**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549**

**FORM 10-Q**

x                                  Quarterly Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934.

o                                    Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934.

For Quarter Ended **September 30, 2006**

Commission File Number **1-3439**

**SMURFIT-STONECONTAINER ENTERPRISES, INC.**(Exact name of registrant as specified in its charter)

| **Delaware**                     | ** ** | **36-2041256**                     |
|----------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of |       | (IRS Employer  Identification No.) |
| incorporation or  organization)  |       |                               |

 

###### **150 North Michigan Avenue,    Chicago, Illinois      60601**(Address of principal executive offices)              (Zip Code)

**(312) 346-6600**(Registrant’s telephonenumber, including area code)

###### **Not Applicable** (Former name,former address and former fiscal year, ifchanged since last report)

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be 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 to suchfiling requirements for the past 90 days.   Yes  x  No  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of theExchange Act):Large accelerated filer  o                                  Acceleratedfiler  o                            Non-accelerated filer  x

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of November 3, 2006, the registrant had outstanding 770 shares ofcommon stock, $.01 par value per share, all of which are owned by Smurfit-StoneContainer Corporation.

**The registrant meets theconditions set forth in General Instruction (H) (1) (a) and (b) of Form 10-Qand is therefore filing this form with the reduced disclosure format permittedthereby.**

 

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**PARTI - FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**SMURFIT-STONECONTAINER ENTERPRISES, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                                                                                                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In millions)**                                                                                                                                                                        | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                                                                                                                                                                     | ** ** | **$**                                                | **1,844**  |                                                | $          | 1,696 | ** ** | **$** | **5,338** |   | $ | 5,165 |   |
| Costs and expenses                                                                                                                                                                            | ** ** | ** **                                           |       |                                                |       |   |   |   |   |
| Cost of goods  sold                                                                                                                                                                           | ** ** | **1,551**                                            |       | 1,513                                               | ** ** | **4,653** |   | 4,536 |   |
| Selling and  administrative expenses                                                                                                                                                          | ** ** | **165**                                              |       | 160                                                 | ** ** | **508** |   | 490 |   |
| Restructuring  charges                                                                                                                                                                        | ** ** | **13**                                               |       | 293                                                 | ** ** | **35** |   | 297 |   |
| (Gain) loss on  sale of assets                                                                                                                                                                |       |                                                 |       | 1                                                   | ** ** | **(24** | **)** | 1 |   |
| Income (loss)  from operations                                                                                                                                                                | ** ** | **115**                                              |       | (271                                                | )          | **166** |   | (159 | ) |
| Other income (expense)                                                                                                                                                                        | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Interest  expense, net                                                                                                                                                                        | ** ** | **(78**                                              | **)**      | (88                                                 | )          | **(266** | **)** | (260 | ) |
| Loss on early  extinguishment of debt                                                                                                                                                         | ** ** | ** **                                           |       |                                                | ** ** | **(28** | **)** |   |   |
| Other, net                                                                                                                                                                                    | ** ** | **(3**                                               | **)**      | (18                                                 | )          | **(26** | **)** | (20 | ) |
| Income (loss)  from continuing operations before income taxes                                                                                                                                 | ** ** | **34**                                               |       | (377                                                | )          | **(154** | **)** | (439 | ) |
| (Provision for) benefit  from income taxes                                                                                                                                                    | ** ** | **(14**                                              | **)**      | 136                                                 | ** ** | **59** |   | 161 |   |
| Income (loss)  from continuing operations                                                                                                                                                     | ** ** | **20**                                               |       | (241                                                | )          | **(95** | **)** | (278 | ) |
| Discontinued operations                                                                                                                                                                       | ** ** | ** **                                           |       |                                                |       |   |   |   |   |
| Income from  discontinued operations, net of income tax provision of $9 for the nine  months ended September 30, 2006 and $11 and $27 for the three and nine months  ended September 30, 2005 | ** ** | ** **                                           |       | 15                                                  | ** ** | **14** |   | 40 |   |
| Loss on sale of  discontinued operations, net of income tax benefit (provision) of $1 and  ($174) for the three and nine months ended September 30, 2006                                      | ** ** | **(2**                                               | **)**      |                                                | ** ** | **(3** | **)** |   |   |
| Net income (loss)                                                                                                                                                                             | ** ** | **$**                                                | **18**     |                                                | $          | (226 | ) | **$** | **(84** | **)** | $ | (238 | ) |

 

See notes toconsolidated financial statements.

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**SMURFIT-STONE CONTAINER ENTERPRISES,INC.CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In millions, except share data)**                                                                            | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                          | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                          |       |                   |       |                  |       |
| Current assets                                                                                                                      |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                          | ** ** | **$**                  | **7**      |                  | $          | 5 |   |
| Receivables,  less allowances of $5 in 2006 and $10 in 2005                                                                         | ** ** | **143**                |       | 224                   |       |
| Retained  interest in receivables sold                                                                                              | ** ** | **213**                |       | 139                   |       |
| Inventories,  including amounts valued under LIFO method                                                                            |       |                   |       |                  |       |
| Work-in-process  and finished goods                                                                                                 | ** ** | **161**                |       | 234                   |       |
| Materials and  supplies                                                                                                             | ** ** | **398**                |       | 500                   |       |
|                                                                                                                                | ** ** | **559**                |       | 734                   |       |
| Prepaid expenses  and other current assets                                                                                          | ** ** | **38**                 |       | 82                    |       |
| Total current  assets                                                                                                               | ** ** | **960**                |       | 1,184                 |       |
| Net property, plant and  equipment                                                                                                  | ** ** | **3,765**              |       | 4,245                 |       |
| Timberland, less timber  depletion                                                                                                  | ** ** | **43**                 |       | 44                    |       |
| Goodwill                                                                                                                            | ** ** | **2,873**              |       | 3,309                 |       |
| Other assets                                                                                                                        | ** ** | **290**                |       | 332                   |       |
|                                                                                                                                | ** ** | **$**                  | **7,931**  |                  | $          | 9,114 |   |
| **Liabilities and Stockholder’s  Equity**                                                                                      | ** ** | ** **             |       |                  |       |
|                                                                                                                                |       |                        | ** ** | ** **            | ** ** |
| Current liabilities                                                                                                                 |       |                   |       |                  |       |
| Current  maturities of long-term debt                                                                                               | ** ** | **$**                  | **90**     |                  | $          | 35 |   |
| Accounts payable                                                                                                                    | ** ** | **548**                |       | 654                   |       |
| Accrued  compensation and payroll taxes                                                                                             | ** ** | **165**                |       | 186                   |       |
| Interest payable                                                                                                                    | ** ** | **72**                 |       | 97                    |       |
| Income taxes  payable                                                                                                               | ** ** | **5**                  |       | 17                    |       |
| Current deferred  income taxes                                                                                                      | ** ** | **16**                 |       | 15                    |       |
| Other current  liabilities                                                                                                          | ** ** | **153**                |       | 183                   |       |
| Total current  liabilities                                                                                                          | ** ** | **1,049**              |       | 1,187                 |       |
| Long-term debt, less  current maturities                                                                                            | ** ** | **3,633**              |       | 4,536                 |       |
| Other long-term  liabilities                                                                                                        | ** ** | **1,141**              |       | 1,123                 |       |
| Deferred income taxes                                                                                                               | ** ** | **461**                |       | 529                   |       |
| Stockholder’s equity                                                                                                           |       |                   |       |                  |       |
| Common stock,  par value $.01 per share; 1,000 shares authorized, 770 shares issued and  outstanding in 2006 and 2005, respectively | ** ** | ** **             |       |                  |       |
| Additional  paid-in capital                                                                                                         | ** ** | **3,628**              |       | 3,604                 |       |
| Retained  earnings (deficit)                                                                                                        | ** ** | **(1,582**             | **)**      | (1,492                | )          |
| Accumulated  other comprehensive income (loss)                                                                                      | ** ** | **(399**               | **)**      | (373                  | )          |
| Total  stockholder’s equity                                                                                                    | ** ** | **1,647**              |       | 1,739                 |       |
|                                                                                                                                | ** ** | **$**                  | **7,931**  |                  | $          | 9,114 |   |

 

See notes toconsolidated financial statements.

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| **Nine Months Ended September 30, (In millions)**               | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Cash flows from operating  activities**                                                     |       |       | ** ** | ** ** | ** ** |
| Net loss                                                                                      | ** ** | **$**      | **(84**    | **)**      | $          | (238 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities               | ** ** | ** ** |       |       |       |
| Gain on  disposition of discontinued operations                                               | ** ** | **(171**   | **)**      |       |       |
| Loss on early  extinguishment of debt                                                         | ** ** | **28**     |       |       |       |
| Depreciation,  depletion and amortization                                                     | ** ** | **288**    |       | 308        |       |
| Amortization of  deferred debt issuance costs                                                 | ** ** | **7**      |       | 7          |       |
| Deferred income  taxes                                                                        | ** ** | **91**     |       | (159       | )          |
| Pension and  postretirement benefits                                                          | ** ** | **(2**     | **)**      | (33        | )          |
| (Gain) loss on  sale of assets                                                                | ** ** | **(24**    | **)**      | 1          |       |
| Non-cash  restructuring charges                                                               | ** ** | **16**     |       | 261        |       |
| Non-cash  stock-based compensation                                                            | ** ** | **18**     |       | 9          |       |
| Non-cash foreign  currency losses                                                             | ** ** | **12**     |       | 12         |       |
| Change in  current assets and liabilities, net of effects from acquisitions and  dispositions |       |       |       |       |       |
| Receivables and  retained interest in receivables sold                                        | ** ** | ** ** |       | 9          |       |
| Inventories                                                                                   | ** ** | **27**     |       | 25         |       |
| Prepaid expenses  and other current assets                                                    | ** ** | **10**     |       | 1          |       |
| Accounts payable  and accrued liabilities                                                     | ** ** | **(88**    | **)**      | (12        | )          |
| Interest payable                                                                              | ** ** | **(25**    | **)**      | (16        | )          |
| Other, net                                                                                    | ** ** | **17**     |       | (13        | )          |
| Net cash provided  by operating activities                                                    | ** ** | **120**    |       | 162        |       |
| **Cash flows from investing  activities**                                                     | ** ** | ** ** |       |       |       |
| Expenditures for  property, plant and equipment                                               | ** ** | **(198**   | **)**      | (201       | )          |
| Proceeds from  property disposals and sale of businesses                                      | ** ** | **956**    |       | 7          |       |
| Payments on  acquisitions                                                                     | ** ** | ** ** |       | (5         | )          |
| Net cash  provided by (used for) investing activities                                         | ** ** | **758**    |       | (199       | )          |
| **Cash flows from financing  activities**                                                     | ** ** | ** ** |       |       |       |
| Proceeds from  long-term debt                                                                 | ** ** | ** ** |       | 72         |       |
| Net repayments  of debt                                                                       | ** ** | **(848**   | **)**      | (29        | )          |
| Debt repurchase  premiums                                                                     | ** ** | **(24**    | **)**      |       |       |
| Dividends paid                                                                                | ** ** | **(6**     | **)**      | (6         | )          |
| Capital  contribution from SSCC                                                               | ** ** | **2**      |       | 1          |       |
| Deferred debt  issuance costs                                                                 |       |       |       | (2         | )          |
| Net cash  provided by (used for) financing activities                                         | ** ** | **(876**   | **)**      | 36         |       |
| **Increase (decrease) in cash and  cash equivalents**                                         | ** ** | **2**      |       | (1         | )          |
| Cash and cash  equivalents                                                                    | ** ** | ** ** |       |       |       |
| Beginning of  period                                                                          | ** ** | **5**      |       | 6          |       |
| End of period                                                                                 | ** ** | **$**      | **7**      |       | $          | 5 |   |

 

See notes toconsolidated financial statements.

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Tabularamounts in millions, except share data)

**1.****              SignificantAccounting Policies**

**Basis of Presentation:**  The accompanying consolidated financialstatements and notes thereto of Smurfit-Stone Container Enterprises, Inc. (“SSCE”or the “Company”) have been prepared in accordance with the instructions toForm 10-Q and reflect all adjustments which management believes necessary(which include only normal recurring accruals) to present fairly the Company’sfinancial position, results of operations and cash flows.  These statements, however, do not include allinformation and footnotes necessary for a complete presentation of financialposition, results of operations and cash flows in conformity with U.S.generally accepted accounting principles. Interim results may not necessarily be indicative of results that may beexpected for any other interim period or for the year as a whole.  These financial statements should be read inconjunction with the audited consolidated financial statements and footnotesincluded in the SSCE Annual Report on Form 10-K for the year ended December 31,2005 (“2005 10-K”) filed March 6, 2006 with the Securities and ExchangeCommission.

SSCE is a wholly-owned subsidiary of Smurfit-StoneContainer Corporation (“SSCC”).  SSCE hasdomestic and international operations.

**RecentlyAdopted Accounting Standard:** In September 2005, the Emerging Issues TaskForce (“EITF”) reached a consensus on Issue No. 04-13, “Accounting forPurchases and Sales of Inventory With the Same Counterparty,” effective for theCompany April 1, 2006, for new arrangements and modifications or renewals ofexisting arrangements.  EITF No. 04-13requires certain inventory buy/sell transactions between counterparties withinthe same line of business to be viewed as a single exchange transaction.   The Company adopted EITF No. 04-13 effectiveApril 1, 2006.  EITF No. 04-13 requiredthe Company to prospectively report certain inventory buy/sell transactions ofsimilar containerboard types in the Containerboard and Corrugated Containerssegment on a net basis in the consolidated statements of operations, therebyreducing net sales and cost of goods sold by $64 million and $134 million,respectively, for the three and six months ended September 30, 2006.  Had EITF No. 04-13 previously been in effect,net sales and cost of goods sold would have been reduced by an additional $58million for the nine months ended September 30, 2006, and $65 million and $218million, respectively, for the three and nine months ended September 30, 2005.

**ProspectiveAccounting Standards: **In September 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 158 “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans,”effective for fiscal years ending after December 15, 2006.  This standard requires the funded status ofthe Company’s defined benefit pension plans and postretirement plans, measuredas the difference between plan assets at fair value and the benefitobligations, be recorded as an asset or liability with the after-tax impactrecorded to other comprehensive income (“OCI”) in the December 31, 2006 balancesheet, based on an actuarial valuation as of that date.  Subsequent changes in the funded status ofthe plans will be recognized in OCI in the year in which the changesoccur.  SFAS No. 158 has no impact on theconsolidated statements of operations. The Company expects this new standard to increase pension and otherpostretirement liabilities, included in other long-term liabilities in theconsolidated balance sheet, by approximately $225 million at December 31, 2006with the offset recorded to OCI, net of tax.

InSeptember 2006, the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1 “Accountingfor Planned Major Maintenance Activities,” effective for fiscal years beginningafter December 15, 2006, and the Company plans to adopt this standard effectiveJanuary 1, 2007.  This FSP prohibits theuse of the accrue-in-advance method of accounting for planned major maintenanceactivities in annual and interim financial reporting periods.  The FSP requires retrospective application toall financial statements presented.  The 

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newstandard will not impact the Company’s previous annual financial statements,however, the Company is currently evaluating the impact on the 2006 interimfinancial statements as it is the Company’s current policy to accrue in advancecertain major maintenance projects.

InJune 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes,” (“FIN 48”), an interpretation of SFAS No. 109, “Accountingfor Income Taxes,” to create a single model to address accounting foruncertainty in tax positions.  FIN 48clarifies the accounting for income taxes by prescribing a minimum recognitionthreshold a tax position is required to meet before being recognized in thefinancial statements.  FIN 48 alsoprovides guidance on de-recognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  TheCompany will adopt FIN 48 as of January 1, 2007, and the cumulative effect ofthe new standard will be recorded as an adjustment to retained earnings.  The Company has not determined the impact, ifany, the adoption of FIN 48 will have on the Company’s financial position andresults of operations.

**2.****              Reclassifications**

Certainprior year amounts have been reclassified to conform to the current yearpresentation.

**3.****             ****Discontinued Operations**

Duringthe second quarter of 2006, the Company entered into an agreement to sellsubstantially all of the assets of the Consumer Packaging division to a companyformed by Texas Pacific Group for $1.04 billion.  On June 30, 2006, the Company completed thesale transaction and received cash proceeds of $902 million, which excluded$126 million of estimated accounts receivable previously sold to StoneReceivables Corporation (“SRC”) under the accounts receivable securitizationprogram and was net of sales transaction costs and other closingadjustments.  The Company recorded apretax gain of $174 million, offset by a $175 million income tax provision,resulting in a net loss on sale of discontinued operations of $1 million,subject to post-closing adjustments as provided in the sale agreement.  The after-tax loss was the result of aprovision for income taxes that was higher than the statutory income tax ratedue to non-deductible goodwill of $273 million.

Duringthe third quarter of 2006, the Company finalized its accounting for thistransaction and recorded an additional pretax loss of $3 million, which wasreduced by a $1 million income tax benefit. In October 2006, the sale proceeds were reduced by $5 million as aresult of the final working capital adjustments, which were previously accrued.

TheConsumer Packaging division was a reportable segment of the Company comprisedof four coated recycled boxboard mills, 39 consumer packaging operations in theUnited States, including folding carton, multiwall and specialty bag, flexiblepackaging, label, contract packaging and lamination businesses and one consumerpackaging plant in Brampton, Ontario.   Netsales for these operations were $787 million for the nine months endedSeptember 30, 2006, and $407 million and $1,184 million, respectively, for thethree and nine months ended September 30, 2005. These facilities employed approximately 6,600 hourly and salariedemployees.  The results of operationsfrom the Consumer Packaging segment have been reclassified as discontinuedoperations for all periods presented.

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Theassets and liabilities of the discontinued operations included in theaccompanying consolidated balance sheet as of December 31, 2005 consisted ofthe following:
| Receivables                                |   | $      | 10     |   |
|--------------------------------------------|--------|--------|--------|--------|
| Inventories                                |   | 150    |   |
| Prepaid expenses  and other current assets |   | 3      |   |
| Net property,  plant and equipment         |   | 356    |   |
| Goodwill                                   |   | 279    |   |
| Other assets                               |   | 9      |   |
|                                       |   | $      | 807    |   |
|                                       |   |   |   |
| Accounts payable                           |   | $      | 78     |   |
| Accrued  compensation and payroll taxes    |   | 24     |   |
| Other current  liabilities                 |   | 15     |   |
| Long-term debt                             |   | 16     |   |
| Other long-term  liabilities               |   | 1      |   |
|                                       |   | $      | 134    |   |

 

**4.****              StrategicInitiatives and Restructuring Activities**

During the fourth quarterof 2005, the Company announced a strategic reassessment plan to improveperformance and better position the Company for long-term growth.  The plan focuses on cost reduction andproductivity initiatives from which the Company expects to achieve $525 millionin annual savings by the end of 2008.  Aspart of the initiative plan, the Company completed the sale of its ConsumerPackaging division on June 30, 2006 and used the proceeds to reduce debt.  The original cost reduction and productivityinitiatives target included cost savings benefits to be derived from theConsumer Packaging division and, accordingly, the Company has adjusted thistarget to exclude the impact of the Consumer Packaging division from both thetarget and actual savings achieved.

In connection with thisplan, during the third quarter of 2006, the Company recorded restructuringcharges of $13 million, including non-cash charges of $6 million related to thewrite-down of assets, primarily property, plant and equipment, to estimated netrealizable value.  Restructuring chargesare net of a $4 million gain from the sale of a previously closedfacility.  The Company has shut down orannounced the closure of five converting facilities and idled one corrugatorduring the quarter, which resulted in the termination of approximately 350employees.  The remaining charges wereprimarily for severance and benefits, including pension settlement costs of $4million.

For the nine months endedSeptember 30, 2006, the Company recorded restructuring charges of $35 million,including non-cash charges of $16 million related to the write-down of assets,primarily property, plant and equipment, to estimated net realizablevalue.  The remaining charges wereprimarily for severance and benefits, including pension settlement costs of $6million.  The Company has shut down orannounced the closure of eleven converting facilities and idled threecorrugators during the nine month period, which resulted in the termination ofapproximately 830 employees.  The netsales and operating losses of these facilities in 2006 prior to closure were$83 million and $14 million, respectively. The net sales and operating losses of these facilities for the yearended December 31, 2005 were $178 million and $17 million, respectively.  Additional charges of up to $9 million willbe recorded in future periods for severance and benefits related to the closureof these converting facilities and for pension settlement costs.

Duringthe third quarter of 2005, the Company permanently closed the New Richmond, Quebeclinerboard mill, the Bathurst, New Brunswick medium mill and the previouslyidled No. 2 paper machine at the Fernandina Beach, Florida linerboardmill.  The Company’s containerboardmanufacturing capacity was 

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reducedby approximately 700,000 tons, or 8.5%, as a result of these closures.  In addition, the Company initiated a plan toexit its investment in the Groveton, New Hampshire medium mill and exited itsinvestment in the Las Vegas, Nevada converting facility.  The Company recorded restructuring charges of$293 million and $297 million for the three and nine months ended September 30,2005, respectively, including non-cash charges of $256 million and $261million, respectively, to write-down assets, primarily property, plant andequipment, to estimated net realizable value and $3 million related to apension curtailment non-cash charge for terminated employees.  The remaining charges were primarily forseverance, benefits and post-closure environmental costs.

At December 31, 2005, theCompany had $55 million of accrued exit liabilities related to therestructuring of operations.  For thethree and nine months ended September 30, 2006, the Company incurred $3 millionand $19 million, respectively, of cash disbursements related to these exitliabilities.  In addition, for the threeand nine months ended September 30, 2006, the Company incurred $8 million and$15 million, respectively, of cash disbursements related to exit liabilitiesestablished during 2006.

**5.****              Stock-BasedCompensation**

Certain officers and keymanagers of the Company participate in various stock-based compensation planssponsored by SSCC, which issues stock options and restricted stock units.  SSCC has stock options and restricted stockunits (“RSUs”) outstanding under several long-term incentive plans.  The stock options granted under plans priorto the 1998 Long-Term Incentive Plan (the “1998 Plan”) are fully vested andexercisable.

The 1998 Plan and the2004 Long-Term Incentive Plan (the “2004 Plan”) have reserved 16.5 million and12.5 million shares, respectively, of SSCC’s common stock for non-qualifiedstock options, RSUs and performance awards to officers, key employees andnon-employee directors of the Company. The stock options are exercisable at a price equal to the fair marketvalue of SSCC’s stock on the date of grant. The vesting schedule and other terms and conditions of options grantedunder each plan are established separately for each grant.  These options expire no later than ten yearsfrom the date of grant.

Certain grants under the1998 Plan and the 2004 Plan contain change in control provisions which providefor immediate vesting and exercisability in the event that specific ownershipconditions are met.  These grants issuedbefore December 31, 2005 allowed for immediate vesting and exercisability inthe event of retirement.  For grantsissued after December 31, 2005, retirees do not vest immediately, but ratherover the service period.  These optionsremain exercisable until the earlier of five years from retirement or ten yearsfrom the initial grant date.

**SFAS No. 123**

In 2003, the Companyadopted the fair value recognition provisions of SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS No. 123”). The Company selected the prospective transition method as allowed inSFAS No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure,” which requires expensing options prospectively, beginning in theyear of adoption, and utilized the Black-Scholes formula to estimate the valueof stock options granted to employees. The assumptions used in the Black-Scholes formula are described in the2005 10-K.  Because the prospectivetransition method was used and awards vest over three to eight years (seebelow), the expense for the three and nine months ended September 30, 2005 isless than what would have been recognized if the fair value-based method hadbeen applied to all awards since the original effective date of SFAS No.123.  The following table illustrates theeffect on net loss and earnings per share if the fair value based method hadbeen applied to all outstanding and unvested awards for the three and ninemonth periods ended September 30, 2005.

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| ** **                                                                                                                                    | ** ** | **Three months ended  September 30, 2005** | ** ** | **Nine months ended  September 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Net loss as reported                                                                                                                          |       | $                                                              | (226       | )                                                             | $          | (238 | ) |
| Add: Stock-based  employee compensation expense included in reported net loss, net of related  tax effects                                    |       | 2                                                              |       | 5                                                             |       |
| Deduct: Total stock-based  employee compensation expense determined under fair value-based method for  all awards, net of related tax effects |       | (4                                                             | )          | (10                                                           | )          |
| Pro forma net loss                                                                                                                            |       | $                                                              | (228       | )                                                             | $          | (243 | ) |

 

**SFAS No. 123(R)**

In December 2004, theFASB issued SFAS No. 123(R), “Shared-Based Payment” (“SFAS No. 123(R)”)  effective January 1, 2006, which is arevision of SFAS No. 123.  SFAS No.123(R) requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statements based ontheir fair values.  The Company adoptedSFAS No. 123(R) on January 1, 2006, under the modified prospective method, inwhich the requirements of SFAS No. 123(R) must be applied to new awards and topreviously granted awards that are not fully vested on the effective date, butdoes not require a restatement of previous years’ financial statements.  Upon adoption, the Company implemented alattice option pricing model to estimate the fair value of stock optionsgranted after January 1, 2006.  The Companychanged to a lattice option pricing model as it accommodates dynamicassumptions of expected volatility over the option’s contractual term, andestimates of expected option exercise patterns during the option’s contractualterm, including the effect of blackout periods, which provides a betterestimate of the options’ fair value and more fully reflects the substantivecharacteristics of the Company’s stock-based compensation.

The lattice optionpricing model considers a range of assumptions related to volatility, risk-freeinterest rate and historical employee behavior. Expected volatility was based on historical volatility on SSCC’s commonstock and current implied volatilities from traded options on SSCC’s commonstock.  The risk-free interest rate wasbased on U.S. Treasury security yields at the time of grant.  The dividend yield on SSCC’s common stock isassumed to be zero since SSCC has not paid dividends and has no current plansto do so in the future.  The expectedlife was determined from the lattice option pricing model.  The lattice option pricing model incorporatesexercise and post-vesting forfeiture assumptions based on analysis ofhistorical data.  The following tableprovides the assumptions used in determining the fair value of the stock-basedawards granted during the nine months ended September 30, 2006 and 2005, usingthe lattice option pricing model and Black-Scholes formula, respectively.

 
| ** **                       | ** ** | **Nine months ended  September 30, 2006** | ** ** | **Nine months ended  September 30, 2005** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Weighted-average  dividend yield |       | 0.00                                                          | %          | 0.00                                                          | %          |
| Weighted-average  volatility     |       | 36                                                            | %          | 41                                                            | %          |
| Risk-free interest rate          |       | 4.60                                                          | %          | 4.09                                                          | %          |
| Weighted-average expected life   |       | 5                                                             |       | 6                                                             |       |

 

For stock options andRSUs granted subsequent to the adoption of SFAS No. 123(R) on January 1, 2006,the compensation expense for employees that become eligible to retire isrecognized over the period from date of grant through the date that theemployee first becomes eligible to retire and is no longer required to provideservice to earn the award.   Stockoptions and RSUs granted prior to December 31, 2005 allowed for immediatevesting and exercisability in the event of retirement.  The Company had recognized compensationexpense over the explicit service period (up to the date of actual retirement)and will continue this method for awards granted prior to the adoption of SFASNo. 123(R).

8

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The impact of adoptingSFAS No. 123(R) for the three and nine months ended September 30, 2006 was anincrease in selling and administrative expenses of $1 million and $4 million,respectively, due to recognizing expense on non-vested, outstanding sharesissued prior to the adoption of SFAS No. 123 on January 1, 2003.  The related tax benefit was an immaterialamount and $1 million, respectively, for the three and nine months ended September30, 2006.

Totalpretax stock-based compensation costs recognized in selling and administrativeexpense in the consolidated statements of operations for the nine months endedSeptember 30, 2006 and 2005 was $18 million and $9 million, respectively.  The related tax benefit was $7 million and $4million, respectively, for the nine months ended September 30, 2006 and 2005.

At September 30, 2006,the total compensation cost related to non-vested awards not yet recognized wasapproximately $32 million to be recognized through March 31, 2009, with aweighted-average expense period of approximately two years.

**Stock Options**

The stock options grantedprior to April 2001 vest and become exercisable eight years after the date ofgrant subject to acceleration based upon the attainment of pre-establishedstock price targets.  For grants betweenApril 2001 and June 2004, the stock options vest and become exercisable at therate of 25% each year for four years. All grants issued subsequent to June 2004 vest and become exercisable onthe third anniversary of the award date. Awards with pro rata vesting are expensed on a straight-line basis.

Under the 2004 Plan,during the first and second quarters of 2006, the Company grantedperformance-based stock options to management level employees responsible forimplementing the strategic initiatives plan. Vesting is dependent upon the financial performance of the Company andthe attainment of the strategic initiatives savings from 2006 to 2008.  These performance-based stock options expireno later than seven years from the date of grant.  Compensation expense is recorded over thethree-year performance period based on the achievement of the performancecriteria.

Asummary of stock option activity for the nine months ended September 30, 2006is as follows:
| ** **                         | ** ** | **Options**    | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term  (in years)** | ** ** |
|------------------------------------|------------|----------------|------------|----------------------------------------|------------|----------------------------------------------------------------------|------------|
| Outstanding at  January 1, 2006    |       | 14,457,126     |       | $                                      | 14.55      |                                                                 |       |   |
| Granted                            | ** ** | **4,645,100**  | ** ** | **13.05**                              | ** ** | ** **                                                           | ** ** |
| Exercised                          | ** ** | **(140,761**   | **)**      | **12.78**                              | ** ** | ** **                                                           | ** ** |
| Cancelled                          | ** ** | **(1,942,476** | **)**      | **14.04**                              | ** ** | ** **                                                           | ** ** |
| Outstanding at  September 30, 2006 | ** ** | **17,018,989** | ** ** | **14.22**                              | ** ** | **5.76**                                                             | ** ** |
|                               |       |           |       |                                   |       |                                                                 |       |
| Exercisable at  September 30, 2006 | ** ** | **10,017,560** | ** ** | **$**                                  | **14.40**  | ** **                                                           | **4.32**   | ** ** |

 

The weighted-averagegrant date fair value of stock options granted during the nine months endedSeptember 30, 2006 and 2005 was $4.73 and $6.34, respectively.

The total intrinsic valueof stock options exercised during the nine months ended September 30, 2006 and2005 was $0.1 million and $0.8 million, respectively.

The aggregate intrinsicvalue of stock options exercisable at September 30, 2006 was $0.1 million.  The aggregate intrinsic value represents thetotal pretax intrinsic value, based on options with an exercise 

9

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price less than SSCC’sclosing stock price as of September 30, 2006, which would have been received bythe option holders had those option holders exercised their options as of thatdate.

**RSUs**

The Company issues RSUsto pay a portion of employee bonuses under its annual management incentiveplan.  These RSUs vest immediately, butthe restrictions do not lapse until the third anniversary of the awarddate.  The Company pays a premium on theemployee bonuses in the form of RSUs (“Premium RSUs”) to certainemployees.  Premium RSUs vest at theearlier of a change in control, death, disability or three years after theaward date.  Non-employee directors areannually awarded non-vested RSUs as part of their director compensation.  In 2006 and 2005, the Company grantednon-vested RSUs under the 2004 Plan to certain employees.  These non-employee directors and employeenon-vested RSUs vest at the earlier of a change in control, death, disabilityor three years after the award date.  TheRSUs are non-transferable and do not have voting rights.

Additional informationrelating to RSUs is as follows:
| ** **                                        | ** ** | **RSUs**      | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|---------------------------------------------------|------------|---------------|------------|---------------------------------------------------------|------------|
| **Vested  RSUs**                                  |       |          |       |                                                    |       |
| Outstanding vested RSUs at January 1, 2006        |       | 732,838       |       | $                                                       | 15.07      |   |
| Granted                                           | ** ** | **175,896**   |       | **13.02**                                               | ** ** |
| Converted                                         | ** ** | **(623,168**  | **)**      | **14.31**                                               | ** ** |
| Transfer from non-vested                          | ** ** | **307,964**   |       | **14.68**                                               | ** ** |
| Outstanding vested RSUs at September 30, 2006     | ** ** | **593,530**   |       | **15.06**                                               | ** ** |
|                                              |       |          |       |                                                    |       |
| **Non-Vested  RSUs**                              |       |          |       |                                                    |       |
| Outstanding non-vested RSUs at January 1, 2006    |       | 1,267,866     |       | $                                                       | 14.76      |   |
| Granted                                           | ** ** | **384,002**   |       | **13.25**                                               | ** ** |
| Forfeited                                         | ** ** | **(119,055**  | **)**      | **12.31**                                               | ** ** |
| Transfer to vested                                | ** ** | **(307,964**  | **)**      | **14.68**                                               | ** ** |
| Outstanding non-vested RSUs at September 30, 2006 | ** ** | **1,224,849** |       | **14.54**                                               | ** ** |
|                                              |       |          |       |                                                    |       |
| Total  outstanding RSUs at September 30, 2006     | ** ** | **1,818,379** |       | **$**                                                   | **14.71**  | ** ** |

 

**6.****              Gainon Sale of Assets**

The Company recorded again of $23 million in the first quarter of 2006 related to the divestiture ofits Port St. Joe, Florida joint venture interest and related real estate.

**7.****              Other,Net**

For the three and ninemonths ended September 30, 2006, the Company recorded non-cash foreign currencylosses of an insignificant amount and $12 million, respectively, related to itsoperations in Canada.  For the three andnine months ended September 30, 2005, the Company recorded non-cash foreigncurrency losses of $16 million and $12 million, respectively, related to itsoperations in Canada.

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**8.  Accounts Receivable Securitization Programs**

AtSeptember 30, 2006 and December 31, 2005, $700 million and $592 million,respectively, of receivables had been sold under two accounts receivablesecuritization programs, of which the Company retained a subordinated interest.  The off-balance sheet SRC debt and fundingreceived from the Canadian accounts receivable program totaled $494 million and$472 million, respectively, as of those dates.

OnSeptember 28, 2006, $137 million of containerboard customer accountsreceivables, net of related allowance for doubtful accounts, were sold into theSRC accounts receivable securitization program, of which $78 million wereretained by the Company as a subordinated interest and recorded in retainedinterest in receivables sold in the consolidated balance sheet.

TheConsumer Packaging division receivables sold under the accounts receivablesecuritization program were substantially collected as of September 30, 2006and were used to reduce the related off-balance sheet debt (See Note 3).

**9.  Long-Term Debt**

On May 23, 2006, theCompany commenced a cash tender offer to purchase up to $400 million inunsecured senior notes, applicable to any and all of its $300 million aggregateprincipal amount of outstanding 9.25% unsecured senior notes due 2008 and aportion of its $750 million aggregate principal amount of outstanding 9.75%unsecured senior notes due 2011. Approximately $298 million of the outstanding 9.25% unsecured seniornotes were purchased by the Company at a price equal to 105.8% of the principalamount thereof (together with accrued interest thereon) and approximately $725million of the outstanding 9.75% unsecured senior notes were tendered.  Pursuant to the terms of the tender offer,the Company purchased approximately $102 million of the 9.75% unsecured seniornotes on a pro-rata basis at a price equal to 105.1% of the principal amountthereof (together with accrued interest thereon).

OnJune 9, 2006, the Company and its subsidiary, Smurfit-Stone Container CanadaInc., as borrowers, and SSCC, as guarantor, entered into an amendment to thesenior credit facility with its lending group permitting the Company to use aportion of the net cash proceeds to be received from the sale of the Company’sConsumer Packaging division and additional borrowings, if necessary, to prepaycertain unsecured debt.   The amendment(i) required the use of $240 million of the proceeds to prepay Tranche B termloans; (ii) permitted the use of up to $400 million of the proceeds to prepaythe unsecured senior notes; and (iii) permitted the reinvestment of up to $250million of the balance of the proceeds in the business of the Company and itssubsidiaries.  If, after giving effect tothe payments described above, the remaining balance of the proceeds exceeds $10million, the Company would be required to use the remaining balance of theproceeds to make a further repayment of the term loans in accordance with theprovisions of the senior credit facility.

OnJune 30, 2006, the Company completed the sale of the Consumer Packagingdivision (See Note 3) and used the proceeds to repay the following obligationsunder its senior secured credit facilities and unsecured senior notes:

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| Tranche B term loan,  due in various installments through November 1, 2011 |   | $   | 240    |   |
|----------------------------------------------------------------------------|--------|-----|--------|--------|
| SSCE revolving credit  facility, due November 1, 2009                      |   | 218 |   |
| 9.25% unsecured senior  notes, due February 1, 2008                        |   | 298 |   |
| 9.75% unsecured senior  notes, due February 1, 2011                        |   | 102 |   |
| Other debt                                                                 |   | 20  |   |
| Total debt  repayment                                                      |   | $   | 878    |   |
| Tender premium and fees                                                    |   | 24  |   |
| Total application of  net proceeds                                         |   | $   | 902    |   |

 

In the second quarter of2006, the Company recorded a loss on early extinguishment of debt of $28million related to the repayment of borrowings with net proceeds from the saleof its Consumer Packaging division.  Theloss included $24 million for tender premiums and fees for the unsecured seniornotes called and a $4 million non-cash write-off of related unamortizeddeferred debt issuance costs.

InSeptember 2006, the Company used $59 million of proceeds received from the SRCaccounts receivable securitization program to repay $50 million of theoutstanding Tranche B term loan due November 1, 2011 and $9 million of therevolving credit facility (See Note 8).

**10.  Guarantees**

The Company has certain wood chipprocessing contracts extending from 2012 through 2018 with minimum purchasecommitments.  As part of the agreements,the Company guarantees the third party contractors’ debt outstanding and has asecurity interest in the chipping equipment. At September 30, 2006, the maximum potential amount of future paymentsrelated to these guarantees was approximately $34 million and decreases ratablyover the life of the contracts.  In theevent the guarantees on these contracts were called, which the Companycurrently believes is not probable, proceeds from the liquidation of thechipping equipment would be based on current market conditions and the Companymay not recover in full the guarantee payments made.

In March 2006, the Companyentered into an agreement to guarantee a portion of a third party’s debt indecreasing amounts through January 2010. The guarantee was entered into in connection with the third party’sprogress payment financing for the purchase and installation of machinery andequipment for the manufacture of corrugated containerboard.  The Company and third party are parties to asupply agreement through 2021, whereby the Company sells containerboard to thethird-party, and a purchase agreement through 2014, whereby the third partysells corrugated sheets to the Company. At September 30, 2006, the maximum potential amount of future paymentsrelated to this guarantee was approximately $12 million, and decreases as thethird party’s contractual financial targets are met.  The Company has no recourse to the assets ofthe third-party, other than that of a general unsecured creditor.  The fair value of this guarantee at September30, 2006 was an immaterial amount and is included in other long-term assets,with an offset in other long-term liabilities in the accompanying consolidatedbalance sheet.

**11.  Employee Benefit Plans**

The Company sponsorsnoncontributory defined benefit pension plans covering substantially all U.S.employees.  The Company also sponsorsnoncontributory and contributory defined benefit pension plans for its Canadianoperations.

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The Company’spostretirement plans provide health care and life insurance benefits for allretired salaried and certain retired hourly employees, and for salaried andcertain hourly employees who have reached the age of 60 with ten years ofservice as of January 1, 2007.

The components of netperiodic benefit costs for the defined benefit plans and the components of thepostretirement benefit costs, including the discontinued Consumer Packagingdivision through June 30, 2006, are as follows:
| ** **                                    | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **Defined Benefit Plans**                      | ** ** | **Postretirement Plans**                           | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement   Plans** | ** ** |
| ** **                                    | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                                  |       | $                                                        | 15         |                                                    | $          | 20 |   | $ | 1 |   | $ | 2 |   | $ | 54 |   | $ | 61 |   | $ | 4 |   | $ | 6 |   |
| Interest cost                                 |       | 50                                                       |       | 47                                                      |       | 3 |   | 4 |   | 146 |   | 142 |   | 10 |   | 11 |   |
| Expected return  on plan assets               |       | (56                                                      | )          | (52                                                     | )          |   |   |   |   | (167 | ) | (157 | ) |   |   |   |   |
| Amortization of  prior service cost (benefit) |       | 2                                                        |       | 2                                                       |       | (1 | ) | (1 | ) | 7 |   | 7 |   | (3 | ) | (2 | ) |
| Amortization of  net loss                     |       | 14                                                       |       | 16                                                      |       | 1 |   | 1 |   | 57 |   | 47 |   | 3 |   | 4 |   |
| Curtailment loss  (gain)                      |       |                                                     |       | 3                                                       |       |   |   |   |   | 15 |   | 3 |   | (5 | ) |   |   |
| Settlements                                   |       | 4                                                        |       |                                                    |       |   |   |   |   | 6 |   |   |   |   |   |   |   |
| Multi-employer  plans                         |       | 2                                                        |       | 2                                                       |       |   |   |   |   | 5 |   | 5 |   |   |   |   |   |
| Net periodic benefit  cost                    |       | $                                                        | 31         |                                                    | $          | 38 |   | $ | 4 |   | $ | 6 |   | $ | 123 |   | $ | 108 |   | $ | 9 |   | $ | 19 |   |

 

The Company’s 2006expected contributions to its qualified defined benefit plans and benefitpayments to its non-qualified defined benefit plans and postretirement plansare not expected to be materially different from the amounts disclosed atDecember 31, 2005.

The 2006 curtailment loss(gain) are related to the sale of the Consumer Packaging division and areincluded in the net loss on sale of discontinued operations (See Note 3).

The 2006 settlementcharges are related to closed facilities and are included as part ofrestructuring charges (See Note 4).

**12.  Derivative Instruments andHedging Activities**

The Company’s derivativeinstruments used for its hedging activities are designed as cash flow hedgesand relate to minimizing exposures to fluctuations in the price of commoditiesused in its operations, the movement in foreign currency exchange rates and thefluctuations in the interest rate on variable rate debt.

**CommodityDerivative Instruments**

The Company uses derivative instruments, including fixed price swaps andoptions, to manage fluctuations in cash flows resulting from commodity pricerisk in the procurement of natural gas and other commodities, including fueland heating oil.  The objective is to fixthe price of a portion of the Company’s purchases of these commodities used inthe manufacturing process.  The changesin the market value of such derivative instruments have historically offset,and are expected to continue to offset, the changes in the price of the hedgeditem.  As of September 30, 2006, themaximum length of time over which the Company was hedging its exposure to thevariability in future cash flows associated with the commodities forecastedtransactions was 27 months.  

For the three and nine months ended September 30, 2006, the Companyreclassified a $2 million loss (net of tax) from OCI to cost of goods sold whenthe hedged items  

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were recognized.  For the threeand nine months ended September 30, 2005, the Company reclassified a $2 milliongain (net of tax) and a $1 million gain (net of tax), respectively, from OCI tocost of goods sold when the hedged items were recognized.  The fair value of these commodity derivativeinstruments at September 30, 2006 was a $27 million liability, of which $20million was included in other current liabilities, and $7 million was includedin other long-term liabilities.

For the three and nine months ended September 30, 2006, the Companyrecorded a $5 million loss (net of tax) and a $13 million loss (net of tax),respectively, in cost of goods sold related to the change in fair value ofcertain commodity derivative instruments not qualifying for hedgeaccounting.  For the three and ninemonths ended September 30, 2005, the Company recorded an $8 million gain (netof tax) and an $11 million gain (net of tax), respectively, in cost of goodssold related to the change in fair value of certain commodity derivativeinstruments not qualifying for hedge accounting.

For the three and nine months ended September 30, 2006, the Companyrecorded a $2 million loss (net of tax) and a $4 million loss (net of tax),respectively, in cost of goods sold on settled commodity derivative instrumentsrelated to commodity derivative instruments not qualifying for hedgeaccounting.  For the three and ninemonths ended September 30, 2005, the Company recorded a $3 million gain (net oftax) and a $2 million gain (net of tax), respectively, in cost of goods sold onsettled commodity derivative instruments related to commodity derivativeinstruments not qualifying for hedge accounting

#### **ForeignCurrency Derivative Instruments**

#### The Company’sprincipal foreign exchange exposure is the Canadian dollar.  The Company uses foreign currency derivativeinstruments, including forward contracts and options, primarily to protectagainst Canadian currency exchange risk associated with expected future cashflows.  As of September 30, 2006, themaximum length of time over which the Company was hedging its exposure to thevariability in future cash flows associated with foreign currency was 15months.  For the three and nine monthsended September 30, 2006, the Company reclassified a $1 million gain (net oftax) and a $3 million gain (net of tax), respectively, from OCI to cost ofgoods sold related to the recognition of the foreign currency derivativeinstruments.  For the three and ninemonths ended September 30, 2005, the Company reclassified a $1 million loss(net of tax) and a $1 million gain (net of tax), respectively, from OCI to costof goods sold related to the recognition of the foreign currency derivativeinstruments.  The change in fair value ofthese derivative instruments is recorded in OCI until the underlyingtransaction is recorded.  The fair valueof the Company’s foreign currency derivative instruments at September 30, 2006was a $5 million asset, of which $4 million was included in prepaid expensesand other current assets, and $1 million was included in other assets.

#### For the threeand nine months ended September 30, 2006, the Company recorded an immaterialamount in cost of goods sold related to the change in fair value of certainforeign currency derivative instruments not qualifying for hedgeaccounting.  For the three and ninemonths ended September 30, 2005, the Company recorded an immaterial amount anda $1 million loss (net of tax), respectively, in cost of goods sold related tothe change in fair value of certain foreign currency derivative instruments notqualifying for hedge accounting.

#### For the threeand nine months ended September 30, 2006, the Company recorded an immaterialamount in cost of goods sold on settled foreign currency derivative instrumentsnot qualifying for hedge accounting.  Forthe three and nine months ended September 30, 2005, the Company recorded animmaterial amount and a $1 million gain (net of tax), respectively, in cost ofgoods sold on settled foreign currency derivative instruments not qualifyingfor hedge accounting

#### **InterestRate Swap Contracts**

The Company uses interest rate swap contracts to manageinterest rate exposure on $300 million of the current Tranche B and Tranche Cfloating rate bank term debt, effectively fixing the interest rate at4.3%.  These contracts extend until 2011,consistent with the maturity of the Company’s Tranche B and Tranche C termloans.  Changes in the fair value of theinterest rate swap contracts are expected to be highly effective in offsettingthe fluctuations in the floating interest rate and are recorded in OCI untilthe underlying 

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transaction is recorded. The accounting for the cash flow impact of the swap contracts isrecorded as an adjustment to interest expense each period.  For the three and nine months ended September30, 2006, the Company reclassified a $1 million gain (net of tax) from OCI tointerest expense when the hedged items were recognized.  For the three and nine months ended September30, 2005, the Company reclassified an immaterial amount and a $2 million loss(net of tax), respectively, from OCI to interest expense when the hedged itemswere recognized.  The fair value of theCompany’s interest rate swap contracts at September 30, 2006 was a $10 millionasset included in other assets.

The cumulative deferred hedge loss on all derivativeinstruments was $2 million (net of tax) at September 30, 2006, including a $9million loss (net of tax) on commodity derivative instruments, a $1 milliongain (net of tax) on foreign currency derivative instruments and a $6 milliongain (net of tax) on interest rate swap contracts.  The Company expects to reclassify a $3million loss (net of tax) into cost of goods sold within the next 12 months,related to the commodity and foreign currency derivative instruments.

**13.  Income Taxes**

Thesale of the Consumer Packaging division (See Note 3) generated a taxable gainfor U.S. income tax purposes that will be offset by available net operatingloss (“NOL”) carryforwards, a portion of which are subject to valuationallowances previously established in a prior purchase business combination.  Due to the utilization of these NOLcarryforwards, the related valuation allowances were reduced by $157 million inthe second quarter of 2006 with a corresponding reduction in goodwill relatedto the prior business combination.

Thesale of the Consumer Packaging division generated a $14 million U.S. federalalternative minimum tax, of which $9 million was paid in the third quarter and$5 million is expected to be paid in the fourth quarter of 2006.

**14.  Comprehensive Income (Loss)**

Comprehensiveincome (loss) is as follows: 
| ** **                                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  (loss)                                 |       | $                                                    | 18         |                                                | $          | (226 | ) | $ | (84 | ) | $ | (238 | ) |
| Other  comprehensive income (loss), net of tax:    |       |                                                 |       |                                                |       |   |   |   |   |
| Net changes in fair value of hedging instruments   |       | (14                                                  | )          | 38                                                  |       | (23 | ) | 39 |   |
| Net hedging loss (gain) reclassified into earnings |       |                                                 |       | (1                                                  | )          | (2 | ) |   |   |
| Foreign currency translation adjustment            |       |                                                 |       | (8                                                  | )          | (1 | ) | (7 | ) |
| Comprehensive income  (loss)                       |       | $                                                    | 4          |                                                | $          | (197 | ) | $ | (110 | ) | $ | (206 | ) |

 

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**15. Goodwill**

The following table summarizes the activity of goodwillby segment for the nine months ended September 30, 2006:
| ** **                                                                                           | ** ** | **Containerboard  & Corrugated  Containers** | ** ** | **Consumer  Packaging** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------|------------|-----------|------------|
| Balance at  January 1, 2006                                                                          |       | $                                                     | 3,030      |                    | $          | 279       |       | $ | 3,309 |   |
| Goodwill included in loss on sale of discontinued  operations                                        |       |                                                  |       | (279                    | )          | (279      | )          |
| Goodwill reduced as a result of a reduction of valuation  allowances associated with NOL utilization |       | (157                                                  | )          |                    |       | (157      | )          |
| Balance at September  30, 2006                                                                       |       | $                                                     | 2,873      |                    | $          |      |       | $ | 2,873 |   |

 

The Consumer Packaging segment goodwill was eliminated aspart of the Consumer Packaging division sale (See Note 3).  Goodwill was reduced by $157 million as aresult of a reduction of the valuation allowances associated with NOLcarryforwards utilized as a result of the sale (See Note 13).

**16.  Business Segment Information**

TheCompany’s Consumer Packaging segment, which was sold as of June 30, 2006 (SeeNote 3), has been classified as discontinued operations and is excluded fromthe segment results for all periods presented. As a result, the Company has one reportable segment, Containerboard andCorrugated Containers.  TheContainerboard and Corrugated Containers segment is highly integrated.  It includes a system of mills and plants thatproduces a full line of containerboard that is converted into corrugatedcontainers.  It also provides singlesource full merchandising solutions to retailers and consumer packagingcompanies.  Corrugated containers are usedto transport such diverse products as home appliances, electric motors, smallmachinery, grocery products, produce, books, tobacco and furniture.

TheCompany evaluates performance and allocates resources based on profit or lossfrom operations before income taxes, interest expense and other non-operatinggains and losses.  The accountingpolicies of the reportable segment are the same as those described in thesummary of significant accounting policies in the 2005 10-K.  Intersegment sales and transfers are recordedat market prices.

Otherincludes corporate related items and a non-reportable segment,Reclamation.  Corporate related itemsinclude expenses not allocated to reportable segments, including corporateexpenses, restructuring charges, unrealized gains or losses on derivativeinstruments not qualifying for hedge accounting, non-cash foreign currencygains or losses, gains or losses from the sale of businesses and real estateand interest expense.

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Asummary by business segment follows:
| ** **                        | ** ** | **Containerboard &  Corrugated  Containers** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Three months ended  September 30, |       |                                                  |       |      |       |      |       |
| 2006                              |       |                                                  |       |      |       |      |       |
| Revenues from  external customers |       | $                                                     | 1,733      |      | $          | 111       |       | $ | 1,844 |   |
| Intersegment  revenues            |       |                                                  |       | 71        |       | 71        |       |
| Segment profit  (loss)            |       | 165                                                   |       | (131      | )          | 34        |       |
|                              |       |                                                  |       |      |       |      |       |
| 2005                              |       |                                                  |       |      |       |      |       |
| Revenues from  external customers |       | $                                                     | 1,604      |      | $          | 92        |       | $ | 1,696 |   |
| Intersegment  revenues            |       |                                                  |       | 61        |       | 61        |       |
| Segment profit  (loss)            |       | 34                                                    |       | (411      | )          | (377      | )          |
|                              |       |                                                  |       |      |       |      |       |
| Nine months ended  September 30,  |       |                                                  |       |      |       |      |       |
| 2006                              |       |                                                  |       |      |       |      |       |
| Revenues from  external customers |       | $                                                     | 5,056      |      | $          | 282       |       | $ | 5,338 |   |
| Intersegment  revenues            |       |                                                  |       | 172       |       | 172       |       |
| Segment profit  (loss)            |       | 293                                                   |       | (447      | )          | (154      | )          |
|                              |       |                                                  |       |      |       |      |       |
| 2005                              |       |                                                  |       |      |       |      |       |
| Revenues from  external customers |       | $                                                     | 4,874      |      | $          | 291       |       | $ | 5,165 |   |
| Intersegment  revenues            |       |                                                  |       | 177       |       | 177       |       |
| Segment profit (loss)             |       | 194                                                   |       | (633      | )          | (439      | )          |

 

**17. Contingencies**

The Company’s past andpresent operations include activities which are subject to federal, state andlocal environmental requirements, particularly relating to air and waterquality.  The Company faces potentialenvironmental liability as a result of violations of permit terms and similarauthorizations that have occurred from time to time at its facilities.  In addition, the Company faces potentialliability for response costs at various sites for which it has received noticeas being a potentially responsible party (“PRP”) concerning hazardous substancecontamination.  In estimating itsreserves for environmental remediation and future costs, the Company’sestimated liability of $4 million reflects the Company’s expected share ofcosts after consideration for the relative percentage of waste deposited ateach site, the number of other PRPs, the identity and financial condition ofsuch parties and experience regarding similar matters.  As of September 30, 2006, the Company hadapproximately $24 million reserved for environmental liabilities includedprimarily in other long-term liabilities in the consolidated balancesheet.  The Company believes theliability for these matters was adequately reserved at September 30, 2006.

If all or most of theother PRPs are unable to satisfy their portion of the clean-up costs at one ormore of the significant sites in which the Company is involved or the Company’sexpected share increases, the resulting liability could have a material adverseeffect on the Company’s consolidated financial condition or results ofoperations.

The Company is adefendant in a number of lawsuits and claims arising out of the conduct of itsbusiness.  While the ultimate outcome ofsuch suits or other proceedings against the Company cannot be predicted withcertainty, the management of the Company believes that the resolution of thesematters will not have a material adverse effect on its consolidated financialcondition, results of operations or cash flows.

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**ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**FORWARD-LOOKING STATEMENTS**

Some information includedin this report may contain forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, as amended.  Although we believe that, in making any suchstatements, our expectations are based on reasonable assumptions, any suchstatement may be influenced by factors that could cause actual outcomes andresults to be materially different from those projected.  When used in this document, the words “anticipates,”“believes,” “expects,” “intends” and similar expressions as they relate toSmurfit-Stone Container Enterprises, Inc. or its management, are intended toidentify such forward-looking statements. These forward-looking statements are subject to numerous risks anduncertainties.  There are importantfactors that could cause actual results to differ materially from those inforward-looking statements, certain of which are beyond our control.  These factors, risks and uncertainties arediscussed in our 2005 Annual Report on Form 10-K (2005 Form 10-K).

Our actual results, performance or achievements could differ materiallyfrom those expressed in, or implied by, these forward-looking statements.  Accordingly, we can give no assurances thatany of the events anticipated by the forward-looking statements will transpireor occur, or if any of them do, what impact they will have on our results ofoperations or financial condition.  Weexpressly decline any obligation to publicly revise any forward-lookingstatements that have been made to reflect the occurrence of events after thedate hereof.

# **GENERAL**

# We meet the conditions set forthin General Instruction (H) (1) (a) and (b) of Form 10-Q and are thereforefiling this form with the reduced disclosure format permitted thereby.  The omitted information is substantiallysimilar to the disclosures contained in Smurfit-Stone Container Corporation’sQuarterly Report on Form    10-Q for thequarter ended September 30, 2006 filed with the Securities and ExchangeCommission on the date hereof.  Inaccordance with General Instruction (H) (2) (a), the discussion of our resultsof operations below includes only a narrative analysis of the most recentfiscal year-to-date period presented and the corresponding year-to-date periodin the preceding fiscal year.

We are awholly-owned subsidiary of Smurfit-Stone Container Corporation (Smurfit-Stone),a holding company with no business operations of its own.  Smurfit-Stone conducts its businessoperations through us.  We are thesurviving company resulting from the merger (the Merger) of Smurfit-Stone’sprimary operating subsidiaries on November 1, 2004.  JSCE, Inc.merged with and into Jefferson Smurfit Corporation (U.S.) (JSC(U.S.)), withJSC(U.S.) as the surviving company, and then JSC(U.S.) merged with and into us,with us as the surviving entity.  TheMerger was effected principally to consolidate debt financing activities ofSmurfit-Stone and its subsidiaries.  Wewere simultaneously renamed Smurfit-Stone Container Enterprises, Inc.

# We and JSC(U.S.) were wholly-owned subsidiaries ofSmurfit-Stone and, therefore, the historical cost basis of the acquired entity,JSC(U.S.), carried over into us.  As aresult of the Merger, our financial statements for all periods presented havebeen restated to include the combined results of us and JSC(U.S.).  The Merger did not impact the operatingactivities of the merged companies, which continue to do business as Smurfit-Stone.

Our Consumer Packagingsegment, which was sold as of June 30, 2006 (see “Discontinued Operations”),has been classified as discontinued operations and is excluded from the segmentresults for all periods presented.  As aresult, we have one reportable segment, Containerboard and CorrugatedContainers.

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**DISCONTINUED OPERATIONS**

During the secondquarter of 2006, we entered into an agreement to sell substantially all of theassets of the Consumer Packaging division to a company formed by Texas PacificGroup for $1.04 billion.  On June 30,2006, we completed the sale transaction and received cash proceeds of $902million, which excluded $126 million of estimated accounts receivablespreviously sold to Stone Receivables Corporation (SRC) under the accountsreceivable securitization program and was net of sales transaction costs andother closing adjustments.  We recorded apretax gain of $174 million, offset by a $175 million income tax provision,resulting in a net loss on sale of discontinued operations of $1 million,subject to post-closing adjustments as provided in the sale agreement.  The after-tax loss was the result of aprovision for income taxes that was higher than the statutory income tax ratedue to non-deductible goodwill of $273 million.

Duringthe third quarter of 2006, we finalized our accounting for this transaction andrecorded an additional pretax loss of $3 million, which was reduced by a $1million income tax benefit.  In October2006, the sales proceeds were reduced by $5 million as a result of the finalworking capital adjustments, which were previously accrued.

The Consumer Packagingdivision was a reportable segment comprised of four coated recycled boxboardmills, 39 consumer packaging operations in the United States, including foldingcarton, multiwall and specialty bag, flexible packaging, label, contractpackaging and lamination businesses, and one consumer packaging plant inBrampton, Ontario.  Net sales for theseoperations were $787 million for the nine months ended September 30, 2006, and$407 million and $1,184 million, respectively for the three and nine monthsended September 30, 2005.  Thesefacilities employed approximately 6,600 hourly and salaried employees.  The results of operations from the ConsumerPackaging segment have been reclassified as discontinued operations for allperiods presented.

# **RESULTS OF OPERATIONS**

# **Strategic Initiatives**

During the fourth quarterof 2005, we announced a strategic reassessment plan to improve performance andbetter position us for long-term growth. Our plan focuses on cost reduction and productivity initiatives fromwhich we expect to achieve $525 million in annual savings by the end of 2008.

As part of the initiativeplan, we completed the sale of our Consumer Packaging division on June 30, 2006and used the proceeds to reduce debt. Our original initiative target included cost savings benefits to bederived from the Consumer Packaging division and accordingly, we have adjustedthis target to exclude the impact of the Consumer Packaging division from boththe target and actual savings achieved.

For 2006, we aretargeting $240 million of cost savings and productivity improvements from ourstrategic initiatives.  During the threeand nine months ended September 30, 2006, we realized estimated savings of $66million and $156 million, respectively, from these initiatives compared toprior year cost levels as adjusted for the impact of inflation.  Since we announced our strategic reassessmentplan, we have realized cumulative initiative savings of approximately $201million.  The cumulative savings includea reduction of fixed costs primarily related to the closures of twocontainerboard mills in August 2005, other workforce reductions in theContainerboard and Corrugated Containers segment and a one-time curtailmentgain related to the elimination of postretirement health care and lifeinsurance benefits for certain employees. To date, we have closed two containerboard mills, shut down or announcedthe closures of 13 converting facilities and idled three corrugators.  As a result of these actions, we have reducedour headcount by approximately 3,200 since June 30, 2005, including more than1,700 during the first nine months of 2006.

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**RecentlyAdopted Accounting Standards**

In September 2005, the EmergingIssues Task Force reached a consensus on Issue No. 04-13, “Accounting forPurchases and Sales of Inventory With the Same Counterparty” (EITF No. 04-13),effective for us April 1, 2006, for new arrangements and modifications orrenewals of existing arrangements.  EITFNo. 04-13 requires certain inventory buy/sell transactions betweencounterparties within the same line of business to be viewed as a singleexchange transaction.  We adopted EITFNo. 04-13 effective April 1, 2006, which required us to prospectively reportcertain inventory buy/sell transactions of similar containerboard types in ourContainerboard and Corrugated Containers segment on a net basis in ourconsolidated statements of operations, thereby reducing net sales and cost ofgoods sold by $64 million and $134 million, respectively, for the three and sixmonths ended September 30, 2006.  HadEITF No. 04-13 previously been in effect, net sales and cost of goods soldwould have been reduced by an additional $58 million for the nine months endedSeptember 30, 2006, and $65 million and $218 million, respectively, for thethree and nine months ended September 30, 2005.

# **Overview**

For the nine months endedSeptember 30, 2006, we had a net loss of $84 million compared to a net loss of$238 million for the same period in 2005. Net sales for the year-to-date period increased 3.3% compared to lastyear.  Our loss was lower in 2006 dueprimarily to lower restructuring charges and higher Containerboard andCorrugated Containers segment profit.  Werecorded pretax restructuring charges of $35 million for the nine month periodin 2006 compared to $297 million in the same period last year.  For the nine months ended September 30, 2006,the Containerboard and Corrugated Containers segment profits of $293 millionwere $99 million higher compared to the same period last year due primarily tohigher average selling prices for containerboard and corrugated containers andhigher containerboard sales volume.

We expect to remainprofitable in the fourth quarter of 2006. However, lower containerboard mill production due to additionalscheduled maintenance downtime, higher energy usage and a turbine failure atour Florence, South Carolina mill will result in a decline in our sequentialearnings.  We expect cost for freight,wood fiber and other material to be higher, but the impact of these items willbe partially offset by continuing incremental benefit from our strategicinitiatives.

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**Nine Months2006 Compared to Nine Months 2005**
| ** **                                                   | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **(In millions)**                                       | ** ** | **Net  Sales**                                          | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
|                                                         |       |                                                    |       |   |   |   |   |   |   |
| Containerboard and  corrugated containers                    |       | $                                                       | 5,056      |   | $ | 293 |   | $ | 4,874 |   | $ | 194 |   |
| Other operations (1)                                         |       | 282                                                     |       | 13 |   | 291 |   | 16 |   |
| Total segment  operations                                    |       | $                                                       | 5,338      |   | 306 |   | $ | 5,165 |   | 210 |   |
|                                                         |       |                                                    |       |   |   |   |   |   |   |
| Restructuring charges                                        |       |                                                    |       | (35 | ) |   |   | (297 | ) |
| Gain (loss) on sale of  assets                               |       |                                                    |       | 24 |   |   |   | (1 | ) |
| Interest expense, net                                        |       |                                                    |       | (266 | ) |   |   | (260 | ) |
| Loss on early  extinguishment of debt                        |       |                                                    |       | (28 | ) |   |   |   |   |
| Non-cash foreign  currency exchange losses                   |       |                                                    |       | (12 | ) |   |   | (12 | ) |
| Mark-to-market gains  (losses) on derivative instruments (2) |       |                                                    |       | (28 | ) |   |   | 20 |   |
| Corporate expenses and  other (3)                            |       |                                                    |       | (115 | ) |   |   | (99 | ) |
| Loss from continuing  operations before income taxes         |       |                                                    |       | $ | (154 | ) |   |   | $ | (439 | ) |

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   (1) Other operations consist of our Reclamation division, which is anon-reportable segment.

(2)  Amounts includemark-to-market gains or losses on natural gas and other commodities, includingfuel and heating oil, and foreign currency derivative instruments notqualifying for hedge accounting.

(3)  Amounts include corporateexpenses, corporate charges to segments for working capital interest and otherexpenses not allocated to segments.

The increase in net saleswas due primarily to the improvements in pricing for the Containerboard andCorrugated Containers segment.  Thechange in net sales for each of our segments, including the impact of adoptingEITF No. 04-13, as described in “Recently Adopted Accounting Standards,” issummarized in the chart below:
| **(In millions)**       | ** ** | **Container-  board &  Corrugated  Containers** | ** ** | **Other  Operations** | ** ** | **Total** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|-----------------------|------------|-----------|------------|
|                         |       |                                                     |       |                  |       |      |       |
| Sales price and product  mix |       | $                                                        | 262        |                  | $          | (25       | )          | $ | 237 |   |
| Sales volume                 |       | 54                                                       |       | 16                    |       | 70        |       |
| EITF No. 04-13               |       | (134                                                     | )          |                  |       | (134      | )          |
| Total                        |       | $                                                        | 182        |                  | $          | (9        | )          | $ | 173 |   |

 

Cost of goods soldincreased from $4,536 million in 2005 to $4,653 million in 2006 due primarilyto higher costs for energy ($61 million), higher sales volume ($61 million),freight ($43 million), chemicals ($13 million) and wood fiber ($12million).  Cost of goods sold wasfavorably impacted by adopting EITF No. 04-13 ($134 million) and by lower costfor reclaimed material ($37 million). Cost of goods sold as a percent of net sales decreased from 87.8% in2005 to 87.2% in 2006 due primarily to the higher average sales prices.

Selling andadministrative expense increased $18 million compared to last year dueprimarily to higher stock-based compensation expense ($9 million), including $4million due to the impact of adopting SFAS No. 123(R) on January 1, 2006, andcosts related to the implementation of the strategic initiatives ($11million).  For information concerningstock-based compensation, see Note 5 of the Notes to Consolidated FinancialStatements.  Selling and administrativeexpense as a percent of net sales was comparable to last year.

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In connection with ourstrategic initiatives, for the nine months ended September 30, 2006, werecorded restructuring charges of $35 million, including non-cash charges of$16 million related to the write-down of assets, primarily property, plant andequipment, to estimated net realizable value. We shut down or announced the closure of 11 converting facilities andidled three corrugators, which resulted in the termination of approximately 830employees.  The remaining charges wereprimarily for severance and benefits including pension settlement costs of $6million.  Additional charges of up to $9million will be recorded in future periods for severance and benefits relatedto the closure of these converting facilities and for pension settlement costs.

We recorded pretaxrestructuring charges of $297 million in the nine months ended September 30,2005, including $293 million in connection with our strategic reassessmentinitiative.

Interest expense, net was$266 million in 2006.  The $6 millionincrease compared to 2005 was the result of higher average interest rates ($17million) partially offset by lower average borrowings ($11 million).  Our overall average effective interest ratein 2006 was higher than 2005 by approximately 0.52%.  The lower average borrowings were primarilydue to the sale of the Consumer Packaging division and the resulting debtreduction.

We recorded a gain of $23million in the first quarter of 2006 related to the divestiture of our Port St.Joe, Florida joint venture interest and related real estate.

Other, net includednon-cash foreign currency exchange losses of $12 million in both 2006 and 2005.

Benefit fromincome taxes differed from the amount computed by applying the statutory U.S.federal income tax rate to loss before income taxes due primarily to stateincome taxes and the effect of other permanent differences.  In connection with the sale of the ConsumerPackaging division, during the nine months ended September 30, 2006, werecorded a pretax gain of $171 million, offset by a $174 million income taxprovision, resulting in a net loss on sale of discontinued operations of $3million.  The after-tax loss is theresult of a provision for income taxes that is higher than the statutory incometax rate due to the non-deductibility of goodwill.  The sale of the Consumer Packaging divisiongenerated a $14 million U.S. federal alternative minimum tax, of which $9million was paid in the third quarter of 2006 and $5 million is expected to bepaid in the fourth quarter of 2006.

**Containerboard and CorrugatedContainers Segment**

Net sales increased 3.7%in 2006 compared to last year primarily as a result of higher average salesprices for containerboard and corrugated containers and higher containerboardsales volume. Net sales were unfavorably impacted by the adoption of EITF04-13.  For the year-to-date period,average domestic linerboard prices increased 11.9% compared to the same periodlast year.  Our average North Americanselling price for corrugated containers was 3.5% higher compared to 2005.  Shipments of corrugated containers decreased0.9% compared to the same period last year due to one less shipping day and thecontainer plant closures.  On a per daybasis, shipments of corrugated containers declined by 0.4%.  Third party containerboard shipmentsincreased 17.0% compared to the same period last year.  Average sales prices for market pulp, SBS andkraft paper increased 8.2%, 2.8%, and 6.0%, respectively, compared to the sameperiod last year.

Our containerboard millsoperated at 100% of capacity for the nine months ended September 30, 2006 andcontainerboard production increased 2.2% compared to last year.  Production of market pulp, SBS and kraftpaper increased 1.6%, 8.0% and 1.3%, respectively, compared to last year.

Profitsincreased $99 million due primarily to the higher average sales prices.  Profits were unfavorably impacted by thelower sales volume for corrugated containers and higher costs of energy ($61million), freight ($43 million), chemicals ($13 million) and wood fiber ($12million).

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**Other Operations**

Net sales decreased 3.1%due primarily to lower average sales prices for reclaimed fiber.  The average price for old corrugatedcontainers decreased approximately $10 per ton compared to last year.  Total tons of fiber reclaimed and brokeredfor the nine months ended September 30, 2006 was 0.8% higher compared to thesame period last year.  Lower externalsales volume was offset by higher internal consumption.  Profits in 2006 decreased $3 million comparedto last year due primarily to the lower average selling prices.

#### **StatisticalData**

| ** **                                                                | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands of tons, except as noted)** | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Mill production                                                           |       |                                                |       |   |   |
| Containerboard (1)                                                        |       | 5,519                                               |       | 5,402 |   |
| Kraft paper                                                               |       | 152                                                 |       | 150 |   |
| Market pulp                                                               |       | 432                                                 |       | 425 |   |
| SBS                                                                       |       | 230                                                 |       | 213 |   |
| North American  corrugated containers sold (billion sq. ft.) (2)          |       | 60.0                                                |       | 60.6 |   |
| Fiber reclaimed and  brokered                                             |       | 4,940                                               |       | 4,902 |   |

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(1)                                  Forthe nine months ended September 30, 2006 and 2005, our container plantsconsumed 4,027,000 and 4,095,000 tons of containerboard, respectively.

(2)                                  Excludesintercompany shipments.  Includes ourproportionate share of affiliates reported on an equity ownership basis.

**CONTINGENTOBLIGATIONS**

InMarch 2006, we entered into an agreement to guarantee a portion of a thirdparty’s debt in decreasing amounts through January 2010.  The guarantee was entered into in connectionwith the third party’s progress payment financing for the purchase andinstallation of machinery and equipment for the manufacture of corrugatedcontainerboard.  We and the third partyare parties to a supply agreement through 2021, whereby we sell containerboardto the third party, and a purchase agreement through 2014, whereby the thirdparty sells corrugated sheets to us.  AtSeptember 30, 2006, the maximum potential amount of future payments related tothis guarantee was approximately $12 million, and decreases as the third party’scontractual financial targets are met. We have no recourse to the assets of the third party, other than that ofa general unsecured creditor.  The fairvalue of this guarantee at September 30, 2006 was an immaterial amount and isincluded in other long-term assets, with an offset in other long-term liabilitiesin the accompanying consolidated balance sheet.

**CRITICALACCOUNTING POLICIES AND USE OF ESTIMATES**

**IncomeTaxes**

Thesale of the Consumer Packaging division generated a taxable gain for U.S.income tax purposes that will be offset by available net operating loss (NOL)carryforwards, a portion of which are subject to valuation allowancespreviously established in a prior purchase business combination.  Due to the utilization of these NOLcarryforwards, the related valuation allowances were reduced by $157 million inthe second quarter of 2006 with a corresponding reduction to goodwill thatresulted from a prior purchase business combination.

**PROSPECTIVEACCOUNTING STANDARDS**

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 158 “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans,” (SFAS No. 158)effective for fiscal years ending after December 15, 2006.  This 

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standardrequires the funded status of our defined benefit pension plans andpostretirement plans, measured as the difference between plan assets at fairvalue and the benefit obligations, be recorded as an asset or liability withthe after-tax impact recorded to other comprehensive income (OCI) in the December31, 2006 balance sheet based on an actuarial valuation as of that date.  Subsequent changes in the funded status ofthe plans will be recognized in OCI in the year in which the changes occur.  SFAS No. 158 has no impact on theconsolidated statements of operations. We expect this new standard to increase pension and other postretirementliabilities, included in other long-term liabilities in the consolidatedbalance sheet, by approximately $225 million at December 31, 2006 with theoffset recorded to OCI, net of tax.

InSeptember 2006, the FASB issued FASB Staff Position (FSP) No. AUG AIR-1 “Accountingfor Planned Major Maintenance Activities,” effective for fiscal years beginningafter December 15, 2006 and we plan to adopt this standard effective January 1,2007.  This FSP prohibits the use of theaccrue-in-advance method of accounting for planned major maintenance activitiesin annual and interim financial reporting periods.  The FSP requires retrospective application toall financial statements presented.  Thenew standard will not impact our previous annual financial statements, however,we are currently evaluating the impact on the 2006 interim financial statementsas it is our current policy to accrue in advance certain major maintenanceprojects.

In June 2006, the FASB issued Interpretation No. 48, “Accounting forUncertainty in Income Taxes,” (FIN 48), an interpretation of SFAS No. 109, “Accountingfor Income Taxes,” to create a single model to address accounting foruncertainty in tax positions.  FIN 48clarifies the accounting for income taxes, by prescribing a minimum recognitionthreshold a tax position is required to meet before being recognized in thefinancial statements.  FIN 48 alsoprovides guidance on de-recognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  Wewill adopt FIN 48 as of January 1, 2007 and the cumulative effect of the newstandard will be recorded as an adjustment to retained earnings.  We have not determined the impact, if any,the adoption of FIN 48 will have on our financial position and results ofoperations.

**ITEM 3.**          **QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Intentionallyomitted in accordance with General Instruction (H) of Form 10-Q.

**ITEM4.      CONTROLS AND PROCEDURES**

**Evaluation of Disclosure Controlsand Procedures**

Our management, with theparticipation of our principal executive officer and our principal financialofficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of theperiod covered by this report and concluded that, as of such date, ourdisclosure controls and procedures were adequate and effective.

**Changes in Internal Control**

There have not been anychanges in our internal control over financial reporting during the most recentquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II - OTHER INFORMATION**

**ITEM 1.          LEGALPROCEEDINGS**

None

**ITEM 1A.       RISK FACTORS**

There are no material changes to the risk factors as disclosed in our2005 Annual Report on Form 10-K.

**ITEM 2.          UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

Intentionally omitted inaccordance with General Instruction (H) of Form 10-Q.

**ITEM 3.          DEFAULTS UPONSENIOR SECURITIES**

Intentionally omitted inaccordance with General Instruction (H) of Form 10-Q.

**ITEM 4.          SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

Intentionally omitted inaccordance with General Instruction (H) of Form 10-Q.

**ITEM 5.          OTHERINFORMATION**

None

**ITEM 6.          EXHIBITS**

The following exhibits areincluded in this Form 10-Q:

10.1                                                   JeffersonSmurfit Corporation Supplemental Income Pension Plan II (incorporated byreference to Exhibit 10.1 to Smurfit-Stone Container Corporation’s (“SSCC”)Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).

10.2                                                   ExecutiveRetirement Agreement, dated as of October 2, 2006, between Smurfit-Stone ContainerCorporation and Steven J. Klinger (incorporated by reference to Exhibit 10.1 toSSCC’s Current Report on Form 8-K dated October 2, 2006).

31.1                                                   Certification pursuant to Rules 13a—14 and 15d—14under the Securities Exchange Act of 1934, as adopted pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

31.2                                                   Certification pursuant to Rules 13a—14 and 15d—14under the Securities Exchange Act of 1934, as adopted pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

32.1                                                 Certification pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2                                                 Certification pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Signature

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

 
|                        |   | SMURFIT-STONE  CONTAINER ENTERPRISES, INC.      |
|------------------------|--------|-------------------------------------------------|
|                   |   | (Registrant)                                    |
|                   |   |                                            |
|                   |   |                                            |
| Date: November 7, 2006 |   | /s/ Paul K.  Kaufmann                           |
|                   |   | Paul K. Kaufmann                                |
|                   |   | Senior Vice  President and Corporate Controller |
|                   |   | (Principal  Accounting Officer)                 |

 

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