 40 per cent. of the Unvested Convertible Equity will vest in three equaltranches as of December 31 in each of 2005, 2006 and 2007, provided that theholder remains actively employed by JSG Packaging or any of its subsidiaries onthe relevant date.

F-124

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**26**   Shareholders’ Equity—(continued)

·  Performance vesting.  40 per cent. of the Unvested ConvertibleEquity will vest in one, two or three tranches as of December 31 in each of2005, 2006 and 2007, provided that the holder remains actively employed by JSGPackaging or any of its subsidiaries as of such date, subject to the attainmentas of each such date of specified performance criteria, which criteria will becumulative, such that attainment of criteria with respect to any of theforegoing dates will trigger vesting in respect of all previous such dates. Theperformance criteria will be based on the achievement of a valuation of JSGPackaging measured by notional return on investment achieved by MadisonDearborn Partners LLC from the date of its investments in JSL, calculated byreference to the price paid for JSL and expressed as a compounded percentagerate per annum.

·  Time/performance vesting.   20 per cent. of the Unvested ConvertibleEquity will vest on December 31, 2007 if return on investment of 30 percent. or more is achieved up to such date, provided the holder remains activelyemployed by JSG Packaging or any of its subsidiaries on the relevant date.

·  Early vesting. The board of directors of JSGPackaging will have discretion as to early vesting in certain circumstances.

The Unvested Convertible Equity will vest immediatelyupon the closing of an initial public offering of JSG Packaging’s equity.However, the convertible shares are subject to certain contractual restrictionson transfer following their acquisition upon exercise of the underlyingconvertible equity. At December 31, 2005, JSG Packaging had issued 10,404,610convertible shares.

**27**   Net Cash Flowfrom Operating Activitiesand Movement in Working Capital

| ** **                                                      | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|-----------------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                                      | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Operating income                                                |       | 167,028       |        | 281,788       |       | 309,193       |       |
| Reorganization and restructuring costs                          |       | 8,421         |        | 23,231        |       | 16,357        |       |
| Depreciation and depletion (net of government grants amortized) |       | 282,378       |        | 259,831       |       | 250,590       |       |
| Amortization of intangible assets                               |       | 29,203        |        | 37,925        |       | 44,548        |       |
| Finance lease interest paid                                     |       | 1,138         |        | 1,962         |       | 2,164         |       |
| Decrease / (increase) in other payables and provisions          |       | (14,291       | )           | (12,891       | )          | 6,451         |       |
| Decrease / (increase) in working capital                        |       | 40,252        |        | 47,419        |       | 62,848        |       |
| Currency adjustment                                             |       | (1,258        | )           | 1,663         |       | (1,124        | )          |
|                                                            | ** ** | **€**    | **512,871** | ** **    | **€** | **640,928**   | ** ** | **€** | **691,027** | ** ** |
|                                                                 |            |               |             |               |            |               |            |  |  |  |

 

| ** **                          | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** **          | **Total**     | ** ** |
|-------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|---------------------|---------------|------------|
| ** **                          | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** **          | **€000** | ** ** |
| December 31,  2004             |       |            | 452,166    |            |       | 925,048       |                | (1,017,060    | )          | 360,154 |   |
| Acquisitions                        |       |            | 275,804    |            |       | 572,415       |                | (535,081      | )          | 313,138 |   |
| Disposed                            |       |            | (68,698    | )               |       | (62,196       | )                   | 69,217        |       | (61,677 | ) |
| Reclassification                    |       |            | (5,282     | )               |       | 16,328        |                | (16,486       | )          | (5,440 | ) |
| Assets  held for sale               |       |            | —     |            |       | (79,810       | )                   | 25,406        |       | (54,404 | ) |
| Deferred  acquisition consideration |       |            | —     |            |       | —        |                | (31,384       | )          | (31,384 | ) |
| Decrease  in working capital        |       |            | (7,051     | )               |       | (76,262       | )                   | 43,061        |       | (40,252 | ) |
| Currency  adjustment                |       |            | 16,192     |            |       | 19,205        |                | (13,544       | )          | 21,853 |   |
| **December 31,  2005**         | ** ** | ** **      | **€** | **663,131**     |       | ** **    | **€1,314,728** |          | **€** | **(1,475,871** | **)** | **€** | **501,988** | ** ** |
|                                     |            |                 |            |                 |            |               |                     |               |            |  |  |  |  |  |

 

F-125

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**27   Net Cash Flow from Operating Activities and Movementin Working Capital—(continued)**

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** **  |     |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|-------------|----------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** **  |     |
| December 31, 2003             |       |            | 477,432    |            |       |          | 911,443    |          |        | (967,141 | ) | 421,734 |   |
| Reclassification                   |       |            | 4,151      |            |       |          | (15,903    | )             |        | 3,202    |   | (8,550 | ) |
| Deferred acquisition consideration |       |            | —     |            |       |          | —     |          |        | 854      |   | 854 |   |
| Decrease in working capital        |       |            | (22,434    | )               |       |          | 38,291     |          |        | (63,276  | ) | (47,419 | ) |
| Currency adjustment                |       |            | (6,983     | )               |       |          | (8,783     | )             |        | 9,301    |   | (6,465 | ) |
| **December 31,  2004**        | ** ** | ** **      | **€** | **452,166**     |       | ** **    | ** ** | **€**    | **925,048** |     | ** ** | **€** | **(1,017,060** | **)** | **€** | **360,154** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |             |          |  |  |  |  |  |  |  |  |  |

 

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** ** |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31, 2002             |       |            | 470,207    |            |       | 1,016,181     |       | (1,018,286    | )          | 468,102 |   |
| Acquisitions                       |       |            | 59,724     |            |       | 115,628       |       | (109,936      | )          | 65,416 |   |
| Disposed                           |       |            | (33,890    | )               |       | (72,899       | )          | 44,173        |       | (62,616 | ) |
| Reclassification                   |       |            | (1,267     | )               |       | (12,566       | )          | 57,676        |       | 43,843 |   |
| Deferred acquisition consideration |       |            | —     |            |       | —        |       | (3,178        | )          | (3,178 | ) |
| Decrease in working capital        |       |            | 4,638      |            |       | (102,680      | )          | 35,194        |       | (62,848 | ) |
| Currency adjustment                |       |            | (21,980    | )               |       | (32,221       | )          | 27,216        |       | (26,985 | ) |
| **December 31,  2003**        | ** ** | ** **      | **€** | **477,432**     |       | ** **    | **€** | **911,443**   |       | **€** | **(967,141** | **)** | **€** | **421,734** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |            |  |  |  |  |  |  |

----

*                    Amounts falling due within one year not includingborrowing due within one year, corporation tax, capitalized lease obligationsand amounts due to affiliates.

**28   Retirement of Fixed Assets**

| ** **                    | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                    | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Property, plant and equipment |       | 17,756        |       | 33,860        |       | 12,351        |       |
| Investments                   |       | 442           |       | 2,528         |       | 32,544        |       |
|                          | ** ** | **€**    | **18,198** | ** **    | **€** | **36,388**    | ** ** | **€** | **44,895** | ** ** |
|                               |            |               |            |               |            |               |            |  |  |  |

 

F-126

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**29   Reconciliationof Net Cash Flow to Movement in Net Debt**

| ** **                                   | ** ** | **2005**      | ** **     | **2004**      | ** ** | **2003**       | ** ** |
|----------------------------------------------|------------|---------------|----------------|---------------|------------|----------------|------------|
| ** **                                   | ** ** | **€000** | ** **     | **€000** | ** ** | **€000**  | ** ** |
| (Decrease) / increase in cash                |       | (27,045       | )              | 50,285        |       | 29,314         |       |
| (Increase) / decrease term debt              |       | (481,142      | )              | 67,266        |       | 49,789         |       |
| Increase / (decrease) in liquid resources    |       | 789,786       |           | 16,914        |       | (18,812        | )          |
| Capital elements of finance leases repaid    |       | 4,812         |           | 13,576        |       | 5,689          |       |
| Change in net debt resulting from cash flows |       | 286,411       |           | 148,041       |       | 65,980         |       |
| New finance leases                           |       | (4,053        | )              | (2,963        | )          | —         |       |
| Loans and finance leases acquired            |       | (1,814,470    | )              | —        |       | (122,952       | )          |
| Loans and finance leases disposed            |       | 1,471         |           | —        |       | 23,695         |       |
| Other non cash movements                     |       | (8,088        | )              | 3,663         |       | 2,221          |       |
| Currency adjustment                          |       | 112,435       |           | 27,265        |       | 153,216        |       |
| Movement in net debt                         |       | (1,426,294    | )              | 176,006       |       | 122,160        |       |
| Net debt at beginning of period              |       | (1,700,066    | )              | (1,876,072    | )          | (1,998,232     | )          |
| **Net debt  at end of period**               | ** ** | **€**    | **(3,126,360** | **)**         | **€** | **(1,700,066** | **)**      | **€** | **(1,876,072** | **)** |
|                                              |            |               |                |               |            |                |            |  |  |  |

 

**30   Analysis of Net Debt**

| ** **                                | ** ** | **December**  | ** **     | **Cash**      | ** ** | **Acquisitions**       | ** ** | ** **        | ** **     | ** **    | ** ** | **December**  | ** ** |
|-------------------------------------------|------------|---------------|----------------|---------------|------------|------------------------|------------|-------------------|----------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **2004**      | ** **     | **Flow**      | ** ** | **and Disposals** | ** ** | **Non Cash** | ** **     | **Currency**  | ** ** | **2005**      | ** ** |
| ** **                                | ** ** | **€000** | ** **     | **€000** | ** ** | **€000**          | ** ** | **€000**     | ** **     | **€000** | ** ** | **€000** | ** ** |
| Cash                                      |       | 140,149       |           | (44,246       | )          | —                 |       | —            |           | 3,639         |       | 99,542        |       |
| Short term  deposits and liquid resources |       | 107,809       |           | 34,211        |       | —                 |       | —            |           | 6,165         |       | 148,185       |       |
| Restricted cash                           |       | —        |           | 755,575       |       | —                 |       | —            |           | —        |       | 755,575       |       |
| Cash and  investments                     |       | 247,958       |           | 745,540       |       | —                 |       | —            |           | 9,804         |       | 1,003,302     |       |
| Bank overdrafts and demand loans          |       | (28,673       | )              | 17,201        |       | —                 |       | —            |           | (8,551        | )          | (20,023       | )          |
| Loans repayable within one year           |       | (53,877       | )              | (14,511       | )          | —                 |       | (8,911            | )              | 24,767        |       | (52,532       | )          |
| Kappa bonds  outstanding                  |       | —        |           | (755,575      | )          | —                 |       | —            |           | —        |       | (755,575      | )          |
| Short term  borrowing                     |       | (82,550       | )              | (752,885      | )          | —                 |       | (8,911            | )              | 16,216        |       | (828,130      | )          |
| Long and medium term borrowing            |       | (1,848,074    | )              | 288,944       |       | (1,805,992             | )          | 823               |           | 86,316        |       | (3,277,983    | )          |
| Net borrowing                             |       | (1,682,666    | )              | 281,599       |       | (1,805,992             | )          | (8,088            | )              | 112,336       |       | (3,102,811    | )          |
| Finance leases                            |       | (17,400       | )              | 4,812         |       | (7,007                 | )          | (4,053            | )              | 99            |       | (23,549       | )          |
| **Net debt**                              | ** ** | **€**    | **(1,700,066** | **)**         | **€** | **286,411**            | ** ** | **€**        | **(1,812,999** | **)**         | **€** | **(12,141**   | **)**      | **€** | **112,435** | ** ** | **€** | **(3,126,360** | **)** |
|                                           |            |               |                |               |            |                        |            |                   |                |               |            |               |            |  |  |  |  |  |  |

 

F-127

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**30**   Analysis of Net Debt—(continued)

| ** **                               | ** ** | ** **    | ** **     | **December  2003** | ** ** | **Cash Flow** | ** ** | **Acquisitions  and  disposals** | ** ** | **Non Cash** | ** ** | **Currency**  | ** ** | **December  2004** | ** ** |
|------------------------------------------|------------|---------------|----------------|--------------------|------------|--------------------|------------|----------------------------------|------------|-------------------|------------|---------------|------------|--------------------|------------|
| ** **                               | ** ** | **€**000 | ** **     | **€**000      | ** ** | **€000**      | ** ** | **€**000                    | ** ** | **€**000     | ** ** | **€**000 | ** ** |
| Cash                                     |       | 86,137        |           | 55,623             |       |               | —     | ** **                       |       | —            |       | (1,611        | )          | 140,149            |       |
| Short term deposits and liquid resources |       | 92,930        |           | 16,914             |       |               | —     | ** **                       |       | (35               | )          | (2,000        | )          | 107,809            |       |
| Cash and investments                     |       | 179,067       |           | 72,537             |       |               | —     | ** **                       |       | (35               | )          | (3,611        | )          | 247,958            |       |
| Bank overdrafts and demand  loans        |       | (22,373       | )              | (5,338             | )          |               | —     | ** **                       |       | —            |       | (962          | )          | (28,673            | )          |
| Loans repayable within one year     |       | (88,138       | )              | 54,280             |       |               | —     | ** **                       |       | 3,698             |       | (23,717       | )          | (53,877            | )          |
| Short term borrowing                     |       | (110,511      | )              | 48,942             |       |               | —     | ** **                       |       | 3,698             |       | (24,679       | )          | (82,550            | )          |
| Long and medium term borrowing           |       | (1,916,348    | )              | 12,986             |       |               | —     | ** **                       |       |              |       | 55,288        |       | (1,848,074         | )          |
| Net borrowing                            |       | (1,847,792    | )              | 134,465            |       |               | —     | ** **                       |       | 3,663             |       | 26,998        |       | (1,682,666         | )          |
| Finance leases                           |       | (28,280       | )              | 13,576             |       |               | —     | ** **                       |       | (2,963            | )          | 267           |       | (17,400            | )          |
| **Net debt**                             | ** ** | **€**    | **(1,876,072** | **)**              | **€** | **148,041**        | ** ** |                             | **—** | ** **        |       | **€**    | **700**    | ** **         | **€** | **27,265** | ** ** | **€** | **(1,700,066** | **)** |
|                                          |            |               |                |                    |            |                    |            |                                  |            |                   |            |               |            |                    |            |  |  |  |  |  |  |  |

 

| ** **                               | ** ** | **December  2002** | ** **     | **Cash Flow** | ** ** | **Acquisitions  and  Disposals** | ** ** | **Non Cash** | ** ** | **Currency**  | ** ** | **December  2003** | ** ** |
|------------------------------------------|------------|--------------------|----------------|--------------------|------------|----------------------------------|------------|-------------------|------------|---------------|------------|--------------------|------------|
| ** **                               | ** ** | **€000**      | ** **     | **€000**      | ** ** | **€000**                    | ** ** | **€000**     | ** ** | **€000** | ** ** | **€000**      | ** ** |
| Cash                                     |       | 69,224             |           | 22,493             |       |                             | —     |              |       | —        |       | (5,580             | )          | 86,137 |   |
| Short term deposits and liquid resources |       | 115,031            |           | (18,812            | )          |                             | —     |              |       | (58           | )          | (3,231             | )          | 92,930 |   |
| Cash and investments                     |       | 184,255            |           | 3,681              |       |                             | —     |              |       | (58           | )          | (8,811             | )          | 179,067 |   |
| Bank overdrafts and demand loans    |       | (51,379            | )              | 6,821              |       |                             | —     |              |       | —        |       | 22,185             |       | (22,373 | ) |
| Loans repayable within one year     |       | (79,584            | )              | 31,085             |       |                             | —     |              |       | 2,279         |       | (41,918            | )          | (88,138 | ) |
| Short term borrowing                     |       | (130,963           | )              | 37,906             |       |                             | —     |              |       | 2,279         |       | (19,733            | )          | (110,511 | ) |
| Long and medium term borrowing           |       | (2,028,937         | )              | 18,704             |       |                             | (86,119    | )                 |       | —        |       | 180,004            |       | (1,916,348 | ) |
| Net borrowing                            |       | (1,975,645         | )              | 60,291             |       |                             | (86,119    | )                 |       | 2,221         |       | 151,460            |       | (1,847,792 | ) |
| Finance leases                           |       | (22,587            | )              | 5,689              |       |                             | (13,138    | )                 |       | —        |       | 1,756              |       | (28,280 | ) |
| **Net debt**                             | ** ** | **€**         | **(1,998,232** | **)**              | **€** | **65,980**                       | ** ** | ** **        | **€** | **(99,257**   | **)**      | ** **         | **€** | **2,221** | ** ** | **€153,216** | ** ** | **€** | **(1,876,072** | **)** |
|                                          |            |                    |                |                    |            |                                  |            |                   |            |               |            |                    |            |  |  |  |  |  |  |  |

 

F-128

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**30**   Analysis of Net Debt—(continued)

Cashcomprises cash in hand and overnight deposits. The movement in liquid resourcesrepresents movement in all monetary assets (excluding cash, short term depositsand overnight borrowing) which are convertible into cash at, or close to, theircarrying value in the balance sheet. These specifically comprise government gilts,commercial paper and deposits, with maturities of less than one year whenacquired. They are categorized as held-to-maturity because the Group has boththe intent and the ability to hold these investments until maturity.

**31**   Acquisitions and Disposals

| ** **                                       | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|--------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                       | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Net (liabilities)  / assets acquired (see below) |       | (203,598      | )           | —        |       | 6,180         |       |
| Reclassification  from associates                |       | —        |        | —        |       | (35,030       | )          |
| Goodwill                                         |       | 1,185,705     |        | 2,731         |       | 174,659       |       |
|                                             | ** ** | **€**    | **982,107** | ** **    | **€** | **2,731**     | ** ** | **€** | **145,809** | ** ** |
| **Satisfied by:**                                | ** ** | ** **    | ** **  | ** **    | ** ** | ** **    | ** ** |
| Shareholders loan  contributed                   |       | 738,953       |        | —        |       | —        |       |
| Cash payments                                    |       | 209,608       |        | 2,731         |       | 145,809       |       |
| Deferred  consideration                          |       | 33,546        |        | —        |       | —        |       |
|                                             | ** ** | **€**    | **982,107** | ** **    | **€** | **2,731**     | ** ** | **€** | **145,809** | ** ** |
| **Net cash outflows**                            | ** ** | ** **    | ** **  | ** **    | ** ** | ** **    | ** ** |
| Cash payments                                    |       | 209,608       |        | 2,731         |       | 145,809       |       |
| Cash acquired                                    |       | (48,887       | )           | —        |       | (52,683       | )          |
| Bank overdrafts  acquired                        |       | 44,811        |        | —        |       | 8,955         |       |
| ** **                                       | ** ** | **€**    | **205,532** | ** **    | **€** | **2,731**     | ** ** | **€** | **102,081** | ** ** |

 

Summaryof net (liabilities) / assets acquired:

| ** **                                                          | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|---------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                          | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Net assets acquired:                                                | ** ** | ** **    | ** **   |          | ** ** | ** **    |       | ** ** | ** ** |
| Fixed assets:                                                       | ** ** | ** **    | ** **   |          | ** ** | ** **    |       | ** ** | ** ** |
| Property, plant  and equipment                                      |       | 1,557,132     |         |          | —     | ** **    |       | 269,385 |   |
| Investments                                                         |       | 3,533         |         |          | —     | ** **    |       | 3,616 |   |
| Current assets:                                                     | ** ** | ** **    |         |          |       | ** **    |       | ** ** | ** ** |
| Inventories                                                         |       | 275,804       |         |          | —     | ** **    |       | 59,724 |   |
| Accounts receivable and prepayments                                 |       | 572,415       |         |          | —     | ** **    |       | 115,628 |   |
| Cash and  investments held as current assets                        |       | 48,887        |         |          | —     | ** **    |       | 52,683 |   |
| Total assets                                                        |       | 2,457,771     |         |          | —     | ** **    |       | 501,036 |   |
| Accounts payable  and accrued liabilities                           |       | (587,196      | )            |          | —     | ** **    |       | (135,268 | ) |
| Long term debt  and other payables                                  |       | (1,805,992    | )            |          | —     | ** **    |       | (113,896 | ) |
| Provisions for liabilities  and charges                             |       | (312,151      | )            |          | —     | ** **    |       | (6,197 | ) |
| Fair value  adjustment                                              |       | 45,467        |         |          | —     | ** **    |       | (239,495 | ) |
| Minority  interests                                                 |       | (1,497        | )            |          | —     | ** **    |       | — |   |
| **Net (liabilities) / assets  acquired at fair value to the Group** | ** ** | **€**    | **(203,598** | **)**         |       | **€**    | **—** | ** ** |   | **€** | **6,180** | ** ** |
|                                                                     |            |               |              |               |            |               |            |  |  |  |  |  |

** **

F-129

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**31**   Acquisitionsand disposals—(continued)

**Summary of effects of theacquisition of Kappa**

**The acquisition of Kappa was completed on December 1,2005. The fair value exercise relating to the acquisition is preliminary and isreflected in the schedule below although the fair value exercise on fixed andintangible assets has been substantially completed. The fair value exercise onpensions has also been substantially completed, and no significant adjustmentis expected in relation to these amounts.**

| ** **                                     | ** ** | **Book Value**      | ** ** | **Policy Alignment** | ** ** | **Revaluation**          | ** ** | **Fair Value**      | ** ** |
|------------------------------------------------|------------|--------------------------|------------|---------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **€ millions** | ** ** | **€ millions**  | ** ** | **€ millions** | ** ** | **€ millions** | ** ** |
| Cash                                           |       |                     | 49         |                      |       |                     | —     |                     |       |   | — |   |   |   | 49 |   |   |
| Accounts receivable and prepayments            |       |                     | 575        |                      |       |                     | (2         | )                        |       |   | (1 | ) |   |   | 572 |   |   |
| Inventories                                    |       |                     | 258        |                      |       |                     | 18         |                     |       |   | — |   |   |   | 276 |   |   |
| Financial assets                               |       |                     | 3          |                      |       |                     | —     |                     |       |   | — |   |   |   | 3 |   |   |
| Property, plant and equipment                  |       |                     | 1,574      |                      |       |                     | (17        | )                        |       |   | 23 |   |   |   | 1,580 |   |   |
| Intangible assets                              |       |                     | —     |                      |       |                     | —     |                     |       |   | 35 |   |   |   | 35 |   |   |
| Total assets                                   |       |                     | 2,459      |                      |       |                     | (1         | )                        |       |   | 57 |   |   |   | 2,515 |   |   |
| Accounts payable and accruals                  |       |                     | (581       | )                         |       |                     | (6         | )                        |       |   | (8 | ) |   |   | (595 | ) |   |
| Long term debt and other long term liabilities |       |                     | (1,806     | )                         |       |                     | —     |                     |       |   | (4 | ) |   |   | (1,810 | ) |   |
| Provisions for liabilities and charges         |       |                     | (385       | )                         |       |                     | 73         |                     |       |   | — |   |   |   | (312 | ) |   |
| Minorities                                     |       |                     | (2         | )                         |       |                     | —     |                     |       |   | — |   |   |   | (2 | ) |   |
| Net (liabilities) / assets acquired            |       |                     | (315       | )                         |       |                     | 66         |                     |       |   | 45 |   |   |   | (204 | ) |   |
| Shareholders loans acquired                    |       |                     |       |                      |       |                     |       |                     |       |   |   |   |   |   | (739 | ) |   |
| Goodwill                                       |       |                     |       |                      |       |                     |       |                     |       |   |   |   |   |   | 1,186 |   |   |
| **Total consideration**                        |       |                     |       |                      |       |                     |       |                     |       |   |   |   | ** ** | ** ** | **243** |   |   |
| Deferred consideration                         |       |                     |       |                      |       |                     |       |                     |       |   |   |   | ** ** | ** ** | (33 | ) |   |
| **Cash  payments**                             |       |                     |       |                      |       |                     |       |                     |       |   |   |   | ** ** | ** ** | **€** | **210** |   |   |
|                                                |            |                          |            |                           |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |

 

The consolidated financial statements of cash flows for2005 includes the following significant cash flows in relation to Kappa.

| ** **                              | ** ** | **€ millions** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|
| Net cash flow from operating activities |       |                     | 71         |   |   |
| Interest paid                           |       |                     | (20        | ) |   |
| Purchase  of tangible fixed assets      |       |                     | (25        | ) |   |

 

F-130

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**31**   Acquisitionsand disposals—(continued)

The summarized statementsof operations and statements of total recognized gains and losses for Kappafrom the beginning of its financial year on January 1, 2005 toNovember 30, 2005 are set out below. These figures are reported inaccordance with accounting standards generally accepted in The Netherlands andare unaudited.

**Summarizedstatements of operations**

| ** **                  | ** ** | **Jan. 1, 2005 through  Nov. 30, 2005** | ** ** |
|-----------------------------|------------|------------------------------------------------------------------|------------|
| ** **                  | ** ** | **€ millions**                                         | ** ** |
| Net Sales                   |       |                                                             | 2,585      |   |   |
| Operating Income            |       |                                                             | 154        |   |   |
| Exceptional items           |       |                                                             | (11        | ) |   |
| Profit before interest      |       |                                                             | 143        |   |   |
| Net interest                |       |                                                             | (208       | ) |   |
| Loss before taxes           |       |                                                             | (65        | ) |   |
| Tax                         |       |                                                             | (11        | ) |   |
| **Net loss for the period** | ** ** | ** **                                                       | **€** | **(76** | **)** | ** ** |
|                             |            |                                                                  |            |  |  |  |

 

**Statements of total recognized gains and losses**

| ** **                                                  | ** ** | **Jan. 1, 2005 through  Nov. 30, 2005** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **€ millions**                                         | ** ** |
| Net loss for the period                                     |       |                                                             | (76        | ) |   |
| Translation adjustment  on foreign currency net investments |       |                                                             | (8         | ) |   |
| **Total recognized gains and losses**                       | ** ** | ** **                                                       | **€** | **(84** | **)** | ** ** |
|                                                             |            |                                                                  |            |  |  |  |

 

The net loss for Kappa forthe year ended December 31, 2004 was €79million.

**Summary of effects of theacquisition of the SSCC European assets in 2003**

| ** **                                      | ** ** | **Book Value**      | ** ** | **Revaluations**         | ** ** | **Fair Value**      | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **€ millions** | ** ** | **€ millions** | ** ** | **€ millions** | ** ** |
| Cash                                            |       |                     | 29         |                     |       |                     |       |   |   |   | 29 |   |   |
| Accounts  receivable and prepayments            |       |                     | 103        |                     |       |                     |       |   |   |   | 103 |   |   |
| Inventories                                     |       |                     | 49         |                     |       |                     |       |   |   |   | 49 |   |   |
| Property,  plant and equipment                  |       |                     | 103        |                     |       |                     | 115        |   |   |   | 218 |   |   |
| Accounts  payable and accruals                  |       |                     | (98        | )                        |       |                     |       |   |   |   | (98 | ) |   |
| Long  term debt and other long term liabilities |       |                     | (115       | )                        |       |                     |       |   |   |   | (115 | ) |   |
| Other  liabilities                              |       |                     | (95        | )                        |       |                     | (59        | ) |   |   | (154 | ) |   |
| Net  assets acquired                            |       |                     | €     | (24                      | )          |                     |       | € | 56 |   |   |   | 32 |   |   |
| Goodwill                                        |       |                     |       |                     |       |                     |       |   |   |   | 174 |   |   |
| **Consideration**                               | ** ** |                     |       |                     |       |                     |       |   | ** ** | ** ** | **€** | **206** | ** ** | ** ** |
|                                                 |            |                          |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |

 

**32**   ParentUndertakings and Controlling Parties

The immediate controlling party and the parentundertaking of the smallest group of which the company is a member, and forwhich group financial statements are prepared, is JSG Funding, a companyincorporated in Ireland. The ultimate controlling party and the parentundertaking of the largest group of 

F-131

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**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**32**   Parent Undertakings and Controlling Parties—(continued)

which the company is amember, and for which group financial statements are prepared, is SKGL, acompany incorporated in Ireland.

We are subject to the reporting requirements of theSecurities Exchange Act of 1934, as amended, and file reports, including AnnualReports on Form 20-F, and other information with the SEC. You mayread and copy any document we file with the SEC at its public reference roomsat 100 F Street, N.E. Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330for more information on the public reference rooms and their copy charges. Inaddition, the SEC maintains an Internet site at http://www.sec.gov thatcontains reports and other information regarding issuers that fileelectronically with the SEC. These filings are also available to the publicfrom commercial document retrieval services.

JSG Funding’s annualreport on Form 20-F, current reports on Form 6-K, and allamendments to those reports are made available free of charge through ourwebsite (www.smurfitkappa.com) as soon as practicable after such material iselectronically filed with or furnished to the Securities and ExchangeCommission.

**33**   Companies(Amendment) Act, 1963 to 2005

The financial statementsin this report do not comprise ‘full group accounts’ within the meaning ofRegulation 40(1) of the European Communities (Companies: Group Accounts)Regulations, 1992 of Ireland in so far as such group accounts would have tocomply with the disclosure and other requirements of those Regulations. Fullgroup accounts for JSL for the year ended December 31,2003 have been filed with the Irish Registrar of Companies. The auditors havemade reports without qualification and without reference to an emphasis ofmatter under Section 193 of the Companies Act, 1990, in respect of theconsolidated financial statements for the years ended December 31, 2004and 2003. Full accounts for SKGL for the year ended December 31,2004 have also been filed with the Registrar of Companies. Full accounts forSKGL for the year ended December 31, 2005 will be filed with the Registrarin due course.

**34   ComparativeFigures**

Certain figures for theprior years have been adjusted to conform with 2005 classifications anddisclosure requirements

**35**   DifferencesBetween Accounting Principles Generally Accepted in Ireland and in the UnitedStates

The Group’s consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in Ireland (“Irish GAAP”), which differ in certain respectsfrom accounting principles generally accepted in the United States (“US GAAP”).The significant differences as they apply to the Group and the necessaryadjustments are summarized below.

**Goodwill**

Irish GAAP, FRS 10—“Goodwill and Intangible Assets,”requires goodwill to be capitalized as an intangible fixed asset and amortizedin the statement of operations over its estimated useful live. For US GAAP, theGroup applies SFAS No. 142 “Goodwill and Other Intangible Assets”. UnderSFAS No. 142, goodwill is no longer amortized, but is tested forimpairment on an annual basis and whenever indicators of impairment arise. TheGroup’s identified indicators of impairment under SFAS No. 142 are thesame as under SAB No. 100, “Restructuring and Impairment Charges”.

F-132

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**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences BetweenAccounting Principles Generally Accepted in Ireland and in the United States—(continued)

The goodwill impairment test, which is based on fairvalue, is to be performed on a reporting unit level using a two-step impairmenttest. A reporting unit is an operating segment as defined by SFAS No. 131,‘‘Disclosures about Segments of an Enterprise and Related Information’’, or onelevel lower. In the first step, the fair value of a reporting unit is comparedwith its carrying amount, including goodwill. If the fair value of thereporting unit exceeds its carrying value, goodwill is not deemed to beimpaired and step two of the impairment test is not required. If the fair valueof the reporting unit is lower than the carrying value of long term assets andnet working capital, step two needs to be performed to measure the amount ofimpairment. The second step of the goodwill impairment test, used to measurethe amount of impairment loss, compares the implied fair value of reportingunit goodwill with the carrying amount of that goodwill. If the carrying amountof reporting unit goodwill exceeds the implied fair value of that goodwill, animpairment loss shall be recognized in an amount equal to that excess. The lossrecognized cannot exceed the carrying amount of goodwill.

The fair value of eachreporting unit was determined based upon JSG’s segment reporting. According tothese calculations, the fair value of the reporting units exceeded the carryingvalue of their net assets. Therefore, the additional analysis was not requiredand there was no impairment of goodwill upon adoption of SFAS No. 142. TheGroup performed an annual impairment test in the last quarter of 2003, 2004 and2005. No indicators of impairment were identified.

Under Irish GAAP, the Group account for goodwillarising on the acquisition of a foreign entity as a euro functional asset.Under U.S. GAAP, SFAS No. 52 requires goodwill and any fair valueadjustments arising out of the purchase of a foreign entity to be treated ascurrency assets and liabilities of the foreign operation and translated at theclosing rates with differences taken to the currency translation adjustmentrecorded in other comprehensive income as a component of shareholders’ equity.

**Intangible Assets**

Under US GAAP, €141million representing the allocated value for customer relationships has beenaccounted for as intangible assets under US GAAP. Irish GAAP does not permitthe separate recognition of such assets and thus has included the €141 millionamount in goodwill under Irish GAAP. Such goodwill is amortized under IrishGAAP on a straight-line basis over 40 years. The separately identifiedintangible assets have been amortized on a straight-line basis over 5 - 8 yearsunder US GAAP.

**Deferred taxation**

Irish GAAP, FRS 19—’’DeferredTax’’ requires full provision to be made for deferred tax arising from timingdifferences between the recognition of gains and losses in the financialstatements and their recognition in tax computations. In adopting FRS 19, wehave chosen not to discount deferred tax assets and liabilities. This standardeliminated a number of the differences between accounting for deferred taxunder Irish and US GAAP. However, under SFAS No. 109—’’Accounting forIncome Taxes’’, deferred taxation would also be provided under US GAAP on thedifference between the accounting and taxation bases of assets and liabilitiesof subsidiaries acquired. Deferred income taxes on the taxable US GAAPadjustments are included within the reconciliations.

F-133

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

**Retirement benefits**

Under Irish GAAP, FRS 17—“RetirementBenefits” requires that scheme assets are valued at fair value and schemeliabilities are measured using the Projected Unit Credit method. Net schemeassets and liabilities, reduced by deferred tax amounts, are required to beshown on the face of the balance sheet as a pension asset or liability asappropriate. JSG Acquisitions has also adopted Urgent Issues Task Forceabstract 35—“Death-in-service and incapacity benefits’’ (‘‘UITF 35’’). Under USGAAP the main differences with Irish GAAP arise in relation to the recognitionof actuarial gains and losses and the treatment of death-in-service andincapacity benefits. Under US GAAP, net scheme assets and liabilities arerequired to be shown gross of deferred tax amounts.

**Hyper-inflationaryeconomies**

The Group accounts for theactivities of its subsidiaries in Mexico, Colombia, Venezuela and Argentina,which historically have high rates of inflation, using the US dollar as thefunctional currency.

Under US GAAP for each ofthe periods presented, Mexico, Colombia, Argentina and Venezuela would not beregarded as hyper-inflationary and the Mexican Peso, the Colombian Peso, theArgentinean Peso and the Venezuelan Bolivar respectively would have been usedas the functional currency. The application of US GAAP has no material effecton the reported net income of these subsidiaries.

**Stock-based employee compensation expense**

SFAS No. 123—“Accountingfor Stock-Based Compensation’’ encourages, but does not require, compensationexpense for employee stock options to be measured based on their fair value atthe date of grant, determined using option valuation models. JSG Acquisitions haselected to continue to account for stock based employee compensation inaccordance with APB Opinion No. 25—“Accounting for Stock Issued toEmployees’’ (‘‘APB 25’’) and related interpretations and to provide the proforma information required by SFAS No. 123.

Under US GAAP, followingthe measurement principles of APB 25, compensation expense would be accrued andbooked to income over the vesting period. The vesting period commences when itbecomes probable that the underlying targets attaching to the options will beachieved and the number of shares will be known and ends with the date when thegranting of the shares is not contingent upon the performance of additionalservices or other conditions. Compensation expense would be booked on a periodby period basis to reflect the difference between the price an employee mustpay to acquire the shares underlying the option and the market price of theshares, at the end of each accounting period until the final vesting date.

**Debt instruments issue costs**

Under Irish GAAP debtissue costs are deducted from the proceeds of the relevant debt instruments.Under US GAAP such costs would be shown as deferred charges in the balancesheet. In both cases the amount of such costs are expensed at a constant rateof interest on the outstanding balance of the debt.

F-134

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**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

**Accounting for associates**

Irish GAAP requiresseparate disclosure of operating earnings, net interest, exceptional items andthe taxation charge arising in associates. Under US GAAP earnings ofassociates, net of taxation would be shown as a single line item in arriving atnet income.

**Financial instruments**

Under Irish GAAP allhedging instruments are matched with their underlying hedged item. Eachinstrument’s gain or loss is brought into the profit and loss account and itsfair value into the balance sheet at the same time as is the matched underlyingasset, liability, income or cost.

Under SFAS No. 133, ‘‘Accountingfor Derivative Instruments and Hedging Activities’’ all derivative instrumentsare recognized on the balance sheet at their fair values. Changes in fair valueare either recognized periodically in income or in shareholders’ equity as acomponent of comprehensive income depending on whether the derivative qualifiesfor hedge accounting in accordance with the requirements of SFAS No. 133,and if so, whether it qualifies as a fair value hedge or cash flow hedge.Changes in fair value of derivatives accounted for as fair value hedges arerecorded in income along with the corresponding portions of the changes in thefair value of the hedged items, to the extent they are effective as hedges.Changes in fair value of derivatives accounted for as cash flow hedges, to theextent they are effective as hedges, are recorded in other comprehensive incomenet of deferred taxes. Changes in fair values of derivatives not qualifying ashedges are reported in net income.

**Currency swaps**

Under Irish GAAP, the fairvalue of currency swaps relating to outstanding debt is an adjustment to thecarrying value of debt. Under US GAAP, it would be separately recorded as partof other assets or liabilities.

**Impairment writedowns**

Under Irish GAAP,impairment writedowns are included in accumulated depreciation. Under US GAAPthey would be deducted from the cost of the assets identified as beingimpaired.

Under US GAAP, SFAS No. 144,‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’ establishesa single accounting model for long-lived assets to be disposed of by saleconsistent with the fundamental provisions of SFAS No. 121, ‘‘Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed of’’. While it supersedes portions of APB Opinion 30, ‘‘Reporting theResults of Operations-Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions’’, it retains the discontinued operations presentation, yet itbroadens that presentation to include a component of an entity (rather than asegment of a business). However, discontinued operations are no longer recordedat net realizable value and future operating losses are no longer recognizedbefore they occur. Under SFAS No. 144, it is no longer necessary toallocate goodwill to long-lived assets and then perform impairment testing.Furthermore, it has been stipulated that in situations where it is expectedthat certain flows of capital will be accumulated in areas subject toimpairment testing, these can be calculated on the basis of a probability-weightedcash flow estimate. SFAS No. 144 also establishes criteria for determiningwhen an asset should be treated as held for sale.

F-135

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**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

**Insurance receipts**

Under Irish GAAP insurance receipts related to theinter***r***uption of business are deferred andreleased to income against the related costs.

Under US GAAP,FIN 30, SOP***9***6-1 and EITF******01-13 require insurance receipts tobe recognized on receipt.

**Restructuring andintegration costs**

The rules forrecognizing restructuring and integration costs in the statement of operations aregenerally consistent between Irish and US GAAP. However, under Irish GAAP, onthe acquisition of a business, costs in connection with restructuring would notbe recorded in purchase accounting but would be expensed as incurred postacquisition. Under US GAAP, a purchase accounting liability would be recordedfor qualifying costs and goodwill increased if certain requirements aresatisfied as prescribed by EITF 95-3.

**Leveraged buyouttransactions**

Under US GAAP, because ofthe application of the EITF issue 88-16, ‘‘Basis in Leveraged BuyoutTransactions’’, only partial purchase accounting applied to the acquisition ofJSG in 2002. The approximate 8% rollover investment by senior managementshareholders would be valued at their predecessor basis in JSG as opposed tothe inherent new basis in successor. The primary effect of that adjustment wasto reduce goodwill and shareholders’ equity. Under Irish GAAP, no suchadjustment is required.

**Composition of JSGFunding Group—consolidation of companies sold to affiliates**

As part of the MDPacquisition, certain assets were transferred to newcos, wholly ownedsubsidiaries of JSL. The newcos borrowed €125million which was lent to JSL to fund a €125 million capitalcontribution in JSG Funding. Under US GAAP, the newcos would be consolidated inJSG Acquisitions’s financial statements, causing debt of JSG Acquisitions toincrease and equity of JSG Acquisitions to decrease. Even though JSGAquisitions under US GAAP would consolidate the newcos, JSG Acquisitions had norepayment obligations relating to the newco debt, which was recourse only tothe assets of the newcos. The newcos facility was fully paid before December 31,2003.

**Consolidation ofassets held for sale**

The European Commission approval of the Kappa mergerrequired the divestment by the group of certain Kappa and Smurfit plants. UnderIrish GAAP the Smurfit plants continue to be consolidated until they are soldand the Kappa plants are included as available for sale and are shown ascurrent assets recorded at the lower of cost or net realizable value.

Under US GAAP boththe Kappa and the Smurfit plants are consolidated but treated as held for saleunder SFAS No. 144 “Accounting for the Impairment or Disposal of Long-LivedAssets”. The assets and liabilities are included at fair value less costs tosell and are shown as current assets and liabilities. Any fair 

F-136

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**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted in Ireland and in the United States—(continued)

value adjustment on theKappa plants is treated as part of purchase price accounting but any subsequentadjustments to fair value will be taken to the income statement. Assets heldfor sale includes assets of €92,901,000 and liabilitiesof €38,497,000which are included in the European Specialties segment.

Under US GAAP, the results from operations for assetsheld for sale are included in the consolidated statement of operations whereasthey are excluded under Irish GAAP.  

Furthermore, the resultsfor assets held for sale have been classified as discontinued operations underboth Irish and US GAAP.

**Inventory valuation—fairvalue**

Under Irish GAAP the fair value of inventory in anacquisition would be based either, on the current cost to the acquired entityof reproducing the inventory or on the historical cost of the inventory(including the interest cost of holding the inventory) where it is difficult tofind replacement cost as replacement would be impossible.

Under US GAAP, inventoryacquired in a transaction accounted for under the purchase method is asfollows: (a) finished are valued at estimated selling prices less the sum ofthe costs of disposal and a normal profit; (b) work in process inventories arevalued at estimated selling prices less the sum of the costs of completion,costs of disposal, and a normal profit; and (c) raw material inventories arevalued at current replacement cost. The differences in valuation of inventoryacquired in the Kappa transaction under Irish GAAP and US GAAP will result inan adjustment to goodwill in the reconciliations.

**Long-termreceivables**

Under Irish GAAP, certainlong-term receivables are included in current assets. Under US GAAP, they areincluded in long term assets

**CurrencyTranslation Adjustment**

Adjustments arising ontranslation of the results of non-euro entities operations at average rates andon restatement of the opening net assets at closing rates into the consolidatedfinancial statements are dealt with in the consolidated statement of totalrecognized gains and losses under Irish GAAP and in the statement of othercomprehensive income under US GAAP.  Thecurrency translation adjustment included in other comprehensive income includesthe translation impact of the adjustments to net loss under US GAAP for eachyear.  Furthermore, the currency translationadjustment for each Irish GAAP to US GAAP reconciling item has been included intheir respective line items in the shareholders’ reconciliation itself.

**Composition of JSGFunding Group–consolidation of parent company debt**

JSG Holdings plc completed an offering of €325million in aggregate principle amount of 11.5% senior PIK notes due 2015 (the“PIK notes”), through a series of transactions substantially all of the netproceeds were paid to shareholders by mean of a capital share reduction underIrish law.

F-137

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

Under Irish GAAP, JSG Holdings plc is not consoldiatedin the Group’s consolidated financial statements.

Under US GAAP, FIN 46(R), “Consolidation of VariableInterest Entities”, requires a variable interest entity (“VIE”) to beconsolidated if a party with an ownership, contractual or other financialinterest in the VIE is obligated to absorb a majority of the risk of loss fromthe VIE’s activities, is entitled to receive a majority of the VIE’s residualreturns (if no party absorbs a majority of the VIE’s losses), or both. Avariable interest holder that consolidates the VIE is called the primarybeneficiary. Upon consolidation, the primary beneficiary generally mustinitially record all of the VIE’s assets, liabilities and noncontrollinginterests at fair value and subsequently account for the VIE as if it wereconsolidated based on majority voting interest. 

Effectively, JSGAcquisitions is deemed the primary beneficiary of JSG Holdings plc under thedefinitions of FIN 46(R), as such, JSG Acquisitions is included in theconsolidated financial statements as of December 31, 2005 and will be reflectedas an increase of outstanding debt with the resulting proceeds as adistribution to shareholders as a dividend. The accrued interest associated with the PIK notes has been recorded inthe statement of operations.  Even thoughJSG Funding would consolidate the PIK notes under US GAAP, JSG Funding has norepayment obligations related to the PIK notes, which was recourse only to theassets of JSG Holdings plc.

**Gain on Munksjödisposal**

The Company disposed of its Munksjö pulp, specialtypaper and tissue operations during the year ended December 31, 2005.  As the carrying value of these entitiesdiffered under Irish GAAP and US GAAP, the reconciliation of income includes anadjustment to the gain on disposal accordingly.

F-138

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

The following is a summaryof the significant adjustments to net loss and shareholders’ equity which wouldbe required if US GAAP were to be applied instead of Irish GAAP.

| **Income**                                                                           | ** ** | ** **         | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**    | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------|------------|---------------|-------------|---------------|------------|-------------|------------|
| ** **                                                                           | ** ** | **€000**      | ** ** | **€000** | ** **  | **€000** | ** ** |
| Net loss reported in the consolidated statement of operations                        |       | (171,470           | )          | (33,858       | )           | (66,665       | )          |
| Adjustments:                                                                         |       |               |       |          |        |          |       |
| Goodwill amortization                                                                |       | 28,914             |       | 37,925        |        | 33,817        |       |
| Other intangible amortization                                                        |       | (2,038             | )          | —        |        | —        |       |
| Retirement benefits                                                                  |       | (8,118             | )          | (3,061        | )           | (3,999        | )          |
| Deferred taxation                                                                    |       | 4,936              |       | 9,309         |        | 22,699        |       |
| Stock based compensation expense                                                     |       | (17,696            | )          | (330          | )           | (493          | )          |
| Inventory valuation—fair value                                                  |       | (5,451             | )          | —        |        | (5,264        | )          |
| Management rollover investment                                                       |       | 614                |       | 616           |        | 894           |       |
| Financial instruments—fair value                                                |       | 11,414             |       | (33,275       | )           | (13,779       | )          |
| Consolidation of companies  sold to affiliates                                       |       | (34,053            | )          | (8,195        | )           | (3,295        | )          |
| Adjustment to gain on Munksjö  disposal                                         |       | 2,597              |       | —        |        | —        |       |
| Consolidation of assets held  for sale                                               |       | 163                |       | —        |        | —        |       |
| Insurance receipts                                                                   |       | (398               | )          | —        |        | —        |       |
| PIK interest                                                                         |       | (35,541            | )          | —        |        | —        |       |
|                                                                                 |       | (54,657            | )          | 2,989         |        | 30,580        |       |
| **Net loss as adjusted to accord  with US GAAP**                                     |       | **€(226,127** | **)**      | **€**    | **(30,869** | **)**         | **€** | **(36,085** | **)**      |
| Arising  from:                                                                       |       |               |       |          |        |          |       |
| Continuing operations                                                                |       | (197,702           | )          | (64,757       | )           | (82,043       | )          |
| Acquired activities                                                                  |       | (26,181            | )          | —        |        | —        |       |
| Discontinued activities                                                              |       | (2,244             | )          | 33,888        |        | 45,958        |       |
| **Net loss  available to ordinary shareholders  as adjusted to accord with US GAAP** |       | **€(226,127** | **)**      | **€**    | **(30,869** | **)**         | **€** | **(36,085** | **)**      |

 

**Total Comprehensive Income**

| ** **                                                                               | ** ** | ** **    | ** **   | **Restated**  | ** ** | **Restated**  | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                                               | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
| ** **                                                                               | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| **Net loss available to ordinary shareholders as adjusted to  accord with US GAAP** | ** ** | **(226,127**  | **)**        | **(30,869**   | **)**      | **(36,085**   | **)**      |
| Other comprehensive income / (loss):                                                     |       |          |         |          |       |          |       |
| Financial instruments—fair value(1)                                                 |       | 7,268         |         | (19,365       | )          | (1,757        | )          |
| Unrealized foreign currency translation adjustments                                      |       | 18,123        |         | 23,091        |       | 6,072         |       |
| Retirement benefits                                                                      |       | (77           | )            | (4,824        | )          | 6,533         |       |
| **Total  Comprehensive loss**                                                            | ** ** | **€**    | **(200,813** | **)**         | **€** | **(31,967**   | **)**      | **€** | **(25,237** | **)** |
|                                                                                          |            |               |              |               |            |               |            |  |  |  |

----

(1)   Financialinstruments—fair value of €7,268,000 in 2005 is net of the tax benefit of €773,000.

F-139

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**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

Net losses of €3,075,000of the accumulated adjustments to total comprehensive income in respect of thefair value of financial instruments are expected to be reclassified intoearnings in the next twelve months. These instruments derive from gains andlosses on derivatives hedging cash flows on forecasted transactions (themaximum period for which is two years) and on interest rate swaps qualifying ascash flow hedges.

**Shareholders’ Equity**

| ** **                                                              | ** **                   | ** **        | ** ** | **Restated**  | ** **  |
|-------------------------------------------------------------------------|------------------------------|-------------------|------------|---------------|-------------|
| ** **                                                              | ** **                   | **2005**          | ** ** | **2004**      | ** **  |
| ** **                                                              | ** **                   | **€000**     | ** ** | **€000** | ** **  |
| Shareholders’ equity as reported in the consolidated balance sheet |                         | 1,418,909         |       | 863,272       |        |
| Adjustments:                                                            |                         |              |       |          |        |
| Goodwill                                                                | —Gross                  |              | 106,985    |          | 44,005      |   |
|                                                                    | —Aggregate amortization |              | 101,606    |          | 81,695      |   |
| Other intangibles amortization                                          |                         | (2,038            | )          | —        |        |
| Hyper-inflationary  economies—property, plant and equipment        |                         |              |       |          |        |
|                                                                    | —Cost                   |              | 103,026    |          | 140,133     |   |
|                                                                    | —Aggregate depreciation |              | (49,707    | )             | (63,141     | ) |
| Hyper-inflationary economies—investments                           |                         | 310               |       | 3,013         |        |
| Retirement benefits                                                     |                         | (30,597           | )          | (34,147       | )           |
| Deferred taxation                                                       |                         | (137,896          | )          | (127,194      | )           |
| Financial instruments—fair value                                   |                         | (30,059           | )          | (48,741       | )           |
| Minority share of US GAAP adjustments                                   |                         | (6,376            | )          | (8,615        | )           |
| Consolidate newcos                                                      |                         | (176,859          | )          | (146,519      | )           |
| Rollover investment by JSG management                                   |                         | (74,961           | )          | (75,574       | )           |
| Insurance receipts                                                      |                         | (398              | )          | —        |        |
| Consolidation of  assets held for sale                                  |                         | 163               |       | —        |        |
| PIK                                                                     |                         | (360,541          | )          | —        |        |
|                                                                    |                         | (557,342          | )          | (235,085      | )           |
| **Shareholders’ equity as  adjusted to accord with US GAAP**       | ** **                   | **€861,567** | ** ** | **€**    | **628,187** | ** ** |
|                                                                         |                              |                   |            |               |             |  |  |  |

 

Shareholders’ equity underUS GAAP includes assets amounting to €157,285,000 andliabilities amounting €57,443,000, held for sale atDecember 31, 2005.

Certain amounts in the US GAAP reconciliation andrelated footnote disclosures have been restated to reflect the currencytranslation adjustment associated with the goodwill arising from theacquisition of the Jefferson Smurfit Group in 2002. SFAS No. 52 requires goodwilland any fair value adjustments arising out of the purchase of a foreign entityto be treated as currency assets and liabilities of the foreign operation andtranslated at the closing rates with differences taken to the currencytranslation adjustment recorded in other comprehensive income as a component ofshareholders’ equity. Accordingly, in performing this goodwill allocation tosubsidiaries and applicable currency translation, the Group has restatedfinancial statement amounts presented in accordance with US GAAP to reflect thecurrency 

F-140

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

movementassociated with goodwill in the years 2003 and 2004. This resulted in acumulative increase in currency translation adjustment of €93,533,000 as of December 31, 2004 leading to a reductionin both goodwill and shareholders’ equity reported under US GAAP for anidentical amount. Consequently, the currency translation adjustment in othercomprehensive loss for the years ended December 31, 2004 and 2003 increased by €8,409,000 and €85,124,000,respectively, thereby increasing other comprehensive loss by identical amountsin both years. This restatement did not impact the consolidated statement ofoperations or cash flows for the years ended December 31, 2004 and 2003 aspresented in accordance with US GAAP.

**Accumulated Other Comprehensive Income Amounts-Restated**

| ** **                             | ** **   | **Currency  Translation  Adjustments** | ** ** | **Financial  Instruments  (Losses)** | ** ** | **Retirement  Benefits** | ** ** | **Total**     | ** **  |
|----------------------------------------|--------------|----------------------------------------|------------|--------------------------------------|------------|--------------------------|------------|---------------|-------------|
| ** **                             | ** **   | **€000**                          | ** ** | **€000**                        | ** ** | **€000**            | ** ** | **€000** | ** **  |
| Balance at December 31, 2002      |         |                                   | 16,900     |                                 |       |                     | (4,534     | )             |        |   | 3,773 |   |   | 16,139 |   |
| Movement in the year                   |         |                                   | 6,072      |                                 |       |                     | (1,757     | )             |        |   | 6,533 |   |   | 10,848 |   |
| Balance at  December 31, 2003     |         |                                   | 22,972     |                                 |       |                     | (6,291     | )             |        |   | 10,306 |   |   | 26,987 |   |
| Movement in the  year                  |         |                                   | 23,091     |                                 |       |                     | (19,365    | )             |        |   | (4,824 | ) |   | (1,098 | ) |
| Balance at  December 31, 2004     |         |                                   | 46,063     |                                 |       |                     | (25,656    | )             |        |   | 5,482 |   |   | 25,889 |   |
| Movement in the  year                  | * *     |                                   | 18,123     |                                 |       |                     | 7,268      |          |        |   | (77 | ) | * * | 25,314 | * * |
| **Balance at December 31,  2005** | *** *** |                                   | **€** | **64,186**                           | ** ** | ** **               | ** ** | **€**    | **(18,388** | **)** | ** ** | ** ** | **€** | **5,405** |   | *** *** | **€** | **51,203** | *** *** |
|                                        |              |                                        |            |                                      |            |                          |            |               |             |  |  |  |  |  |  |  |  |  |  |

 

**Cash Flows**

Theconsolidated statement of cash flows prepared under Irish GAAP presentssubstantially the same information as that required under US GAAP by SFAS No. 95—“Statementof Cash Flows”. This standard differs, however, with regard to theclassification of items within the statements and as regards the definition ofcash and cash equivalents. Under US GAAP, cash would not include bankoverdrafts. The movements on such bank overdrafts are required to be includedin financing activities under SFAS No. 95. Under US GAAP only short terminvestments with a maturity of three months or less at the date of acquisitionare included in cash equivalents. Under Irish GAAP movements in short terminvestments are classified as management of liquid resources. Under Irish GAAP,cash flows are presented separately for operating activities, dividendsreceived from associates, returns on investments and servicing of finance,taxation, capital expenditure and financial investment, acquisitions anddisposals, equity dividends paid, management of liquid resources and financing.US GAAP, however, requires only three categories of cash flow activity to bereported: operating, investing and financing.

Cash flows from taxation and returns on investmentsand servicing of finance shown under Irish GAAP would be included as operatingactivities under US GAAP. Cash flows from capital expenditure, financialinvestment and acquisitions and disposals would be included as investingactivities under US GAAP. The payment of dividends would be included as afinancing activity under US GAAP. Under US GAAP, capitalized interest istreated as part of the cost of the asset to which it relates and is thusincluded as part of investing cash flows; under Irish GAAP all interest istreated as part of returns on investments and servicing of finance.

F-141

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**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted in Ireland and in the United States—(continued)

The categories of cash flow activity under US GAAP aresummarized as follows:

| ** **                                        | ** ** | **2005**      | ** **  | **2004**      | ** ** | **2003**      | ** ** |
|---------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                        | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Cash inflow from operating activities             |       | 182,698       |        | 318,827       |       | 334,868       |       |
| Cash (outflow) on investing activities            |       | (530,701      | )           | (174,770      | )          | (333,626      | )          |
| Cash inflow / (outflow) from financing activities |       | 355,052       |        | (85,896       | )          | 11,039        |       |
| Increase in cash and cash equivalents             |       | 7,049         |        | 58,161        |       | 12,281        |       |
| Currency adjustment on cash and cash equivalents  |       | 9,804         |        | (3,611        | )          | (8,810        | )          |
| Cash and cash equivalents at beginning of period  |       | 230,873       |        | 176,323       |       | 172,852       |       |
| **Cash and  cash equivalents at end of period**   | ** ** | **€**    | **247,726** | ** **    | **€** | **230,873**   | ** ** | **€** | **176,323** | ** ** |
|                                                   |            |               |             |               |            |               |            |  |  |  |

 

**BusinessCombinations—Additional Information Required**

Pro-forma sales and net income/loss for Group under USGAAP for the year ended December 31, 2005 were €7,022million (unaudited) and a loss €141.6 million (unaudited),respectively (2004:  €7,649 million(unaudited) and net income of €63.8 million (unaudited),respectively). Pro forma net income for 2005 includes early debt extinguishmentcosts of €104.7million (unaudited) which are not expected to reoccur.

Other intangibles amortization charge is projected tobe approximately €24 million annually for the next 5years.

**Deferred taxation—additionalinformation required by SFAS No. 109**

The analysis of theUS GAAP deferred taxation liability required by SFAS No. 109 is asfollows:

| ** **                                          | ** ** | **2005**      | ** **  | **2004**      | ** ** |
|-----------------------------------------------------|------------|---------------|-------------|---------------|------------|
| ** **                                          | ** ** | **€000** | ** **  | **€000** | ** ** |
| **Deferred taxation liabilities:**                  |       |          |        |          |       |
| Excess of book value over tax value of fixed assets |       | 386,203       |        | 295,702       |       |
| Other timing differences                            |       | 81,974        |        | 83,526        |       |
|                                                |       | 468,177       |        | 379,228       |       |
| **Deferred taxation assets:**                       | ** ** | ** **    | ** **  | ** **    | ** ** |
| Net operating loss carry forwards                   |       | (293,035      | )           | (61,422       | )          |
| Valuation allowances                                |       | 167,005       |        | 29,631        |       |
| Retirement benefits                                 |       | (58,264       | )           | (45,679       | )(1)       |
| Other timing differences                            |       | (2,573        | )           | (42,447       | )          |
|                                                |       | (186,867      | )           | (119,917      | )          |
|                                                | ** ** | **€**    | **281,310** | ** **    | **€** | **259,311** | ** ** |
| **Split as follows:**                               | ** ** | ** **    | ** **  | ** **    | ** ** |
| Current                                             |       | (14,418       | )           | (20,177       | )          |
| Non current                                         |       | 295,728       |        | 279,488       |       |
|                                                | ** ** | **€**    | **281,310** | ** **    | **€** | **259,311** | ** ** |

----

(1)          Retirementbenefits includes €52,776,000(2004: €44,319,000)in relation to deferred tax which has been recorded within ‘Pensionliabilities’ (note 24).

F-142

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**35   DifferencesBetween Accounting Principles Generally Accepted in Ireland and in the United States—(continued)**

Valuation allowances areset up for losses carried forward in those jurisdictions in which it is morelikely than not that the losses carried forward will not be utilized to offsetfuture taxable income or in which there is no deferred tax liability againstwhich the related asset can be offset prior to expiry.

**Share optionschemes—additional information required by SFAS No. 123**

As permitted by SFAS No. 123, “Accounting forStock-Based Compensation” and amended by SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure”, the Group has elected toaccount for shares to be issued under the Management Participation Agreement underAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and adopt the disclosure only provisions of SFAS No. 123and SFAS No. 148. Under SFAS No. 123, options are valued at the grantdate using the Black-Scholes valuation model and compensation expenses arerecognized ratably over the vesting period. Had compensation expenses beendetermined as prescribed by SFAS No. 123, the Group’s net loss for theperiod presented would have been as shown in the table below.

The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions which have no vesting restrictions and are fully transferable. Inaddition, option valuation models require the input of highly subjective assumptionsincluding the expected share price volatility. Because the Group’s employeesshare options have characteristics significantly different from those of tradedoptions and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion, the existing models donot necessarily provide a reliable single measure of the fair value of itsemployee share options. For purposes of pro forma disclosures, the estimatedfair value of the options is amortized to expense over the options’ vestingperiod (see “Stock based employee compensation expense” above for a descriptionof the vesting period).

| ** **                                                                                                       | ** ** | **2005**      | ** **   | **2004**      | ** ** | **2003**      | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                                                                       | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Net loss attributable to common shareholders under  US GAAP                                                      |       |          |         |          |       |          |       |
| As reported                                                                                                      |       | (226,127      | )            | (30,869       | )          | (36,085       | )          |
| Add: Stock-based employee compensation expense included in reported net  loss                                    |       | 17,696        |         | 259           |       | 394           |       |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards |       | (1,316        | )            | (1,073        | )          | (769          | )          |
| **Pro forma**                                                                                                    | ** ** | **€**    | **(209,747** | **)**         | **€** | **(31,683**   | **)**      | **€** | **(36,460** | **)** |
|                                                                                                                  |            |               |              |               |            |               |            |  |  |  |

 

In September 2002, Jefferson Smurfit Group Ltd.(f/k/a MDCP Acquisitions plc) (“JSGL”) adopted the 2002 Management Equity Plan(the “2002 Plan”). The Plan provides for the issuance of equity purchase rightsfor a nominal value of €0.001 each throughlong-term equity incentive awards to our eligible employees, officers, anddirectors (“Participants”). Each award is comprised of Series A, Series Band Series C convertible shares in JSGL and is proportioned as 40%, 40%and 20%, respectively. Series A convertible shares vest over a three yearperiod ending on December 31, 2007. Series B and Series Cconvertible shares will convert over the same time period if certain InternalRate of Return performance 

F-143

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

requirements are met. Eachseries of convertible share would automatically convert into Series Dconvertible shares upon vesting. Subject to certain criteria, theseSeries D convertible shares then could be converted into Ordinary Sharesof JSGL upon payments of an agreed upon conversion price, usually fair marketvalue of JSGL shares at the date of the original award grant. Each award has alife of ten years from the date of grant. Also, there are certain restrictionson transferring convertible or ordinary shares. When a Participant terminatesemployment from JSGL, JSGL reserves the right to redeem or purchase theconvertible shares and any Ordinary Shares acquired as a result of theconversion thereof.

In February 2004, the 2002 Plan was amended (the“2004 Plan”) and restated to, among other things, to provide a clause thatprovides variability in the exercise price for the aforementioned equity awardsbased upon accrued interest for the senior PIK notes in JSG Holdings plc.Furthermore, the awards were exchanged for an identical number of shares in JSGPackaging Ltd. (subsequently renamed to Smurfit Kappa Group Ltd. (“SKG”) in2005). These changes to the 2002 Plan did not take affect untilFebruary 2005 when a corporate restructuring occurred. All othersignificant terms and conditions of the 2002 Plan remained unchanged with theamendment.

In December 2005, the 2004 Plan was amended (the“2005 Plan”) in which SKG gave Participants the opportunity to exchange theirawards of Series A, Series B and Series C convertible sharesinto an equal number of Series E, Series F and Series Gconvertible shares having basically the same terms and conditions. Participantshad to exchange their entire award, not just a particular series of convertibleshares. The main changes to the convertible shares were that vesting dates werechanged to the three years ended December 31, 2010 and the performancecriteria for the Series F and Series G convertible shares wereslightly different to those for the Series B and Series C convertibleshares, which they replaced. Additionally, SKG introduced Series Hconvertible shares, which automatically convert into Series I convertibleshares upon vesting then can be converted into Ordinary Shares of SKG. Thevesting provisions for Series H convertible shares are similar to Series Fconvertible shares except that once converted into Series I convertibleshares, they are not subject to the variable exercise price that the otherseries of convertible shares possess. All other significant terms andconditions of the 2004 Plan remained unchanged with the amendment.

The opportunity to exchange the convertible sharesunder the 2005 Plan did not occur until the first quarter of 2006. Accordingly,as of December 31, 2005, no Series E, Series F or Series Gconvertible shares were outstanding.

F-144

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

A summary of the activity under the 2002 Plan, asamended, for the three years ended December 31, 2005 is presented below:

| ** **                              | ** ** | **A Convertible** | ** **    | **B Convertible** | ** ** | **C Convertible** | ** **    | **H Convertible** | ** ** | **Total**  | ** **    |
|-----------------------------------------|------------|------------------------|---------------|------------------------|------------|------------------------|---------------|------------------------|------------|------------|---------------|
| April 16,  2003 Shares allotted    |       |                   | 3,118,907     |                   |       |                   | 3,118,907     |                   |       |       | 1,559,449     |   |   |   | **—** |   |   | 7,797,263 |   |
| October 21,  2003 Shares allotted  |       |                   | 176,253       |                   |       |                   | 176,253       |                   |       |       | 88,126        |   |   |   | **—** |   |   | 440,632 |   |
| **Balance at December 31, 2003**   | ** ** | ** **             | **3,295,160** |                   | ** ** | ** **             | **3,295,160** |                   | ** ** | ** ** | **1,647,575** |   | ** ** | ** ** | **—** |   |   | 8,237,895 |   |
| March 5,  2004 Shares allotted     |       |                   | 41,534        |                   |       |                   | 41,534        |                   |       |       | 20,767        |   |   |   | **—** |   |   | 103,835 |   |
| **Balance at December 31, 2004**   | ** ** | ** **             | **3,336,694** |                   | ** ** | ** **             | **3,336,694** |                   | ** ** | ** ** | **1,668,342** |   | ** ** | ** ** | **—** |   |   | 8,341,730 |   |
| December 5,  2005 Shares allotted  |       |                   | —        |                   |       |                   | —        |                   |       |       | —        |   |   |   | 2,062,880 |   |   | 2,062,880 |   |
| December 31, 2005 Shares cancelled |       |                   | **—**    |                   |       |                   | (1,112,231    | )                      |       |       | **—**    |   |   |   | **—** |   |   | (1,112,231 | ) |
| **Balance  at December 31, 2005**  | ** ** | ** **             | **3,336,694** |                   | ** ** | ** **             | **2,224,463** |                   | ** ** | ** ** | **1,668,342** |   | ** ** | ** ** | **2,062,880** |   | ** ** | **9,292,379** | ** ** |
| **Exercisable  at December 31, 2005**   | ** ** | ** **             | **1,112,231** |                   | ** ** | ** **             | **—**    |                   | ** ** | ** ** | **—**    |   | ** ** | ** ** | **—** |   | ** ** | **1,112,231** | ** ** |

 

**Theexercisable price for all convertible shares at December 31, 2005 was**€5.12.

**Pension costs andtermination indemnities—information required by SFAS No. 87 and SFAS No. 132**

The components of thedefined benefit net pension expense for the Group’s defined benefit plans,termination indemnities and post retirement healthcare defined benefit plansfor the years ended December 31, 2005, 2004 and 2003 under SFAS No. 87amended by SFAS No. 132 are estimated to be as follows:

| ** **                                                        | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                        | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Service cost                                                      |       | 37,450        |       | 38,470        |       | 36,885        |       |
| Interest cost                                                     |       | 57,731        |       | 56,282        |       | 55,573        |       |
| Expected return on plan assets                                    |       | (44,259       | )          | (40,627       | )          | (39,669       | )          |
| Amortization of unrecognized transition obligation or asset  |       | 112           |       | —        |       | —        |       |
| Recognized gains and losses                                       |       | 5,453         |       | 61            |       | 4,118         |       |
| Recognized prior service cost                                     |       | (451          | )          | 57            |       | 655           |       |
| Loss due to settlement or curtailment                             |       | (2,564        | )          | (636          | )          | —        |       |
|                                                              | ** ** | **€**    | **53,472** | ** **    | **€** | **53,607**    | ** ** | **€** | **57,562** | ** ** |
|                                                                   |            |               |            |               |            |               |            |  |  |  |

 

F-145

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted in Ireland and in the United States—(continued)

The estimated fund statusof the Group’s defined benefit plans, termination indemnities and postretirement healthcare defined benefit schemes under SFAS No. 87 amended bySFAS No. 132 was as follows:

| ** **                                                                             | ** ** | **2005**      | ** **   | **2004**      | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|
| ** **                                                                             | ** ** | **€000** | ** **   | **€000** | ** ** |
| **Change in benefit obligation**                                                       |       |          |         |          |       |
| Benefit  obligation at beginning of period                                             |       | 1,123,272     |         | 1,081,891     |       |
| Service  cost                                                                          |       | 37,450        |         | 38,470        |       |
| Interest  cost                                                                         |       | 57,731        |         | 56,282        |       |
| Contributions  by plan participants                                                    |       | 7,180         |         | 7,908         |       |
| Actuarial  gains and losses                                                            |       | 89,686        |         | 8,486         |       |
| Benefits  paid                                                                         |       | (58,201       | )            | (60,748       | )          |
| Divestitures,  curtailments or settlements                                             |       | (8,997        | )            | (542          | )          |
| Plan amendments                                                                        |       | (61           | )            | (1,793        | )          |
| Reclassification                                                                       |       | —        |         | 2,291         |       |
| Acquisitions                                                                           |       | 799,806       |         | —        |       |
| Disposals                                                                              |       | (29,741       | )            | (101          | )          |
| Currency adjustments                                                                   |       | 25,249        |         | (8,872        | )          |
| Benefit obligation at end of period                                                    |       | 2,043,374     |         | 1,123,272     |       |
| **Change in plan assets**                                                              | ** ** | ** **    | ** **   | ** **    | ** ** |
| Fair value of plan assets at beginning of period                                       |       | 655,105       |         | 621,833       |       |
| Actual return on assets                                                                |       | 121,834       |         | 40,999        |       |
| Contributions by employer                                                              |       | 51,077        |         | 51,921        |       |
| Contributions by plan participants                                                     |       | 7,180         |         | 7,908         |       |
| Benefits paid                                                                          |       | (58,201       | )            | (60,748       | )          |
| Divestitures, curtailments or settlements                                              |       | (3,048        | )            | —        |       |
| Acquisitions                                                                           |       | 536,793       |         | —        |       |
| Disposals                                                                              |       | (7,705        | )            | —        |       |
| Currency adjustment                                                                    |       | 16,156        |         | (6,808        | )          |
| Fair value of plan assets at end of period                                             |       | 1,319,191     |         | 655,105       |       |
| Funded status of the plans                                                             |       | (724,183      | )            | (468,167      | )          |
| Amounts available to be  applied as an increase / (reduction) of future pension costs: |       |          |         |          |       |
| Unrecognized actuarial gains or losses                                                 |       | (7,003        | )            | (13,162       | )          |
| Unrecognized prior service cost                                                        |       | (1,535        | )            | (1,680        | )          |
| Minimum pension liability                                                              |       | (6,020        | )            | (6,694        | )          |
| **(Accrued) pension costs**                                                            | ** ** | **€**    | **(738,741** | **)**         | **€** | **(489,703** | **)** |
|                                                                                        |            |               |              |               |            |  |  |

 

The Group’s postretirement healthcare defined benefitschemes are in the US. The estimated fund status of these schemes at December 31,2005 were €2,412,000 (2004: €2,245,000).

F-146

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

Plan assets less thanprojected benefit obligations include overfunded plans at December 31,2005, €3,200,000(2004: nil) and underfunded plans at December 31, 2005 of €727,383,000(2004: €468,167,000).

Thefollowing assumptions were used to determine the defined benefit expense forthe Group.

| ** **                                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average assumed discount rate                              |       |     | 4.9        | %        |       |     | 5.5        | % |   |   | 5.4 | % |   |
| Weighted average rates of compensation increase                     |       |     | 3.1        | %        |       |     | 3.3        | % |   |   | 3.2 | % |   |
| Weighted  average expected long term rates of return on plan assets |       |     | 6.1        | %        |       |     | 6.7        | % |   |   | 6.5 | % |   |

 

The calculation of theprojected benefit obligation at December 31, 2005 assumed a discount rateof approximately 4.6% (2004: 5.1%).

The assets of the plansare invested primarily in equities, fixed interest securities, insurancecontracts and real estate.

Theweighted-average asset allocations at December 31, 2005 and 2004 by assetcategory of the defined benefit pension schemes is shown below:

| ** **        | ** ** | **Plan assets**   | ** ** |
|-------------------|------------|------------------------|------------|
| ** **        | ** ** | **Target  Allocation** | ** ** | **Percentage of Plan  Assets at December 31,** | ** ** |
| ** **        | ** ** | ** **             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Equity securities |       | 15 - 80%               | ** ** |   | 50 | % |   |   | 49 | % |   |
| Debt securities   |       | 20 - 85%               | ** ** |   | 38 | % |   |   | 39 | % |   |
| Real Estate       |       | 0 - 10%                | ** ** |   | 6 | % |   |   | 6 | % |   |
| Other             |       | 0 - 10%                | ** ** |   | 6 | % |   |   | 6 | % |   |
| Total             |       | ** **             | ** ** |   | 100 | % |   |   | 100 | % |   |

 

The Group maintains targetallocation percentages among various asset classes based on an investmentpolicy established for the pension plans which is designed to achieve long termrate of return objectives, while mitigating against downside risk andconsidering expected cash flows. Our investment policy is reviewed from time totime to ensure consistency with our long term objective of funding 100% of theprojected benefit obligation.

The expected long termrate of return on plan assets reflects the average return rates expected on thefunds invested or to be invested to provide for the benefits included in theprojected benefit obligation. In estimating those rates, appropriateconsideration is given to the current returns being earned by the plan assetsin the fund and the rates of return expected to be available for reinvestment.

The Group’s expectedreturn on assets of the defined benefit schemes is based on recommendationsfrom the plan actuary, having considered anticipated future long termperformance of individual asset classes. Consideration is also given to theappropriate asset allocation strategy, given the anticipated requirements ofthe plan to determine the average rate of return expected on the funds investedto provide for the pension plan benefits. While appropriate consideration isgiven to recent fund performance and historical returns, the assumption isprimarily a long-term, prospective rate. Based on our most recent study, theexpected long term return assumption effective January 1, 2006 will be6.1%.

F-147

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**35**   Differences Between Accounting Principles Generally Accepted inIreland and in the United States—(continued)

The expected contributions to the defined benefitplans is anticipated to be €80,330,000 in the year endingDecember 31, 2006. The accumulated benefit obligation of all schemes at December 31,2005 is €1,819,813,000.

Expectedfuture benefit payments for each of the next five fiscal years and in theaggregate for the five fiscal years thereafter are shown below:

| **Year**     | ** ** | ** **    | ** ** | **Benefit Payments** | ** ** |
|--------------|------------|---------------|------------|---------------------------|------------|
| ** **   | ** ** | **€000** | ** ** |
| 2006         |       |          | 80,748     |                      |       |
| 2007         |       |          | 82,077     |                      |       |
| 2008         |       |          | 83,584     |                      |       |
| 2009         |       |          | 88,015     |                      |       |
| 2010         |       |          | 91,278     |                      |       |
| 2011  - 2015 |       |          | 514,856    |                      |       |

 

**36   New AccountingStandards**

**U.S. GAAP**

In November 2004, the FASBissued SFAS 151, ‘‘Inventory Costs—An Amendment of ARB No. 43, Chapter 4’’.SFAS 151 amends the guidance in ARB No. 43, Chapter 4, ‘‘Inventory Pricing’’,to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material. Among other provisions, the new rule requiresthat items such as idle facility expense, excessive spoilage, double freightand rehandling costs be recognized as current-period charges. Additionally, SFAS151 requires that the allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities.SFAS 151 is effective for fiscal years beginning after June 15, 2005 andwe are required to adopt it in the first quarter of fiscal year 2006. We do notexpect that the adoption of SFAS 151 will have a material impact on ourconsolidated results of operations and financial condition.

In December 2004, the FASB issued SFAS 123(revised 2004), ‘‘Share-Based Payment’’ which replaces SFAS 123, ‘‘Accountingfor Stock-Based Compensation’’, and supercedes APB Opinion 25, ‘‘Accounting forStock Issued to Employees’’. SFAS 123R requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on their fair values. This statement iseffective for accounting periods starting January 1, 2006. We arecurrently evaluating the effect that the adoption of SFAS 123R will have on ourconsolidated results of operations and financial condition.

In December 2004, the FASB issued SFAS 153, ‘‘Exchangesof Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting forNonmonetary Transactions’’. SFAS 153 eliminates the exception from fairvalue measurement for nonmonetary exchanges of similar productive assets inparagraph 21(b) of APB Opinion 29, ‘‘Accounting for NonmonetaryTransactions’’, and replaces it with an exception for exchanges that do nothave commercial substance. SFAS 153 specifies that a nonmonetary exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange. SFAS 153 is effective for thefiscal periods beginning after 

F-148

----

**JSG Acquisitions and Subsidiary Companies  Notes to the Consolidated Financial Statements—(continued)**

**36**   New Accounting Standards—(continued)

June 15, 2005and is required to be adopted by us in the first quarter of fiscal year 2006.We are currently evaluating the effect that the adoption of SFAS 153 will haveon our consolidated results of operations and financial condition but we do notexpect that it will have a material impact.

In May 2005, the FASB issued SFAS 154, “AccountingChanges and Error Corrections” (“SFAS 154”) which replaces Accounting PrinciplesBoard Opinions 20 “Accounting Changes” and SFAS 3, “Reporting AccountingChanges in Interim Financial Statements—An Amendment of APB Opinion No. 28.”SFAS 154 provides guidance on the accounting for and reporting of accountingchanges and error corrections. It requires retrospective application forchanges in accounting principle and the correction of errors. SFAS 154 iseffective for fiscal years beginning after December 15, 2005. The adoptionof this standard is not expected to have a material effect on our results ofoperations or financial position.

In February 2006, the FASB issued SFAS 155, ‘Accountingfor Certain Hybrid Financial Instruments’ (SFAS 155), an amendment of SFAS 140and SFAS 133. SFAS 155 permits election to measure any hybrid financialinstrument at fair value (with changes in fair value recognised in earnings) ifthe hybrid instruments contains an embedded derivative that would otherwise berequired to be bifurcated and accounted for separately under SFAS 133. Theelection to measure the hybrid instrument at fair value is made on aninstrument-by-instrument basis and is irreversible. The Statement is effectivefor all instruments acquired, issued, or subject to a remeasurement event afterthe beginning of fiscal years begin after September 15, 2006 provided thatfinancial statements for any interim period of that fiscal year have not beenissued. We are currently evaluating the effect that the adoption of SFAS 155will have on our consolidated results of operations and financial condition.

In April 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets, anAmendment to FASB Statement No. 140.” SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities,” to permitservicing rights to either be: (1) measured at fair value with changes in fairvalue reported through earnings; or, (2) amortise servicing rights inproportion to and over the estimated net servicing income or loss and assessthe rights for impairment or the need for an increased obligation.  SFAS No. 156 is effective for fiscal yearsbeginning after September 15, 2006.  TheCompany is currently evaluating the impact of adopting SFAS No. 156, but doesnot expect that the adoption will have a material impact on our consolidatedresults of operations or financial condition.

**InternationalFinancial Reporting Standards**

In 2002 the European Union issued regulationsrequiring all companies with securities admitted to trading on a regulated marketin any European Economic Area (EEA) State to prepare their financial statementsin accordance with accounting standards issued by the International AccountingStandards Board (‘‘*IASB*’’). ForIrish public limited companies with equity securities publicly traded, theregulations apply for accounting periods starting on or after January 1, 2005.For Irish public limited companies whose debt securities only are publiclytraded the regulations may be applied for accounting periods starting on orafter January 1, 2007. Our equity and debt securities are not admitted totrading on a regulated market of any EEA Member State, however we intend toprepare financial statements in accordance with standards issued by the IASBwith effect from January 1, 2007.

F-149

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37**   OrganizationalStructure

Eachof SKGL, JSG Holdings, JSL, JSG Funding, JSG Acquisitions and JSG are holdingcompanies with no operations of their own. A listing of SKG’s principalsubsidiaries is set out below.
| Subsidiaries                                                                                                                             | ** ** | ** **                                                                                                                                                 | ** ** | **Principal Activities** | ** ** | **Country of  Incorporation** | ** ** | **Holding %** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------|------------|--------------------|------------|
| **Carton  de Colombia, S.A.**

Apartado Aereo  219, Cali, Colombia                                                                       |       | Manufacture  of paperboard and packaging products                                                                                                          | ** ** | **Colombia**                  |       |                               | 70         |               |       |
| **Carton de Venezuela, S.A**

Apartado Aereo 609, Caracas, Venezuela                                                                     |       | Manufacture of paperboard and packaging products                                                                                                           | ** ** | **Venezuela**                 |       |                               | 88         |               |       |
| **Grupo Smurfit Mexico, S.A. de C.V.**

Jaime Balmes, No. 11 Torre D. 7 Piso,

Col. Los Morales Polanco 11510,

Mexico D.F., Mexico |       | Manufacture of paperboard and packaging products                                                                                                           | ** ** | **Mexico**                    |       |                               | 100        |               |       |
| **Kappa Kraftliner**** AB**

SE-941 86, Piteå, Sweden                                                                          |       | Manufacture of containerboard and holding company  for operations in Sweden and other countries which manufacture specialty  papers and packaging products | ** ** | **Sweden**                    |       |                               | 100        |               |       |
| **Smurfit****Kappa Nederland B.V.**

**Dr. Holtroplaan 5, 5652 Eindhoven**

**The Netherlands**                                     |       | Holding company for Dutch operations which  manufacture containerboard, solid board and packaging products                                                 | ** ** | **The Netherlands**           |       |                               | 100        |               |       |
| **Nettingsdorfer Papierfabrik AG & Co KG**

A-4054 Nettingsdorf-Fabrik, Austria                                                 |       | Manufacture of containerboard and holding company  for Austrian operations which manufacture corrugated board                                              | ** ** | **Austria**                   |       |                               | 100        |               |       |
| **Smurfit, S.A.**

Paque Saenz Pena 308—8th Floor,

Buenos Aires, Argentina                                                         |       | Manufacture of paperboard and packaging products                                                                                                           | ** ** | **Argentina**                 |       |                               | 100        |               |       |
| **Smurfit Capital Funding Limited******Beech Hill, Clonskeagh, Dublin 4, Ireland                                                         |       | Finance company                                                                                                                                            | ** ** | **Ireland**                   |       |                               | 100        |               |       |
| **Smurfit Deutschland GmbH &  Co KG**

Tilsiter Strasse 144,

22047 Hamburg, Germany                                            |       | Holding company for German operations which  manufacture paperboard and packaging products                                                                 | ** ** | **Germany**                   |       |                               | 100        |               |       |
| **Smurfit  International B.V.**

Fred Roeskestraat  123,

1076 EE  Amsterdam, The Netherlands                                            |       | Principal  international holding company                                                                                                                   | ** ** | **The  Netherlands**          |       |                               | 100        |               |       |

 

F-150

----

**JSG Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37**   Organizational Structure—(continued)
| Subsidiaries                                                                                                                | ** ** | ** **                                                                                                                                                                                             | ** ** | **Principal Activities** | ** ** | **Country of  Incorporation** | ** ** | **Holding %** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------|------------|--------------------|------------|
| **Smurfit  International France S.A.**

2 rue Goethe,

75116 Paris, France                                                  |       | Holding  company for French operations whose activities are the manufacture of paperboard  and packaging products                                                                                      | ** ** | **France**                    |       |                               | 100        |               |       |
| **Smurfit  Investments UK Limited**

Darlington Road, West Auckland,

Bishop Auckland, Co. Durham

DL14 9PE, United Kingdom |       | Holding  company for UK operations whose principal activities are the manufacture of  paperboard and packaging  products                                                                               | ** ** | **United Kingdom**            |       |                               | 100        |               |       |
| **Smurfit Kappa Ireland Limited**

Beech Hill,  Clonskeagh, Dublin 4, Ireland                                               |       | Manufacture of paperboard and packaging products and  printing                                                                                                                                         | ** ** | **Ireland**                   |       |                               | 100        |               |       |
| **Smurfit Nervion, S.A.**

B Arriandi s/n, 48215 lurreta,

Vizcaya, Spain                                                   |       | Manufacture of sack paper and holding company for  Spanish, Portuguese and sack converting operations whose principal activities  are the manufacture of paperboard, packaging and paper sack products | ** ** | **Spain**                     |       |                               | 99         |               |       |
| **Smurfit  SISA, S.p.A**

Strada Serravalle  30,

15067 Novi Ligure  (AL), Italy                                            |       | Manufacture of  paperboard and packaging products                                                                                                                                                      | ** ** | **Italy**                     |       |                               | 90         |               |       |

 

 

F-151

----

**JSG Funding and Subsidiary Companies Valuation and Qualifying Accounts**

**Schedule II-I**

**Description**

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2003** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 42,657              |       |            |       | €           | 10,493     |                |       |   | € | (1,408 | ) |   |   | € | 3,098 |   |   |   | € | 54,840 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2004** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 54,840              |       |            |       | €           | 4,048      |                |       |   | € | (385 | ) |   |   | € | (5,593 | ) |   |   | € | 52,910 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2005** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 52,910              |       |            |       | €           | (7,146     | )                   |       |   | € | 959 |   |   |   | € | (892 | ) |   |   | € | 45,831 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

S-1

----

**JSG Acquisitions and Subsidiary Companies Valuation and Qualifying Accounts—(continued)**

**Schedule II-II**

**Description**

| ** **                                           | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                                           | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                                           | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                                           | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                                           | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31, 2003** | ** ** | ** **            | ** ** | ** **          | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
| Provision for bad  and doubtful debts                |       |                  | €     | 42,657              |       |            |       | €           | 10,493     |                |       |   | € | (1,408 | ) |   |   | € | 3,098 |   |   |   | € | 54,840 |   |   |
|                                                      |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2004** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 54,840              |       |            |       | €           | 4,048      |                |       |   | € | (385 | ) |   |   | € | (5,593 | ) |   |   | € | 52,910 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2005** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 52,910              |       |            |       | €           | (7,146     | )                   |       |   | € | 959 |   |   |   | € | (892 | ) |   |   | € | 45,831 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

S-2

----