**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 20-F**

**(Mark One)**

**o**                                 REGISTRATIONSTATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGEACT OF 1934

**OR**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the fiscal year ended December 31,2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Commissionfile number 333-125371**

**SMURFIT KAPPA FUNDING PLC**

**SMURFIT KAPPAACQUISITIONS**

(Exact name of registrants as specified in theirrespective charters)

**IRELAND**

(Jurisdiction of incorporation or organization)

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

(Address of principal executive offices)

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act:

**None**

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act:

**None**

Securities forwhich there is a reporting obligation pursuant to Section 15(d) ofthe Act:

**10**1¤8% Senior Notesdue 2012

**9**5¤8% Senior Notesdue 2012

**7.75% SeniorSubordinated Notes due 2015**

Indicate the number ofoutstanding shares of each of the SK Funding’s classes of capital or commonstock as of December 31, 2006: Ordinary Shares of €0.001each 40,000,000

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

oYes    xNo

If this report is anannual or transition report, indicate by checkmark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.

oYes    xNo

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.

xYes    oNo

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

| o  Large accelerated filer |   | o  Accelerated filer |   | x  Non-accelerated filer |
|----------------------------|--------|----------------------|--------|--------------------------|

 

Indicate by check markwhich financial statement item the registrant has elected to follow.

oItem 17  xItem 18

If this is an annualreport, indicate by check whether the registrant is a shell company (as definedin Rule 12b-2 of the Exchange Act).

o Yes    xNo

 

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**TABLEOF CONTENTS**

| Item 1.   |   | Identity of  Directors, Senior Management and Advisors                    |   | 6   |   |
|-----------|--------|---------------------------------------------------------------------------|--------|-----|--------|
| Item 2.   |   | Offer  Statistics and Expected Timetable                                  |   | 6   |   |
| Item 3.   |   | Key Information                                                           |   | 6   |   |
| Item 4.   |   | Information on the  Company                                               |   | 18  |   |
| Item 4A.  |   | Unresolved Staff  Comments                                                |   | 42  |   |
| Item 5.   |   | Operating and  Financial Review and Prospects                             |   | 42  |   |
| Item 6.   |   | Directors,  Senior Management and Employees                               |   | 67  |   |
| Item 7.   |   | Related Party  Transactions                                               |   | 78  |   |
| Item 8.   |   | Financial Information                                                     |   | 80  |   |
| Item 9.   |   | The Offer and Listing                                                     |   | 82  |   |
| Item 10.  |   | Additional  Information                                                   |   | 82  |   |
| Item 11.  |   | Quantitative  and Qualitative Disclosures About Market Risk               |   | 102 |   |
| Item 12.  |   | Description of  Securities Other Than Equity Securities                   |   | 104 |   |
| Item 13.  |   | Defaults,  Dividends Arrearages and Delinquencies                         |   | 104 |   |
| Item 14.  |   | Material  Modifications to Rights of Security Holders and Use of Proceeds |   | 104 |   |
| Item 15.  |   | Controls and Procedures                                                   |   | 104 |   |
| Item 16.  |   | Reserved                                                                  |   | 105 |   |
| Item 16A. |   | Audit  Committee Financial Expert                                         |   | 105 |   |
| Item 16B. |   | Code of Ethics                                                            |   | 105 |   |
| Item 16C. |   | Principal  Accountant Fees and Services                                   |   | 106 |   |
| Item 16D. |   | Exemptions  from the Listing Standards for Audit Committees               |   | 106 |   |
| Item 16E. |   | Purchases of  Equity Securities by the Issuer and Affiliated Purchasers   |   | 106 |   |
| Item 17.  |   | Financial Statements                                                      |   | 106 |   |
| Item 18.  |   | Financial Statements                                                      |   | 107 |   |
| Item 19.  |   | Exhibits                                                                  |   | 108 |   |

 

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**Introduction**

In this annualreport, unless the context otherwise requires:

·       “SKFunding” refers to Smurfit Kappa Funding plc (formerly known as JSG Fundingplc), a direct subsidiary of SKCL and indirect owner of JSG, and issuer of the95¤8%Senior Notes due 2012, the 101¤8%Senior Notes due 2012 and the 7.75% Senior Subordinated Notes due 2015;

·       “SKAcquisitions” refers to Smurfit Kappa Acquisitions (formerly known as JSGAcquisitions), a wholly-owned subsidiary of SK Funding and guarantor ofthe 95¤8%Senior Notes due 2012 and the 101¤8% Senior Notes due 2012;

·       “SKCL”refers to Smurfit Kappa Corporation Limited (formerly known as JeffersonSmurfit Group Limited);

·       “JSG”refers to Smurfit Packaging Corporation Limited and its consolidated subsidiaries.

·       “SKGL”refers to Smurfit Kappa Group Limited;

·       “SKGplc” refers to Smurfit Kappa Group plc (formerly known as Smurfit Kappa plc),which from January 31, 2007, became the ultimate parent of the Group;

·       “SKHoldings” refers to Smurfit Kappa Holdings plc (formerly known as JSG Holdingsplc), a direct subsidiary of SKGL and from February 6, 2004, the indirectparent of SK Funding, the indirect parent of JSG and from December 1,2005, the indirect parent of Kappa.

·       “Kappa”refers to Kappa Holding BV and its consolidated subsidiaries, prior to themerger of JSG and Kappa on December 1, 2005;

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

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

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

This annual report on Form 20-Fcovers both SK Funding and SK Acquisitions. SK Acquisitions is the wholly ownedsubsidiary of SK Funding and guarantor of SK Funding’s 101¤8%Senior Notes due 2012 and the 95¤8% Senior Notes due 2012. Theoperating earnings, net income and cash flows of both companies are almostidentical. Although the interest expense of both are similar, SK Funding has agreater third party interest cost while SK Acquisitions has asubstantial inter company interest expense payable to SK Funding. This relatesto the advance to SK Acquisitions of the proceeds from the issuance of thesenior notes and the senior subordinated notes by SK Funding. The balancesheets of both companies are also substantially the same with the exception ofthe composition of their debt. The third party debt of SK Funding is greaterthan that of SK Acquisitions. However, SK Acquisitions has substantial intercompany debt due to SK Funding relating to the advance of the proceeds of thesenior notes and senior subordinated notes offerings.

**Presentation of ourFinancial Information**

Unless otherwise indicated, financial information inthis annual report has been prepared in accordance with generally acceptedaccounting principles in Ireland (“*IrishGAAP*”). Irish GAAP differs in certain significant respects fromaccounting principles generally accepted in the United States (“*U.S.*

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*GAAP*”).For a discussion of the significant differences between Irish GAAP and U.S.GAAP as they apply to SK Funding, see Note 37 to the historical auditedconsolidated financial statements included elsewhere in this annual report.

The financial statementsin this annual report do not comprise ‘full group accounts’ within the meaningof Regulation 40(1) of the European Communities (Companies: GroupAccounts) Regulations, 1992 of Ireland insofar as such group accounts wouldhave to comply with the disclosure and other requirements of those Regulations.Full group accounts for SKCL (formerly known as Jefferson Smurfit Group Limited)for the year ended December 31, 2004 and full group accounts for SKGL forthe year ended December 31, 2005, have received unqualified audit reportsand have been filed as appropriate with the Irish Registrar of Companies. FullGroup accounts for SKGL for the year ended December 31, 2006, which havereceived an unqualified audit report, will be filed with the Registrar in duecourse.

**Exchange RateInformation**

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

Thefollowing tables show for the period from January 1, 2002 through December 31,2006, the period-end, average, high and low Noon Buying Rates in the City ofNew York for cable transfers of euro as certified for customs purposes by theFederal Reserve Bank of New York expressed as U.S. dollars per €1.00,which we refer to as the “*Noon Buying Rate*.”

| ** **                              | ** ** | **euro/U.S. dollar Exchange Rates**                             | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **At and for the Years Ended December 31,** | ** ** |
| ** **                              | ** ** | **2002**                                                                       | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Exchange rate at  end of period         |       | 1.0485                                                                         |       | 1.2597 |   | 1.3538 |   | 1.1842 |   | 1.3197 |   |
| Average exchange  rate during period(1) |       | 0.9495                                                                         |       | 1.1412 |   | 1.2478 |   | 1.2400 |   | 1.2661 |   |
| Highest exchange  rate during period    |       | 1.0485                                                                         |       | 1.2597 |   | 1.3625 |   | 1.3476 |   | 1.3327 |   |
| Lowest exchange rate  during period     |       | 0.8594                                                                         |       | 1.0361 |   | 1.1801 |   | 1.1667 |   | 1.1860 |   |

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(1)          The average of the NoonBuying Rates on the last business day of each month during the applicableperiod.

| ** **                          | ** ** | **euro/U.S. dollar Exchange Rates**       | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **At and for the Months Ended** | ** ** |
| ** **                          | ** ** | **2006**                                                 | ** ** | **2007** | ** ** |
| ** **                          | ** ** | **Jan**                                                  | ** ** | **Feb** | ** ** | **Mar** | ** ** | **Apr** | ** ** | **May** | ** ** | **Jun** | ** ** | **Jul** | ** ** | **Aug** | ** ** | **Sep** | ** ** | **Oct** | ** ** | **Nov** | ** ** | **Dec** | ** ** | **Jan** | ** ** | **Feb** | ** ** | **Mar** | ** ** |
| Exchange rate at end of   period    |       | 1.22                                                     |       | 1.19 |   |   | 1.21 |   |   | 1.26 |   |   | 1.28 |   |   | 1.28 |   | 1.28 |   | 1.28 |   | 1.27 |   | 1.28 |   | 1.33 |   | 1.32 |   | 1.30 |   | 1.32 |   |   | 1.34 |   |   |
| Average exchange rate during period |       | 1.21                                                     |       | 1.19 |   |   | 1.20 |   |   | 1.23 |   |   | 1.28 |   |   | 1.27 |   | 1.27 |   | 1.28 |   | 1.27 |   | 1.26 |   | 1.29 |   | 1.32 |   | 1.30 |   | 1.31 |   |   | 1.32 |   |   |
| Highest exchange rate during period |       | 1.23                                                     |       | 1.21 |   |   | 1.22 |   |   | 1.26 |   |   | 1.29 |   |   | 1.30 |   | 1.28 |   | 1.29 |   | 1.28 |   | 1.28 |   | 1.33 |   | 1.33 |   | 1.33 |   | 1.32 |   |   | 1.34 |   |   |
| Lowest exchange  rate during period |       | 1.20                                                     |       | 1.19 |   |   | 1.19 |   |   | 1.21 |   |   | 1.26 |   |   | 1.25 |   | 1.25 |   | 1.27 |   | 1.26 |   | 1.25 |   | 1.27 |   | 1.31 |   | 1.29 |   | 1.29 |   |   | 1.31 |   |   |
|                                     |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On April 26, 2007,the Noon Buying Rate was €1.00=$1.359.

Our inclusion of theseexchange rates is not meant to suggest that the euro amounts actually representsuch U.S. dollar amounts or that such amounts could have been converted intoU.S. dollars at such rate or any other rate. In connection with the preparationof our consolidated statements of operations and our consolidated statements ofcash flows, management uses average monthly exchange rates. In connection 

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with thepreparation of the group balance sheets, management uses the closing exchangerate at the balance sheet date. For a discussion of the impact of the exchangefluctuations on our financial condition and results of operations, see “Operatingand Financial Review and Prospects.”

**Market, Ranking AndOther Data**

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

**DisclosureRegarding Forward-Looking Statements**

This annual report includes forward-lookingstatements. These forward-looking statements can be identified by the use offorward-looking terminology, including the terms “believes,” “estimates,” “anticipates,”“expects,” “intends,” “may,” “will” or “should” or, in each case, theirnegative, or other variations or comparable terminology. These forward-lookingstatements include all matters that are not historical facts. They appear in anumber of places throughout this annual report and include statements regardingour intentions, beliefs or current expectations concerning, among other things,our results of operations, financial condition, liquidity, prospects, growthstrategies and the industry in which we operate.

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

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

·       ourability to generate growth or profitable growth;

·       theavailability and price of raw materials;

·       ourexposure to currency or interest rate fluctuations;

·       ourability to implement our business strategy successfully;

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

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

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

·       ourability to maximize operating and organizational efficiencies; and

·       generallocal and global economic conditions.

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

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

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

Not applicable.

**Item 2.**                        OfferStatistics and Expected Timetable

Not applicable.

**Item 3.**                        KeyInformation

**Selected HistoricalFinancial Data**

The following table sets forth our selected historicalfinancial data. The periods prior to and including September 2, 2002reflect data of JSG, SK Funding’s (formerly known as JSG Funding) predecessorfor financial accounting purposes. The periods beginning September 3, 2002reflect data of SK Funding and its consolidated subsidiaries after theacquisition of JSG. Because of the revaluation of certain assets andliabilities acquired and the increased level of debt as part of the acquisitionof JSG, and their related impact on the financial data, the consolidatedfinancial statements of JSG, SK Funding’s predecessor for the periods prior to September 3,2002, are not comparable to those of SK Funding subsequent to that date.

We have derived the selected historical consolidatedfinancial data for the period January 1, 2002 through September 2,2002 from JSG’s audited consolidated financial statements, which are notincluded in this annual report. We have derived the selected historicalconsolidated financial data for the period from September 3, 2002 through December 31,2002 and for the year ended December 31, 2003, from SK Funding’s auditedconsolidated financial statements, which are not included in this annualreport. We have derived the selected historical consolidated financial data forthe years ended December 31, 2004, 2005 and 2006 from SK Funding’s auditedconsolidated financial statements and the related notes included elsewhere inthis annual report. The selected historical financial data set forth below isnot necessarily indicative of the results of future operations and should beread in conjunction with the discussion under the Item 5 “Operating andFinancial Review and Prospects,” and the historical consolidated financialstatements of SK Funding and accompanying notes included elsewhere in thisannual report.

Unlessotherwise indicated, this historical financial data has been prepared inaccordance with Irish GAAP. Irish GAAP differs in certain significant respectsfrom U.S. GAAP. For a discussion of the most 

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significant differences between Irish GAAP and U.S.GAAP as they apply to SK Funding, see Note 37 to SK Funding’s historicalfinancial statements included elsewhere in this annual report.

| ** **                                                | ** ** | **Predecessor**                                        | ** ** | ** ** | ** ** | **Successor**                                           | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|---------------------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** **                                              | ** ** | **Restated**(1) | ** ** | **Restated**(1) | ** ** | **Restated**(1) | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Jan. 1,   2002 to   Sept. 2,   2002** | ** ** | ** ** | ** ** | **Sept. 3,   2002 to   Dec. 31,   2002** | ** ** | **Year   Ended   Dec. 31,   2003** | ** ** | **Year   Ended   Dec. 31,   2004** | ** ** | **Year   Ended   Dec. 31,   2005**(2) | ** ** | **Year   Ended   Dec. 31,   2006** | ** ** |
| **Consolidated Statement of Income Data:**                | ** ** |                                                   | ** ** | ** ** |       |                                                    |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Irish GAAP unless stated otherwise*                      | * *   | * *                                               | * *   | * *   | * *   | * *                                                | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Net sales                                                 |       |                                                   | €     | 3,134,080  |       |                                                    |       |   | € | 1,575,575 |   | € | 4,746,315 |   | € | 4,805,082 |   | € | 4,437,329 |   | € | 7,032,713 |   |
| Cost of sales                                             |       |                                                   | 2,272,287  |       |       |                                                    |       | 1,145,857 |   | 3,419,820 |   | 3,473,299 |   | 3,222,705 |   | 5,064,797 |   |
| Impairment of  property, plant and equipment              |       |                                                   | —     |       |       |                                                    |       | — |   | — |   | — |   | 45,214 |   | 31,299 |   |
| Gross profit                                              |       |                                                   | 861,793    |       |       |                                                    |       | 429,718 |   | 1,326,495 |   | 1,331,783 |   | 1,169,410 |   | 1,936,617 |   |
| Net operating expenses                                    |       |                                                   | 656,419    |       |       |                                                    |       | 284,005 |   | 990,428 |   | 1,017,748 |   | 982,363 |   | 1,542,183 |   |
| Reorganization and  restructuring costs                   |       |                                                   | 12,484     |       |       |                                                    |       | 11,978 |   | 35,006 |   | 39,430 |   | 25,090 |   | 196,563 |   |
| Impairment of  advances to   affiliates                   |       |                                                   | —     |       |       |                                                    |       | — |   | — |   | — |   | — |   | 52,821 |   |
| Operating income—subsidiaries                        |       |                                                   | 192,890    |       |       |                                                    |       | 133,735 |   | 301,061 |   | 274,605 |   | 161,957 |   | 145,050 |   |
| Share of  associates’ operating   income             |       |                                                   | 117,473    |       |       |                                                    |       | 7,224 |   | 12,155 |   | 12,611 |   | 7,287 |   | 11,627 |   |
| Share of  associates’ restructuring costs            |       |                                                   | (7,541     | )          |       |                                                    |       | — |   | — |   | — |   | — |   | — |   |
| Total operating income                                    |       |                                                   | €     | 302,822    |       |                                                    |       |   | € | 140,959 |   | € | 313,216 |   | € | 287,216 |   | € | 169,244 |   | € | 156,677 |   |
| Income/(loss) on  sale of operations—subsidiaries    |       |                                                   | 20,440     |       |       |                                                    |       | — |   | 5,560 |   | 22,173 |   | 52,587 |   | (22,856 | ) |
| Interest income                                           |       |                                                   | 10,286     |       |       |                                                    |       | 5,230 |   | 11,631 |   | 8,335 |   | 10,730 |   | 13,227 |   |
| Interest expense                                          |       |                                                   | (65,881    | )          |       |                                                    |       | (92,718 | ) | (309,368 | ) | (299,338 | ) | (360,009 | ) | (356,182 | ) |
| Share of  associates’ net interest                   |       |                                                   | (74,387    | )          |       |                                                    |       | (386 | ) | (2,062 | ) | (1,301 | ) | (1,336 | ) | (1,950 | ) |
| Other financial  expense(3)                               |       |                                                   | —     |       |       |                                                    |       | (10,775 | ) | (15,266 | ) | (15,718 | ) | (13,259 | ) | (9,064 | ) |
| Income/(loss)  before taxes and equity minority interests |       |                                                   | 193,280    |       |       |                                                    |       | 42,310 |   | 3,711 |   | 1,367 |   | (142,043 | ) | (220,148 | ) |
| Taxes on income,  as reported                             |       |                                                   | (77,889    | )          |       |                                                    |       | (31,395 | ) | (62,354 | ) | (26,973 | ) | (21,561 | ) | (37,307 | ) |
| Income/(loss)  before equity minority interests           |       |                                                   | 115,391    |       |       |                                                    |       | 10,915 |   | (58,643 | ) | (25,606 | ) | (163,604 | ) | (257,455 | ) |
| Equity minority  interests                                |       |                                                   | (19,969    | )          |       |                                                    |       | (9,061 | ) | (16,768 | ) | (16,067 | ) | (18,813 | ) | (14,474 | ) |
| Net income/(loss)                                         |       |                                                   | €     | 95,422     |       |                                                    |       |   | € | 1,854 |   | € | (75,411 | ) | € | (41,673 | ) | € | (182,417 | ) | € | (271,929 | ) |
| Net income/(loss)  in accordance with U.S. GAAP           |       |                                                   | €     | 95,973     |       |                                                    |       |   | € | 52,676 |   | € | 79,306 |   | € | 12,556 |   | € | (300,229 | ) | € | (181,977 | ) |
| **Other Financial Data:**                                 | ** ** |                                                   | ** ** | ** ** |       |                                                    |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| EBITDA:(4)                                                |       |                                                   | €     | 385,684    |       |                                                    |       |   | € | 215,621 |   | € | 589,369 |   | € | 584,186 |   | € | 644,300 |   | € | 583,245 |   |
| Depreciation,  depletion and amortization expense         |       |                                                   | 172,354    |       |       |                                                    |       | 92,661 |   | 298,014 |   | 303,126 |   | 443,015 |   | 470,115 |   |
| Net cash provided by (used in):                           |       |                                                   |       |       |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Operating  activities                                     |       |                                                   | €     | 356,514    |       |                                                    |       |   | € | 271,698 |   | € | 690,964 |   | € | 640,929 |   | € | 512,869 |   | € | 657,710 |   |
| Capital  expenditure and financial investment             |       |                                                   | (121,206   | )          |       |                                                    |       | (90,307 | ) | (161,680 | ) | (166,013 | ) | (166,880 | ) | (315,050 | ) |
| Acquisitions and  disposals                               |       |                                                   | (297,064   | )          |       |                                                    |       | (2,516,819 | ) | (180,546 | ) | 5,619 |   | 374,670 |   | 5,173 |   |
| Financing  activities                                     |       |                                                   | 43,502     |       |       |                                                    |       | 2,561,209 |   | (7,421 | ) | (123,548 | ) | 470,767 |   | (606,372 | ) |
| Capital  expenditures                                     |       |                                                   | (119,620   | )          |       |                                                    |       | (91,139 | ) | (207,518 | ) | (206,466 | ) | (192,434 | ) | (344,686 | ) |

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| **Balance Sheet Data (at end of  period):**           | ** ** |   | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|--------|------------|------------|--------|--------|--------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Cash at bank and  in hand                             |       |   | n/a        |       |   |   |   | €     | 184,331    |       | €     | 179,067    |       | €     | 248,033    |       | €     | 247,807 |   | € | 370,204 |   |
| Property, plant  and equipment                        |       |   | n/a        |       |   |   |   | 2,214,254  |       | 2,435,946  |       | 2,334,858  |       | 3,499,084  |       | 3,398,956  |       |
| Total assets                                          |       |   | n/a        |       |   |   |   | 5,842,608  |       | 5,816,927  |       | 5,768,077  |       | 9,375,777  |       | 8,387,372  |       |
| Total long term  debt and other long term liabilities |       |   | n/a        |       |   |   |   | 3,027,284  |       | 3,022,350  |       | 2,959,840  |       | 4,537,329  |       | 4,544,614  |       |
| Shareholders’  equity                            |       |   | n/a        |       |   |   |   | 878,099    |       | 895,356    |       | 869,101    |       | 1,418,862  |       | 1,241,020  |       |
| **U.S. GAAP:**                                        | ** ** |   | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                          |       |   | n/a        |       |   |   |   | €     | 6,071,534  |       | €     | 5,880,648  |       | €     | 5,926,319  |       | €     | 9,630,288 |   | € | 8,749,722 |   |
| Shareholders’  equity                            |       |   | n/a        |       |   |   |   | 691,685    |       | 666,278    |       | 634,016    |       | 776,935    |       | 627,205    |       |

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(1)          Irish GAAP amounts restatedto reflect the impact of implementing FRS 20 ‘Share-based Payments’.Refer to Note 2 of the Consolidated Financial Statements includedelsewhere in this annual report, for further information.

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

(3)          Otherfinancial expense represents the difference between the expected return onpension scheme assets and the interest cost of pension scheme liabilities andis disclosed in accordance with FRS 17—“Retirement Benefits.”

(4)          EBITDA represents “operatingincome subsidiaries” plus “income on sale of operations—subsidiaries” plus “depreciation,depletion and amortization” less “other financial expense”. EBITDA is includedin this report because it is a basis upon which we assess our financialperformance and debt service capabilities, and because certain covenants in our(and our subsidiaries’) borrowing arrangements are tied to similar measures. Managementbelieves EBITDA provides useful information to investors because it isfrequently used by securities analysts, lenders and others in their evaluationof companies. In addition, management believes that EBITDA provides atransparent measure of our performance and allows management to readily viewoperating trends, perform analytical comparisons and identify strategies toimprove operating performance. For this reason, EBITDA is the measure we use toassess performance for purposes of determining compensation under our stockcompensation plan.

Youshould not consider EBITDA in isolation from or as a substitute for cash flowsfrom operations, net income or other consolidated statement of operations orcash flow statement data prepared in accordance with Irish GAAP or U.S. GAAP oras a measure of a company’s profitability or liquidity. We understand thatwhile EBITDA is frequently used by securities analysts, lenders and others intheir evaluation of companies, EBITDA as used herein is not necessarilycomparable to other similarly titled captions of other companies due topotential inconsistencies in the method of calculation. Our use of EBITDA,instead of a GAAP measure, has limitations as an analytical tool, including theinability to determine profitability or liquidity, due to the exclusion ofinterest expense and the associated significant cash requirements and theexclusion of depreciation and amortization, which represent significant andunavoidable operating costs given the level of indebtedness and capitalexpenditures needed to maintain our business. For these reasons, we relyprimarily on our Irish GAAP operating results and use EBITDA onlysupplementally. In calculating EBITDA, we exclude the effects of equityminority interests and share of associates income because equity minorityinterests and share of associates income are generally recognized in the formof dividends paid or 

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received,respectively. In order to maintain comparability and consistency betweenoperating income and EBITDA, we believe it is appropriate to exclude equityminority interests and share of associates income from EBITDA. Managementbelieves that these items do not facilitate an understanding of our continuingoperating performance.

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

| ** **                                            | ** ** | **Predecessor**                                     | ** ** | ** ** | ** ** | **Successor**                                        | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** **                                           | ** ** | **Restated**(1) | ** ** | **Restated**(1) | ** ** | **Restated**(1) | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Jan. 1,  2002 to  Sept. 2,  2002** | ** ** | ** ** | ** ** | **Sept. 3,  2002 to  Dec. 31,  2002** | ** ** | **Year  Ended  Dec. 31,  2003** | ** ** | **Year  Ended  Dec. 31,  2004** | ** ** | **Year  Ended  Dec. 31,  2005** | ** ** | **Year  Ended  Dec. 31,  2006** | ** ** |
| Net income/(loss)  available to ordinary shareholders |       |                                                | €     | 95,422     |       |                                                 |       |   | € | 1,854 |   | € | (75,411 | ) | € | (41,673 | ) | € | (182,417 | ) | € | (271,928 | ) |
| Equity minority  interests                            |       |                                                | 19,969     |       |       |                                                 |       | 9,061 |   | 16,768 |   | 16,067 |   | 18,813 |   | 14,474 |   |
| Taxes on income                                       |       |                                                | 77,889     |       |       |                                                 |       | 31,395 |   | 62,354 |   | 26,973 |   | 21,561 |   | 37,306 |   |
| Share of  associates’ income                     |       |                                                | (35,545    | )          |       |                                                 |       | (6,838 | ) | (10,093 | ) | (11,310 | ) | (5,951 | ) | (9,677 | ) |
| Net interest  expense                                 |       |                                                | 55,595     |       |       |                                                 |       | 87,488 |   | 297,737 |   | 291,003 |   | 349,279 |   | 342,955 |   |
| Depreciation,  depletion and amortization expense     |       |                                                | 172,354    |       |       |                                                 |       | 92,661 |   | 298,014 |   | 303,126 |   | 443,015 |   | 470,115 |   |
| EBITDA                                                |       |                                                | €     | 385,684    |       |                                                 |       |   | € | 215,621 |   | € | 589,369 |   | € | 584,186 |   | € | 644,300 |   | € | 583,245 |   |

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(1)          Restated to reflect theimpact of implementing FRS 20 ‘Share-based Payments’.

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**RISK FACTORS**

*You shouldcarefully consider the risks described below that could affect our business.The risks below are not the only ones that we face—some risks are not yet knownto us and some that we do not currently believe to be material could later turnout to be material. All of these risks could significantly harm our business,revenues, operating income, net income, net assets and liquidity and capitalresources.*

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

**Risks Relating toOur Indebtedness**

**Our level ofindebtedness could, in certain circumstances, have a material adverse effect onour operations and prevent us from fulfilling our outstanding obligations**

We have significantdebt service obligations. As at December 31, 2006, we had total debtoutstanding of approximately €4,873 million. Our debtservice obligations could have important adverse consequences for ouroperations. For example, it could:

·       makeit more difficult for us to satisfy our obligations with respect to the 95¤8%senior notes due 2012 (the “95¤8%senior notes”), the 101¤8%senior notes due 2012 (together with the 95¤8% seniornotes, the “senior notes”), the 7.75% senior subordinated notes due 2015 (the “7.75%senior subordinated notes”) and our obligations under the senior creditfacility;

·       requireus to dedicate a substantial portion of our cash flow from operations topayments on our debt, which may reduce the funds available for working capital,capital expenditures, acquisitions and other general corporate purposes andlimit our flexibility in operating our business;

·       increaseour vulnerability to both general and industry specific adverse economicconditions;

·       limitour ability to borrow additional funds or raise further capital; and

·       limitour ability to pay dividends.

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

Our financing arrangementscontain financial and other restrictive covenants that limit the way in whichwe operate our business. Our failure to comply with those covenants couldresult in an event of default which, if not cured or waived, could result inthe acceleration of a large portion of our debt.

**Our ability to makepayments and to refinance our indebtedness depends on our ability to generatesufficient cash in the future**

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

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We cannot assure you thatour business will generate sufficient cash flows from operations or that futureborrowing will be available to us under our senior credit facility in an amountsufficient to enable us to pay our debt, including the notes, or to fund ourother liquidity needs. If our future cash flows from operations and othercapital resources are insufficient to pay our obligations as they mature or tofund our liquidity needs, we may be forced to reduce or delay our business activitiesand capital expenditures, sell assets, obtain additional debt or equity capitalor restructure or refinance all or a portion of our debt. We cannot assure youthat we would be able to accomplish any of these alternatives on a timely basisor on satisfactory terms, if at all. In addition, the terms of our existing andfuture indebtedness, including the senior notes, the senior credit facility andthe 7.75% senior subordinated notes, may limit our ability to pursue any ofthese alternatives.

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

A portion of our debt,including all of the debt we incur under the senior credit facility, bearsinterest at variable rates. An increase in the interest rates on our debt willtherefore reduce our funds available to repay our debt and to finance ouroperations and future business opportunities and, as a result, may have amaterial adverse impact on our capital structure. As at December 31, 2006,€1.5billion of our total outstanding debt of €4.9 billion bore interestat variable rates after taking into account interest rate hedges.

**Risks Relating toour Business**

**We are exposed tothe risk of an economic slowdown**

The principal factoraffecting demand for our products, both globally and regionally, is the generallevel of economic growth and in particular the level of industrial activity.Since the markets for paper based packaging products in  many industrialized countries are generallymaturing, there is a close correlation between industrial production growth anddemand for packaging products such as corrugated containers and their componentmaterials, including containerboard. Accordingly, the demand for our productsis likely to be adversely affected by an economic slowdown which could have amaterial adverse effect on the profitability of our businesses.

**The cyclical natureof the packaging industry could result in overcapacity and consequentlythreaten our pricing structure**

Our operating results reflect the packaging industry’shistorical cyclical pattern with periodic overcapacity and resulting pressureon pricing of packaging products. This cyclicality arises, in part, from thecapital intensity of facilities such as paper mills (which generally results incontinued production by paper mills as long as paper prices are sufficient tocover their marginal costs), the long lead time between the planning andcompletion of a new mill and the fact that new additions of containerboardcapacity tend to be large relative to the overall demand for the product.Consequently, the industry has from time to time experienced periods ofsubstantial overcapacity and there can be no assurance that this will notrecur. In the absence of sufficient economic growth to generate increased demandor the closure of facilities (either temporarily or permanently) to mitigatethe effect, new capacity can cause a period of regional overcapacity which maylead to downward pricing pressure. There are two significant capacity additionsknown to be planned in Europe beyond 2007: Progroup’s recently announcedintention to build a 650,000 metric tons per year recycled containerboard millin Germany and Mondi Packaging Group’s recently announced intention to build alightweight recycled containerboard mill with an annual capacity of 500,000metric tons. Both mills are expected to be operational in 2009. In periods ofovercapacity, industry participants may stop operating certain of theirproduction facilities periodically to reduce inventory levels. In the eventthat we take downtime at our mills for any significant length of time but ourcompetitors continue production at high levels, our sales volumes could beadversely affected without any significant 

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offsetting benefit ofimproved prices in the market. This could have a material adverse effect on theprofitability of our business.

These adverse effectscould be further exacerbated in the event that producers in other regions(particularly the United States and China) experience overcapacity within theirown local and regional markets and seek to increase their level of exports intothose markets within which we operate and do so at pricing levels which areuneconomic. The effect of such activity would be to depress prices for ourproducts in those markets and could adversely affect our selling prices andprofitability.

**The standardizednature of containerboard could result in downward pressure on pricing and, as aconsequence, lower earnings**

Containerboard cannotgenerally be differentiated by producer, and this standardization has led tointensified price competition. This could in turn lead to a reduction in ourmarket share as well as lower product prices, both of which could reduceearnings and have a material adverse effect on us. Our business has in the pastfaced significant downward pricing pressure, including as a result ofstandardization, in certain of the markets in which we operate. In many marketswhere we operate, we continue to be exposed to such factors and are likely tocontinue to be so in the future. In circumstances where we are unable to adjustour cost base or achieve economies of scale comparable to our competition inthese markets, pricing pressure could have a material adverse effect on ourmargins and the profitability of the relevant business and its market share.

**If operations atany of our facilities (in particular our key mills) were interrupted for anysignificant length of time it could adversely affect our financial position andresults of operations**

We have five major millsin Europe, each of which has the capacity to produce in excess of 400,000metric tons of containerboard, compared with our overall capacity of just overfive million metric tons. Our kraftliner mill in Piteå, Sweden is responsiblefor approximately 750,000 metric tons of capacity, with the other twokraftliner mills (Facture, France, and Nettingsdorfer, Austria) havingcapacities of 540,000 metric tons and 420,000 metric tons respectively. Theother two mills, Roermond, in the Netherlands, and Zülpich, in Germany, producerecycled containerboard, and have capacities of 520,000 metric tons and 450,000metric tons, respectively. Between them these five mills, and Piteå inparticular, represent a substantial amount of our containerboard production.Each is an important part of the business (with Piteå being a critical part ofour business). If operations at any of these key mills were interrupted for anysignificant length of time, either because of natural disaster (such asflooding or fire), man-made disruptions (such as labor strikes), failureto obtain raw materials, or any other reason, it could have a material adverseeffect on our financial position and results of operations. Similar occurrencesat our other mills may have a lesser but still notable effect on our results.

**We are exposed tointense competition in the containerboard and packaging industry**

We operate in a highlycompetitive and fragmented industry. The paper packaging industry ischaracterized by a high level of price competition, as well as othercompetitive factors including innovation, design, quality and service. To theextent that any of our competitors are more successful with respect to any keycompetitive factor, our business, results of operations and financial positioncould be adversely affected. Pricing pressure could arise from, among otherthings, limited demand growth and existing overcapacity in the market inquestion, price reductions by competitors, the ability of competitors tocapitalize on their economies of scale and create excess product supply, theability of competitors to operate or successfully relocate or open productionfacilities in countries where production costs are lower than those in which weoperate and the access of competitors to new technology which we do notpossess.

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

Our main products,corrugated containers and solidboard packaging, compete with other forms ofpackaging, principally reusable plastic containers. We believe the substitutionof reusable plastic containers in the short shelf life sector may now bereaching its limit in many countries within Europe. However, there can be noassurance that further substitution will not occur in this sector or in othersectors or in other regions in which we operate, nor can there be any assurancethat future packaging developments and trends will not drive furthersubstitution. Any significant substitution away from paper-based packagingproducts may adversely affect our profitability. Substitution is also possiblebetween solidboard packaging and corrugated containers, with the generallylower cost of corrugated containers offset by the moisture and temperaturehandling characteristics of solidboard packaging. If substitution levelsincrease, the demand for our solidboard products will fall, resulting in lowersales, which may lead to downward pressure on the profitability of ourproducts.

**We could beadversely affected by the consolidation of our customers**

A number of the industriesin which our customers operate have experienced consolidation in the past andmay continue to do so in the future. Such consolidation may affect ourrelations with our customers. In the past, when one customer of ours hascombined with another, we have on occasion lost business and there can be noassurance that this will not recur. Additionally, customers’ ability to exertpricing pressure on all suppliers, including us, has increased as theirindustries have consolidated and these customers have become larger. Any ofthese circumstances could have an adverse impact on our results or operationsand, in particular, stronger customer buying power can cause downward pricingpressure which consequently may have an adverse effect on revenue.

**Price fluctuationsin raw materials and energy costs could adversely affect our manufacturingcosts**

Recovered paper, particularly old corrugatedcontainers, or ‘‘OCC’’, is one of the principal raw materials used in themanufacture of our paper-based packaging products and is purchased in increasinglycompetitive, price sensitive markets. OCC has historically exhibited price anddemand cyclicality and extreme price volatility over short periods and may doso again in the future. In particular, the price of OCC depends on a variety offactors over which we have no control, including environmental and conservationregulations, natural disasters and weather. A decrease in the supply of suchraw materials has caused, and any such decrease in the future can be expectedto cause, higher fiber costs. In addition, the increase in demand for productsmanufactured, in whole or in part, from OCC has in the past caused anoccasional supply/demand imbalance in the market for OCC. It may also cause asignificant increase in the cost of such fiber used in the manufacture ofrecycled containerboard and related products. Such costs are likely to continueto fluctuate based upon demand and supply characteristics. Over recent years,Chinese purchasers have entered the market for OCC and the effect of this hasbeen periodically to increase the price of OCC and there can be no assurancethat this effect will not recur.

In response to growing environmental pressure and theneed to comply with environmental emission targets, a number of northernEuropean governments have recently sought to encourage the use of wood forenergy generation purposes through the use of subsidies. This policy creates anew source of demand for wood, another principal raw material used in themanufacture of our paper-based packaging products. This has the effect ofincreasing the price of wood and consequently the cost of our raw materials forthe production of kraftliner. In the event that this policy continues or isextended, this could lead to further price increases in our raw material and havea material adverse effect on our production costs.

Our production processesare energy intensive and, although certain of our kraftliner mills, as a by-productof the production process, supply some of their own energy needs, elsewhere weare reliant upon third parties for the supply of our energy. Energy prices, inparticular oil, natural gas and electricity, 

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haveincreased significantly in recent years with a corresponding effect on ourproduction costs. If energy prices continue to increase in the future, thiswould increase our production costs, which could consequently have a materialadverse effect on our profitability.

**We may fail insuccessfully implementing our business strategy of maximizing cash flow andprofitability**

Our business strategy isto maximize our cash flow and use this to repay debt as well as to strengthenour position as one of the world’s leading providers of containerboard,corrugated containers and other paper-based packaging products, implementinginitiatives aimed at achieving cost savings and generating profitable growth.In order to continue to realize cost savings, we must continue to reduce ouroverhead costs, improve our procurement process, realize certain operatingefficiencies and rationalize our manufacturing capacity. As we, in common withour competitors, are unable to influence commodity and energy prices directly,our competitiveness and long-term profitability are, to a significant degree,dependent upon our ability to reduce costs (including the costs of rawmaterials and consumables such as power, labor and transport) and maintainlow-cost efficient operations. Our production costs are also significantlyaffected by production volumes and, therefore, our ability to maintain productionlevels and maximize capacity utilization will be a key factor in determiningour overall cost competitiveness. Our ability to maintain earnings andundertake capital expenditure could be adversely affected in the event of asustained material fall in prices for our products, an appreciable rise in ourproduction costs or a decline in our production volumes. A number of factorsbeyond our control, such as operating difficulties, personnel turnover,competition, delays in implementing initiatives and general economic or industryconditions could have an adverse effect on our ability to implement ourstrategy by reducing our ability to grow or our ability to reduce costs andincrease efficiency which could have a material adverse effect on our business.We cannot give any assurance that we will be successful in achieving costsavings, generating growth or in increasing our cash flows or profitability.

**The costs anddifficulties of acquiring and integrating complementary businesses andtechnologies could impede our future growth and adversely affect ourcompetitiveness**

In the past, we have pursued a strategy of acquiringor merging with complementary businesses in the paper sector and haveintegrated such businesses to form part of our operations. As part of ourgrowth strategy, we may consider acquiring further complementary businesses inthe future.

Risks that we couldface with respect to any such future acquisitions may include:

·       greaterthan expected costs and management time and effort involved in identifying,completing and integrating acquisitions;

·       potentialdisruption of our ongoing business and difficulty in maintaining our internalcontrol environment, information systems and procedures;

·       theinability to successfully integrate the services, products and personnel of anyacquisition into our operations or to realize any expected cost savings orother synergy benefits from any acquisition;

·       customeroverlap/loss of customers supplied prior to the acquisition by both us and theacquired business;

·       aneed to incur debt, which may reduce our cash available for operations andother uses due to increased debt service obligations; and

·       lackof return on our investment.

The impact of any suchfuture acquisitions on us cannot be predicted and any of the risks outlinedabove, should they materialize, could have a material adverse effect on ourbusiness, financial results and financial position.

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**We are exposed tocurrency rate fluctuations**

With the introduction of the euro in 15 of the present27 European Union Member States, our exposure to exchange rate fluctuationarises mainly in relation to the U.S. dollar, sterling and the Swedish krona.In light of the use of the U.S. dollar as the functional currency of our LatinAmerican operations, the U.S. dollar is the most important foreign currency inwhich we conduct our business.

Fluctuations in the value of the U.S. dollar have asignificant effect on our operations and on our reported results in euro. Aweaker U.S. dollar will decrease and, conversely, a stronger U.S. dollar willincrease the euro figures reported in our consolidated financial statementswith respect to our Latin American operations. The depreciation in the U.S.dollar adversely affected our reported non-euro denominated sales revenues in2006. During the year ended December 31, 2006, the euro strengthened by approximately12% against the U.S. dollar, resulting in a €48million decrease in our borrowing in foreign currencies. During the year ended December 31,2005, the euro weakened by approximately 13% against the U.S. dollar, resultingin a €73million increase in our borrowing in foreign currencies. During the year ended December 31,2004, the euro strengthened by approximately 8% against the U.S. dollar,resulting in a €40million reduction in our borrowing in foreign currencies.

In addition, the relativestrength or weakness of the U.S. dollar is important for the industry in whichwe operate in both Europe and Latin America because U.S. containerboard pricestend to influence the world market. A weak U.S. dollar over a sustained periodcould result in lower imports into the United States of goods shipped incorrugated containers and, as a result, lower demand for our containers. A weakU.S. dollar could also result in additional competition in our European andLatin American markets from U.S. manufacturers that have an incentive to exportmore products due to increased demand for relatively lower-priced U.S.goods.

**We have a number ofpension schemes that are currently in deficit**

We operate a number of pension plans throughout theworld, devised in accordance with local conditions and practice. Currently, asignificant proportion of our employees are members of defined benefit pensionarrangements, most of which are closed to new entrants. Under Irish GAAP,  the combined deficit of these defined benefitplans was €493.8 million (net of a deferred tax asset of€75.9 million)as at December 31, 2006. Further information on the funding status ofthese plans is contained in Note 24 to the consolidated financial statementsincluded elsewhere in this annual report.

An increase in the valueof the liabilities or decrease in the value of pension plan assets on an IrishGAAP basis may negatively affect our balance sheet and distributable reserves,any of which could have a material adverse effect on our business, operatingresults or financial condition. The liabilities will mainly be affected byincreases in life expectancy and by changes in long term yields, which are usedto discount the liabilities to present value. The assets will be affected byincreases in long term yields, which will reduce the value of bond investmentsand by falls in equity markets. These factors create a considerable degree ofvolatility in the measurement of any pension scheme’s deficit or surplus.

**Failure to maintaingood employee relations may affect our operations and the success of ourbusiness**

While we believe that ourrelations with our employees and the works councils are currently satisfactory,there can be no assurance that future developments in relation to ourbusinesses could not affect such relationships. A sustained labor disputeleading to a substantial interruption to our overall business could have amaterial adverse effect on our operating results or financial condition.

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**We may not be ableto attract and retain suitably qualified employees as required for our business**

Certain parts of ourbusiness are dependent on the availability of skilled and semi-skilledemployees. A shortage of labor owing to our inability to attract and retainsuch employees could have a material adverse effect on our business, operatingresults or financial condition.

**Failure to maintaingood health and safety practices may have an adverse effect on our business**

Our employees carry out relativelydifficult and specialized tasks and a major incident affecting the health andsafety of employees would disrupt our operations. There is a risk of fines orlitigation if a health and safety incident occurs. Furthermore, disruption ofoperations caused by a major incident could have a material adverse effect on ourbusiness, financial condition and results of operations.

**We may be adverselyaffected by increasing costs in maintaining our required level of workforce**

We currently have aworkforce of over 40,000 employees, which constitutes a significant proportionof our cost base. Accordingly, inflationary pressures, changes in applicablelaws and regulations or other factors resulting in increased labor costs couldhave a material adverse effect on our business, operating results or financialcondition.

**We are subject to agrowing number of environmental laws and regulations, and the cost ofcompliance with current and future laws and regulations may negatively affectour business**

We are subject to a wide range of environmental,health and safety laws and regulations in all the jurisdictions where weoperate, including international, national, state and local laws andregulations. These requirements are complex, frequently changing and have tendedto become more stringent over time. There can be no assurance that therequirements of such laws and regulations and the associated cost of compliancewill not increase in the future. Such cost increases could have a negativeimpact on our results of operations.

While we have procedures in place to allow us tocomply with our environmental and health and safety  requirements, there can be no assurance thatwe will be at all times in compliance with our obligations, that we will notincur material costs or liabilities in connection with such requirements in thefuture or that we will be able to obtain all licenses, consents or otherpermits necessary to allow us to continue to operate our business as we intend.Similarly, there can be no assurance that we will not experience an accident orotherwise become liable for environmental contamination in the future or thatsuch an event giving rise to such a liability may not have already occurred(including such liability to buyers of properties or businesses that we havesold). We may incur significant expenditure in connection with the requiredremediation of past environmental conditions. In addition, we may also incursignificant expenditure in order to comply with any present and newenvironmental laws and regulations. There can also be no assurance that we willnot be required to incur significant costs to maintain compliance with existingand future laws, regulations and policies relating to these or similar matters.Such expenditures and liabilities could adversely affect our operating resultsand financial condition.

In addition, part of our operations (paper or boardmills) may in the future be adversely affected by the Kyoto Protocol, underwhich most industrialized countries agreed to reduce their emissions of carbondioxide and other ‘‘greenhouse gases’’. While we currently have excess carboncredits for our current emission levels, there can be no assurance that we willmaintain such emission levels or that our allocations will be sufficient in thefuture. The failure to maintain our emission levels within our allocation wouldresult in increased costs for us.

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We believe that we operateour business in an environmentally sustainable manner. However, there can be noassurance that environmental pressure groups and similar organizations will notmount campaigns against us which, were they to occur, could have an adverseeffect on our reputation.

**Operatinginternationally subjects us to the risk that business or market disruptionswill result in delays and/or increased costs in the production or delivery ofour products and services or disrupt demand for our products**

We operate in manydifferent countries. As a result, we are vulnerable to risks in thesecountries, including:

·       impositionof tariffs, quotas, import duties, additional taxes or other market barriers;

·       increaseddifficulty in the collection of accounts receivable, including longercollection periods;

·       inconsistentregulations and unexpected changes in legislation or regulatory requirementsand increased difficulty and expense in hiring and dismissing employees;

·       impositionof quotas relating to the composition of the employee base or the localsourcing of raw materials or other similar quotas;

·       politicaland economic instability, disruptions and government intervention in nationaleconomies and social structures, including the threat of terrorism;

·       workstoppages, transport interruptions and difficulties in managing internationaloperations;

·       governmentexpropriation of private sector assets;

·       adversetax consequences and inability to repatriate cash; and

·       adversecurrency fluctuations.

The occurrence of any ofthe foregoing could have a material adverse effect on our earnings as a resultof the related delays and/or increased costs in the production and delivery ofproducts and services or otherwise disrupt the demand for our products.

**We are exposed topotential risks in relation to our Venezuelan operations**

Following the re-election of Venezuela’s SocialistParty, led by President Hugo Chávez, the Venezuelan government is pursuing anationalization plan with the objective of returning industries that areconsidered strategic to the Venezuelan national interests to Venezuelan statecontrol. The focus under this plan has, to date, been on utilities such aselectricity and communications and natural resources such as oil. Pursuant tothis policy, the Venezuelan government is seeking to acquire control of privatesector companies owning such assets.

We own substantial landsunder forestry in Venezuela, which supply virgin fiber for our local kraftlinerproduction. While neither the lands nor any other assets of our Venezuelanoperations have to date been the target of this nationalization action plan andwe are not aware of any proposals by the Venezuelan government to target any ofour assets for acquisition under its nationalization plan, there can be noassurance that this will not occur in the future. The occurrence of any suchevent could have an adverse effect on our profitability.

**We are subject toanti-trust and similar legislation in the jurisdictions in which we operate**

We are subject to a variety of anti-trust and similarlegislation in the jurisdictions in which we operate. In a number of markets,we have market positions which may make future significant acquisitions moredifficult and may limit our ability to expand by acquisition or merger, if wewished to do so.

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In addition, we aresubject to legislation in many of the jurisdictions in which we operaterelating to unfair competitive practices and similar behavior. There can be noassurance that we will not be subject to allegations of, or regulatoryinvestigations or proceedings into, such practices. In the event that suchallegations are made or investigations or proceedings initiated (irrespectiveof merit), we may be required to devote significant management resources todefending ourselves against such allegations. In the event that suchallegations are proved, we may be subject to significant fines, damages awardsand other expenses.

**We are engaged in anumber of active litigation matters, the outcome of which could have a materialadverse effect on our financial condition and results of operations**

In addition to litigationarising in the ordinary course of business, we are involved in a number ofactive litigation matters, the outcome of which could have a material adverseeffect on our financial condition and results of operations. See Item 8.“Financial Information—Legal Proceedings” for a more complete discussion ofsuch proceedings.

**Item 4.**                        Informationon the Company

**History andDevelopment of the Company**

***History of JSG/SKG***

JSG was originally incorporated in Ireland on January 15,1934 as a private company. Since then, JSG had grown from its original Irishbase to become a major international manufacturer of containerboard, corrugatedcontainers and other paper-based packaging products, with operations in over 30countries. Initial expansion in Ireland in the 1960s and early 1970s wasfollowed by a series of acquisitions in the United Kingdom, the United States,Latin America and, during the late 1980s and 1990s, in continental Europe. In1998, JSG extended its operations to Canada with the acquisition of a 50%holding in Smurfit MBI, formerly MacMillan Bathurst, the remaining 50% beingowned by our former associate, SSCC. On December 1, 2005, JSG merged withKappa and the combined company was renamed Smurfit Kappa Group (SKG).

JSG was listed as a public company on the Irish StockExchange from 1964 until 2002 when it was taken private with funds under themanagement of Madison Dearborn Partners and the current management team. Forease of reference, we refer to this transaction as the “JSG Acquisition”.  SKG plc, our ultimate parent company,completed an initial public offering on March 14, 2007, and became apublic company, with a primary listing of its shares on the Irish StockExchange and a secondary listing on the London Stock Exchange.

Kappa was a leadingpan-European producer of containerboard, solidboard, corrugated containers andsolidboard packaging products, having grown from the mid 1990s as a result ofits acquisitions of additional businesses in Western and Eastern Europe andthrough organic growth. Kappa was formerly part of KNP BT, which wasformed in 1993 by the merger of the paper and packaging divisions of thepublicly listed companies, Koninklijke Nederlanse Papierfabrieken, Bührmann-Tetterodeand VRF-Groep N.V. In subsequent years, the various activities of KNP BT werereorganized into three main activities, of which KNP Packaging (which becameKappa) was one. In 1998, KNP BT sold Kappa to funds managed or advised byprivate equity investors Cinven Limited and CVC Capital Partners.

***History of Smurfit Kappa Funding plc***

SK Funding, a publiclimited company, was incorporated in Ireland as MDP Acquisitions plc on June 12,2002 to act as a financing company in connection with the JSG Acquisition. On October 7,2002, SK Acquisitions (formerly known as MDP Acquisitions and JSGAcquisitions), a wholly owned subsidiary 

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of SKFunding, acquired all of the ordinary shares of JSG in a take privatetransaction. Prior to this acquisition, SK Funding had no operations. As partof the JSG Acquisition, JSG distributed its 29.3% interest in SSCC, its U.S.affiliate, to its shareholders. On June 10, 2003, MDP Acquisitions plcchanged its name to JSG Funding plc and on May 29, 2006, JSG Funding plcchanged its name to Smurfit Kappa Funding plc. The registered office of SKFunding is Beech Hill, Clonskeagh, Dublin 4, Ireland and the telephone numberis +353-1-202-7000.

***Corporate Structure***

On February 6, 2004 SKGL (formerly known as JSGPackaging Limited) completed an exchange offer for the existing shares of SKCL(formerly known as Jefferson Smurfit Group Limited) for an identical number ofnewly issued shares of SKGL having substantially identical rights, privileges,terms and conditions. Upon completion of the exchange, SKGL contributed itsshares of SKCL to SK Holdings (formerly known as JSG Holdings plc) (“theexchange”) in exchange for newly issued shares of SK Holdings. SK Holdings is apublic limited company incorporated in Ireland. As a result, SK Holdings becamea subsidiary of SKGL and the holder of all of the outstanding capital stock ofSKCL. All outstanding warrants to purchase ordinary shares of SKCL wereconverted, without any action of the holders thereof, into the right topurchase ordinary shares of SKGL in accordance with the terms of thoseinstruments.

On January 31, 2007SKG plc (formerly known as Smurfit Kappa plc) completed an exchange offer forthe existing shares of SKGL whereby the shareholders of SKGL exchanged theirshares for an identical number of shares of the same classes in the capital ofSKG plc (the “Exchange Offer”). As a consequence of the Exchange Offer, witheffect from January 31, 2007, SKG plc became the ultimate holding companyof the Group in place of SKGL.

***Munksjö Specialties Disposal***

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

***Refinancing Transactions***

In January 2005, SK Funding completed an offeringof approximately €370 million of 7.75%senior subordinated notes. SK Funding applied the net proceeds from suchoffering to fund the purchase of its existing 15.5% subordinated notes due 2013 (the “15.5% subordinated notes”) pursuantto the tender offer described below and to pay related fees and expenses. In February 2005, SK Funding completed atender offer and consent solicitation for its 15.5% subordinated notes. All ofthe euro 15.5% subordinated notes were tendered in the tender offer. The 0.1%of the dollar 15.5% subordinated notes not tendered in the tender offer wereredeemed in October 2005.

In January 2005,SK Holdings completed an offering of €325 million in aggregate principal amount of11.5% senior pay-in-kind notes due 2015 (the “PIK notes”), substantially all ofthe net proceeds of which were loaned to SKGL, which, in turn, paid such netproceeds to its shareholders by means of a share capital reduction under Irishlaw. Neither SK Funding nor any of its subsidiaries guaranteed the PIK notesand thus the PIK notes were effectively subordinated to all debt and otherliabilities and preferred stock, if any, of SK Funding and its subsidiaries. In March 2007, SK Fundingcompleted a tender offer and consent solicitation for the PIK notes. The 10% ofPIK notes not tendered in the tender offer were redeemed in April 2007.

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***Merger of JSG and Kappa***

On December 1, 2005 SKGL, SK Acquisitions and theshareholders of Kappa completed the merger of the operations of both groups ofcompanies (the “Merger”). The Merger was completed through the issue of sharesby SKGL and the payment of consideration comprising cash of approximately €238 millionand an €89 millionsubordinated promissory note, primarily to Kappa’s former shareholders (the “shareholdersPIK note”).

The ownership structure ofthe combined company resulted in the then shareholders of SKGL owningapproximately 58.3% of the combination while Kappa’s then shareholders owned approximately41.7%. In connection with the Merger, JSG Packaging was renamed Smurfit KappaGroup Limited. As part of the Merger, Kappa’s existing 10.625% seniorsubordinated notes due 2009 and its 12.5% senior subordinated notes due 2009were redeemed, and the existing SK Acquisitions and Kappa senior creditfacilities were refinanced by way of a new senior credit facility. The Mergerrequired European Commission approval which was granted subject to thefulfillment of an agreed schedule of commitments to dispose of a number ofbusinesses. The financial statements reflect the combination with effect from December 1,2005 incorporating one month’s results for the enlarged business. Thecombination is accounted for as a purchase.

***Initial Public Offering***

On March 14, 2007, SKG plc completed an initialpublic offering, with the placing to institutional investors of 78,787,879 newordinary shares in SKG plc (the “Ordinary Shares”), a company formed in January 2007as the ultimate holding company for the Group. This offering, together with theissue of an additional 11,818,181 Ordinary Shares, generated gross proceeds of €1,495 million,which were used to repay certain debt obligations as set forth below and toprepay the shareholder PIK note issued in connection with the Merger. Tradingin the shares (“Admission”) on the Irish Stock Exchange and on the London StockExchange commenced on March 20, 2007. The additional shares were issued onAdmission by Deutsche Bank acting as stabilizing manager under anover-allocation option representing shares up to a maximum of 15% of the totalnumber of shares comprised in the initial public offering.

The pre-existingshareholders of SKG did not sell any shares and have agreed not to do so for aperiod of at least 180 days post Admission. The total number of Ordinary Sharesin issue at April 25, 2007 was 217,696,296.

***Tender Offers for Senior Notes***

In March 2007, SK Holdings completed a tenderoffer and consent solicitation for its PIK notes. 90% of the PIK notes weretendered in the tender offer. SK Holdings used a portion of the net proceedsfrom the initial public offering proceeds it received from SKG plc to financethe repurchase of notes and to pay fees and expenses related to the tenderoffer. The 10% of PIK notes not tendered in the tender offer were redeemed in April 2007.

In March 2007, SKFunding completed a tender offer for up to $470 million of its outstanding 95/8% Dollar Senior Notes due 2012 (the “Dollarsenior notes”) and up to €219 million of its outstanding 101/8% euro Senior Notes due 2012 (the “eurosenior notes”). In April 2007, SK Funding completed a further tender offerfor up to $208 million of its outstanding Dollar senior notes and up to €98million of its outstanding euro senior notes. Upon completion of the secondtender offer, $72 million aggregate principal amount of Dollar senior notes and€33million of euro senior notes remained outstanding. SK Funding used the netproceeds from the initial public offering proceeds it received from SKG plc tofinance the repurchase of notes and to pay fees and expenses related to thetender offers.

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**Business Overview**

We are the largest European integrated manufacturer ofcontainerboard, corrugated containers and other paper-based packaging products,with operations mainly in Europe and Latin America. SKG currently owns 42 mills(most of which produce containerboard used to manufacture corrugatedcontainers), 261 converting plants (most of which convert containerboard intocorrugated containers), 43 reclamation facilities (which provide some of the recoveredpaper requirement for our mills) and 27 other production facilities. OurEuropean and Latin American operations accounted for approximately 88% and 12%respectively, of our net sales for the year ended December 31, 2006.

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

Our containerboard millsand converting operations are highly integrated, as our corrugated containerplants convert much of our own containerboard production. For the year ended December 31,2006, we produced over 5,000,000 metric tons of containerboard in Europe, andapproximately 4,600,000 metric tons of corrugated containers. In Latin America,we produced approximately 720,000 metric tons of containerboard andapproximately 780,000 metric tons of corrugated containers. In addition, ourmills in Europe produced over 1,210,000 metric tons of other grades of paper,including solidboard, sack kraft, which is used to make industrial grade papersacks, boxboard, which is used in the manufacture of folding cartons, togetherwith non packaging grades, graphic board and printing and writing paper, whileour mills in Latin America produced 350,000 metric tons of other grades ofpaper, including boxboard, sack kraft and printing and writing paper. Ourconversion plants in Europe produced approximately 570,000 metric tons of otherpaper-based packaging products, such as paper sacks and folding cartons, whileour Latin American operations produced 85,000 metric tons of these products.

**Industry Overview**

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

Recovered fiber is obtained principally from oldcorrugated case material, or “OCC”, acquired through open market purchases orfrom company-owned reclamation facilities. Virgin fiber is obtained in the formof wood chips or pulp wood acquired through open market purchases of wood fiberor from company-owned timberland. These fibers are chemically treated andthen processed through paper machines, which consist of a paper-formingsection, a press section (where water is removed by pressing the wet containerboardbetween rolls) and a drying section. The containerboard is then wound intorolls, which are shipped to company-owned converting plants or outsideconverters.

The dispersion of customers for corrugated containersand the high bulk, low density and low value of corrugated containers, whichtypically are delivered by truck, make shipping costs a relatively highpercentage of total costs. As a result, corrugated container plants usuallyserve markets within a 250 to 300 kilometer radius of the plant and employ alocal sales force to serve the market area.

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Containerboard pricing is driven primarily by thesupply/demand balance and price movements in OCC and wood pulp, although upwardpressure on pricing has also come as a result of significant increases inenergy costs in recent years. Corrugated container pricing is drivensignificantly by movements in containerboard pricing. Price increases at thecorrugated level tend to lag behind containerboard price movements, sometimesby months. Part of the reason for this is that the pricing element in somecontracts to sell corrugated is based on changes to a published paper priceindex, which reflects historic and not anticipated price movements. As aresult, the greater the level of forward integration, the slower generally isthe rate of change in net profits resulting from containerboard pricemovements.

Recovered paper, principally OCC, is the principal rawmaterial used in the manufacture of our products. Recycled fiber prices canvary widely at times and are very dependent upon mill demand. While wood pricesare relatively stable, fluctuations in Asian demand and reduced collections inthe United States have been the principal factors driving the price of OCC.

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

**CompetitiveStrengths**

We believe that ourkey competitive strengths are:

·       ourleading market positions;

·       thequality of our assets and active capacity management;

·       ourbroad geographic reach and exposure to growth markets;

·       ouractive management of our asset base through acquisitions and disposals;

·       theintegrated nature of our business; and

·       our value-driveninternational management.

***Leading market positions***

We have a clear focuson paper-based packaging: 95% of our mill capacity relates to core paper-basedpackaging grades (of containerboard, solidboard, recycled boxboard and sackkraft). Geographically, the major economic environments in which we conduct ourbusiness are Europe (principally Eurozone, Sweden and the United Kingdom,together with a growing presence in some Eastern European countries) and LatinAmerica (principally Mexico). We believe, based on management estimates, thatwe have the largest market share by volume and sales in corrugated containersin seven European countries (Germany, France, Italy, the Netherlands, Belgium,Ireland and Sweden), with the number two position in a further seven countries(Spain, the United Kingdom, Slovakia, Denmark, Norway, Poland and the Czech  Republic), and we believe that we have a toptwo market position in corrugated containers by volume and sales in each of ourmain countries of operation in Latin America.

We operate three of the largest kraftliner mills inWestern Europe, managing 1,600,000 metric tons of kraftliner capacity—approximately40% of the total capacity in Europe. The mills are strategically located closeto substantial virgin fiber sources and are well positioned to serve ourEuropean markets (Piteå, Sweden serving northern Europe; Nettingsdorfer,Austria serving central and Eastern Europe; and Facture, France servingsouthern Europe). Western Europe does not currently produce sufficient 

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kraftliner for its ownneeds and, as a result, is a net importer of approximately 1,000,000 metric tons of kraftliner per annum,representing approximately 25% of the European kraftliner market. There aresignificant barriers to entry in kraftliner production, particularly in WesternEurope. These barriers include obtaining regulatory, planning and environmentalconsents and the high costs of building new facilities and identifying suitablesites. We also operate three large testliner machines in central Europe(comprising 40% of our total testliner production). In addition, we believethat we operate the only kraftliner mills in both Colombia and Venezuela, aposition we view as strategically important as it ensures supply of this gradewhich would otherwise have to be imported, with transport cost issues andexposure to price volatility.

We believe, based on managementsestimates, that we are the largest producer by volume and sales of corrugatedcontainers in Latin America, and the third largest producer by volume and salesof containerboard in Latin America. We believe that we are the onlypan-regional producer of containerboard and corrugated containers in LatinAmerica with operations in Mexico, Argentina, Venezuela, Colombia, theDominican Republic, Puerto Rico, Chile, Ecuador and Costa Rica. By reason ofour pan-regional presence in Latin America, we benefit from not being dependenton any one particular country. We believe that our Latin American seniormanagement’s extensive local knowledge, together with their internationalexperience, provide a competitive advantage to our operations in Latin America.Through our European specialties division, we also have operations in sacks(Spain, France, Italy, Sweden, Ireland and Poland), solidboard packaging (theUnited Kingdom, France, the Netherlands, Belgium, Germany and Norway) and bag-in-boxproduction (France and Italy selling throughout Europe). In Latin America wehave operations in sacks (Colombia, Venezuela, Ecuador and Costa Rica) andboxboard (Colombia, Venezuela and Mexico). In many instances, these businesseshave strong market positions (by volume) in their own right but also allow usto sell a broader range of packaging solutions. There is no difference in thetype of product manufactured and sold by us across our European and LatinAmerica markets.

***The quality of our assets and active capacitymanagement***

Since the JSG Acquisition in 2002, we have sought toimprove the quality of our asset base through the closure or disposal ofhigh-cost, under-performing businesses, investment in more efficient mills andthe targeted acquisition of complementary businesses. Between 2002 and 2005, weclosed two containerboard mills and five converting businesses.

In order to manage output actively at a competitivecost, we have closed six high-cost mills and two high-cost non-containerboardmachines since the Merger was completed in late 2005. We have also closed tenconverting businesses and are in the process of transferring equipment andcustomers elsewhere within our operations in order to optimize service,responsiveness, efficiency and margins in our converting businesses.

As a consequence of the Merger, significant synergieshave been achieved throughout our organization, including paper millrationalization, machine specialization, paper logistics and integration,corrugated system optimization, purchasing savings and central andadministrative overhead reductions.

Following the Merger, wehave benefited from the improving quality of our asset base, achieved by  an aggressive program of closures ofhigh-cost capacity mills and investments in our more efficient mills. Theinitial cost benefits of this have been achieved and we intend to continuemaking improvements. We made multi-million euro investments in each of Piteå,Sweden, Facture, France and Nettingsdorfer, Austria in 2006, in order to  improve efficiency and, in the case ofFacture, to increase the capacity of white top kraftliner. An investment incost efficiency was also approved for the Roermond mill in the Netherlands,which will have a small capacity effect. The initial cost benefits of closingcapacity have been to allow existing mills to supply customers closer to theirlocation, reducing transport costs, as well as to more 

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efficientlyschedule the mills for particular grades, thereby reducing manufacturing costs.It is anticipated that these types of efficiencies could continue incrementallyas better machine scheduling is made and the capabilities of the mills in termsof what grades they can make most efficiently are better understood.

***Broad geographic reach and exposure to growth markets***

We have an extensive presence across Europe, where wehave facilities in 21 countries. With our broad spread of operations indifferent European countries, we are able to provide a more comprehensive andsophisticated product offering to our customers, together with a higher overalllevel of service. Furthermore, we have an established and growing presence inLatin America, where we have facilities in nine countries. Current andprojected demand growth within the Eastern European and Latin American markets issuperior to those of the more mature Western European markets, with forecastcorrugated container growth rates of over 4% per annum for the medium term.

Average regional demand growth in corrugatedcontainers in Latin America from 2006 to 2009 is forecast at 4.2% per annumcompared with over 2% for Western Europe for the same period. We have developed key markets inArgentina, Colombia, Mexico, Venezuela and Chile, and have a plant in each ofthe Dominican Republic, Ecuador, Puerto Rico and Costa Rica. We believe, basedon management estimates, that we have a top two market position in corrugatedcontainers (by volume and sales) in each of our main countries of operation inLatin America. As we believe that we are the only pan-regional Latin Americanoperator, we benefit from not being dependent on any one particular country.

In Eastern Europe, average regional demand growth incorrugated containers for 2006 to 2009 is forecast at over 6% per annumcompared with over 2% for Western Europe. We currently have operations in fivecountries in Eastern Europe (Poland, the Czech Republic, Slovakia, Lithuaniaand Russia) and we believe that we have a top two market position by volume andsales in Poland, the Czech Republic and Slovakia.

We believe that thedeveloping markets of the Latin American and Eastern European regions have thepotential to generate increased sales for us and will represent significantfurther opportunities for us in the future.

***We have actively managed our asset base throughacquisitions and disposals***

Our progress towards becoming the leader inpaper-based packaging in our chosen markets has been driven to a significantextent by the acquisition of strategically compatible companies and operations.These acquisitions have enhanced our asset base, expanded our product range andgeographic reach and upgraded our management skills, work practices andefficiencies.

We have historically undertaken a number ofacquisitions and disposals, particularly within the last five years.

Between 2001 and 2005, we significantly advanced ourstrategy of: disposing of non-core or non-cash generating assets;increasing our spread and penetration in our core paper-based packagingbusinesses; filling gaps in our portfolio or geographic presence in Europe andLatin America; and progressing our objective of being the clear market leaderor number two in our chosen markets.

In doing so, we have established a strong platformfor: organic growth; increased productivity and efficiency; furtheracquisitions in appropriate circumstances; and continued participation in  development of industry practices.

A critical feature of thisactivity is the ability to identify suitable companies for acquisition,integrate the acquired companies, identify and achieve the synergies, enhanceprofits, and retain and motivate high-quality management.

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**The integratednature of our business**

In Europe, we produced approximately 1,600,000 metrictons of kraftliner, 180,000 metric tons of semi-chemical medium and 3,300,000metric tons of testliner in our mills. We consume 5,000,000 metric tons ofcontainerboard (approximately 20% of which is kraftliner) in our corrugatedproduction facilities, of which approximately 70% is produced in our own mills.Therefore, we are long (sell to third party markets) on kraftliner and short(buy from third party markets) on testliner.

We believe that there are benefits to being integratedwhich deliver returns, quality of earnings, and an excellent platform forleverage.

Specifically,integration offers:

·       amuch lower volatility in the corrugated container and converting businessesover a sustained period, benefiting the profit profile of integrated companies;

·       securityof supply during periods of market fluctuation, where major producers haveaffordable options when paper is long, such as taking market downtime orimplementing closures;

·       throughthe link between paper and corrugated container businesses, an optimal focus onthe requirements of end customers (such as quality, grades and innovation) andharmonization of synergies in the specifications and supply chain; and

·       theability to provide better service to corrugated container customers. If thecustomer has a problem with a product, this problem can be traced back to thepaper supplier. If a customer has unique product requirements or design andinnovation needs, these options are available.

The process of integrationin 2006 has delivered benefits for us. These benefits include: the ability ofpaper machines to produce the paper grades that gave us the best levels ofefficiency; the ability to produce paper most efficiently in terms of using thewidth of paper machines that best match the corrugated container manufacturersto whom we are selling; the ability for paper machines to run a single grade ofpaper for longer, obviating the need to change grades as often and increasingthe efficiency of the machines; and improving the logistics of supplyingcustomers, thereby reducing our transport costs.

***Value-driven international management***

We have an experienced and proven internationalmanagement team with a strong value-driven management style and experience ofmanaging through several industry cycles. The management team comprises a broadrange of nationalities with an average industry experience of 18 years. We havesought to establish a management team comprising the highest available qualityof management and reflecting the broad geographic spread of our businesses. Themanagement team includes a number of managers who have joined us frombusinesses acquired by or integrated with SKG. Our management approach combinesstrong central disciplines (strategic, professional development, financial andcapital allocation) with locally devolved production and marketing decisions.Performance is measured on the basis of profitability as well as cash flow.Investment decisions are made using stringent return-on-investmentcriteria.

In Latin America, we believe that our significantexperience and extensive focus on local, but internationally educated andtrained management provides a competitive advantage in our chosen markets. Wealso believe that our ability to manage successfully over a protracted periodin these markets is evidence of the success of our model and gives usopportunities for further growth.

Management in all regions of our operations havedemonstrated their capacity to implement our strategic transformations,influence changes in the industry, take rationalization and closure decisions,and to recruit, retain and motivate diverse teams in over 30 countries.

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**Business Strategy**

Our objective is to be the market leader inpaper-based packaging in terms of profitability and return on investment,underpinned by a focus on delivering superior customer satisfaction, proactiveenvironmental awareness, and a commitment to both continuous improvement in thearea of health and safety and to corporate responsibility, thereby enhancingshareholder value.

Our key objectives and strategies are:

·       Tobuild on our market positions in Western and Eastern Europe and in Latin Americathrough  selective focused growth,including:

·       organicgrowth from increased market share through consolidating, and where possible,extending our leadership position in Western Europe by leveraging ourrelationships with our customers across our broad product range and enhancingour profitability by maximizing synergies and optimizing the cost base; and

·       acquisition-ledgrowth in areas where market share and/or coverage facilitates it, particularlyin the higher growth markets.

This dual approach of organicgrowth and acquisition will be pursued in each of Western Europe, EasternEurope and Latin America.

·       Tofocus on enhancing our operational excellence, thus continuing to improve ourcustomer offering, by continuously upgrading our products, services, qualityand delivery in all markets by:

·       leveragingour high quality asset base through continuous improvement programs, transferof best practice, industrial engineering, innovation and targeted capitalinvestment;

·       increasingthe proportion of added-value converting products in the overall portfoliothrough the use of our pan-European network in high-value areas such as highquality printing, display and litho-lamination; and

·       ensuringthat our operations, whether in the converting or mill divisions, continue tobe close to the customers and clearly market-focused rather thanproduction-driven.

·       To focus on cash flow andreturns on investment and maintaining an efficient capital structure in orderto maximize shareholder returns.

***Focused growth***

Our focused growthstrategy has been designed to build on our existing market leadership positionin each of our markets, through organic growth and, where appropriate, byvalue-enhancing acquisitions. We have an established track record ofimplementing this strategy through identifying targets, building relationships,and acquiring and effectively integrating paper-based packaging assets. Thistrack record has included a number of significant mergers and acquisitions,including the Merger. Our approach to the implementation of this strategydiffers in the two regions in which we currently operate. In general, we intendto increase our exposure to markets with superior demand growthcharacteristics, through organic growth and an acquisition-led strategy, primarilyin markets such as Eastern Europe and Latin America.

*Western Europe*

We believe that in WesternEurope, we currently command the leading market position in corrugatedcontainers by volume and sales in seven of the 14 countries in which wecurrently operate and we are number two by volume and sales in seven additionalcountries. One of our key objectives is to be the leading or number twooperator in each of the businesses and markets in which we operate, providingtotal 

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solutionsfor major customers across our wide range of products, services and geography.In order to achieve this objective, we intend to use a combination of increasedmarket penetration through our sales network, establishment of facilities innew geographic areas, and, where appropriate, acquisition of competitors in theregion. Although Western Europe is a more mature market relative to EasternEurope and Latin America, it continues to be a growth market and it remains ourintention to pursue profitable growth in this market. We believe that a keybenefit of scale and cost efficiency is the ability to pursue profitablebusiness as opposed to pursuing a solely volume-driven approach.

*Eastern Europe*

We operate in five EasternEuropean countries. We believe that we have a top two market position by volumeand sales in Poland, the Czech Republic and Slovakia. It is our intention toexpand our presence in this region by selectively investing in the countriesthat have the greatest opportunities and growth patterns consistent with ouracquisition strategy. The medium term objective is that, through the selectiveacquisition of a combination of smaller and medium sized Eastern Europeanfacilities, as well as investment in new facilities, we intend to achieve aleading or number two position in the major Eastern European countries. Thiswill involve expanding beyond our existing country footprint.

*Latin America*

Our progress in Latin America has been made throughacquisition and organic growth since our entry into the region in 1986. Thepackaging business in Latin America is not as homogenous as the business inEurope, and each country has differing market and industry characteristics. Webelieve that our success to date, based largely on our pan-regional presence(our investment in more than one country, which allows for the impact of macroeconomic events such as currency devaluations in any individual country to beoffset by relative stability in another), provides a strong platform to enhanceour businesses in the countries in which we currently operate, both throughorganic growth where the market is growing strongly, and through acquisitionswhere we are under-represented. We will consider growth primarily byacquisition in key markets where we are not already present.

Using the domestic and international experience of ourlocal management, investment in new markets in Latin America has been led fromcountries in which we have existing operations. By extending existing productsinto the new markets and by acquiring businesses that have upside potential andwhich present integration synergies, we have been able to expand our presencein the region. For example, the Colombian management led the investment inpaper sack operations in Venezuela, Ecuador and Costa Rica, while theArgentinean management led the investment in a greenfield corrugated containeroperation in Chile.

In the course of ourbusiness of selling packaging products in Latin America, we have also been ableto identify market opportunities in the specialties business, particularly inthe areas of solidboard packaging and bag-in-box. Argentina and Chile have beenidentified as countries with particular potential in these product areas. Weintend to exploit these market opportunities to create a larger market presencein these countries and are evaluating the possibility of establishingproduction facilities for these products, initially in these countries.

*Specialties*

Our specialties businessesare related to the core containerboard and corrugated container businesseseither through production techniques and manufacturing systems (solidboard,graphicboard, folding boxboard and sack paper) or through the end market user(buyers of packaging products, e.g. solidboard packaging, folding cartons,paper sacks and bag-in-box). In the case of solidboard packaging and foldingcartons, both the end market user and the manufacturing systems are related. Wewill continue to invest in 

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thesebusinesses where we are able to significantly improve the profitability of suchbusinesses, where such businesses can deliver higher margins than our corebusiness, and where they are already of an adequate size, are capable ofgrowing further and are capable of achieving the leading or the number twomarket position. In addition, we believe there are opportunities to expandthese businesses geographically, particularly in Latin America.

***Operational excellence***

As the business operatesin a number of markets, we believe that the growth strategy of the businessneeds to be underpinned with operational excellence. We have identified threekey areas in which to address this objective, based on which we have developedthe following strategies.

*The improvement of ourasset base and the reduction of costs*

Our strategies for the packaging segment are driven bythe markets in which we operate. Given the maturing aspects of Western Europeanmarkets, it is essential that we continue to reduce our production costs inorder to provide opportunities to increase our profit margins. An ongoingobjective of the business is to improve productivity, efficiency and,consequently, our cost base in order to remain competitive. In order toimplement this strategy, cost reductions are planned through a combination ofmore efficient production through numerous operating programs in individualfacilities and through the investment of capital for increased efficiency. Aproportion of the €300 million per year thatis spent on capital investment in our organization will be allocated toinitiatives focusing on cost reduction. This applies equally to Eastern Europeand Latin America.

Within the specialtiessegment, the focus on cost reduction is also an important feature of ourstrategy. The main strategy for the solidboard business, which  operates in a relatively mature market, is toensure that our businesses are the lowest-cost producers in their market segments. The graphicboard market is alsorelatively mature, and our focus is on the maintenance of market position andcontinued cost reduction. Our strategies for the paper sack operations lie inreducing costs in Western Europe while expanding our presence in EasternEurope, where we have a fast-growing paper sack business in Poland.

*Increase theproportion of added value converting products in our overall portfolio*

In addition to maintaining cost and pricecompetitiveness, we seek to differentiate ourselves in the end market throughhigh-quality products, service, execution, delivery and customer satisfaction.In the corrugated operations, examples of these products are boxes that involvehigh quality pre- or post-print, litholaminated boxes and displays. We believethat we will grow our market share in these more specialized areas, improve ouroverall profitability as the contribution of these higher margin businessesincreases, and retain the loyalty of our overall customer base by being able tosupport our customers across a range of existing and innovative products andservice offerings. The primary method of implementation will be through capitalinvestment. In some instances, such as high quality print, the investment willbe to add machinery to existing plants. In instances such as litholamination,the investment is likely to be in new production plants, which, compared withmills or corrugated container operations, are relatively small. Where suitablevalue adding acquisitions can be identified, we would also consider this routeto expansion.

In solidboard, examples ofthe implementation of this strategy involve exploiting the characteristics ofthe product (namely printability, moisture control and its ability to withstandfreezing conditions) and identifying new applications to develop and/or defendniche sectors of the business.

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*Ensure that all ouroperations are market led*

Of particularimportance to us is the manner in which our packaging segment operations inEurope and in Latin America work together to achieve synergies and customerresponsiveness, rather than solely focusing on maximizing operating rates andmill efficiencies. Growth and efficiency ultimately has to be market-supportedrather than purely production-driven. In each of the countries of Europe and LatinAmerica in which we have operations, the key objective of our paper division isto supply the corrugated containers division with the right mix of grades, atthe lowest cost, which allows the corrugated containers division in turn toservice its customers efficiently and with consistent quality. This mix ofgrades will either be produced within the mills or sourced by the mills orsourced by the mill division on behalf of the corrugated containers division.The objective is achieved through regular dialogue and meetings betweenmanagement of the divisions.

The specialties divisionsimilarly has the objective to be market-led. For example, the folding carton business,and hence the recycled boxboard mill operations, share a very close customerbase with the corrugated container business. Our strategy is to exploit ourwider product offering and our ability to cross-sell in order to expandboth this and the corrugated containers business, with greater potentialbenefits for the relatively smaller carton business. This strategy is beingsuccessfully pursued in Italy and Ireland and is being advanced elsewhere inour organization.

***Focus on cash flow and returns and maintain efficientcapital management***

We believe that maintaining an efficient capitalstructure provides a strong basis to maximize shareholder returns. We alsobelieve that our planned level of debt, if managed by experienced  management, facilitates better shareholderreturns.

We will continue to focus on cash flow considerations.We will aim to optimize cash flow by enhancing profitability, by optimizingworking capital and by continuing our approach to disciplined capitalexpenditure. This expenditure will continue to focus on a prioritizationprocess that supports operations that can clearly demonstrate the potential forimproved returns.

We believe that we areleveraged financially as well as operationally for growth. Historically, we andour management team have demonstrated the ability to operate with a leveragedbalance sheet through the active management of working capital and a judiciousapproach to capital expenditure, supported by a carefully designed debtstructure. This approach supports our stated acquisition strategy and optimizesreturn on equity. In that context, the attainment of investment grade status isnot one of our objectives.

**Operations**

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

Containerboard, boxboard, sack kraft paper, solidboardand graphicboard are all forms of paperboard. Containerboard is a form ofpaperboard used primarily for the production of corrugated materials. Boxboardis used for the production of folding cartons. Sack kraft paper is used for theproduction of durable paper sacks. Solidboard is used for the production ofsolidboard packaging. Graphicboard is used for the production of, among otherthings, book covers.

We use recovered paper and, to a lesser extent, woodto produce our paperboard and paper. We then use the paperboard and paper thatwe produce as a source of raw materials for our converted product facilities,and we also sell some of our paperboard and paper to third parties. Weoutsource some paperboard and paper from third parties as raw materials for ourconverted product facilities, particularly where, for reasons of geographicproximity or price, it can be more efficiently outsourced.

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The recycling of OCC provides the primary source ofrecovered paper and is the principal raw material used in our production ofpaperboard and is the essential component of recycled containerboard, one ofthe two main types of containerboard we produce, the other being kraftliner.Recycled containerboard can be subdivided into testliner and fluting. Bothtestliner and kraftliner serve as the outer facing component of containerboard.Fluting is the wavy inner layer of paper.

Although we have our own reclamation operations inIreland, the United Kingdom, Germany and the Netherlands, we source most of ourOCC requirements on the open market. We have five mills in Europe for whichwood pulp (virgin fiber) is the primary raw material. We generally source thefiber requirements of these mills through long-term relationships with thirdparties. We have our own reclamation operations in Latin America also althoughour mills in Colombia and Venezuela primarily use wood from our nearby forestryoperations.

While wood prices historically have been relativelystable, recovered paper prices can vary widely on a regional basis depending onmill demand and tend to be volatile even within short time periods. The focusof governments on identifying alternative sources of energy in Europeancountries to advance compliance with Kyoto undertakings has led to the use ofsubsidized wood for business, thereby exerting significant pressure on woodcosts. The paper industry is lobbying aggressively to have all such subsidiesremoved. Fluctuations in Asian demand and seasonal patterns of collectionand/or demand have been the principal factors driving the recovered paper pricein recent years.

Given the relative stability of wood prices, to theextent that we are able to source wood for conversion into virgin pulp at ourown mills, we have a raw material source with greater price stability that helpsprotect margins. We make a relatively higher margin on our production ofkraftliner than we do on our production of recycled containerboard. Demand forkraftliner, however, is price sensitive relative to recycled containerboard,which moderates our ability to raise prices during an upturn in the industrycycle. We believe that the market demand for recycled containerboard in Europeand in Latin America will grow over time at a faster rate than the marketdemand for kraftliner, and we believe that we are well positioned in thesemarkets to respond to this expected change in demand mix.

Our operations are currently managed on the basis oftwo regions: Europe and Latin America. After the sale of the majority of ourU.S. subsidiaries and an asset swap transaction with SSCC, we no longer conductsignificant operations in the United States and Canada.

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Thetable below shows a regional breakdown of our production volumes in 2006.

| ** **                                     | ** ** | ** **                                    | ** ** | **Latin**  | ** ** | ** **  | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|-------------|------------|
| **Product**                                    | ** ** | ** **                                    | ** ** | **Europe** | ** ** | **America** | ** ** | **Total SKG** | ** ** |
| ** **                                     | ** ** | **(metric tons in thousands)** | ** ** |
| *Raw  Materials*                               |       |                                          |       |       |       |        |       |   |   |   |   |   |   |
| Recycling                                      |       |                                          | 2,747      |       |       |        | 520        |   |   |   | 3,267 |   |   |
| **Total  raw materials**                       |       |                                          | 2,747      |       |       |        | 520        |   |   |   | 3,267 |   |   |
| *Mills*                                        |       |                                          |       |       |       |        |       |   |   |   |   |   |   |
| Containerboard                                 |       |                                          | 5,016      |       |       |        | 716        |   |   |   | 5,732 |   |   |
| Sack kraft                                     |       |                                          | 126        |       |       |        | 37         |   |   |   | 163 |   |   |
| Boxboard                                       |       |                                          | 217        |       |       |        | 167        |   |   |   | 384 |   |   |
| Solidboard and  graphicboard              |       |                                          | 782        |       |       |        | —     |   |   |   | 782 |   |   |
| Other paperboard                               |       |                                          | —     |       |       |        | 46         |   |   |   | 46 |   |   |
| **Total  containerboard and other paperboard** | ** ** | ** **                                    | **6,141**  |       | ** ** | ** **  | **966**    |   | ** ** | ** ** | **7,107** |   |   |
| Other  non-packaging paper(1)                  |       |                                          | 91         |       |       |        | 100        |   |   |   | 191 |   |   |
| **Total  mill**                                | ** ** | ** **                                    | **6,232**  |       | ** ** | ** **  | **1,066**  |   | ** ** | ** ** | **7,298** |   |   |
| *Conversion*                                   |       |                                          |       |       |       |        |       |   |   |   |   |   |   |
| Corrugated  containers                         |       |                                          | 4,563      |       |       |        | 783        |   |   |   | 5,346 |   |   |
| Solidboard                                     |       |                                          | 445        |       |       |        | —     |   |   |   | 445 |   |   |
| Paper sacks                                    |       |                                          | 96         |       |       |        | 52         |   |   |   | 148 |   |   |
| Folding cartons                                |       |                                          | 26         |       |       |        | 33         |   |   |   | 59 |   |   |
| **Total conversion**                           | ** ** | ** **                                    | **5,130**  |       | ** ** | ** **  | **868**    |   | ** ** | ** ** | **5,998** |   |   |
|                                                |            |                                               |            |            |            |             |            |  |  |  |  |  |  |  |  |

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

**Europe**

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

***Packaging***

*Paperboard.**  *The principal paperboard product inour packaging segment is containerboard. However, our mills produce othergrades of paperboard for use in packaging products, such as sack kraft paperfor use in the production of durable paper sacks, and boxboard, used in theproduction of folding cartons.

Containerboard prices are primarily a function of theprevailing supply-demand balance, raw material prices and other operating costssuch as energy, chemicals and transportation. Demand for containerboard hastended to develop in line with industrial growth rates due to thecharacteristics of the main end-user markets for corrugated containers. Incontrast, the supply side of the containerboard market, as with many capitalintensive industries characterized by large production facilities, is morevolatile reflecting new capacity additions and closures across the industryand, to a lesser extent, increases in mill capacity resulting from productivitygains.

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As there is a significant lead time between theplanning and completion of new containerboard mills, the supply side tends tolag behind changes in demand. Between 2005 and 2006, new recycledcontainerboard capacity peaked in Europe, with an estimated 1,600,000 metrictons of new capacity becoming operational. These additions, which representedapproximately 8% of the existing capacity, reflected expansion decisions thathad been made two or three years earlier. This resulted in a high level ofovercapacity in containerboard during a period of weak demand in Europe in 2005and, in turn, to downward pressure on pricing.

In response to this difficult operating environment, anumber of industry leaders gradually began to restructure, with a focus onrationalizing high-cost or inefficient capacity. In August 2005, JSG andKappa announced a merger agreement and Svenska Cellulosa Aktiebolaget announceda comprehensive rationalization program shortly thereafter. During the 2005 to2006 period, mills with an estimated 1,900,000 metric tons of containerboardcapacity were closed (of which approximately 1,500,000 metric tons was closedin 2006). These closures contributed to a better supply-demand balance in theEuropean market and to positive momentum on pricing.

In 2003, a combination of the increased supply and therelatively poor economic conditions across Europe had caused the pricing ofrecycled containerboard to be lower than in 2002. In 2004, with slightlyimproved demand and no significant increase in supply, prices were more stableand on average were slightly higher than in 2003. The same relative economicweakness, along with the growing strength of the euro against the U.S. dollar,had caused pricing in kraftliner in Europe to be lower in 2003 than in 2002.Although kraft prices increased towards the end of 2004 on average they werelower in 2004 than in 2003. In 2005, a combination of new capacity additions tothe market, and relatively weak economic conditions, which led to relativelypoor demand conditions, resulted in a reduction in containerboard prices,particularly in the second and third quarters. With improving marketconditions, however, prices began to strengthen in the latter part of 2005.

Five containerboard price increases have been successfullyimplemented from the third quarter of 2005 to the fourth quarter of 2006,resulting in increases of over 35% and over 30% in testliner and kraftlinerprices respectively. While rising raw material and energy prices provided themain impetus for the first few containerboard price increases, we believe thatreduced capacity and the improved supply-side situation was the key driverbehind subsequent price increases.

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

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

Our corrugated container plants are widely spreadacross the various regional and international markets that we serve. In WesternEurope, our largest regional market, we are the largest integrated producer ofcorrugated containers, with an estimated market share of 24% in 2006. Webelieve that we are the market leader in seven European countries (Germany,France, Italy, the Netherlands, Belgium, Ireland and Sweden) and in the numbertwo position in a further seven countries (Spain, the United Kingdom, Slovakia,Denmark, Norway, Poland and the Czech Republic).

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In 2003, the demand forcorrugated containers was relatively weak as industrial growth in Europe waslimited, and indeed negative in the case of certain countries. With littledemand growth and reducing raw material prices, there was no upward pressure inpricing for corrugated containers in 2003. This situation continued into 2004,where estimated market growth was around 2.3%. However, increased competitionand a lack of a cost “push” from paper pricing helped cause a decrease incorrugated pricing of approximately 2.5%. In 2005, there continued to berelatively low market growth across Europe, with an estimated growth of 1%.When combined with reductions in paper prices, the trend in corrugated priceswas downwards in the year. In 2006, however, demand growth in Western Europewas in excess of 3% with selling price increases driven by risingcontainerboard prices. Market growth has been relatively stronger in EasternEurope, reflecting the rapid rate of overall economic development andmodernisation in the region, particularly in the new EU member states andRussia. This has been driven partially by the current trend for migration ofmanufacturing from Western European to Eastern European countries.

***Specialties***

Our European specialties segment includes our principalsolidboard and graphicboard mills together with our sack paper, paper sackconverting and bag-in-box operations.

Solidboard is a grade of paperboard used primarily inthe manufacture of packaging products, mainly for the fish, flower and agriculturalsectors. Mills produce the paper while converting plants convert this paperinto packaging products. Graphicboard is a grade of paperboard used in themanufacture of a variety of products such as bookbinding, lever arch files andpuzzles.

Multi-wall paper sacks are used in a wide range ofindustries including agriculture, food and cement. While the industrialproducts sector predominates, the use of these durable sacks is growing in theretail or take-home sector where paper sacks provide a convenient means ofcarrying such goods as pet food and “do-it-yourself” products. Our paper sackplants are based in the United Kingdom, France, Spain, Ireland, Italy, Swedenand Poland.

Bag-in-box is a form ofpackaging where a liquid is packed in a flexible plastic film or bag with a tapattached, which is then generally inserted into a corrugated container.

**Latin America**

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

Our Latin American operations are highly integrated,from the reclamation of wastepaper and the production of wood pulp toconversion into paper-based packaging products of a substantial portion of thepaperboard produced by our mills.

Our reclamation operations, located in Venezuela,Puerto Rico, Colombia, Mexico and Argentina, processed approximately 520,000metric tons of OCC in 2006. The OCC we recover in Venezuela and Puerto Rico isconsumed entirely by our mills in Venezuela, largely satisfying their recycledfiber requirements. Likewise, the OCC we collect in Colombia is consumedentirely by our mills in Colombia, largely satisfying Colombia’s recycled fiberrequirements. Our paperboard mills in Mexico purchase the major part of theirrecycled fiber requirements from third parties, mainly from within Mexico.

We also have forestry operations in Latin America. InColombia and Venezuela, we own over 94,000 hectares (228,000 acres) and managea further 6,000 hectares (15,000 acres). These plantations provide the localmills with a significant portion of their total wood fiber needs. Because woodhas more stable pricing than both the pre-processed virgin pulp that wepurchase from third parties and OCC, our mills that source 

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from these plantationsbenefit from relatively greater margin protection. We also procure rawmaterials from third parties.

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

**United States andCanada**

We have reduced ourpresence in the United States and Canada in recent years with our soleoperation now being a bag-in-box operation, which started-up in 2004. In March 2003,as part of an asset swap transaction with SSCC, we transferred our 50%ownership interest in Smurfit MBI Canada, our principal subsidiary operation inCanada, in exchange for some of SSCC’s European assets. Our principal subsidiaryoperation in the United States, a decor base paper mill in Fitchburg,Massachusetts was sold in 2005.

**Marketing and Sales**

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

The marketing strategy for our mills is to profitablymatch the sale of paper and paperboard to the demand requirements of bothinternal and external converters located within an economically reasonableshipping distance from each mill. The strategy in the corrugated container andother converting plants focuses on both customized products tailored to fitcustomers’ needs and high volume sales of commodity products. Most sales ofconverted products are made on the basis of spot sales or short-term orders forspecified volumes at market rates. These orders are priced based on a number offactors such as currency, volume, weight and geographic area. We seek tomaintain a broad customer base for each of our markets rather than concentrateon only a few accounts for each plant.

No single customeraccounts for more than 1% of our third party sales.

**Patents, Licensesand Research and Development**

Proprietary products donot generally characterize the paper and packaging industry and, although wehold or are licensed to use certain patents, the successful continuation of anyimportant part of our business is not dependent upon such patents. Accordingly,the focus of research in papermaking is on providing the materials that willenable our converting operations and other packaging manufacturers to meet thechallenges of a changing, retail-driven marketplace. In recent years, the focusin the corrugated container industry has, for example, been on more efficientlymeeting the performance characteristics required of the corrugated container asa transport, storage, retail-ready and point-of-display medium. In addition toimproved containerboard quality, research programs have provided improvementsin printing processes. Furthermore, the need to meet the changing demands ofcustomers’ automated packaging lines requires us to stay abreast of innovationsin industrial processes.

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**Competition**

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

Although no single company is dominant, we do facesignificant competition in each of our businesses and the geographic markets inwhich we operate. Our competitors include other large vertically integratedcompanies as well as numerous smaller companies. The European and LatinAmerican containerboard markets are more fragmented than the U.S. and Canadianmarkets.

In Western Europe, the top five producers representabout 46% of the total containerboard capacity. The level of consolidationvaries significantly between grades. In the testliner market, which comprisesapproximately 80% of the containerboard market in Western Europe, the top fiveproducers represent 43% of total capacity. The market for kraftliner ischaracterized by a greater degree of concentration, with the top four producersaccounting for 82% of the total capacity. In the corrugated market, the topfive leaders represent 51% of the total capacity (with the top four of thesebeing the same as the top four in overall containerboard capacity).

Due to the high density and consequent easytransportability of paper and paperboard, the geographic market for kraftlineris worldwide. Because of the number and scale of recycled mills, the geographicmarket for testliner tends to be regional. The European market forcontainerboard is a pan-continental market, where inter-company trade incontainerboard is commonplace. As corrugated containers can typically only beeconomically delivered over a relatively short distance of 250 to 300 kilometers(although deliveries can be and are made across national borders), the natureof market conditions and competition tends to be at a more local level. Eachcountry in Latin America, with differing economic, political and currencyprofiles, represents a more distinct market than is the case in Europe.

Ourprincipal competitors in the geographic regions in which we operate are listedin the table below:
| Europe                                                  | ** ** | ** **                         | ** ** | **Latin America** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|-------------------|------------|------------|
| DS Smith plc                                            |       | Cartonajes Estrella,  S.A. de C.V. |
| Mondi Packaging  Europe                                 |       | Corporacion Durango,  S.A. de C.V. |
| Sociedad Anonima  Industrias Celulosa Aragonesa (SAICA) |       | Empresas CMPC, S.A.                |
| Svenska Cellulosa  Aktiebolaget (SCA)                   |       | Klabin S.A.                        |

 

The level of competitionin a given product market may be affected by the relative strength of the U.S.dollar against the euro and other market factors including geographic location,general economic conditions and the operating efficiencies of competitors.Although price is an important factor because many of our products are characterizedby commodity pricing, other factors affecting competition include productquality and performance, service and product innovation. In addition, ourpaper-based packaging products compete with various other packaging materials,including products made of plastic and wood.

**EnvironmentalIssues**

We are subject to a widerange of environmental laws and regulations. These requirements are complex,frequently changing and tend to become more stringent over time. We devotesubstantial resources to ensuring and monitoring compliance with environmentalrequirements. Despite these efforts, we cannot assure you that we have been orwill be at all times in complete compliance with all such 

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requirementsor that we will not incur material costs or liabilities in connection with suchrequirements in the future.

***Compliance with Environmental Regulatory Requirements***

The most significant impact from environmentalregulatory requirements on our operations relates to our paper and board mills,which constitute 42 of our 373 facilities. Our manufacturing processes resultin discharges to water and emissions to air, and they can produce elevatednoise levels. At the same time, most of our paper and board mills are recycledmills, and therefore do not handle black liquor (a by-product of certainwood pulping operations) or employ chlorine bleaching, which in each case cancreate additional environmental challenges. These integrated paper millsoperate with their own combustion plants and they are in compliance with theregulations applying to such large combustion plants. Nonetheless, we areaffected by increasingly stringent environmental regulations in the countrieswhere we operate.

We are subject to the European Union’s IntegratedPollution Prevention and Control Directive (“IPPC”). The IPPC has, since itsintroduction, gradually been incorporated into national legislation, such thatall installations must be covered by an IPPC permit before October 31,2007, although some member states have negotiated an extended timetable beyondthis date. We have obtained IPPC permits for most of our mills that requirethem, are in the process of obtaining such permits for the remaining millswhich require them and are taking such actions as are necessary to meet therequirements set out under the new permits. IPPC or a similar multi-countryregulatory regime is not applicable to our mills in Latin America. In thisregion, permit conditions reflect individual country regulations.

Stemming from the KyotoProtocol, in February 2005, the EU Emission Trading Scheme (“ETS”) cameinto force. The European Union began emission trading for an initial three-yearperiod (2005—2007) in advance of the commencement of the worldwide EmissionTrading Scheme in 2008. Our European paper and board mills have received theircarbon dioxide (“CO2”)allocation for the period 2005—2007. Each member state granted each mill anallocation according to their level of production and previous CO2 emission levels. At the end of 2006, thesum of CO2 emissionsfrom our European mills was 16% lower than our allocation. The nationalallocation plan for the next period, 2008 to 2012, has already been sent to theEU Commission and, although we expect that a lower level of allowance will begranted to our operations, we believe that the allocation will sufficientlycover our CO2 emissions.

***Environmental Contamination***

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

The IPPC program requires, as part of the permitprocess, that our European mills conduct “baseline” environmentalinvestigations or otherwise provide information regarding the condition of theunderlying soil and groundwater at most of our European mill sites as well asto set up appropriate provisions in case of leak malfunctions, momentary stoppages anddefinitive cessation of operations. While the purpose of providing suchinformation is not to force a facility to clean up historical contaminationthat is identified, several member countries intend to review the results and,if significant contamination is detected, may issue orders to address thecontamination. Thus, providing such information may result in our having toaddress contamination that is currently undetected at some of our mills. Thecost of addressing the contamination, if necessary, will depend upon the extentof contamination detected and the required remedies, and therefore, cannot yetbe determined at some of our mills. We may also be required to addresscontamination at any mills we decide to close or have sold in the past.

In October 2006, a notice of claim was receivedby a former Group subsidiary from a local County Administrative Board in Swedenrequiring it to investigate and remediate an adjacent lake. This lake was 

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polluted by local industryover a very long period of time. The subsidiary was in dialogue with the CountyAdministrative Board over the past thirty years as some of its operationsrequire operating permits under the local administrative code. Theinvestigation is at a very preliminary stage.

In November 2002, wewere notified by the Spanish Environmental Enforcement Agency, Seprona, that ithad become aware of an accumulation of rain water mixed with manufacturingwaste in the vicinity of our Sanguesa plant and that such concentration posed apotential environmental hazard. The rain water was removed and new procedureswere put in place to prevent any recurrence. Three of our local managers havebeen imputed by the court for an offence against natural resources and theenvironment in respect of the matter. This case was adjourned for considerationon September 22, 2006 and a decision is expected in due course.

**Raw Materials**

OCC is the principal raw material used in ourproduction of paperboard and is the essential component of recycledcontainerboard, one of the two main types of containerboard we produce, theother being kraftliner. Wood is the principal component used in the manufactureof kraftliner. We source most of our OCC supply on the open market; however, atDecember 31, 2006, we had 43 reclamation plants located in Europe andLatin America, the primary focus of which is sourcing fiber for our mills.

We have five mills in Europe for which wood pulp isthe primary raw material. These are our three kraftliner mills, Facture inFrance, Nettingsdorfer in Austria and Piteå in Sweden, our semi chemicalfluting mill in Štúrovo, Slovakia, and our Spanish sack kraft mill, SmurfitNervion. In Europe, we generally procure virgin fiber through long-termrelationships with third parties. While Nettingsdorfer, Piteå and Štúrovopurchase their wood fiber requirements on the open market, we co-operate withlandowners to develop forest resources, primarily in the Aquitaine region ofFrance, which facilitates the supply of wood fiber to Facture. We own a woodprocurement business in Spain, which facilitates the supply of wood to our Nervionmill.

In Latin America, however, we source a significantproportion of our virgin fiber needs from our forestry operations, which arelocated in Colombia and Venezuela, where we own over 94,000 hectares (228,000acres) and manage a further 6,000 hectares (15,000 acres). These plantationsprovide the local mills with a significant portion of their total wood fiberneeds.

Increases in the price of recovered paper and virginfiber as raw materials could result from a variety of factors. The prices wepay for these raw materials tend to be cyclical, subject to significantvolatility, and vary on a regional basis.

The price of recovered paper, using OCC as a basis inEurope, has peaked dramatically twice in recent years—in June 2002 and in April 2003.In each case, a relatively low level of supply was matched with a relativelyhigh level of demand, principally caused by increased demand from Asia. In thefirst case, the free-on-board price rose to over €150per metric ton. Within a period of three months, supply and demand conditionsleveled to return the price to around €100 per metric ton. In thesecond case, the spike was even more rapid with prices falling back to previouslevels almost immediately. In 2004, the price per metric ton remainedrelatively stable, fluctuating by a total of €11 per metric ton, butending the year at the same price as January. Similarly, in 2005, there wasrelative stability with the annual peak being €13 per metric ton ahead ofthe trough, and the price ending the year €5 per metric ton above theJanuary price. In 2006, the price of OCC increased by around €10per metric ton between April and May, and stayed at the higher level forthe remainder of the year.

We believe that our available sources of OCC(including from our own reclamation activities) and virgin fiber will beadequate to supply our raw material needs for the foreseeable future.

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Thetable below provides information on average European corrugated waste pricingper metric ton during and at the end of each year in the three year period from2004 to 2006:

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

| ** **                      | ** ** | **As of and for the YearEnded December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                                                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **(euro)**                                                                      | ** ** |
| Price at the end  of the period |       |                                                                            | 55         |   |   |   | 57 |   |   |   | 67 |   |   |
| Average price  during period    |       |                                                                            | 59         |   |   |   | 58 |   |   |   | 63 |   |   |
| Highest price  during period    |       |                                                                            | 65         |   |   |   | 65 |   |   |   | 67 |   |   |
| Lowest price during  period     |       |                                                                            | 54         |   |   |   | 52 |   |   |   | 57 |   |   |

 

**SegmentalInformation**

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

**Segmental Analysis of Total Sales**

| ** **             | ** ** | **2004**                  | ** ** | **2005**                  | ** ** | **2006**                  | ** ** |
|------------------------|------------|---------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **             | ** ** | **(**€ million) | ** ** | **(**€ million) | ** ** | **(**€ million) | ** ** |
| Packaging              |       |                      | 4,256      |                      |       |                      | 4,339      |   |   |   | 7,615 |   |   |
| Specialties            |       |                      | 1,139      |                      |       |                      | 652        |   |   |   | 1,293 |   |   |
| Europe                 |       |                      | 5,395      |                      |       |                      | 4,991      |   |   |   | 8,908 |   |   |
| Latin America          |       |                      | 1,090      |                      |       |                      | 1,221      |   |   |   | 1,350 |   |   |
| **Total Subsidiaries** | ** ** | ** **                | **€** | **6,485**                 |       | ** **                | ** ** | **€** | **6,212** |   | ** ** | ** ** | **€** | **10,258** |   |   |
|                        |            |                           |            |                           |            |                           |            |  |  |  |  |  |  |  |  |  |

 

**Segmental Analysis of Net Sales**

| **Subsidiaries**       | ** ** | ** **                | ** ** | **2004**                  | ** ** | **2005**                  | ** ** | **2006**   | ** ** |
|------------------------|------------|---------------------------|------------|---------------------------|------------|---------------------------|------------|------------|------------|
| ** **             | ** ** | **(**€ million) | ** ** | **(**€ million) | ** ** | **(**€ million) | ** ** |
| Packaging              |       |                      | 3,093      |                      |       |                      | 3,117      |       |       |   | 5,183 |   |   |
| Specialties            |       |                      | 1,009      |                      |       |                      | 531        |       |       |   | 978 |   |   |
| Europe                 |       |                      | 4,102      |                      |       |                      | 3,648      |       |       |   | 6,161 |   |   |
| Latin America          |       |                      | 703        |                      |       |                      | 789        |       |       |   | 872 |   |   |
| **Total Subsidiaries** | ** ** | ** **                | **€** | **4,805**                 |       | ** **                | ** ** | **€** | **4,437**  |   | ** ** | ** ** | **€** | **7,033** |   |   |
|                        |            |                           |            |                           |            |                           |            |            |            |  |  |  |  |  |  |  |  |  |

 

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**Segmental Analysis of Income/ (Loss) (before taxes andequity minority interests)**

| ** **                                            | ** ** | **2004**                  | ** ** | **2005**                  | ** ** | **2006**                  | ** ** |
|-------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                            | ** ** | **(**€ million) | ** ** | **(**€ million) | ** ** | **(**€ million) | ** ** |
| Packaging                                             |       |                      | 152        |                      |       |                      | 130        |   |   |   | 339 |   |   |
| Specialties                                           |       |                      | 98         |                      |       |                      | 33         |   |   |   | 51 |   |   |
| Associates                                            |       |                      | 10         |                      |       |                      | 6          |   |   |   | 10 |   |   |
| Europe                                                |       |                      | 260        |                      |       |                      | 169        |   |   |   | 400 |   |   |
| Packaging                                             |       |                      | 118        |                      |       |                      | 114        |   |   |   | 128 |   |   |
| Associates                                            |       |                      | 3          |                      |       |                      | 1          |   |   |   | 1 |   |   |
| Latin America                                         |       |                      | 121        |                      |       |                      | 115        |   |   |   | 129 |   |   |
| Unallocated center costs                              |       |                      | (25        | )                         |       |                      | (23        | ) |   |   | (27 | ) |   |
| Income before goodwill  amortization,                 |       |                      |       |                      |       |                      |       |   |   |   |   |   |   |
| interest and  exceptional items                       |       |                      | 356        |                      |       |                      | 261        |   |   |   | 502 |   |   |
| Share-based  payments                                 |       |                      | (7         | )                         |       |                      | (5         | ) |   |   | (8 | ) |   |
| Goodwill  amortization                                |       |                      | (38        | )                         |       |                      | (30        | ) |   |   | (66 | ) |   |
| Group net  interest                                   |       |                      | (286       | )                         |       |                      | (244       | ) |   |   | (343 | ) |   |
| Loss from early  extinguishment of debt               |       |                      | (6         | )                         |       |                      | (105       | ) |   |   | — |   |   |
| Share of  associates’ net interest               |       |                      | (1         | )                         |       |                      | (1         | ) |   |   | (2 | ) |   |
| Income/(loss)  before exceptional items               |       |                      | 18         |                      |       |                      | (124       | ) |   |   | 83 |   |   |
| Reorganization and restructuring costs                |       |                      | (39        | )                         |       |                      | (25        | ) |   |   | (196 | ) |   |
| Impairment of  property, plant and equipment          |       |                      | —     |                      |       |                      | (45        | ) |   |   | (31 | ) |   |
| Impairment of  advances to affiliates                 |       |                      | —     |                      |       |                      | —     |   |   |   | (53 | ) |   |
| Income / (loss)  on the sale of assets and businesses |       |                      | 22         |                      |       |                      | 52         |   |   |   | (23 | ) |   |
| **Income/(loss) before taxation**                     | ** ** | ** **                | **€** | **1**                     |       | ** **                | ** ** | **€** | **(142** | **)** | ** ** | ** ** | **€** | **(220** | **)** | ** ** |
|                                                       |            |                           |            |                           |            |                           |            |  |  |  |  |  |  |  |  |  |

 

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**OrganizationalStructure**

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

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

 

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| **Subsidiaries**                                                                                                                   | ** ** | ** **                                                                                                                                                                                                                | ** ** | **Principal Activities** | ** ** | **Country of Incorporation** | ** ** | **Holding %** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|---------------|
| **Smurfit  Kappa International France S.A.******2 rue Goethe, 75116 Paris, France                                                  |       | Holding company for  French operations whose activities are the manufacture and sale of paperboard  and packaging products                                                                                                | ** ** | **France**               |       | 100                          |
| **Smurfit Kappa Investments UK Limited******Darlington Road, West Auckland,  Bishop Auckland, Co. Durham  DL14 9PE, United Kingdom |       | Holding company  for UK operations whose principal activities are the manufacture and sale of  paperboard and packaging products                                                                                          | ** ** | **United Kingdom**       |       | 100                          |
| **Smurfit Kappa Ireland Limited******Beech Hill, Clonskeagh, Dublin 4,  Ireland                                                    |       | Manufacture and  sale of paperboard and packaging products and printing                                                                                                                                                   | ** ** | **Ireland**              |       | 100                          |
| **Smurfit Nervion, S.A.******B Arriandi s/n, 48215 lurreta,  Vizcaya, Spain                                                        |       | Manufacture and  sale of sack paper and holding company for Spanish, Portuguese and sack  converting operations whose principal activities are the manufacture and sale  of paperboard, packaging and paper sack products | ** ** | **Spain**                |       | 99                           |
| **Smurfit Kappa SISA, S.p.A******Strada Serravalle 30,  15067 Novi Ligure (AL), Italy                                              |       | Manufacture of paperboard  and packaging products                                                                                                                                                                         | ** ** | **Italy**                |       | 90                           |
| **Smurfit  Kappa Treasury Funding Limited******Beech Hill, Clonskeagh, Dublin 4, Ireland                                           |       | Financial services                                                                                                                                                                                                        | ** ** | **Ireland**              |       | 100                          |

 

**Property, Plant andEquipment**

Our manufacturing facilities are mainly spread acrossEurope and Latin America. Our paper and paperboard mills are our main assets.We believe that our facilities are suitable and adequate for our businesspurposes for the foreseeable future. At December 31, 2006, the net bookvalue of our tangible fixed assets amounted to €3,399 million,of which €35million related to capitalized leased assets.

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Thetable below provides a regional summary of our facilities at December 31,2006.

| **Facilities**         | ** ** | ** ** | ** ** | **Europe** | ** ** | **Latin  America** | ** ** | **North  America** | ** ** | **Total SKG** | ** ** | ** ** |
|------------------------|------------|------------|------------|------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|------------|
| Reclamation            |       |       | 17         |       |       |               | 26         |               |       |               | —     |       |   |   | 43 |   |   |   |
| Mills                  |       |       | 31         |       |       |               | 11         |               |       |               | —     |       |   |   | 42 |   |   |   |
| Corrugated  containers |       |       | 178        |       |       |               | 28         |               |       |               | —     |       |   |   | 206 |   |   |   |
| Folding cartons        |       |       | 2          |       |       |               | 3          |               |       |               | —     |       |   |   | 5 |   |   |   |
| Paper sacks            |       |       | 12         |       |       |               | 5          |               |       |               | —     |       |   |   | 17 |   |   |   |
| Other conversion(1)    |       |       | 32         |       |       |               | 1          |               |       |               | —     |       |   |   | 33 |   |   |   |
| Other(2)               |       |       | 25         |       |       |               | 1          |               |       |               | 1          |       |   |   | 27 |   |   |   |
| **Total facilities**   | ** ** | ** ** | **297**    |       | ** ** | ** **         | **75**     |               | ** ** | ** **         | **1**      |       | ** ** | ** ** | **373** |   | ** ** | ** ** |

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(1)          Other conversionincludes solidboard packaging and other plants related to the corrugatedbusiness such as display and partitions.

(2)          Otherincludes plants related to various businesses such as bag-in-box, newspaperprinting, publishing and wood products.

**Item 4A.**                Unresolved Staff Comments

Not applicable.

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

*The followingdiscussion and analysis is based on our consolidated financial statements,which are prepared in accordance with Irish GAAP. Our accounting policies arediscussed in the notes to the consolidated financial statements. Irish GAAPdiffers in certain significant respects from U.S. GAAP. A description of theprincipal differences as they apply to SKG and reconciliations of net incomefor 2006, 2005 and 2004 and shareholders’ equity at December 31, 2006 and2005 are set forth in Note 37 to the audited consolidated financial statements.*

*While the Merger ofthe former JSG and Kappa operations to form SKG has had a major impact on ourfinancial structure, this was primarily evident in the consolidated balancesheet as of December 31, 2005. The impact of the Merger on the reportedconsolidated statement of operations for the year ended December 31, 2005was limited, because the Merger was completed on December 1, 2005. Inaddition, the effect of including the former Kappa operations for one month in2005 was offset by the absence of the principal Munksjö specialty operationsfor the year. However, the Merger did have a significant impact on the reportedconsolidated statement of operations for the year ended December 31, 2006.*

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

**General**

SKG is the largest European-based integratedmanufacturer of containerboard, corrugated containers and other paper-basedpackaging products. In terms of world market positions, SKG is the largestproducer of corrugated containers, the second largest producer of graphicboardand the third largest producer of containerboard. Within the Europeancorrugated container market, the merger combined JSG’s previous strongpositions particularly in Western and Southern Europe with those of Kappa whowere particularly strong in Northern and Eastern Europe. SKG is the leadingEuropean producer of containerboard and also has market leading positions, inboth containerboard and corrugated in Latin 

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America. SKG’s operationsspan over 30 countries, with total capacity of approximately 6 millionmetric tons of both containerboard and corrugated. SKG is also a leadingproducer of solidboard, paper sacks and bag-in-box.

Our operations areorganized and managed on the basis of two regions: Europe and Latin America.Prior to the sale of our Canadian subsidiary, Smurfit MBI, as part of an assetswap transaction with SSCC in 2003, we also had operations in the United Statesand Canada.

·       *Europe*.   Our European operations are spread across themajor economies of Western Europe. Within Europe, our operations are dividedinto two segments: packaging and specialties. As restructured following themerger, our packaging segment consists principally of our containerboard andcorrugated container operations. Our specialties segment consists primarily ofour graphic and solid board businesses along with our paper sack (comprisingthe Nervion mill and the sack conversion plants) and bag-in-box operations. Throughthe creation of SKG we have extended the geographic spread of our packagingoperations and significantly increased our presence in the European solid boardmarket. Prior to the merger, we had earlier expanded our European presencethrough the asset swap transaction with SSCC in 2003, selling our 50%shareholding in Smurfit MBI as part of this transaction.

·       Inlate 2004, we agreed to sell Munksjö’s specialty paper and pulp operations witheffect from January 1, 2005 and completed this sale in March 2005.While we retained the packaging operations, we also agreed to sell Munksjö’stissue operations, the sale of which was completed in May 2005. Until theend of 2004, the décor base paper and other specialty papers produced byMunksjö formed part of our specialties segment while the tissue operationsformed part of this segment until their disposal.

·       InJune 2005, we completed the sale of assets comprising The K Club andthe site of the former Clonskeagh, Dublin paper mill. The Munksjö specialtyoperations and The K Club are treated as discontinued for the year to December 31,2005.

·       InOctober 2006, we completed the sale of the facilities required to be soldunder the terms of the approval of the Merger by the EU Commission. EuropeanUnion approval of the Merger was given in November 2005, subject to thedisposal of eight facilities in Europe. These comprised Kappa’s twographicboard mills in the Netherlands along with JSG’s Dutch solidboard milland converting operation, four corrugated container plants (two in Sweden andtwo in Denmark) and a partition facility in Scotland. We received the cashproceeds in the fourth quarter of 2006 and recorded a loss of over €40million (including a goodwill write-off of almost €10 million).

·       *Latin America*.   Our Latin American operations arelocated principally in Mexico, Colombia, Venezuela and Argentina. Since ourinitial investments in the late 1980’s, Latin America has contributedsignificantly to our earnings and cash flow. As in the case of our Europeanoperations, the main products are containerboard and corrugated containers,with most of the containerboard produced by the mills being sold to our owncorrugated container plants.

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

| ** **    | ** ** | **Years Ended December 31,** | ** ** |
|---------------|------------|---------------------------------------------|------------|
| **Region:**   | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **    | ** ** | **€000**                               | ** ** | **€000** | ** ** | **€000** | ** ** |
| Europe:       |       |                                        |       |   |   |   |   |
| Packaging     |       | 3,093,484                                   |       | 3,117,403 |   | 5,183,095 |   |
| Specialties   |       | 1,009,038                                   |       | 530,629 |   | 977,395 |   |
| Total Europe  |       | 4,102,522                                   |       | 3,648,032 |   | 6,160,490 |   |
| Latin America |       | 702,560                                     |       | 789,297 |   | 872,223 |   |
| Total         |       | €                                      | 4,805,082  |   | € | 4,437,329 |   | € | 7,032,713 |   |
|               |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Our European and Latin American operations accountedfor approximately 88% and 12% respectively of our net sales for the year endedDecember 31, 2006.

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

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

**Overview**

We generate sales revenue principally through the saleof paperboard and paper-based packaging products. We sell our paper-basedpackaging products, primarily corrugated containers, to third party customers.Our paper mills sell the containerboard and other grades of paperboard theyproduce primarily to SKG-owned converting operations. We also sellcontainerboard and other grades of paperboard to third parties.

Key factors thatimpact our operating results are:

·       changesin demand;

·       changesin industry capacity;

·       thecost of recovered paper and wood;

·       recoveryof paperboard price increases from our packaging customers;

·       changesin energy prices; and

·       certaincurrency exchange rate movements.

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

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

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

The profitability of our mills can be affected by thedifferent characteristics of the markets for recycled containerboard andkraftliner. Because the primary raw material for the production of recycledcontainerboard is recovered paper, the price of which tends to fluctuate, ourrecycled containerboard mills can experience temporary increases and decreasesin profits while earning a relatively stable margin over time. In contrast, theprimary raw material for the production of kraftliner is wood, the cost ofwhich is relatively more stable. As a result, our kraftliner mills can earnrelatively strong margins during periods of high prices, but relatively lowermargins when prices decline. Moreover, a relatively larger proportion of ourkraftliner sales is made to third parties (in contrast to our recycledcontainerboard sales). Consequently, a change in the profitability of kraftlinerhas a more immediate impact on our operating results than recycledcontainerboard, which we primarily sell to our converting plants.

Our overall profitability is also affected not only bysupply and demand for raw materials and our finished products, but also by thelength of time it takes us to translate price increases in raw materials intoprices we charge for third-party sales of containerboard and paper-basedpackaging products. To the extent our containerboard is sold internally, ourprofitability will only be affected by the ability to recover any priceincreases from third-party sales of paper-based packaging products.

The principal determinant of the cost of ourpaperboard products is recovered paper, which is used extensively in themanufacture of these products. An important driver of recovered paper prices isthe balance of supply and demand for paper products in general. When the priceof recovered paper begins to rise, paper and containerboard manufacturersattempt to raise their prices to preserve profit margins, which generallynarrow as a result of increased raw material costs. It generally takesapproximately two months for the mills to pass along their price increases tothe paper-based packaging products manufacturers. In turn, the manufacturers ofpaper-based packaging products generally attempt to raise prices to recovercontainerboard cost increases. It generally takes approximately four months forthese manufacturers to pass through their price increases.

In a down cycle, as recovered paper prices fall,manufacturers of paper and paper-based packaging products attempt to maintainprices. From our experience, our mills are able to maintain prices for betweentwo and three months, while our paper-based packaging operations are able tomaintain prices for between three and six months. As a result, the effect ofprice fluctuations on our mills and converting operations will vary, dependingon the relevant point in the industry cycle. During periods of risingcontainerboard prices, our profitability is generally adversely affected.Conversely, during periods of declining containerboard prices, ourprofitability is generally positively affected.

Our production processes are energy intensive and,although certain of the kraftliner mills supply their own energy, our otheractivities are reliant upon third parties for the supply of their energy. Energyprices, in particular those of oil and natural gas, have significantlyincreased in recent years, with a corresponding increase in our productioncosts.

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Given the wide geographic spread of our operations, weare exposed to currency rate fluctuations. Since the introduction of the euroon January 1, 1999, our exposure to fluctuations in exchange rates withinthe European Union has been reduced. However, the United Kingdom, Sweden,Norway, Denmark and Poland have not adopted the euro as their national currency.While the merger has increased our presence in these countries, it has alsoextended it into other countries outside the Eurozone such as the CzechRepublic, Slovakia, Switzerland and Russia. Although, under Irish GAAP, theresults of our operations in Latin America are reported in U.S. dollars, theyare denominated in local currency meaning that fluctuations in the value of thethose currencies against the U.S. dollar and, in turn, in the value of thedollar may have a significant effect on our operations and on our reportedresults in euro. A weaker U.S. dollar decreases and, conversely, a strongerU.S. dollar increases, the euro figures we report in our financial statementswith respect to our Latin American operations. As a result, comparability ofperformance between financial periods can be significantly affected byfluctuations in the value of the U.S. dollar against the euro.

The relative strength orweakness of the U.S. dollar is also important for the European packagingindustry, because U.S. containerboard prices tend to influence the worldmarket. Movements in the U.S. dollar exchange rate may also have an effect ontrading since a strong U.S. dollar tends to make U.S. exports less competitive.Conversely, a weak U.S. dollar over a sustained period has, in the past,resulted in lower sales into the United States by European manufacturers whoship products in corrugated containers, resulting in lower European demand forour containers. A weak U.S. dollar may result in additional competition in theEuropean market from U.S. manufacturers that have an incentive to sell moreproducts in Europe, due to increased European demand for the relativelylower-priced U.S. goods over higher-priced European goods. Therefore, the sustained strength of the eurorelative to the U.S. dollar could adversely affect our operating results andfinancial condition.

***Comparability of Periods***

The Merger was accounted for as an acquisition of theKappa operations by JSG. As at December 1, 2005, JSG was renamed SmurfitKappa Group Limited (“SKG”). Accordingly, as reported for the year ended December 31,2005, the consolidated results of SKG are made up of twelve months of JSG, plusthe results of Kappa for the month of December 2005.

The Merger had asignificant impact on the reported consolidated balance sheet of SKG as of December 31,2005 and on the reported consolidated statement of operations for the yearended December 31, 2006. As a result, our consolidated financialinformation for the year ended December 31, 2006 differed significantlyfrom our consolidated financial information for the year ended December 31,2005, resulting in a significant impact on the period-to-period comparisons.

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**Results ofOperations**

Thefollowing table sets forth each category of our consolidated statement ofoperations data, expressed as a percentage of net sales for the years ended December 31,2006, 2005 and 2004:

| ** **                                                        | ** ** | ** ** | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------------------------|------------|
| **Consolidated Statement of Operations Data** | ** ** | ** ** | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                         |       | 100.0      | %          | 100.0                        | %          | 100.0 | % |
| Cost of sales                                                     |       | 72.0       | %          | 72.6                         | %          | 72.3 | % |
| Impairment of  fixed assets                                       |       | 0.4        | %          | 1.0                          | %          | — |   |
| Gross profit                                                      |       | 27.6       | %          | 26.4                         | %          | 27.7 | % |
| Net operating expenses                                            |       | 21.9       | %          | 22.0                         | %          | 21.0 | % |
| Reorganization,  restructuring and other exceptional costs        |       | 3.6        | %          | 0.6                          | %          | 0.8 | % |
| Operating income—subsidiaries                                |       | 2.1        | %          | 3.8                          | %          | 5.9 | % |
| Share of  associates’ operating income                       |       | 0.1        | %          | 0.1                          | %          | 0.2 | % |
| Total operating  income                                           |       | 2.2        | %          | 3.9                          | %          | 6.1 | % |
| (Loss)/profit on  sales of assets and businesses                  |       | (0.3       | )%         | 1.2                          | %          | 0.5 | % |
| Net interest                                                      |       | (4.9       | )%         | (5.5                         | )%         | (6.1 | )% |
| Exceptional debt  issue costs                                     |       | —     |       | (2.4                         | )%         | — |   |
| Other financial  expense                                          |       | (0.1       | )%         | (0.3                         | )%         | (0.3 | )% |
| Income before  taxes and equity minority interests                |       | (3.1       | )%         | (3.1                         | )%         | (0.2 | )% |
| Taxes on income                                                   |       | (0.6       | )%         | (0.5                         | )%         | (0.6 | )% |
| (Loss) before  equity minority interests                          |       | (3.7       | )%         | (3.6                         | )%         | (0.4 | )% |
| Equity minority  interests                                        |       | (0.2       | )%         | (0.4                         | )%         | (0.3 | )% |
| Net (loss) available to  ordinary shareholders                    |       | (3.9       | )%         | (4.0                         | )%         | (0.7 | )% |

 

***Comparison of Year Ended December 31, 2006 andYear Ended December 31, 2005***

*NetSales.*   Net sales from continuing operationsamounted to €7,033 millionin the year to December 2006 compared to €4,412 million in 2005,with the year-on-year increase of €2,621 million primarilyreflecting the inclusion of the former Kappa operations for an additionaleleven months in 2006. While these operations added over €2,570million to net sales, other movements were relatively modest, with the positiveimpact of currency movements, primarily in Latin America, being more thanoffset by the negative impact of disposals and, to a lesser extent, plantclosures.

Disposals and plant closures reduced net sales in 2006by €37million. The disposals primarily comprised those operations sold in 2006 underthe terms of the approval of the Merger by the EU Commission. Plant closureshad a limited impact on net sales, because the containerboard mills that wereclosed in 2006 had been fully integrated with our corrugated plants.

The positive currency movement in 2006 increased netsales by €49 million. This currency move aroseprimarily in Latin America as a result of the general appreciation of the localcurrencies, particularly the Colombian peso, in the countries in which weoperate. The exception to this trend was the Venezuelan Bolivar which has afixed exchange rate against the U.S. dollar.

The performance of our regional operations excludingthe former Kappa operations increased modestly, with the increase arising primarily in Latin America.Comparable sales revenue in Europe was broadly unchanged year-on-year, wherethe sales growth in the latter part of the year was offset by lower revenue inthe six months ended June 30, 2006.

Including the sales of over €25million generated by Munksjö’s tissue operations and The K Club, net salesamounted to €4,437million in total in 2005.

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Primarily as a result of the Merger, net sales fromour European Packaging operations at €5,183 million in 2006were significantly higher than in 2005. The inclusion of the former Kappaoperations for an additional eleven months in 2006 added €2,110 millionin net sales. Although overall corrugated volumes were flat year-on-year on acomparable basis, volumes within the former JSG operations were lower as aresult of the negative impact of plant closures during 2006. With improvingselling prices during 2006, however, average corrugated prices wereapproximately 2% higher than in 2005. Comparable containerboard volumes werelower year-on-year in both the kraftliner and recycled mills. However, with thebenefit of higher selling prices, sales revenue in the mills was higher in 2006than in 2005. Kraftliner volumes were approximately 3% lower overall in 2006,primarily because of the impact of the partial shut-down at our Facturemill in France in order to facilitate the upgrade of its white-top machine. Thedecrease in our recycled containerboard arose mainly as a result of millclosures during the year.

The Merger also had a significant impact on ourSpecialties segment. The inclusion of the former Kappa operations for anadditional eleven months in 2006 accounted for €460 millionof the net sales of €977 millionreported in 2006. Net sales of €531 million in 2005 alsoincluded the contribution of €25 million from thediscontinued operations. The year-on-year increase mainly reflected salesgrowth in our graphic board mills and in our bag-in-box business.

In total, net sales by our European operationsamounted to €6,160 million in 2006 compared to €3,648 millionin 2005.

Latin American sales asreported in euro terms increased by over 10% to €872 millionin 2006 from €789 millionin 2005. With market conditions generally good across the region, our overallvolumes and selling prices were higher than in 2005. Currency movements had apositive impact on reported sales revenue of approximately €45million.

**INCOMEBEFORE INTEREST EXPENSE AND TAXES**

With higher net sales in 2006, cost of sales increasedalso while representing 72.0% of net sales compared to 72.6% in 2005. The lowerratio in 2006 reflects the benefit of improved selling prices year-on-yearalthough this was partly offset by the impact of cost increases, primarily inenergy and energy related costs. In addition, we benefited from the relativestability of the average cost of recovered paper (the primary raw material forour recycled containerboard mills) and from the impact on overall costs of thesynergies resulting from the Merger.

Following increases in 2005, energy costs,particularly in Europe, continued to rise for much of 2006, before easingtowards the end of the year. We faced higher costs for gas and electricity, thetwo main elements of our energy requirements, although the full exposure tomarket prices was reduced through the operation of medium-term contracts thathad been entered into at a time of generally lower energy costs. Total energycosts amounted to over €502.0 million in 2006compared to €302.6million in 2005. Energy costs in the former Kappa operations in the elevenmonths to November 2005 amounted to €157.1 million. Energycosts are net of credits from CO2 certificate sales, which amounted to €11.5million and €2.2million in 2006 and 2005, respectively.

Our gross profit was also impacted by an assetimpairment charge of €31.3 million in 2006,primarily in respect of facilities closed during the year, and an assetimpairment charge of €45.2 million in 2005.

The asset impairment charge of €31.3 millionin 2006 related to property, plant and equipment, primarily in Europe. Withinthe Packaging segment, a total of €21.1 million related bothto plants which had been closed in 2006, such as the French recycledcontainerboard mills and the Wiesloch mill in Germany, and to plants targetedfor restructure or closure. Within the Specialties segment, €9.2million related to the restructuring of our Dutch solidboard mills and theresultant impact on the value of the underlying property, plant and equipment.The €45.2 millioncharged in 2005 related mainly to our 

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Packaging operations andto the write down in asset values of those plants which we expected to close in2006 such as the four French recycled containerboard mills and to a number ofcorrugated container plants in the United Kingdom.

Net operating expenses, comprising selling andadministration costs as well as distribution costs, at €1,542.2 millionwere higher in 2006 primarily as a result of the increased scale of the Groupfollowing the Merger. Net operating expenses were impacted by the inclusion ofthe expenses within the former Kappa operations and for the impact ofdisposals, closures and currency fluctuations. The increase was partially offsetby lower comparable distribution costs in Europe through a combination of lowervolumes and post-merger synergies. Although higher in absolute terms, netoperating expenses represented 21.9% of net sales in 2006, compared to 22.0% in2005 as a result of the positive impact on sales revenue of higher averageselling prices in 2006.

Income before intangible assets amortization,interest, exceptional items and taxation in 2006, of which the former Kappaoperations accounted for €178.6 million,amounted to €501.9 millioncompared to €260.6 millionreported in 2005. Reflecting the much improved result in the second half of theyear, our earnings in 2006 were higher than in 2005 in both Europe and LatinAmerica. While the profitability of our European operations was loweryear-on-year in the six months ended June 30, 2006, this shortfall hasbeen more than reversed by the improving earnings in the second half of theyear, which in turn reflected the positive impact on mill earnings of higherselling prices and the progress being made in recovering these increases inhigher corrugated container prices.

As a result of the increases implemented during 2006,average containerboard prices were considerably higher than in 2005. Althoughthe benefit was partly offset by higher energy costs and by lower volumes,reflecting the mill closures effected earlier in the year, the profitability ofour mills was much improved year-on-year. While the higher containerboardprices have put pressure on the margins within the corrugated operations, wemade further progress during the fourth quarter in recovering these increasesthrough higher corrugated container prices. Reflecting this progress, averagecorrugated prices were 2% higher than in 2005.

For our European Packaging operations, the profit forthe year to December 31, 2006 was €338.7 million,including the contribution of €165.6 million fromthe former Kappa operations, compared to 2005’s €129.5 million.Significantly higher mill earnings also contributed to the increase in profits,despite the negative impact of higher energy costs, and reduced earnings fromour corrugated operations.

The profit generated by our Specialties operations in2006 was €51.2 million, including the contributionof €13.0 millionfrom the former Kappa operations, compared to €33.2 million in 2005,which included the negative earnings generated by The K Club, and to alesser extent, Munksjö tissue prior to their disposal during the second quarterof 2005. The year-on-year growth in segmental earnings arose primarily inour bag-in-box business.

Our Latin American operations continued to performrelatively well in 2006 with profits of €128.2 millioncompared to €114.0million in 2005. The year-on-year increase of €14.2 million equated to12.5%. Although currency movements had an overall positive impact on theyear-on-year result, this was relatively modest, while the underlying growth inearnings was approximately 11.7%. While the country results varied, theyear-on-year growth in profitability arose mainly in Colombia, reflectingstrong economic growth, but also in Mexico and Venezuela. Earnings were lower,however, in Argentina where volumes have been adversely affected by extremelycompetitive market conditions.

In addition to the impairment charge of €31.3million in respect of property, plant and equipment, exceptional items in 2006included reorganization, restructuring and other costs of €196.6 million,a charge of €52.8million in respect of the impairment of advances to affiliates and a net loss of€22.9million on the sale of assets and businesses.

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The total of €196.6 million comprisedreorganization and restructuring charges of €174.0 million and €22.6 millionin respect of the cost of settling the legal issues relating to our corrugatedcontainer plant in the Dominican Republic. The reorganization and restructuringcharges in 2006 related to the significant rationalization program we undertookfollowing the Merger.

This program involved the restructuring of ourEuropean paper mills and converting plants and the rationalization of thehead-office function. The objective of this program was to fully integrate thecombined operations, thereby achieving the synergistic benefits of the Merger.The program included the closure of a number of relatively high-costcontainerboard mills, which primarily served our own corrugated containerplants, where the requirements of those plants could be better met by othermills in the combined system. The removal of this tonnage also had a positiveimpact on the overall supply/demand balance in the market, underpinning thepositive pricing momentum achieved in 2006.

Of the total of €174.0million charged in respect of reorganization and restructuring costs in 2006, €159.4 million(including €10.4 millionin respect of the former Kappa head office in Eindhoven) and €14.6 millionarose in the European packaging and specialties segments respectively. Withinthe packaging segment, a total of €29.9 million was chargedin respect of the closure of four recycled containerboard mills in France andone in Sweden, with a further €9.9 million inrespect of the closure of the Wiesloch mill in Germany. In addition, €20.0 millionwas charged in respect of the coated-paper machine at the Townsend Hook mill inthe United Kingdom, with the mill now producing only containerboard. Within ourEuropean corrugated operations, restructuring costs of €25.1million arose in the United Kingdom, primarily in respect of the closure of theNelson and Chelmsford plants, and €12.6 million in France,primarily in respect of the closure of the Cevennes and Gravelines plants.Other costs arose across the packaging operations, with provision being madefor certain closures planned for the first half of 2007. Within our specialtiesoperations, the reorganization and restructuring costs of €14.6 millionin total included €8.6 millionin respect of the closure of a solidboard mill in the Netherlands and €2.2million in respect of the closure of our paper sack plant in the UnitedKingdom.

Reorganization andrestructuring costs in 2005 amounted to €25.1million and arose in Europe, relating mainly to the closure of the Clonskeaghmill in Ireland and the Cevennes and Gravelines corrugated container plants inFrance.

**INTERESTEXPENSE AND TAXES**

Group net interest at €343.0million for the year was considerably higher in 2006 than in 2005 as a resultof the increased level of debt following the Merger. In addition to the netinterest charge of €244.6 millionin 2005, we reported a loss of €104.7 million inrespect of the early extinguishment of debt.

After other financial expense of approximately €9.1 million,which represents the interest element of our post retirement benefit costs, theresult before taxation was a loss of €220.1 million in 2006compared to a loss of €142.0 million in 2005. The accountingtax charge amounted to €37.3 million compared to €21.6 millionin 2005.

Equity minority interestsamounted to €14.5 million in 2006 compared to €18.8million in 2005 and arose mainly in Latin America. The year-on-year decreasereflected higher minority interests in Latin America as more than offset by areduced level in Europe. After minorities, the net loss for 2006 was €271.9million compared to €182.4million in 2005.

***Comparison of Year Ended December 31, 2005 andYear Ended December 31, 2004***

*Net sales*. Net sales fromcontinuing operations at €4,412 million in 2005 were 3.1% higher thanin 2004, primarily as a result of the inclusion of €200 million in respect ofthe former Kappa operations for the month of December 2005. Without thiscontribution, net sales in 2005 decreased slightly, reflecting the 

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impact, primarily on averageselling prices, of weak market conditions in Europe. Allowing for the impact ofadditions, disposals and closures as offset by a positive currency move, theunderlying movement in net sales was an overall decrease of €70million. The positive currency move in the year arose in Latin America mainlyas a result of the strong appreciation of the Colombian Peso in 2005 as offsetby the reduced value of the Venezuelan Bolivar following its devaluation inMarch 2005. Within Europe, currency movements had a marginal impact inoverall terms. While the euro was stronger against Sterling and the SwedishKrona, the impact was largely offset by the positive effect of a relativestrengthening in the Norwegian and Polish currencies against the euro in 2005.

Including the sales of €25 milliongenerated by Munksjö’s tissue business and The K Club prior to theirdisposal, net sales in total amounted to €4,437 million in2005. Including the sales of €527 million generated byMunksjö’s specialty operations and The K Club, net sales in total amounted to €4,805million in the year ended December 31, 2004.

With the impact of the disposal of Munksjö’s specialtyoperations and The K Club outweighing that of the inclusion of the salesgenerated by Kappa’s operations in December 2005, net sales from ourEuropean operations decreased from €4,103 million in 2004 to €3,648 millionin 2005.

Net sales from our European Packaging operations were €3,117million in 2005 compared to €3,093 million in2004. The increase reflects the inclusion of the sales of Kappa’s packagingoperations, without which the year-on-year move would have been adecrease of €141million. With overall containerboard and corrugated volumes within thecontinuing operations of the former JSG flat year-on-year, the decrease in netsales reflects the impact of lower average selling prices in 2005 for ourprincipal products.

Kraftliner volumes in the former JSG were 2% lower in2005 than in 2004. This decline in volumes, coupled with lower prices andrising input costs, negatively impacted the financial performance of thekraftliner operations. Recycled containerboard volumes (excluding mills closedor sold) in the former JSG were unchanged in 2005 on 2004 levels, althoughpaper prices declined year-on-year. Paper price increases, of €50 permetric ton on kraftliner and recycled, were partially implemented in the fourthquarter of 2005 in an attempt to commence the recovery of rising input costs;specifically energy prices. Nevertheless, given that price increases wereimplemented in the latter part of 2004 also, average containerboard prices werelower year-on-year in 2005. Corrugated volumes in the former JSG in 2005 wereunchanged on 2004 levels but selling prices declined on 2004 levels reflectingthe weakness in paper prices throughout the year.

In Specialties, the decrease in net sales aroseprimarily as a result of the absence in 2005 of Munksjö’s specialty operations(except for the relatively small tissue business in the early part of the year)although the Kappa operations added approximately €35 millionin net sales.

Latin American sales asreported in euro terms increased by 12% to €789 millionin 2005 from €703 millionin 2004. While part of the increase came from the presence in 2005 of SmurfitChile and the recently acquired sack plants in Ecuador and Costa Rica, itmainly reflects the underlying strong performance of the operations. Given thegeneral appreciation of the local currencies against the euro in 2005, there isalso a positive currency element in the year-on-year move. On a comparablebasis, the real growth in sales revenues in the region was approximately 7% andreflects primarily overall higher sales volumes in 2005 although conditionsvaried from country to country.

**INCOMEBEFORE INTEREST EXPENSE AND TAXES**

With sales revenue lower in 2005, cost of salesdecreased also while representing 72.6% of net sales compared to 72.3% in 2004.The slightly higher percentage in 2005 results mainly from lower averageselling prices and from the impact of higher costs such as energy. Gross profitin 2005 was €1,169.4 million, 

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after an asset impairmentcharge of €45.2 million, compared to €1,331.8 millionin 2004. The charge was in respect of the write down in asset values of thoseplants which we were expecting to close during 2006.

Net operating expenses, which consist of selling andadministration expenses as well as distribution costs, decreased by 3.4% to €982.4million in 2005 from €1,017.7 million in 2004. The decrease of €35.3 millionresulted mainly from net disposals with the impact of the inclusion of theformer Kappa operations for one month being more than offset by that of the Munksjödisposal. Net operating expenses were also impacted by currency fluctuations.Although lower in absolute terms in 2005, net operating expenses represented22.0% of net sales compared to 21.0% in 2004 with the increase driven primarilyby the change in our overall sales mix following the disposal of Munksjöspecialties.

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

While our Latin American operations generallyperformed well in 2005, the overall profitability of the region was adverselyaffected by a decline in Venezuela and, to a lesser extent, by the effect ofthe relative strength of the euro in 2005. Following a strong result in 2004,lower profits were expected in Venezuela in 2005 reflecting changes to marketconditions as a result of increased competition from imports and thedevaluation of the Bolivar in March 2005. This decline was more thanoffset, however, by higher profits in Colombia and, despite a slowdown in thelatter part of the year, in Mexico.

Exceptional items in 2005 comprised disposal gains of €52.6 millionnet of reorganization and restructuring costs of €25.1 million andimpairment of property, plant and equipment of €45.2 million. Theprincipal disposal in 2005 was that of Munksjö’s specialty operations, whichwere sold in two separate transactions with a combined gross gain ofapproximately €30million (after the write-off of goodwill relating to the operations sold).Other gains arose in relation to the sale of The K Club (including theClonskeagh mill site) and the Voghera mill. The reorganization andrestructuring costs arose in Europe with the largest charges relating to theclosure of our Irish mill and to two of our French corrugated plants.

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

**INTERESTEXPENSE AND TAXES**

Group net interest in 2005 was €244.6 million(before the €104.7million loss from early extinguishment of debt) compared to €285.3million (before the €5.7million loss from early extinguishment of debt) in 2004. The year-on-yeardecrease arose primarily as a result of lower net borrowing in 2005 with theuplift as a result of the merger affecting only the month of December. Neithercurrency nor rate had any real impact on the move other than through theredemption earlier in the year of the relatively high cost original PIK debt.

With the pay down of the original PIK debt in February 2005,our PIK interest charge was €33.0 million loweryear-on-year while our cash interest was marginally higher due to the switchbetween non-cash and cash interest as a result of redeeming the PIK andmovements in our level of net borrowing. Prior to the completion of the Mergerin December, our net borrowing level had fallen during 2005 as a result of ourasset sales, principally Munksjö specialties and The K Club, but this trend wasreversed with 

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the significant increasein December as a result of the Merger. With significant acceleratedwrite-offs of debt issue costs (included within the loss from the earlyextinguishment of debt), the amortization charge was also lower in 2005.

The loss of €104.7 million from theearly extinguishment of debt arose mainly as a result of our refinancing anddebt reduction activities during 2005. We incurred costs of €76.4million in the first quarter of 2005 as a result of the February refinancingand the subsequent repayment of debt with the Munksjö and The K Club proceeds.The early pay down of the original PIK debt, following the refinancing,resulted in the write-off of €13.5 million indeferred debt issuance and other costs as well as cash costs of €53.0 million,primarily the cash premium paid for early redemption. In addition, we wrote offdebt issuance costs of €9.9 million in respect of the debtrepaid with the Munksjö proceeds. We wrote off a further €4.0million in the second quarter in respect of the debt repaid with TheK Club proceeds and €24.2 million in the fourth quarter as aresult of the early pay down of some debt in the former JSG as part of thefinancing of the Merger.

After other financial expense of €13.3 million,the result before taxation in 2005 was a loss of €142.0 millioncompared to a profit of €1.4 million in 2004. The other financialexpense represents the difference between the expected return on pension schemeassets and the interest cost of pension scheme liabilities and is disclosed inaccordance with FRS 17—“Retirement Benefits”.

The tax charge amounted to €21.6 millionin 2005 compared to €27.0 millionin 2004. As in 2004, when we had the benefit of the Dutch tax refund followingthe Bosal judgment, we benefited from tax credits in certain countries in 2005.Our overall effective accounting tax rate is adversely affected by the presenceof items not allowable for tax (such as the goodwill amortization). Whereprofits are low, these add-backs have a significant impact on our overalleffective tax rate resulting in a significant charge despite a reported lossbefore taxation.

Equity minority interests amounted to €18.8 millionin 2005 compared to €16.1 millionin 2004 and arose mainly in Latin America. After minorities, the net loss for2005 was €182.4million compared to €41.7 millionin 2004.

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**Liquidity andCapital Resources**

***Historical Cash Flow***

Summarycash flows for the years ended 2006, 2005 and 2004 are set out in the followingtable:

| ** **                                | ** ** | **Year Ended  December 31, 2006** | ** ** | **Restated**(1)  Year Ended  December 31, 2005 | ** ** | **Restated**(1)  Year Ended  December 31, 2004 | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                | ** ** | **€ Million**                          | ** ** | **€ Million**                                       | ** ** | **€ Million**                                       | ** ** |
| (Loss) before tax—subsidiaries       |       |                                             | (230       | )                                                             |       |                                                          | (148       | ) |   |   | (10 | ) |   |
| Exceptional items                         |       |                                             | 158        |                                                          |       |                                                          | (44        | ) |   |   | 1 |   |   |
| Impairment of  fixed assets               |       |                                             | 31         |                                                          |       |                                                          | 45         |   |   |   | — |   |   |
| Depreciation and  depletion               |       |                                             | 364        |                                                          |       |                                                          | 240        |   |   |   | 263 |   |   |
| Goodwill  amortization                    |       |                                             | 66         |                                                          |       |                                                          | 29         |   |   |   | 38 |   |   |
| Non cash interest  expense                |       |                                             | 11         |                                                          |       |                                                          | 70         |   |   |   | 68 |   |   |
| Refinancing costs                         |       |                                             | —     |                                                          |       |                                                          | 53         |   |   |   | — |   |   |
| Share-based  payments                     |       |                                             | 8          |                                                          |       |                                                          | 5          |   |   |   | 7 |   |   |
| Working capital  change                   |       |                                             | (75        | )                                                             |       |                                                          | 59         |   |   |   | 43 |   |   |
| Current  provisions                       |       |                                             | (23        | )                                                             |       |                                                          | (14        | ) |   |   | (1 | ) |   |
| Capital  expenditure                      |       |                                             | (345       | )                                                             |       |                                                          | (192       | ) |   |   | (206 | ) |   |
| Change in capital  creditors              |       |                                             | 36         |                                                          |       |                                                          | (5         | ) |   |   | 7 |   |   |
| Sale of fixed  assets                     |       |                                             | 25         |                                                          |       |                                                          | 18         |   |   |   | 34 |   |   |
| Tax paid                                  |       |                                             | (42        | )                                                             |       |                                                          | (43        | ) |   |   | (37 | ) |   |
| Dividends from  associates                |       |                                             | 4          |                                                          |       |                                                          | 3          |   |   |   | 3 |   |   |
| Other                                     |       |                                             | (35        | )                                                             |       |                                                          | (14        | ) |   |   | (23 | ) |   |
| Free cash flow                            |       |                                             | (47        | )                                                             |       |                                                          | 62         |   |   |   | 187 |   |   |
| Investments                               |       |                                             | (34        | )                                                             |       |                                                          | (207       | ) |   |   | (6 | ) |   |
| Sale of  businesses and investments       |       |                                             | 16         |                                                          |       |                                                          | 326        |   |   |   | 3 |   |   |
| Dividends                                 |       |                                             | (7         | )                                                             |       |                                                          | (6         | ) |   |   | (6 | ) |   |
| Debt issue costs                          |       |                                             | —     |                                                          |       |                                                          | (98        | ) |   |   | (6 | ) |   |
| Acquisition costs  and fees               |       |                                             | (4         | )                                                             |       |                                                          | (4         | ) |   |   | (3 | ) |   |
| Transfer of cash  from affiliates         |       |                                             | 2          |                                                          |       |                                                          | 10         |   |   |   | 13 |   |   |
| Refinancing costs                         |       |                                             | —     |                                                          |       |                                                          | (53        | ) |   |   | — |   |   |
| Net cash  (outflow) / inflow              |       |                                             | (74        | )                                                             |       |                                                          | 30         |   |   |   | 182 |   |   |
| Net (debt)/cash  acquired/disposed        |       |                                             | 1          |                                                          |       |                                                          | (1,805     | ) |   |   | — |   |   |
| Munksjö  inter-company debt repaid   |       |                                             | —     |                                                          |       |                                                          | 157        |   |   |   | — |   |   |
| K Club  inter-company debt repaid         |       |                                             | —     |                                                          |       |                                                          | 92         |   |   |   | — |   |   |
| EU disposals  inter-company debt repaid   |       |                                             | 28         |                                                          |       |                                                          | —     |   |   |   | — |   |   |
| Non-cash interest  accrued                |       |                                             | —     |                                                          |       |                                                          | (12        | ) |   |   | (45 | ) |   |
| Currency  translation adjustments         |       |                                             | 48         |                                                          |       |                                                          | (73        | ) |   |   | 40 |   |   |
| **Decrease/(increase) in net  borrowing** | ** ** | ** **                                       | **€** | **3**                                                         |       | ** **                                                    | ** ** | **€** | **(1,611** | **)** | ** ** | ** ** | **€** | **177** |   |   |
|                                           |            |                                                  |            |                                                               |            |                                                               |            |  |  |  |  |  |  |  |  |  |

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(1)          The financial statementshave been restated to reflect the impact of implementing FRS 20 ‘Share-basedPayments’ as set out in Note 2—Summary of Accounting Policies.

***Free Cash Flow***.   Weuse the non-GAAP financial measure of “free cash flow” as a measure ofoperating performance and as a measure of liquidity. EBITDA is our primarymeasure of operating performance, and we use free cash flow to measure cashflows associated with EBITDA. Free cash flow is used by management to assessand understand our sources and uses of cash and to identify underlying trendsin our business. Free cash flow is used by management to assess our ability togenerate cash flow to reduce debt and invest in our business.

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We believe that this financial measure is important tohelp us monitor and communicate to investors our efforts as it shows the cashinflows and outflows from our operating activities, distinguishing them fromcash inflows and outflows arising from acquisition and disposal activities. Theformat of this simplified cash flow statement was developed in response tocomments received from the users of our financial statements, primarily lendersand analysts, who stated that the Irish GAAP cash flow statement included inour financial statements was not user friendly and did not match the modelsthey used for investment decisions.

We define free cash flow as income before tax addingback non-cash expenses which are depreciation, amortization, depletion andimpairment of assets and non-cash interest; deducting capital expenditure andadding cash inflows in relation to the purchase or sale of items of property,plant and equipment; deducting corporate taxes paid; adding or deducting thedecrease or increase in working capital; other, less significant, items are mainlyrelated to changes in other long term liabilities relating to employeepostretirement and profit sharing benefits, and dividends received fromassociates. In addition we adjust for refinancing costs expensed to enable usto show total outflows from refinancing activities (including outflowscapitalized as intangible assets) as a single line item in the financingsection of the cash flow statement. Similarly, we adjust for the gain or losson the disposal of businesses to enable us to show the total sale proceeds inthe financing section of the cash flow statement.

You should not considerfree cash flow in isolation or as a substitute for cash flow from operatingactivities. In addition, it may not be comparable to similarly describedmeasures used by other entities, as not all companies and analysts calculatethis non-GAAP measure in the same way. A reconciliation between net income/(loss) and consolidated statement of cash flows to free cash flow is set out onpage 59 of this report.

***Comparison of Year Ended December 31, 2006 andYear Ended December 31, 2005***

The 2006 twelve months cash flowcombines the full twelve month cash flows for JSG and Kappa. As the merger wascompleted on December 1, 2005, the twelve months comparative cash flowincludes Kappa for the month of December 2005 only.

Free cash flow, for the twelvemonths to December 2006 was a net outflow of €47 million compared toa net inflow of €62 million in the same period in 2005. Although the loss beforetax was significantly higher in 2006, this was strongly driven by exceptionalcosts of €281million, a larger part of which were either non-cash or unpaid at the end ofthe year, and higher charges for depreciation and amortization (reflecting theenlarged scale of the Group) which are added back to arrive at free cash flow. Exceptionalitems in 2006 comprised reorganization, restructuring and other costs of €197 million,asset impairment charges of €84 million in totaland a net loss of €23million on the sale of assets and businesses. In 2005, the impact ofexceptional items was less pronounced with reorganization and restructuringcosts of €25 millionand asset impairment charges of €45 million, partly offsetby disposal gains of €53 million, mainly from the sale ofMunksjö’s specialty operations and The K Club. In addition, however, the lossbefore tax in 2005 reflected the loss from the early extinguishment of debt of €105 million.This loss in turn is added back in arriving at free cash flow, partly as therefinancing costs of €53 million and partly within the non-cashinterest expense of €70million.

In cash terms, the net cash outflow after theadd-backs for exceptional items and the loss in 2005 from the earlyextinguishment of debt is broadly similar in both years. Consequently, thenegative swing of free cash flow in 2006 of €109million arises mainly as a result of increased capital expenditure and a workingcapital outflow in 2006 compared to an inflow in 2005.

The inflow of €158million for exceptional items for the twelve months to December 2006related primarily to the reclassification of the unpaid element of thereorganization and restructuring costs to current provisions and deferredcreditors. It also includes €53 million of a non-cashimpairment of 

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advances to affiliatesalong with the net loss on disposals, which is transferred to sale ofbusinesses and investments. The outflow in 2005 related primarily to thetransfer of disposal gains to the sale of businesses and investments and saleof fixed assets.

The impact of the Merger is seen in the figures fordepreciation and amortization of intangible assets, which are considerablyhigher in 2006 than in 2005. Capital expenditure at €345 millionin 2006 represented approximately 95% of depreciation compared to 80% in 2005as a result of major strategic projects. Despite the increased scale of theGroup, tax payments were similar year-on-year.

Working capital increased by €75 millionin 2006, having decreased by €59 million in 2005.Working capital amounted to €474 million at December 2006,representing 6.7% of annualized net sales compared to 7.4% at December 2005.

Financing and investment activity in 2006 included thepayment of the deferred consideration of €34 millionto the former Kappa shareholders, which was partly offset by the proceeds fromthe sale of businesses and investments, primarily in respect of the operationssold as agreed with the E.U. merger control authorities. Together, the freecash outflow of €47million and the financing and investment usage of €27 million resulted in atotal net cash outflow of €74 million in 2006 compared to €30million in 2005.

Financing and investment activity in 2005 of €32million included payments of €204 million to the formerKappa shareholders, the refinancing costs of €53 million and the issuecosts of €98million in respect of new debt, primarily in respect of the Merger.Approximately €10million of the debt issuance costs arose in the first quarter in respect of thenew senior notes. The €53 million of refinancing costscomprised the €51 millionpremium paid for the early redemption of the original PIK debt together withwaiver fees of approximately €2 million. Theseoutflows were offset in part by the disposal proceeds of €326million which included €298 million in respect of the sale ofMunksjö’s operations and €23 million in respect of the K Club.Together, the free cash inflow of €62 million and thefinancing and investment usage of €32 million resulted in atotal net cash inflow of €30 million.

The net cash outflow of €74 millionin 2006 is reduced by inter-company debt repaid of €28 million and thenet debt of €1million in respect of the E.U. disposals and a currency inflow of €48 millionresulting in a decrease in net borrowing of €3 million. In 2005,although the net cash inflow of €30 million isincreased by inter-company debt repaid of €157 million and €92 millionin respect of Munksjö and The K Club respectively, this was offset by thenet borrowing acquired as a result of the Merger and by the add-back ofnon-cash interest and currency. The overall result in 2005 was an increase innet borrowing of €1,611 million.

A positive currency adjustment on net debt of €48million arose in 2006 primarily because of a relative strengthening of the euroagainst the U.S. dollar during the year. Moves in the European currencies had alimited impact. In comparison to a year-end 2005 rate of US$ 1.18, the eurostrengthened to US$ 1.317 at the end of December 2006. Conversely, wereported a negative currency adjustment of €73 million in 2005 asa result of a weakening of the euro from US$ 1.36 at December 2004 toapproximately US$ 1.18 at December 2005.

Net borrowing inSK Funding amounted to €4,503 million (€4,521 millionincluding capital leases of €18 million) at December 2006compared to €4,507 million(€4,530 millionincluding leases) at December 2005.

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

Free cash flow for year ended December 31, 2005was €62million compared to €187million in 2004. Although our loss before taxation was higher in 2005, much ofthe increase arose from charges, such as the refinancing costs and theimpairment of fixed assets, which are added back in arriving at free cash flow.The reduction in free cash flow in 2005 versus 2004 arises mainly due to lowerpre-tax profits, lower 

56

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proceeds from the sale offixed assets and higher tax payments. On the other hand, outflows such ascapital expenditure and other outflows were lower in 2005.

The outflow of €44million for exceptional items represents the reclassification of the disposalgains of €53 millionnet of the inflow of approximately €9 million in non-cashreorganization and restructuring costs. While the larger gains relate to thesale of businesses and investments and are transferred to the investment andfinancing section of the cash flow, the gains made on property disposals arereclassified to sales of fixed assets. Proceeds from the sale of fixed assetsin turn related mainly to the properties sold in both Norway and Mexico. Thereclassification of exceptional items in 2004 related mainly to the profit onthe sale of the Botanic Road site, which is reported within sales of fixedassets, offset by the reclassification of non-cash  reorganization and restructuring costs.

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

At €192 million, ourcapital expenditure was lower than in 2004, with a reduced level of expenditurein JSG’s continuing operations being partly offset by an uplift reflecting thepresence of Kappa operations in 2005, and the absence of Munksjö specialties.For 2005, capital expenditure at €192 million represented80% of depreciation, compared to 79% in 2004.

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

Working capital decreased by approximately €59 millionin 2005 with lower debtors and, to a lesser extent, stocks offset by lowercreditors. In 2004, despite an increase in debtors, working capital decreasedby €43 milliondue to an increase in creditors and, to a lesser extent, a decrease in stocks.As a percentage of annualized net sales (adjusting for the impact of Kappa’ssales being included for December only), working capital of €502 millionat December 2005 represented 7.4% compared to 7.5% at December 2004.

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

Financing and investment activity in 2005 of €32million reflected payments to former Kappa shareholders which more than offsetthe proceeds arising from the sale of assets, primarily the Munksjö operationsand The K Club. The total proceeds received from the sale of the Munksjöoperations was €455 million,€298million of which is shown within sale of businesses and investments and €157 millionwithin the movement on net borrowing as the repayment of inter-company debt. Inaddition to Munksjö, sale of businesses and investments at €326 millionincluded €23million in respect of The K Club and €5 million in respectof the cash element of the Voghera proceeds. The total proceeds of €115million received in respect of The K Club and the Clonskeagh mill site isalso split between the sale of businesses and investments and the repayment ofinter-company loans.

Of the total of €238million payable in respect of the Merger, primarily to Kappa’s formershareholders, approximately €204 million was paid inDecember. The Merger financing resulted in debt 

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issuance costs of €88 millionand transaction fees and expenses of €4 million. We incurred anadditional €10million in debt issuance costs, mainly in the first quarter of 2005 in respectof the 7.75% senior subordinated notes. The €53 million ofrefinancing costs comprise the €51 million premiumpaid for the early redemption of the subordinated PIK notes together withwaiver fees of approximately €2 million.

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

The net cash inflow of €30 million,in 2005, was increased by inter-company debt repaid of €157million and €92 millionin respect of Munksjö and The K Club respectively. This was offset by the netborrowing acquired following the Merger and by the add-back of non-cashinterest and currency. Net borrowing acquired of €1,805 million includes theKappa borrowings taken on, plus cash of €4 million in theoperations sold during 2005. The overall result in 2005 was an increase in netborrowing of €1,611 million.In 2004, net borrowing decreased by €177 million with thenet cash inflow for the year of €182 million beingoffset by the add-back of non-cash interest and enhanced by a positivecurrency adjustment.

The movement in the relative strengths of the euro andthe dollar was different in 2005 than in recent years. In contrast to both 2003and 2004 when the euro rallied late in the year, the euro suffered a downwardtrend during 2005 from its relatively strong position at the end of 2004.Primarily as a result of the relative weakness of the euro, the currencyadjustment in 2005 was negative at €73 million. Conversely,2004’s positive adjustment of €40 million reflected arelative strengthening of the euro compared to December 2003.

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Areconciliation of net losses to free cash flow is set out in the followingtable:

| ** **                                                              | ** ** | **12 months to  Dec. 31, 2006** | ** ** | **Restated**(1)12 months to  Dec. 31, 2005 | ** ** | **Restated**(1)12 months to  Dec. 31, 2004 | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **€Million**                                   | ** ** | **€Million**                                              | ** ** | **€Million**                                              | ** ** |
| Net losses                                                              |       |                                                | (272       | )                                                              |       |                                                           | (182       | ) |   |   | (42 | ) |   |
| Equity minority interests                                               |       |                                                | 14         |                                                           |       |                                                           | 19         |   |   |   | 16 |   |   |
| Taxation                                                                |       |                                                | 37         |                                                           |       |                                                           | 21         |   |   |   | 27 |   |   |
| Share of associates’ operating income and interest  expense        |       |                                                | (9         | )                                                              |       |                                                           | (6         | ) |   |   | (11 | ) |   |
| Loss before tax—subsidiaries                                       |       |                                                | (230       | )                                                              |       |                                                           | (148       | ) |   |   | (10 | ) |   |
| Net loss / (income) on sales of assets and  businesses                  |       |                                                | 23         |                                                           |       |                                                           | (52        | ) |   |   | (22 | ) |   |
| Net interest expense                                                    |       |                                                | 343        |                                                           |       |                                                           | 349        |   |   |   | 291 |   |   |
| Other financial expense                                                 |       |                                                | 9          |                                                           |       |                                                           | 13         |   |   |   | 16 |   |   |
| Operating income                                                        |       |                                                | 145        |                                                           |       |                                                           | 162        |   |   |   | 275 |   |   |
| Reorganization and restructuring costs                                  |       |                                                | 83         |                                                           |       |                                                           | 8          |   |   |   | 23 |   |   |
| Impairment of advances to affiliates                                    |       |                                                | 53         |                                                           |       |                                                           | —     |   |   |   | — |   |   |
| Depreciation and depletion (net of amortization of  government grants)  |       |                                                | 393        |                                                           |       |                                                           | 283        |   |   |   | 260 |   |   |
| Amortization of intangible assets                                       |       |                                                | 66         |                                                           |       |                                                           | 29         |   |   |   | 38 |   |   |
| Share-based payments                                                    |       |                                                | 8          |                                                           |       |                                                           | 5          |   |   |   | 7 |   |   |
| Finance lease interest paid                                             |       |                                                | 1          |                                                           |       |                                                           | 1          |   |   |   | 2 |   |   |
| Decrease in deferred creditors                                          |       |                                                | (29        | )                                                              |       |                                                           | (14        | ) |   |   | (13 | ) |   |
| (Increase) / decrease in working capital (including  capital creditors) |       |                                                | (62        | )                                                              |       |                                                           | 40         |   |   |   | 47 |   |   |
| Currency adjustment                                                     |       |                                                | (1         | )                                                              |       |                                                           | (1         | ) |   |   | 2 |   |   |
| Net cash flow from operating activities                                 |       |                                                | 657        |                                                           |       |                                                           | 513        |   |   |   | 641 |   |   |
| Dividends received from associates                                      |       |                                                | 4          |                                                           |       |                                                           | 3          |   |   |   | 3 |   |   |
| Add back: Dividends paid to minorities                                  |       |                                                | 7          |                                                           |       |                                                           | 6          |   |   |   | 6 |   |   |
| Returns on investments and servicing of finance                         |       |                                                | (347       | )                                                              |       |                                                           | (389       | ) |   |   | (255 | ) |   |
| Taxation                                                                |       |                                                | (42        | )                                                              |       |                                                           | (43        | ) |   |   | (37 | ) |   |
| Capital expenditure and financial investment                            |       |                                                | (315       | )                                                              |       |                                                           | (166       | ) |   |   | (166 | ) |   |
| Financing: Capital elements of finance leases repaid                    |       |                                                | (8         | )                                                              |       |                                                           | (5         | ) |   |   | (13 | ) |   |
| Interest on non FRS 1 short term debt                                   |       |                                                | (2         | )                                                              |       |                                                           | (9         | ) |   |   | 4 |   |   |
| Add back: Refinancing costs and deferred debt issue  costs              |       |                                                | —     |                                                           |       |                                                           | 151        |   |   |   | 6 |   |   |
| Add back: Purchase and sale of other investments                        |       |                                                | (1         | )                                                              |       |                                                           | 1          |   |   |   | (2 | ) |   |
| Free cash flow                                                          |       |                                                | €     | (47                                                            | )          |                                                           |       | € | 62 |   |   |   | € | 187 |   |   |
|                                                                         |            |                                                     |            |                                                                |            |                                                                |            |  |  |  |  |  |  |  |  |  |

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(1)          The financial statementshave been restated to reflect the impact of implementing FRS 20 ‘Share-basedPayments’.

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**Capital Resources**

Our primary sources of liquidity are cash flows fromoperations and borrowings under the senior credit facility. Our primary uses ofcash are for debt service and capital expenditures.

Total debt, including finance leases, amounted to €4,891.6 millionat December 31, 2006 compared to €5,533.7 million at December 31,2005. Cash amounted to €370.2 million at December 31, 2006compared to €1,033.4 million(including restricted cash of €755.6 million) at December 31,2005. The restricted cash was used in January 2006 to repay various Kappabonds, which were included in our total debt at December 31, 2005. Totalnet debt (total debt less cash) amounted to €4,521.4 million(including finance leases of €18.2 million) at December 31,2006 compared to €4,530.3 million(including finance leases of €23.5 million) at December 31,2005.

At December 31, 2006, SK Funding had outstanding €350 million101¤8%senior notes due 2012, US$750 million 95¤8% senior notesdue 2012, €217.5 million7.75% senior subordinated notes due 2015 and US$200 million 7.75% seniorsubordinated notes due 2015. In addition, Smurfit Kappa Treasury FundingLimited had outstanding US$292.3 million 7.50% senior debentures due 2025and the Group had outstanding €210 million floatingrate notes issued under an accounts receivable securitization program maturingin 2011.

As of January 1, 2005, $211,110,848 aggregateprincipal amount of our 15.5% subordinated notes due 2013 and €140,740,568aggregate principal amount of our 15.5% subordinated notes due 2013 wereoutstanding. On January 13, 2005, SK Funding commenced a tender offer topurchase for cash all outstanding existing 15.5% subordinated notes, which werefer to as the ‘‘subordinated notes tender offer’’. In connection with thesubordinated notes tender offer, we also solicited consents to amend theindentures governing the existing 15.5% subordinated notes to removesubstantially all of the restrictive covenants thereunder. The subordinatednotes tender offer was completed and the proposed amendments became effectiveon February 14, 2005. All of the euro 15.5% subordinated notes weretendered. The .01% of the 15.5% dollar subordinated notes not tendered in February wereredeemed on October 28, in accordance with the terms and conditions of theindentures governing the 15.5% subordinated notes, at a redemption price of108.0%. In January 2005, SK Funding completed an offering of approximately€217.5 millionof 7.75% senior subordinated notes and US$200 million of 7.75% seniorsubordinated notes. SK Funding applied the net proceeds from such offering tofund the purchase of its existing 15.5% subordinated notes pursuant to thesubordinated notes tender offer and to pay related fees and expenses.

SK Acquisitions and certain subsidiaries were party toa senior credit facility dated September 12, 2002 which provided for threeterm loans in an aggregate amount of €1.2 billion as at December 31,2004 and a revolving credit facility with up to €425 million inavailability. In March 2005, €421 million from theproceeds of the sale of Munksjö specialty paper operations was used to repayall of the outstanding term loans under Tranche A and part of the outstandingterm loans under Tranches B and C of the facility. In May 2005, €20 millionfrom the proceeds of the Munksjö tissues sale and in June, €112 millionfrom the proceeds of The K Club sale were used to part repay Tranches B and C.The remaining outstanding indebtedness under the 2002 senior credit facilitywas repaid on December 1, 2005 with the proceeds of a new senior creditfacility (the “senior credit facility”) which was arranged to finance theMerger.

On November 30, 2005, SKCL, SK Acquisitions andcertain of SKCL’s subsidiaries, including SK Funding, as borrowers orguarantors, Deutsche Bank AG, London Branch, Citigroup Global Markets Limited,Credit Suisse First Boston International and JP Morgan, as arrangers, certainlenders named therein, and Deutsche Bank AG, London Branch, as issuing bank,facility agent and security agent, entered into the senior credit facility. On December 1,2005, €2,622 millionand US$175 million were drawn under the senior credit facility to fund theinitial cash consideration for the Merger, to refinance the 2002 senior creditfacility of Smurfit Kappa Acquisitions and the existing senior credit facilityof Kappa Packaging, and to fund the redemption price for the 105¤8% seniorsubordinated notes due 2009 and the 121¤2%senior 

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subordinated discountnotes due 2009 issued by Kappa Beheer B.V., and to pay related costs andexpenses. As of December 31, 2006, the senior credit facility consists ofa €452 millionamortizing A tranche term loan maturing in 2012, a €1,188 million Btranche term loan maturing in 2013 and a €1,189 million Ctranche term loan maturing in 2014. The borrowers have €875 millionof additional committed borrowing availability under the senior creditfacility, including a €600 million revolving credit facility,of which €4.5million was drawn as at December 31, 2006, and a €275 millionrestructuring facility, of which €103.2 million was borrowedas at December 31, 2006. The revolving credit facility is available fordrawing until December 2012. The restructuring facility is available fordrawing until December 1, 2008, at which point all drawings convert todrawings under Tranche A, B and C term loans in the proportion that Tranche A,B and C term loans were available under the senior credit facility at thefacility’s inception. During 2006, €33 million was repaidon the Tranche A facility, €32 million of which was funded from thenet proceeds of the EU regulatory disposals.

Thefollowing table provides the range of interest rates as of December 31,2006 for each of the drawings under the term loans and the revolving creditfacility:

| **Borrowing arrangement** | ** ** | ** ** | ** ** | **Currency** | ** ** | **Interest Rate** | ** ** |
|--------------------------------|------------|------------|------------|--------------|------------|------------------------|------------|
| Restructuring  facility        |       |       | EUR        |         |       | 5.81% - 5.91           | %          |
| Term Loan A                    |       |       | EUR        |         |       | 5.91% - 6.09           | %          |
| Term Loan B                    |       |       | EUR        |         |       | 5.96% - 6.34           | %          |
|                           |       |       | USD        |         |       | 7.75                   | %          |
| Term Loan C                    |       |       | EUR        |         |       | 6.46% - 6.84           | %          |
|                           |       |       | USD        |         |       | 8.25                   | %          |

 

Borrowings under the revolving credit facility areavailable to fund the Group’s working capital requirements, capitalexpenditures and other general corporate purposes and will terminate in December 2012.The Term Loan A must be repaid by installments from December 2006 through December 2012.The Term Loan B must be repaid in December 2013. The Term Loan C must berepaid in December 2014. As of December 31, 2006 there was €4.5 milliondrawn under the revolving credit facility by way of drawings on ancillaryfacilities and facilities supported by letters of credit.

The senior credit facility was amended on January 31,2007 to permit the use of the IPO proceeds to repay indebtedness and, subjectto our ratio of consolidated total net borrowings to consolidated EBITDA beingno greater than 4.5:1 (as calculated in accordance with the amended andrestated senior credit facility), to permit the upstreaming of funds for thepayment of dividends and the relaxation of certain other restrictions on oursubsidiaries. In addition, the amended senior credit facility allows SKAcquisitions to incur additional senior secured indebtedness of up to €400 millionto be ranked and secured equally with the existing senior credit facilities,without requiring the consent of the existing senior lenders.

The instrumentsgoverning our indebtedness, including the senior credit facility and theindentures governing the senior and senior subordinated notes and seniordebentures, contain financial and other covenants that restrict, among otherthings, the ability of SK Funding and its subsidiaries to:

·       incuradditional indebtedness and issue preference shares;

·       paydividends or make certain other restricted payments;

·       consummatecertain asset sales;

·       incurliens;

·       enterinto certain transactions with affiliates; or

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·       mergeor consolidate with any other person or sell or otherwise dispose of all orsubstantially all of our assets.

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

*SecuritizationTransactions.*   In September 2004, weinitiated a securitization transaction where we raised seven-year funding of €210 million,which was used to repay a portion of our term loans under our then existingsenior credit facility. Receivables generated by certain of our operatingcompanies in the United Kingdom, Germany and France are sold to special purposesubsidiaries and entities to support the funding provided by a JP Morganconduit. The sale of the securitized receivables is not intended to, and willnot, meet the requirements for off-balance sheet treatment under IrishGAAP, with the result that the sold receivables will, as an accounting matter,continue to be shown on our balance sheet and the notes to be issued to fundthe purchase of the receivables will be shown as liabilities. The gross amountof receivables collateralizing the receivables securitization at December 31,2006 was €260 million.At December 31, 2006 cash of over €10 million was insecuritization bank accounts and was not available for transfer to our othersubsidiaries.

***Capital Expenditures and Other Contingencies***

From 1996 through 2006, the levels of our capitalexpenditure in the aggregate were at or below annual depreciation expenses. Managementexpects this trend to continue. SKG made €345 millionand €192 millionin capital expenditures in the years ended December 31, 2006 and 2005,respectively, and JSG made €206 million in capital expenditures inthe year ended December 31, 2004. These expenditures were used primarilyfor cost reduction, business growth, maintenance and environmental and otherregulatory compliance. Major projects completed or largely completed in 2006included the re-build of a paper machine at the Mengibar mill in Spain, theupgrade of a paper machine at the Facture mill in France and the refurbishmentof a recovery boiler at the Nettingsdorfer mill in Austria. The Mengibarproject cost approximately €46 million in total, with expenditureoccurring from 2004 to 2006. The expenditure on the Facture and Nettingsdorferprojects, at respective total costs of €30 million and €12 million,occurred primarily in 2006. In addition, we are currently engaged in two majormill projects, one at Piteå in Sweden and one at Cali in Colombia. A newbiofuel boiler and steam turbine is being installed at Piteå at a total cost ofapproximately €80 million,of which over €70 millionwas spent in 2005 and 2006. Cali is our principal mill in Colombia and theproject covers its complete upgrade at a total cost of approximately €50 million,of which €30 millionwas spent in 2005 and 2006.

At December 31, 2006, we had capital expenditurecommitments relating to property, plant and equipment in the amount of €244.1 million,of which €148.2 millionhad been contracted for. We currently estimate that capital expenditures in2007 will amount to approximately €325 million.

In order to comply with increasingly stringentenvironmental requirements, we continue to incur capital expenditures toupgrade certain wastewater treatment facilities and to address air emissions,solid waste and noise at our mills. We are subject to the European Union’sIntegrated Pollution Prevention and Control Directive (“IPPC”). The IPPC has,since its introduction, gradually been incorporated into national legislation,such that all installations must be covered by an IPPC permit before October 31,2007, although some member states have negotiated an extended timetable beyondthis date. We have obtained IPPC permits for most of our mills that requirethem, are in the process of obtaining such permits for the remaining millswhich require them and are taking such actions as are necessary to meet therequirements set out under the new permits. Additionally, as part of the IPPCprogramme, we are required to conduct “baseline” environmental investigationsor otherwise provide information regarding the condition of the underlying soiland groundwater at most of our European mill sites as well as set upappropriate provisions in case of leak malfunctions, momentary stoppages anddefinite cessation of operations. IPPC or a similar 

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multi-country regulatoryregime is not applicable to our mills in Latin America. In this region, permitconditions reflect individual country regulations.

Overall, SKG incurred approximately €5** **million and €8 million in capitalexpenditures for environmental controls at our facilities worldwide in 2006 and2005 respectively, while JSG’s expenditure in 2004 was approximately €8 million.We anticipate that our environmental capital expenditures will be approximately€8million in 2007. See Item 4 “Information on the Company-Environmental Issues.”

We are subject to several put arrangements and capitalcommitments in certain companies which are not wholly owned or in which we holdonly a minority interest, namely Fustelpack S.p.A. in Italy and Cajas de CartonSultana S.A. de C.V. in Mexico. The owner of a 12% shareholding in FustelpackS.p.A. (of which we own 69%) has the right every two years to put hisshareholding to other shareholders for a put price presently estimated to beapproximately €1 million. Inaddition, we have an option expiring at the end of December 2008 toacquire the approximate 55% shareholding of Cajas de Carton Sultana S.A. deC.V. that we do not already own. The price for such option, which will bedetermined by an appraiser at the time it is exercised, is currently estimatedat approximately €13 million.

We are a party to various lawsuits and are subject tovarious contingent liabilities for which we have not taken a reserve. In theevent we are found liable in any or all of such lawsuits, or the contingenciesrelating to such liabilities actually occur, our business and financialcondition could be adversely affected. For more information, see Item 3 “KeyInformation—Risk Factors” and Item 8 “Financial Information—Legal Proceedings”.

SK Funding believes thatcash generated from operations will be adequate to meet its anticipated debtservice requirements, capital expenditures and working capital needs for thenext 12 months, and that cash generated from operations and amounts availableunder the revolving credit facility will be adequate to meet its anticipateddebt service requirements, capital expenditures and working capital needs forthe foreseeable future. There can be no assurance, however, that SK Funding’sbusiness will generate sufficient cash flow from operations or that futureborrowings will be available under the senior credit facility or otherwise toenable it to service its indebtedness, including the new senior creditfacility, the senior and senior subordinated notes, to retire or redeem thenotes or to make anticipated capital expenditures. SK Funding’s futureoperating performance and its ability to service or refinance the notes and toservice, extend or refinance the senior credit facility will be subject tofuture economic conditions and to financial, business and other factors, manyof which are beyond our control.

**Critical Accounting Policies and Estimates**

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

***Long lived assets and goodwill***

Weconduct impairment reviews of long-lived assets and goodwill in accordance withFRS 10 “Goodwill and Intangible Assets”, FRS 11 “Impairment of Fixed Assets andGoodwill”, FAS 144 “Accounting for the Impairment or Disposal ofLong-Lived Assets” and SFAS No. 142 “Goodwill and Other Intangible Assets”,respectively. Such reviews require us to make estimates of future cash flowsand fair values. We have performed the required reviews in 2006 and haverecognized an impairment charge of €31 million in respect of property, plant andequipment. Our cash flow projections include significant assumptions abouteconomic conditions, demand and pricing for our products and costs. Ourestimates of fair value are determined using a variety of valuation techniques,including pricing of recent industry acquisitions. While significant judgmentis required, we believe that our estimates of future cash flows and fair valuesare reasonable. However, should our assumptions change in future years, ourfair value models 

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could indicate lower fair values for long-lived assetsand goodwill. This could result in material impairment provisions affecting thecarrying value of property, plant and equipment, goodwill and results ofoperations.

***Allowance for doubtful accounts***

Weevaluate the collectibility of our accounts receivable on a case-by-case basis,and make adjustments to the bad debt reserve for expected losses. We considersuch things as ability to pay, bankruptcy, credit ratings and payment history.For all other accounts, we estimate reserves for bad debts based on historicalexperience and past due status of the accounts. In the fourth quarter of 2005,we conducted a detailed review of the consistency of the application of thispolicy. Taking this into account, our bad debt provision reduced from €53 million to €46 million in2005. During 2006, the policy was consistently applied and resulted in areduction in our bad debt provision from €46 million to €42 million.

***Legal and environmentalcontingencies***

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

***Post retirement benefits***

SK Funding accounts for post retirement benefits inaccordance with FRS 17—“Retirement Benefits”. FRS 17 applies to all types ofbenefits that an employer provides after employees have completed theirservice, including pensions and other post retirement benefits. The expectedincrease in the present value of scheme liabilities arising from employeeservice in the current or prior periods is charged against operating income.The expected returns on the schemes’ assets and the increase during the periodin the present value of the schemes’ liabilities arising from the passage oftime are included in the Consolidated Statement of Operations as “OtherFinancial Expense”. Differences between the expected and the actual return onplan assets, together with the effect of changes in the current or priorassumptions underlying the liabilities are recognized in the ConsolidatedStatement of Total Recognized Gains and Losses. Scheme assets are valued atfair value and scheme liabilities are measured using the projected unit creditmethod. Net scheme assets and liabilities, reduced by deferred tax amounts, arerecorded on the Balance Sheet as a pension surplus or deficit as appropriate.

Thereare several assumptions that impact the actuarial calculation of pensionobligations and, in turn, net periodic pension expense in accordance with SFAS No. 87,“Employer’s Accounting for Pensions”. These assumptions require various degreesof judgment. The most significant assumptions are (1) the expected returnon plan assets and (2) the discount rate. Changes in these assumptions canhave a material impact on pension obligations and pension expense. For example,holding all other assumptions constant, a one percentage point decrease in ourestimated discount rate would increase the estimated 2006 pension expense byapproximately €15 million. A one percentage point increasein the estimated discount rate would decrease the estimated pension expense for2006 by approximately €11 million. Similarly, holding otherassumptions constant, a one percentage point decrease in SK Funding’s estimatedlong-term rate of return on plan assets would increase the pension expense forthe year ended December 31, 2006 by approximately €13 million. A onepercentage point increase in the estimated 

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long-term rate of return would decrease pension expenseby approximately €13 million for the same period.

***Share-based payments***

The determination of thefair value of awards under the management equity plan involves the use ofjudgments and estimates. The fair value has been estimated using a binomiallattice model at each grant date and any subsequent modification dates. Thebinomial lattice model includes judgmental assumptions such as expectedvolatility rates, risk-free interest rates, a marketability discount and anestimate of the fair value of the awards at grant date.

***Income tax matters***

Deferred tax assets andliabilities reflect our assessment of future taxes to be paid in the jurisdictionsin which we operate. These assessments involve temporary differences resultingfrom differing treatment of items for tax and accounting purposes, as well asestimates of our current tax exposures. Based on our evaluation of our taxpositions, we believe we are adequately reserved for these matters at December 31,2006.

At December 31, 2006, wehad net operating loss carry-forwards of €1,187 million.These loss carry-forwards have a tax value of €357 million.Valuation allowances of €173 million have been established for aportion of these deferred tax assets. The realization of these deferred taxassets is dependent on future taxable income. Based upon recent levels oftaxable income, we expect that our deferred tax assets, net of valuationallowances, will be fully utilized.

Wefrequently face challenges from domestic and foreign tax authorities regardingthe amount of taxes due. These challenges include questions regarding thetiming and amount of deductions and the allocation of income among various taxjurisdictions. To the extent we prevail in matters for which accruals have beenestablished or are required to pay amounts in excess of our reserves, oureffective tax rate in a given financial statement period may be materiallyimpacted. While the ultimate results cannot be predicted with certainty, webelieve that the conclusion of any such challenge will not have a materialadverse effect on our consolidated financial condition or results ofoperations.

**Research andDevelopment**

Weare committed to continuous innovation in our products and processes in orderto reduce costs, improve operating efficiencies and increase profitability. Innovationis also an important factor in meeting our customers’ needs. The research anddevelopment activities embrace all aspects of our business from the consumptionof both recycled and virgin fibers by our mills and the manufacture of paperand paperboard to the conversion of paperboard into paper-based packagingproducts. In 2006, 2005 and 2004, the Group’s research and development costswere approximately €2.2 million, €4.3 million and €4.9 millionrespectively.

**Trend Information**

**Europe**

On a comparable basis, volumes of our core grades ofproduct—kraftliner, recycled containerboard and corrugated containers—weregenerally lower in 2006 compared to 2005, partly as a result of plant closuresduring 2006. Kraftliner and recycled containerboard volumes were down 3% and 2%respectively, while overall corrugated container volumes were flatyear-on-year. Corrugated container volumes within the former JSG operationswere lower year-on-year, however, as a result of the negative impact of plantclosures.

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Volumesof corrugated containers closely follow increases in industrial production.Reflecting improving economic conditions in 2006, demand for corrugatedcontainers in Western Europe grew by more than 3% in 2006. Our corrugatedcontainer volumes in 2006 were adversely affected both by plant closures and byour commitment to achieving the box price increases necessary to recover thecontainerboard price increases implemented during the year. As kraftliner andrecycled containerboard are the primary raw materials used in the manufactureof corrugated containers, the growth in these products tends to closely followthat of corrugated containers. In comparison to 2005, however, overall recycledcontainerboard volumes in 2006 reflected the closure of several mills while thedecline in kraftliner volumes resulted primarily from the partial shut-down atthe Facture mill in France in order to facilitate a machine upgrade.

Pricingfor corrugated containers depends on the levels of supply and demand in themarketplace as well as the cost of production, particularly the cost ofkraftliner and recycled containerboard. Kraftliner prices depend on levels ofsupply and demand and can also be affected by the exchange rate differentialbetween the euro and the U.S. dollar, given that kraftliner is a worldwidecommodity and in many cases is sold in U.S. dollars. Recycled containerboardprices are affected by supply and demand conditions, as well as the cost ofproduction, particularly the cost of OCC, the primary raw material.

Increasesin the price of wastepaper and virgin fiber as raw materials could result froma variety of factors. The prices we pay for these materials tend to be cyclical,subject to significant volatility, particularly in the case of wastepaper, andvary on a regional basis.

Theprice of recovered paper, using OCC as a basis in Europe, has peakeddramatically twice in recent years—in June 2002 and in April 2003. Ineach case, a relatively low level of supply was matched with a relatively highlevel of demand, principally caused by increased demand from Asia. In the firstcase, the free-on-board price rose to over €150per metric ton. Within a period of three months, supply and demand conditionsleveled to return the price to around €100 per metric ton. In thesecond case, the spike was even more rapid with prices falling back to previouslevels almost immediately. In 2004, the price per metric ton remainedrelatively stable, fluctuating by a total of €11 per metric ton, butending the year at the same price as January. Similarly, in 2005, there wasrelative stability with the annual peak being €13 per metric ton ahead ofthe trough, and the price ending the year €5 per metric ton above theJanuary price. In 2006, the price of OCC increased by around €10per metric ton between April and May, and stayed at the higher level forthe remainder of the year.

The table below providesinformation about the European OCC price information per metric ton at and forthe years ended December 31, 2004, 2005, and 2006.

**Free-on-Board OCC Price per Metric Ton**

| ** **                      | ** ** | **As of and for the Year Ended December 31,**        | ** ** |
|---------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **       2004       ** | ** ** | **       2005       ** | ** ** | **       2006       ** | ** ** |
| ** **                      | ** ** | **(euro)**                                                                                   | ** ** |
| Price at the end of the  period |       |                                                                                         | 55         |   |   |   | 57 |   |   |   | 67 |   |   |
| Average price during  period    |       |                                                                                         | 59         |   |   |   | 58 |   |   |   | 63 |   |   |
| Highest price during  period    |       |                                                                                         | 65         |   |   |   | 65 |   |   |   | 67 |   |   |
| Lowest price during period      |       |                                                                                         | 54         |   |   |   | 52 |   |   |   | 57 |   |   |

 

Webelieve that our available sources of virgin fiber and OCC (including from ourown reclamation facilities) will be adequate to supply our raw material needsfor the foreseeable future.

Containerboardprices strengthened progressively from the latter part of 2005 with averagekraftliner and recycled containerboard prices higher by approximately 10% and20% respectively year-on-year. Reflecting both a less pronounced decline in2005 and the lag in recovering the containerboard price increases implementedduring 2006, corrugated prices on average in 2006 for our operations were 2%higher than in 2005.

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**Latin America**

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

Reflecting good demandconditions across the region generally, our corrugated container volumes were7% higher in 2006 than in 2005, although conditions varied from country tocountry. Reflecting the impact of downtime at our San Felipe mill in Venezuelain the second quarter of 2006 for the installation of a new press section andcapacity constraints in Colombia and Mexico, our containerboard volumes werehigher year-on-year by only 3%.

**Off Balance SheetArrangements**

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

**Effect of Inflation**

We do not believe thatinflation has had any material effect on our results of operations duringfiscal years 2006, 2005 and 2004.

**Tabular Disclosureof Contractual Arrangements**

Thetable below sets out our contractual arrangements as of December 31, 2006:

| ** **                          | ** ** | **Payments due by period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1 to 3 years** | ** ** | **3 to 5 years** | ** ** | **After 5 years** | ** ** |
| ** **                          | ** ** | **(euro in millions)**          | ** ** |
| Long term debt                      |       | 4,669                                     |       |   | 25 |   |   |   | 139 |   |   |   | 400 |   |   |   | 4,105 |   |   |
| Capital lease  obligations          |       | 18                                        |       |   | 4 |   |   |   | 7 |   |   |   | 3 |   |   |   | 4 |   |   |
| Operating leases                    |       | 165                                       |       |   | 38 |   |   |   | 52 |   |   |   | 35 |   |   |   | 40 |   |   |
| Total contractual cash  obligations |       | €                                    | 4,852      |   |   | € | 67 |   |   |   | € | 198 |   |   |   | € | 438 |   |   |   | € | 4,149 |   |   |
|                                     |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

**Item 6.**                        Directors,Senior Management and Employees

**Directors andExecutive Officers**

SK Funding is owned 100% by SKCL, which is a whollyowned subsidiary of SK Holdings, which in turn is a wholly owned subsidiary ofSKGL. SKGL is a wholly owned subsidiary of SKG plc, a public company listed onthe Irish and London stock exchanges.

Certain members of the board of directors of SKFunding also serve as directors of SKG plc, SKGL, SK Holdings and SKCL.

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The directors andexecutive officers of SKG plc, and their ages and positions, are as follows asof April 27, 2007:

| **Name**               | ** ** | ** ** | ** ** | **Age**                                      | ** ** | **Position** |
|------------------------|------------|------------|------------|----------------------------------------------|------------|--------------|
| Sean Fitzpatrick       | ** ** | 58         | ** ** | Non-executive Chairman                       |
| Frits Beurskens        | ** ** | 60         | ** ** | Non-executive Deputy  Chairman               |
| Gary W. McGann         | ** ** | 56         | ** ** | Group Chief Executive  Officer and Director  |
| Anthony P.J. Smurfit   | ** ** | 43         | ** ** | Group Chief Operations  Officer and Director |
| Ian J. Curley.         | ** ** | 45         | ** ** | Group Chief Financial  Officer and Director  |
| Christopher J. McGowan | ** ** | 35         | ** ** | Non-executive Director                       |
| Samuel M. Mencoff      | ** ** | 50         | ** ** | Non-executive Director                       |
| Gordon Moore           | ** ** | 40         | ** ** | Non-executive Director                       |
| Liam O’Mahony     | ** ** | 60         | ** ** | Non-executive Director                       |
| Rolly van Rappard      | ** ** | 46         | ** ** | Non-executive Director                       |
| Nicanor Restrepo       | ** ** | 65         | ** ** | Non-executive Director                       |

* *

*Sean Fitzpatrick*joined the board of SKG plc as our non-executiveChairman on March 20, 2007, following the retirement of Sir MichaelSmurfit as non-executive Chairman. He will serve as chairman of the nominationscommittee. He retired as the Chief Executive Officer and was appointednon-executive chairman of Anglo Irish Bank Corporation plc in January 2005.A chartered accountant by qualification, he also serves as a non-executivedirector of the Dublin Docklands Development Authority, Greencore plc, AerLingus Group plc and as a member of the Council of the Institute of CharteredAccountants in Ireland.

*Frits Beurskens*serves as****our non-executive Deputy Chairman and as adirector of SKG plc and certain othersubsidiaries of the Group. He joined the Kappa Group in 1990 and held variousmanaging director positions until his appointment as its President in 1996which he held until the Merger on December 1, 2005. He is chairman of CEPI(Confederation of European Paper Industries) and a member of the executiveboard of ICCA (International Corrugated Cases Association).

*Gary W. McGann*serves as our Group Chief Executive Officer and as adirector of SKG plc and certain other subsidiaries of the Group. He became GroupChief Executive Officer in November 2002 upon the retirement of SirMichael Smurfit as Chief Executive Officer. He was appointed President andChief Operations Officer of JSG on January 28, 2000. He joined JSG in 1998as Chief Financial Officer. He had previously held a number of senior positionsin both the private and public sectors over the last 20 years, including chiefexecutive of Gilbeys of Ireland Limited and Aer Lingus Group plc. He ischairman of Dublin Airport Authority plc and a director of Anglo Irish BankCorporation plc and United Drug plc.

*Anthony P.J. Smurfit*serves as our Group Chief Operations Officer and as adirector of SKG plc and certain other subsidiaries of the Group. He has workedin various parts of JSG in Europe and the United States. Prior to taking up hisposition as Chief Executive of Smurfit Europe in October 1999 and Group ChiefOperations Officer on November 1, 2002, he was Deputy Chief Executive ofSmurfit Europe and previously Chief Executive Officer of Smurfit France.

*Ian J. Curley*serves as our Group Chief Financial Officer and as adirector of SKG plc and certain other subsidiaries of the Group. He became GroupChief Financial Officer in 2000. He joined the Group in 1989 having previouslyworked for a number of multinationals in Ireland. He was appointed ChiefFinancial Officer of Smurfit Europe in 1997, prior to which he served asfinancial controller of Smurfit Continental Europe for a number of years basedin the United Kingdom and France.

*Christopher J. McGowan*serves as a director of SKG plc and certain othersubsidiaries of the Group. He has been employed principally by Madison Dearbornsince 1999 and currently serves as a Director. 

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*Prior tojoining Madison Dearborn, he attended Harvard Graduate School of BusinessAdministration, where he received an M.B.A. He is a member of the board ofdirectors of Forest Product Holdings, LLC (d.b.a. Boise Cascade).*

*Samuel M. Mencoff*serves as a director of SKG plc and certain othersubsidiaries of the Group. He has been employed principally by Madison Dearbornsince 1993 and currently serves as a Co-President. From 1987 until 1993, heserved as Vice President of First Chicago Venture Capital. He is a member ofthe board of directors of Forest Product Holdings, LLC (d.b.a. Boise Cascade),Evanston Northwestern Healthcare and Packaging Corporation of America, and amember of the board of trustees of Brown University.

*Gordon Moore*has served as a director of SKG plc and certain othersubsidiaries of the Group since December 2006. He joined Cinven in 1996from S.G. Warburg. Since joining Cinven, he has held directorships with anumber of investee companies including Fitness First Holdings Limited, OdeonCinema Group and NCP, and is currently a director of Sweden DIA (Sweden) AB. Hehas significant experience working with companies in a wide range of industrialsectors. He is also a director of Worth School.

*Liam O’Mahony*joined the board of SKG plc on March 20,2007 and serves as the Company’s senior non-executive director andchairman of the compensation committee. He is the chief executive officer ofCRH plc, prior to which he held a number of senior management positions withinthe CRH group including chief operations officer of its US operations andmanaging director, Republic of Ireland and UK companies. He is a member of TheIrish Management Institute Council and of the Harvard Business School EuropeanAdvisory Board.

*Rolly van Rappard*has served as a director of SKG plc and certain othersubsidiaries of the Group since December 1, 2005.  He was a member of the Supervisory Board ofKappa from 1998. He held positions at Citicorp prior to becoming a managingpartner of CVC Capital Partners in 1989. He is also member of the Supervisory Boardof Wavin B.V., Veen Bosch and Keuning Uitgevers N.V and Danske Traelast.

*Nicanor Restrepo*joined the board of SKG plc on March 20, 2007 asan independent non-executive director and serves as chairman of the auditcommittee. He is the retired president and chief executive officer ofSuramericana de Inversiones S.A. He is a director of Sofasa (Renault/Toyota)and Exito S.A. He has extensive business experience having occupied severalpositions in the private sector and has received many awards both in Colombiaand internationally.

The mailing address of Messrs. Fitzpatrick,Beurskens, McGann, Smurfit, Curley, O’Mahony and Restrepo is c/o Smurfit KappaGroup plc, Beech Hill, Clonskeagh, Dublin 4, Ireland; the mailing address for Messrs. McGowanand Mencoff is c/o Madison Dearborn Partners, L.L.C., Three First NationalPlaza, Suite 3800, Chicago, Illinois 60602, United States; the mailingaddress for Mr. Moore is c/o Cinven Ltd, Warwick Court, PaternosterSquare, London EC4M 7AG, United Kingdom; and the mailing address for Mr. vanRappard is c/o CVC Capital Partners Group SA ,Chaussee de la Hulpe 166, 1170Brussels, Belgium.

**Board Practices**

Christopher J. McGowan and Samuel M. Mencoff wereappointed as directors of SKG plc on February 6, 2007 as nominees of MDCPIII, MDCP IV and MDSE III (‘‘MDCP’’) pursuant to the terms of the Shareholders’and Corporate Governance Agreement dated December 1, 2005, as described inItem 7 “Major Shareholders and Related Party Transactions.” Gordon Moore andRolly van Rappard were appointed as directors of SKG plc on February 6,2007, as nominees of Smurfit Kappa Feeder G. P. 

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Limited pursuant to theterms of the Shareholders’ and Corporate Governance Agreement dated December 1,2005. The Shareholders and Corporate Governance Agreement terminated uponAdmission.

Each of the Directors (with the exception of SirMichael Smurfit) who were Directors of SKG plc on March 12, 2007 submittedthemselves for re-election, and were re-elected, by the SKG plc’s shareholdersat the extraordinary general meeting of SKG plc held on that date.

Except as described in this annual report of Form 20-F,there are no arrangements or understandings between any member of the board ofdirectors or executive officer and any other person pursuant to which that personwas elected or appointed to his position.

SKG plc’s board ofdirectors has the power to appoint officers. Each officer will hold office forthe term determined by SKG plc’s board of directors and until such person’ssuccessor is chosen and qualified or until such person’s death, resignation orremoval. There are 11 Directors on the Board of SKG plc, comprising: anon-executive Chairman, a non-executive deputy Chairman, 3 executive Directorsand 6 non-executive Directors. Pursuant to the Articles of Association,MDCP III, MDCP IV and MSDE III have the right to nominate up to two persons forappointment as Directors for so long as they hold Ordinary Shares of SKG plcrepresenting 15% or more of the entire issued Ordinary Shares of SKG plc. Pursuantto the Articles of Association, Smurfit Kappa Feeder G.P. Limited also has theright to nominate up to two persons for appointment as Directors for so long asit holds Ordinary Shares of SKG plc representing 15% or more of the entireissued Ordinary Shares of SKG plc. If either of their respective shareholdingsfalls to below 15% but greater than 10% this right reduces to a right tonominate one person for appointment as a director of SKG plc. Pursuant to theseappointment rights under the Articles of Association, Christopher J. McGowanand Samuel M. Mencoff will continue as the nominated directors of MDCP andGordon Moore and Rolly van Rappard will continue as the nominated directors ofSmurfit Kappa Feeder G.P. Any Director co-opted to the Board by the Directorswill be subject to election by the shareholders at the first annual generalmeeting after his appointment and all Directors are subject to re-electionat intervals of no more than three years.

The SKG plc board of directors has three committees: theAudit Committee, the Compensation Committee and the Nominations Committee. TheAudit Committee is comprised of Nicanor Restrepo, Samuel Mencoff, Rolly vanRappard and Gordon Moore. The Compensation Committee is comprised of Liam O’Mahony,Sean Fitzpatrick, Samuel Mencoff and Rolly van Rappard. The NominationsCommittee is comprised of Sean Fitzpatrick, Liam O’Mahony, Gordon Moore,Christopher McGowan and Gary McGann.

Theresponsibilities of the Audit Committee include:

·       reviewingour annual and interim reports;

·       reviewingthe scope of the external audit and considering reports of the externalauditors;

·       theapproval of services provided by the external auditors;

·       recommendationof the appointment of external auditors to the Board;

·       reviewingand reporting to the Board on the effectiveness of our system of internalcontrol;

·       theappointment of the VP Group internal auditor; and

·       approvalof the internal audit plan and review of internal audit reports.

Theresponsibilities of the Compensation Committee include:

·       determiningthe level and structure of remuneration of all executive directors and theChairman;

·       monitoringthe level and structure of remuneration for senior management; and

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·       administeringthe 2007 Share Incentive Plan.

The responsibilitiesof the Nominations Committee include:

·       leadingthe process for appointments to the Board and making recommendations to theBoard on the same: and

·       evaluating the balance ofskills, knowledge and experience on the Board and preparing descriptions of therole and requirements for appointments.

**FamilyRelationships**

Mr.  Anthony Smurfit is the son of Sir Michael Smurfit, who retired fromthe Board on March 20, 2007.

**Compensation**

For 2006, none of SK Funding’s, SKCL’s or SKGL’sdirectors was entitled to receive any fees for serving as directors, other thanSir Michael Smurfit who received fees for serving as chairman of SKGL and MrFrits Beurskens who receives fees as a director of SKGL and its subsidiaries.All of the directors are reimbursed for out-of-pocket expenses related totheir service as directors. Please refer to “Directors’ Service Contracts andLetters of Appointment” below for more information.

The aggregate amount ofremuneration paid for the year ended December 31, 2006 (including anycontingent or deferred compensation) and benefits-in-kind granted to SirMichael Smurfit (as Chairman), Frits Beurskens (as deputy chairman) and theexecutive directors of Smurfit Kappa Group Limited for services in allcapacities to the Group was as follows:

| Salaries and fees            |     | € | 5,605,000  |   |   |
|------------------------------|----------|--------|------------|--------|--------|
| Performance  related annual  |     | € | 3,155,000  |   |   |
| Pension benefits             |     | € | 864,000    |   |   |
| Other benefits               |     | € | 103,000    |   |   |
| Share-based  payments charge | * * | € | 2,401,000  | (1)    |   |
| **Total**                    |     | € | 12,128,000 |   |   |

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(1)          Reflects share-basedpayments charge per Note 27 (Share-based payments) to the consolidatedfinancial statements contained elsewhere in this annual report.

All of the directors ofSmurfit Kappa Group Limited were reimbursed for out-of-pocket expenses related totheir service as directors.

**Directors’ ServiceContracts and Letters of Appointment**

***Executive Directors’ Service Contracts***

Mr. Gary McGann is employed as our Group ChiefExecutive Officer, with reporting responsibilities to the Board of Directors.His role is to discharge all normal responsibilities of a chief executiveofficer. Mr. Anthony Smurfit is employed as our Group Chief OperationsOfficer, with reporting responsibilities to our Group Chief Executive Officer.His role is to manage the day-to-day operations of the Group. Mr. IanCurley is employed as our Group Chief Financial Officer with reportingresponsibilities to our Group Chief Executive Officer. His role is to overseeour financial affairs.

The Executive Directorshave entered into employment letter agreements with SKG plc, dated February 9,2007, the key terms and conditions of which are summarized as follows: Underthe terms of their respective employment letter agreements the base salarypayable to Gary McGann is €1,202,325 per 

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annum,to Anthony Smurfit, €848,162 per annum and toIan Curley, €710,940per annum. They are also eligible to participate in the existing bonus plan (underwhich they can earn a bonus of up to 100% of their base salaries for superiorperformance and achievements) and any of our equity-based incentive plans, aswell as any new incentive plans that may be created for senior executives, allin accordance with the terms of such plans. Each of the Executive Directors isalso entitled to participate in our defined benefit pension scheme (except forGary McGann whose benefits are provided through a defined contribution plan)and is entitled to other customary benefits such as life assurance, privatemedical insurance, a car allowance and reimbursement of expenses. Other thanupon dismissal for cause, both SKG plc and each of the Executive Directors mayterminate his employment at any time upon 12 months prior notice in writing.SKG plc may dispense with such notice and, in such circumstances, the ExecutiveDirector will be entitled to payment in lieu of such notice. Where any of theExecutive Directors is dismissed for cause, he is not entitled to any notice ofthe termination of his employment. Non-compete restrictions are in place for aone-year period from the date of termination of employment in respect of anyarea of the world where we conducted a material portion of our business in thetwelve-month period immediately preceding the termination date. Each of theExecutive Directors is bound by confidentiality obligations during the term ofhis employment letter agreement.

***Non-Executive Directors’ Letters of Appointment***

Each of the Non-Executive Directors has entered into aletter of appointment with SKG plc which took effect from the date ofAdmission. Under the terms of their respective letters of appointment, theNon-Executive Directors each receive a basic fee at the rate of €50,000per financial year.

If a Non-Executive Director performs services which,in the opinion of the Board, are outside the ordinary scope of his duties as aNon-Executive Director (including membership or chairmanship of a Boardcommittee), additional fees will be paid as the compensation committee of theBoard determines to be appropriate. All fees will be subject to annual reviewby the Board. SKG plc will also reimburse all reasonable expenses incurred.

The Non-Executive Directors are expected to bringindependent judgment to bear on issues of strategy, performance, resources, keyappointments and standards of conduct relating to SKG plc and to attend aminimum number of Board meetings per year.

A Non-Executive Director’sappointment may be terminated in accordance with the Articles of Associationand such termination will be effective without any claim for compensation forloss of office or otherwise.

**Chairman and DeputyChairman Agreements**

Sir Michael Smurfit entered into an agreement withSKGL under which he had agreed to serve as non-executive chairman for asix-year term from November 1, 2002. Under the agreement Sir MichaelSmurfit was entitled to a total benefit package of €2,750,000per annum from us with a one-year total benefits severance package in the caseof termination by the Group. Sir Michael Smurfit resigned from all officeswithin our company on March 20, 2007 and consequently this agreement wasterminated.

By agreements dated February 9, 2007 between SirMichael Smurfit and SKGL and one of its subsidiaries, Sir Michael Smurfit agreed,with effect from immediately prior to Admission, to resign from all positionswithin the Group. He also agreed to resign from the boards of directors of, andas chairman of, each Group company. He and his affiliates relinquished anyrights that he may have to appoint any person to the board of directors of anyGroup company. The agreements provided for an aggregate payment to Sir MichaelSmurfit of €2,750,000 plus an amount calculated bymultiplying €2,750,000by the number of days between the first anniversary of Admission and June 30,2010 divided by 365. The 

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shareholders of SKG plcapproved the making of this payment at an extraordinary general meeting held onMarch 12, 2007.

In addition to hisappointment letter, Frits Beurskens entered into a two-year directorshipagreement with the Group from December 1, 2005, under which he has agreedto provide services as a director to certain Group  companies. Frits Beurskens is entitled tofees of €500,000 per annum under this agreement. FritsBeurskens is also eligible for a term-based bonus of €250,000per annum for each year of the term that he completes and a success-basedbonus of €500,000,which is dependant on the achievement of our synergy targets.

**Group ExecutiveIncentive Schemes**

***Management Equity Agreement***

By a series of management equity agreements andexchange offers (including the Exchange Offer) between the successive holdingcompanies since 2002, our principal shareholders and senior executives, thesenior executives subscribed at par (€0.001 in all cases) fordeferred convertible non-voting redeemable shares of classes A, B, C, E, F, Gand H. All of the A and E Convertible Shares, 80% of the  B Convertible Shares and all of the F and HConvertible Shares automatically converted upon Admission, in accordance withtheir terms, to D Convertible Shares. The D Convertible Shares resulting fromthe conversions of the A, B, C, E, F and G convertible shares are themselvesconvertible on a one-to-one basis into Ordinary Shares of SKG plc upon thepayment by the holder of a conversion price of approximately €4.44per share. The D Convertible Shares resulting from the conversion of the HConvertible Shares are themselves convertible on a one-to-one basis intoOrdinary Shares of SKG plc upon the payment by the holder of a conversion priceof €5.6924per share. Prior to Admission, amendments were made to the prevailingManagement Equity Agreement whereby, upon Admission, all of the B, C, F, G andH Convertible Shares that were not converted to D Convertible Shares werere-designated as A1, A2 and A3 Convertible Shares (as to one-third of eachaggregate holding in respect of each class). The A1, A2 and A3 ConvertibleShares will automatically convert on a one-to-one basis into D ConvertibleShares on the first, second and third anniversaries respectively of Admission,provided their holder (‘‘Relevant Holder’’) or his/her spouse or family trustremains their holder at the relevant anniversary and provided the RelevantHolder remains an employee of our company at the relevant anniversary (thelatter condition is subject to exceptions in a number of cases including theretirement or death of the Relevant Holder). The D Convertible Shares resultingfrom these conversions are convertible on a one-to-one basis into OrdinaryShares of SKG plc, at the instance of the holder, upon the payment by theholder of a conversion price of approximately €4.44 per share.

*Redemption.*   Inthe event that any executive ceased to be employed by, or to serve as anofficer of or director for, SKG plc or its subsidiaries, all of suchexecutive’s New A Convertible Shares issued under the Management EquityAgreement may be redeemed or purchased by SKG plc. In the case of anytermination, the purchase price for each New A Convertible Share, will be suchexecutive’s original cost for such share. Such redeemed or repurchased sharesmay be made available for sale by SKG plc, to any member of our management forthe same purchase price and on the same terms as such shares were acquired by SKGplc.

*Restrictions on Transfer.*   TheManagement Equity Agreement prohibits the executives from transferring theirNew A Convertible Shares and their D Convertible Shares, subject to certainexceptions. There are restrictions on the transfer of certain of the OrdinaryShares of SKG plc contained in the Management Equity Agreement which willterminate as follows:

i.                   with respect toOrdinary Shares of SKG plc purchased directly (as opposed to arising on theconversion of a D or I Convertible Share), as of Admission;

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ii.               with respect toOrdinary Shares of SKG plc arising on the conversion of D Convertible Shareswhich, in turn, arose on the conversion of A, B and C Convertible Shares, inequal tranches on each of December 31, 2005, December 31, 2006 and December31, 2007;

iii.           with respect toOrdinary Shares of SKG plc arising on the conversion of D and/or I ConvertibleShares which, in turn, arose on the conversion of E, F, G and/or H ConvertibleShares, in equal tranches on December 31, 2008, December 31, 2009 andDecember 31, 2010; and

iv.             with respect toOrdinary Shares of SKG plc arising on the conversion of D Convertible Sharesarising on the conversion of New A Convertible Shares, upon the issuance ofsuch Ordinary Shares.

***Smurfit Kappa plc 2007 Share Incentive Plan***

On March 12, 2007, the shareholders approved the2007 Share Incentive Plan, to become effective on the date of Admission.Incentive awards under the 2007 Share Incentive Plan will be in the form of NewB Convertible Shares and New C Convertible Shares for which executives will beinvited to subscribe for, at nominal value of €0.001 per share. On satisfaction of specifiedperformance conditions, the New B Convertible Shares and the New C ConvertibleShares will automatically convert on a one-to-one basis into D ConvertibleShares. The D Convertible Shares may be converted by the holder on a one-to-onebasis into Ordinary Shares of SKG plc, upon payment of a conversion price. Theconversion price for each D Convertible Share is the market value of anOrdinary Share of SKG plc on the date the executive was invited to subscribe forthe New B or C Convertible Shares, less the nominal subscription price paid pershare.

The 2007 Share Incentive Plan will be administered bythe Compensation Committee.

The following arethe key provisions of the 2007 Share Incentive Plan:

·       **Eligibility.  **Employees, includingexecutive directors, of any company in the Group may be invited to subscribefor New B or C Convertible Shares.

·       **Performance Criteria.  **The performanceperiod for the New B and C Convertible Shares is three financial years. The NewB Convertible Shares will automatically convert into D Convertible Shares ifthe growth in our earnings per share over that period is a percentage equal toat least five percent per annum plus the annual percentage increase in theConsumer Prices Index of Ireland, compounded. The New C Convertible Shares aresubject to that same performance condition. In addition, the New C ConvertibleShares will convert into D Convertible Shares only if SKG plc’s totalshareholder return over the three-year period is at least equal to themedian total shareholder return of a peer group of companies. 30% of the New CConvertible Shares will convert into D Convertible Shares at the medianperformance level and 100% will so convert if SKG plc’s total shareholderreturn is in the upper quartile of the peer group. A sliding scale will applyfor performance between the median and upper quartile.

The Compensation Committee has discretion to requirethat an executive hold a minimum number of Ordinary Shares of SKG plc at thetime of subscription for New B Convertible Shares or New C Convertible Sharesunder the 2007 Share Incentive Plan and that he maintain such minimumshareholding until the end of the performance period applicable to those sharesor such later date as the Compensation Committee may determine. In addition,the Compensation Committee may require that an executive not dispose of theOrdinary Shares issuable upon conversion of his D Convertible Shares for aminimum period of up to two years.

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·       **Dilution Limits.  **The aggregate numberof New B Convertible Shares and New C Convertible Shares issued under the 2007Share Incentive Plan over any ten-year period, beginning on the date ofAdmission, may not be more than 10% of SKG plc’s issued ordinary share capitalfrom time to time. The number of the New B Convertible Shares issued over anyten-year period, beginning on the date of Admission, may not be more than 5% ofSKG plc’s issued ordinary share capital from time to time.

The aggregate number of NewB Convertible Shares and New C Convertible Shares issued under the 2007 ShareIncentive Plan over any period of 3 years, beginning on the date of Admission,may not be more than 3% of SKG plc’s issued ordinary share capital from time totime. The aggregate number that may be issued in the one-year period beginningon the date of Admission may not be more than 1.5%.

·       **Individual Limits.  **The maximumaggregate value of the New B Convertible Shares and New C Convertible Sharesthat may be issued to an executive in any year is 150% of his base salary (or200% for a newly recruited executive). The maximum value of the New BConvertible Shares that may be issued to an executive in any year is 75% of hisbase salary (or 100% for a newly recruited executive). Value for this purposeis the sum of the nominal subscription price paid for a New B Convertible Shareor C Convertible Share and the conversion price applicable to the D ConvertibleShares into which such shares may convert.

Shares issued under otheremployee share schemes implemented by SKG plc after the date of Admission willbe included in the calculation of the dilution and individual share limits,excluding, however, shares issued under employee-wide share schemes, up to 5%of the issued ordinary share capital from time to time.

New BConvertible Shares and New C Convertible Shares that cease to be capable ofconverting into D Convertible Shares, by reason of the executive leavingemployment with us before the relevant conversion date or the applicable performancetargets not being achieved in full, and D Convertible Shares that cease to becapable of being converted into Ordinary Shares of SKG plc by reason of theexecutive leaving employment with us or otherwise in accordance with theprovisions of the 2007 Share Incentive Plan, will become subject to our rightto redeem those shares at the subscription price paid and those shares willcease to be included in the calculation of the dilution and individual limits.

·       **Change in Control.  **On a change incontrol of SKG plc, the performance conditions applicable to New B ConvertibleShares and New C Convertible Shares will lapse and they will automaticallyconvert into D Convertible Shares. D Convertible Shares must be converted intoOrdinary Shares of SKG plc or may be redeemed by SKG plc for the  nominal subscription price paid.

·       **Cessation of Employment.  **The New Band C Convertible Shares will cease to be capable of conversion to DConvertible Shares on cessation of employment, save where cessation is due toill-health, retirement, death or other special circumstances, in which eventthe portion of such shares referable to the portion of the three-year  performance period completed by the executivemay convert into D Convertible Shares. D Convertible Shares may be convertedinto Ordinary Shares within six months after cessation of employment (or 12months in the case of death).

·       **Amendments.  **The Board may amend the2007 Share Incentive Plan. However, amendments to the material advantage ofparticipants which relate to the price payable for shares issued under the 2007Share Incentive Plan, the maximum aggregate limits and the maximum individuallimits on the shares issuable under the 2007 Share Incentive Plan, the basis ofa participant’s entitlement or the provisions for adjustment of shares on avariation of share capital require shareholder approval.

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On April 13, 2007,Messrs. McGann, Smurfit and Curley received Class B and C ConvertibleShares pursuant to the terms of the 2007 Share Incentive Plan. The Class DConvertible Shares issuable upon conversion of the Class B andClass C Convertible Shares are themselves convertible into Ordinary Shareson a one-for-one basis upon payment of a conversion price equal to €18.28per share.

**Employees**

Weemployed an average of 42,259 employees on a full time equivalent basis in2006. The table below sets forth the average number of employees for the lastthree years by region and reporting segment.

| ** **    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| Europe:       |       |     |       |     |       |     |       |
| Packaging     |       | 29,214   |       | 18,659   |       | 18,536   |       |
| Specialties   |       | 4,266    |       | 2,725    |       | 4,395    |       |
| Total         |       | 33,480   |       | 21,384   |       | 22,931   |       |
| Latin America |       | 8,779    |       | 7,828    |       | 7,440    |       |
| Total         |       | 42,259   |       | 29,212   |       | 30,371   |       |

 

The significant increase in employees in Europe in2006 was as a result of the Merger.

We believe that ourrelationship with our employees and employee representative bodies issatisfactory.

**Share Ownership**

SKG plc is a public limited company. SK Funding is anindirectly wholly owned subsidiary of SKG plc.

The following tablesets forth certain information regarding the beneficial ownership of SKG plc,as of April 26, 2007 by: (i) each person or entity known to us to own morethan 5% of any class of SKG plc’s outstanding securities and (ii) eachmember of SKGL’s board of directors, each of its named executive officers andall members of the board of directors and executive officers as a group. To ourknowledge, each of such security holders has sole voting and investment poweras to the ordinary shares shown unless otherwise noted. Beneficial ownership ofthe securities listed in the table has been determined in accordance with theapplicable rules and regulations promulgated under the U.S. Exchange Act.

|                                | ** ** | **Beneficial Ownership**(1) | ** ** |
|--------------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **Number of**               | ** ** | **Percentage of** | ** ** |
| ** **                     | ** ** | **Ordinary Shares**         | ** ** | **Ordinary Shares** | ** ** |
| **Principal Securityholders:** | ** ** | ** **                  | ** ** | ** ** | ** ** |
| MDCP Co-investors(2)           |       | 46,682,056                  |       | 21.5 | % |
| c/o Walkers SPV Limited        | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Walkers House                  | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Mary Street                    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| P.O. Box 908GT            | ** ** | ** **                  | ** ** | ** ** | ** ** |
| George Town                    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Grand Cayman, Cayman Islands   | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Smurfit Kappa Feeder G.P.      |       | 53,181,884                  |       | 24.5 | % |
| 22 Grenville Street            | ** ** | ** **                  | ** ** | ** ** | ** ** |
| St. Helier                     | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Jersey JB4 8PX                 | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Channel Islands                | ** ** | ** **                  | ** ** | ** ** | ** ** |

 

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| ** **                             | ** ** | **Ordinary**  | ** ** | **A1**         | ** ** | **A2**         | ** ** | **A3**         | ** ** | **B**          | ** ** | **C**          | ** ** | **D**          | ** ** |
|----------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                             | ** ** | **Shares**(3) | ** ** | **Convert**(4) | ** ** | **Convert**(4) | ** ** | **Convert**(4) | ** ** | **Convert**(4) | ** ** | **Convert**(4) | ** ** | **Convert**(4) | ** ** |
| **Directors and Executive  Officers:** | ** ** |          | ** ** |           |       |           |       |           |       |           |       |           |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sean Fitzpatrick                       |       |          | 6,060      |           |       |           | —     |           |       |           | —     |           |       |           | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Frits Beurskens(5)                     |       |          | —     |           |       |           | —     |           |       |           | —     |           |       |           | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Gary W. McGann(6)                      |       |          | 222,727    |           |       |           | 32,075     |           |       |           | 32,075     |           |       |           | 32,074     |   |   |   | 49,320 |   |   |   | 49,320 |   |   |   | 805,890 |   |   |
| Anthony P.J.  Smurfit(6)               |       |          | 451,515    |           |       |           | 26,796     |           |       |           | 26,796     |           |       |           | 26,797     |   |   |   | 34,790 |   |   |   | 34,790 |   |   |   | 742,554 |   |   |
| Ian J. Curley(6)                       |       |          | 192,424    |           |       |           | 25,172     |           |       |           | 25,172     |           |       |           | 25,172     |   |   |   | 29,160 |   |   |   | 29,160 |   |   |   | 723,066 |   |   |
| Liam O’Mahony                     |       |          | 6,060      |           |       |           | —     |           |       |           | —     |           |       |           | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Christopher J.  McGowan                |       |          | —     |           |       |           | —     |           |       |           | —     |           |       |           | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Samuel M. Mencoff(7)                   |       |          | —     |           |       |           | —     |           |       |           | —     |           |       |           | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Gordon Moore                           |       |          | —     |           |       |           | —     |           |       |           | —     |           |       |           | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Nicanor Restrepo                       |       |          | —     |           |       |           | —     |           |       |           | —     |           |       |           | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Rolly van Rappard(8)                   |       |          | —     |           |       |           | —     |           |       |           | —     |           |       |           | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |

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(1)           “Beneficial ownership” generally means anyperson who, directly or indirectly, has or shares voting or investment powerwith respect to a security. The MDCP co-investors and Smurfit Kappa FeederG.P., under the Articles of Association, have rights to nominate persons forappointment as directors.

(2)           Includes: (a) 39,020,270 ordinaryshares beneficially owned by MDCP IV Global Investments LP, whose sole generalpartner is MDP IV Global GP, LP, a Cayman Islands exempted limited partnership,whose sole general partner is MDP Global Investors Limited, a Cayman Islandsexempted company (MDP Investors); (b) 7,495,357 ordinary sharesbeneficially owned by MDCP III Global Investments LP, whose sole generalpartner is MDP III Global GP, LP, a Cayman Islands exempted limited partnership(MDP III Global), whose sole general partner is MDP Investors; and (c) 166,429ordinary shares beneficially owned by MDSE III Global Investments LP, whosesole general partner is MDP III Global. 14 shareholders own MDP Investors, eachof whom are principals of Madison Dearborn, with all voting and investmentdecision-making determined on a majority-vote basis based on capital and with noindividual shareholder owning more than 10% of the capital stock of MDP GlobalInvestors Limited.

(3)           Each Directors holding of Ordinary Sharesis less than 1% of the total of the Ordinary Shares.

(4)           Mr. Gary McGann owns 5.9% of each of thetotal A1, A2 and A3 Convertible Shares, 3.5% of each of the total B and CConvertible Shares and 9.5% of the total D Convertible Shares. Mr. AnthonySmurfit owns 4.9% of each of the total A1, A2 and A3 Convertible Shares, 2.5%of each of the total B and C Convertible Shares and 8.7% of the total DConvertible Shares. Mr. Ian Curley owns 4.6% of each of the total A1, A2 and A3Convertible Shares, 2.1% of each of the total B and C Convertible Shares and8.5% of the total D Convertible Shares.

(5)           Mr. Frits Beurskens has a beneficialinterest, through his interest in Stichting Senior Management Kappa “SSMK” aDutch Foundation which holds current and former Kappa managements interests inSmurfit Kappa Feeder L.P.

(6)           Pursuant to the terms of the managementequity agreement, Messrs. McGann, Smurfit and Curley received Class A1,A2,  and A3 Convertible Shares. The DConvertible Shares resulting from these conversions are convertible on aone-to-one basis into Ordinary Shares of SKG plc, at the option of the holder,upon the payment by the holder of a conversion price of approximately €4.44per share. In addition, Messrs. McGann,Smurfit and Curley own certain Class D Convertible Shares that are todayconvertible on a one-to-one basis into Ordinary Shares of SKG plc, at theinstance of the holder, upon the payment by the holder of a conversion price ofbetween €5.69242 to€4.44 per share. See“—Management Equity Agreement.” Pursuant to the terms of the 2007 ShareIncentive Plan, Messrs. McGann, Smurfit and Curley have received Class Band C Convertible Shares. The Class D Convertible Shares issuable uponconversion of the Class B and Class C Convertible Shares arethemselves convertible into Ordinary Shares on a one-for-one basis upon paymentof a conversion price equal to €18.28 per share. See “—Smurfit Kappa plc2007 Share Incentive Plan.”

(7)           As Mr. Mencoff is Co-President ofMadison Dearborn Partners, he may be deemed to share beneficial ownership ofthe Ordinary Shares owned by the MDP Investors and MDP III Global. Mr. Mencoffexpressly disclaims beneficial ownership of the shares owned by the MDPInvestors and MDP III Global.

(8)           Mr Rolly van  Rappard has a beneficial interest, throughthe holding of his immediate family, in 4,789 Ordinary Interests and €472,301 Preference Capital Interests inSmurfit Kappa Feeder L.P., which in turn holds shares in SKG plc.

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**Item 7.**             Related Party Transactions

**Going Public Agreement**

By an agreement made as ofFebruary 13, 2007 (the “Going Public Agreement”) among SKG plc, SKAcquisitions, MDCP IV Global Investments LP, MDCP III Global Investments LP,MDSE III Global Investments LP (collectively, the “MDCP Co-investors”), SmurfitKappa Feeder GP Limited (in its capacity as general partner of, and on behalfof, the Kappa Limited Partnership), the Partners in the aforesaid Smurfit KappaFeeder GP (collectively, the CVC/Cinven Co-investors”), Sir Michael W JSmurfit, Gary McGann, Anthony Smurfit and Ian Curley, the parties theretoentered into certain agreements in respect of the matters referred to below.

The shares issued to theKappa Limited Partnership (a partnership comprising the former Kappashareholders) in consideration for the Merger were not calculated on afully-diluted basis. Accordingly, among the terms of the Merger wereanti-dilution rights for the Kappa Limited Partnership, whereby it would beentitled to subscribe for new shares in SKGL at par, to avoid dilution by theissue or creation of new ordinary shares pursuant to pre-Merger warrants orconversion rights. The pre-Merger shareholders of SKGL had similar rights inrespect of a smaller number of shares under a single set of circumstances. Theobligations of SKGL in this regard were assumed by SKG plc pursuant to theExchange Offer, with rights to subscribe for Ordinary Shares in SKGL beingsubstituted by rights to subscribe for Ordinary Shares in SKG plc.

The parties to the GoingPublic Agreement agreed that the Kappa Limited Partnership would, immediatelyprior to Admission, subscribe for 497,973 new B Ordinary Shares for cash at par(these were re-designated as Ordinary Shares of SKG plc effective as ofAdmission) in full satisfaction of anti-dilution rights of the parties underthe Share Purchase Agreement arising at any time after the date of the Going PublicAgreement. Upon Admission, all rights and obligations of all parties under theShare Purchase Agreement governing the Merger terminated. The €98million 9% Shareholder PIK note due December 31, 2016 of SKGL (the “ShareholderPIK”) issued in connection with the Merger was repayable in the event of theadmission of SKGL’s Ordinary Shares to listing. The Shareholder PIK wasaccordingly repaid upon Admission without reduction otherwise provided for inthe Share Purchase Agreement. SKGL had the option of repaying the ShareholderPIK in cash or by the issue of Ordinary Shares at the offer price. Pursuant tothe Going Public Agreement, the Shareholder PIK was repaid in cash.

The subscription,termination and repayment provisions of the Going Public Agreement describedabove were conditional upon Admission.

The Going Public Agreementalso provided for the parties thereto who are shareholders in SKGL to castvotes in favor of certain resolutions intended to facilitate the initial publicoffering and to execute the Second Amended and Restated Management EquityAgreement described under “—Management Equity Agreement.”

**Shareholders and Corporate Governance Agreement**

SKGL, the MDCPCo-Investors, the CVC/Cinven Co-Investors and certain additional investorslisted in the schedule thereto, entered into a shareholders and corporategovernance agreement, on December 1, 2005 (as subsequently amended inconnection with the Exchange Offer, the “Shareholders and Corporate GovernanceAgreement”).

*Pre-emptive Rights.**  *Under the terms of the Shareholdersand Corporate Governance Agreement each party has the proportional right topurchase all or part of a portion of any additional ordinary shares or equitysecurities or equity equivalents that are convertible or exercisable into suchnumber of Ordinary Shares of SKG plc (the “New Shares”) calculated by referenceto the proportion which such party’s shareholding immediately prior to suchissue bears to the total number of shares then in issue.

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*Restrictions on Transfer.**  *The Shareholders and CorporateGovernance Agreement prohibited any co-investor from transferring any of itsOrdinary Shares of SKG plc, subject to certain exceptions such as pursuant toapplicable laws of descent in the case of individuals and, in the case of aparty which is a company or partnership, among its affiliates.

*Participation Rights.**  *The parties to the Shareholders andCorporate Governance Agreement are granted certain “tag-along” rights whichentitle them to participate in certain sales by any MDCP Co-Investors andthe CVC/Cinven Co-Investors or their permitted transferees. Any managementinvestor who, together with any affiliates or family members, owns (i) ordinaryshares of SKGL with an aggregate investment cost of not less than €50million (which includes the investment cost in the underlying shares ofJefferson Smurfit Group Limited which were exchanged for shares of SKGL) priorto any public listing of the ordinary shares of SKGL or (ii) on or after apublic listing of SKGL’s ordinary shares, a number of ordinary shares having anaggregate value of not less than €50 million or a number ofordinary shares with an aggregate investment cost of not less than 50% of theaggregate investment cost of the ordinary shares held by such investor and suchinvestor’s affiliates and family members as of the date for settlement ofconsideration after the offer was declared unconditional will have thecollective right, together with any other management investors satisfying suchrequirements, to appoint one member of the board of directors of SKGL (the “PurchasedEquity Director”).

However, in the event thata Purchased Equity Director becomes an employee of, serves as a director of orotherwise provides services for any person (other than SSCC and itssubsidiaries) without the board of directors’ consent, such person will beremoved from the board of directors of SKG plc.

*Termination.**  *The Shareholders and CorporateGovernance Agreement terminates upon the earlier of a public listing of theordinary shares of SKGL and a sale of SKGL to an independent third partypursuant to which such party acquires (i) capital stock of SKGL possessingthe voting power to elect a majority of SKGL’s board of directors or (ii) allor substantially all of SKGL’s assets. Consequently, the Shareholders andCorporate Governance Agreement terminated upon Admission.

**Registration Rights Agreement**

Each of the MDCPCo-Investors, the CVC/Cinven Co-Investors, the management investors, certainadditional investors listed in the schedule thereto and Smurfit Kappa GroupLimited entered into the amended and restated Registration Rights Agreement,dated December 1, 2005 (the “Registration Rights Agreement”).

*Demand Registrations.*   Underthe Registration Rights Agreement, after an initial public offering of equitysecurities of SKGL registered under the Securities Act on Form S-1or similar form, the holders of a majority of the registrable securities heldby the MDCP Co-Investors and their affiliates have the right at any time torequire SKGL to register any or all of their securities under the SecuritiesAct pursuant to up to three long-form registrations (but, after the time thatthe MDCP Co-Investors and their affiliates ceased to own at least 10% offully-diluted ordinary shares of SKGL, no more than one long-form registration)and, if available, an unlimited number of registrations on forms F-2 andF-3 or similar short-form registrations, (“Short-Form Registrations”)at SKGL’s expense (each of these types of registrations are “DemandRegistrations”).

Furthermore under theRegistration Rights Agreement, after an initial public offering of equitysecurities of SKGL under the Securities Act on Form S-1 or similarform the CVC/Cinven Co-Investors have the right at any time to require SmurfitKappa Group Limited to register any or all of their securities under the USSecurities Act pursuant to up to three long-form registrations (but, after thetime that the CVC/Cinven Co-Investors cease to own at least 10% offully-diluted ordinary shares of SKGL, no more than one long-form registration)and if available, an unlimited number of registrations on Forms F-2 and F-3or similar Short-Form Registrations, at SKGL’s expense. The aggregateoffering value of each 

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long-formregistration has to be at least US$100 million and the aggregate offering valueof each short-form registration has to be at least US$50 million.

SKG plc is not required,however, to effect any long-form registration within 180 days after theeffective date of a previous demand registration which was a long-formregistration or a registration in which the holders of the registrablesecurities were given piggyback rights pursuant to the Registration RightsAgreement. In addition, SKGL has the right to postpone for up to 180 days thefiling or the effectiveness of a registration statement for a DemandRegistration if SKGL’s board of directors determines that such DemandRegistration would reasonably be expected to have a material adverse effect onany proposal or plan by SKGL or any of its subsidiaries to engage in anymaterial acquisition of assets or any material merger, tender offer,reorganisation or similar transaction.

*Piggyback Registrations.*   Allholders of registrable securities were entitled to request the inclusion ofsuch securities in any registration statement at SKGL’s expense whenever SKGLproposed to register any offering of its equity securities (other than pursuantto a registration statement on Form F-4 (business combinationtransaction) or Form S-8 (securities to be offered to employeespursuant to employee benefit plans) under the Securities Act) and theregistration form to be used may have been used for the registration of such registrablesecurities.

**Related Party Transactions**

In June 2005, SKGdisposed of the Group companies which owned and operated The K Club, some landproximate to The K Club and the site of the former paper mill in Clonskeagh,Dublin for total cash proceeds of €115 million, to a companypartly controlled by Sir Michael Smurfit, the Chairman of the Group. Asrequired under Irish law, shareholder approval was obtained for the proposedtransaction.

In 2006, the Grouppurchased, in the normal course of business, approximately 47,000 metric tonsof paper, amounting to approximately €20 million, from SavonSellu, a company controlled by Dr. Dermot Smurfit together with hisbrothers Sir Michael Smurfit, the Group’s Chairman, and Dr. Alan Smurfit.At 31 December 2006, an amount of €5.5 million was owed bythe Group to Savon Sellu.

On February 9, 2007,the Company and its subsidiary, S.I. Holdings Limited entered into an agreementwith Sir Michael Smurfit providing (inter alia) for his resignation from alloffices in the Group.

**Item 8.**             Financial Information

**Consolidated Statements and Other FinancialInformation**

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

**Legal Proceedings**

Kappa Packaging’ssubsidiary, Kappa Zülpich, is, since May 25, 2004, being investigated bythe German *Bundes Kartellamt*regardingalleged price co-ordination of recovered paper purchases by paper and boardproducers. We are co-operating fully with the *BundesKartellamt*in respect of its investigation.

Our UK operations were,since July 2004, being investigated by the Office of Fair Trading. Weunderstand that the investigation, which centered on the sheet-feedingbusiness, was prompted by consumer complaints, which were filed during the UKCompetition Commission’s investigation of the March 2004 acquisition proposalby DS Smith for Linpac Limited, a competitor of our sheet-feeding business. Theinvestigation looked into the high levels of pricing transparency which existin the sector and which were a function of, inter alia, vertical integration,swaps and market concentration. This investigation was formally closed by wayof letter from the Office of Fair Trading dated September 21, 2006.

On January 16, 2007,representatives of the *Autoridade daConcorrência*(Portuguese National Competition Authority) visited ourPortuguese corrugated plant, located in São Paio de Oleiros, as part of 

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whatappears to be a local investigation affecting several Portuguese companies inthe packaging sector. We have co-operated fully with the *Autoridade da Concorrência*and as of thisdate have not received any news or further communication in relation to thismatter.

In October 2006, anotice of claim was received by a former subsidiary of ours from a local CountyAdministrative Board in Sweden requiring it to investigate and remediate anadjacent lake. This lake was polluted by local industry over a very long periodof time. The subsidiary was in dialogue with the County Administrative Boardover the past 30 years as some of its operations require operating permitsunder the local environmental code. The investigation is at a very preliminarystage.

In November 2002, wewere notified by the Spanish Environmental Enforcement Agency, Seprona, that ithad become aware of an accumulation of rain water mixed with manufacturingwaste in the vicinity of our Sanguesa plant and that such concentration posed apotential environmental hazard. The rain water was removed and new procedureswere put in place to prevent any recurrence. Three of our local managers havebeen imputed by the court for an offence against natural resources and theenvironment in respect of this matter. This case was adjourned forconsideration on September 22, 2006 and a decision is expected in duecourse.

We were involved incertain civil and criminal proceedings in Spain arising out of a pastacquisition. In November 1988, a subsidiary of Smurfit acquired IndustrialCartonera S.A. (“ICSA”), a Spanish incorporated company, from a subsidiary ofTorras. In early 1989, Smurfit acquired a 35% interest in another Spanishcompany, Industrias del Papel y de la Celulosa, S.A. (‘‘INPACSA’’), a formerparent of ICSA. A number of individuals associated with Torras were charged bythe public prosecutor in Madrid with diverting, for their own use, asubstantial part of the purchase consideration paid by Smurfit for ICSA. Thepublic prosecutor, on behalf of the minority shareholders of INPACSA, alsoclaimed that certain transactions, including the transfer of ICSA by INPACSAwhich took place prior to JSG’s acquisition of ICSA, caused damage to theminority shareholders of INPACSA. In 1998, the public prosecutor also chargedJSG’s Chairman, Sir Michael Smurfit, as the representative of JSG, in theseproceedings with respect to the alleged damage to the minority shareholders ofINPACSA and Torras. A JSG subsidiary was also one of a number of partiesagainst whom secondary civil liability had been claimed. Preliminary proceedingscommenced in March 2003 and on April 11, 2003, the court dismissedthe proceedings against Sir Michael Smurfit, the JSG subsidiary and others. Thefinal decision of the court was handed down in March 2004 and confirmedthe earlier dismissal with respect to Sir Michael Smurfit and the JSGsubsidiary. The decision was appealed to a higher court by two privatecomplainants but not by the public prosecutor. In July 2006, the SupremeCourt confirmed the decision of the lower court. No provisions have beenrecognized in relation to the above matters, as we believe that theseliabilities are contingent liabilities on the basis that any possibleobligations arising from past events will only be confirmed by the occurrence(or non-occurrence) of future events not wholly within our control.

We were the subject oflitigation in the Dominican Republic in relation to the ownership of ourcorrugated container plant. The lawsuits alleged damages in excess of US$300million. This matter was settled on December 13, 2006. The Group incurredsettlement costs of €22.6 million. Thesettlement included the transfer of title to us of certain assets and includedthe payment of cash consideration in three tranches in January 2007, 2008and 2009. As a result, we have retained ownership of the plant and equipmentand the goodwill of the business.

**Dividends**

The Directors of SKG plc intend to adopt a progressivedividend policy which will take into account the underlying growth in ourearnings, as well as its capital requirements and cash flows, whilstmaintaining an appropriate level of dividend cover. However, as a companyincorporated in Ireland, SKG plc may only pay dividends if sufficientdistributable profits are available; as a holding company, SKG plc will bedependent upon dividends and interest distributed to it by its subsidiaries. Inaddition, we are subject to 

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additional restrictionsunder the terms of our current debt facilities which may limit our ability topay dividends.

Certain of thesubsidiaries of SKG plc (namely, SK Acquisitions, SK Funding, SKCL, SK Holdingsand SKGL) have deficits in their distributable reserves which restrict ourability to pursue the dividend policy outlined above. We intend to eliminatethese deficits by implementing a restructuring (the ‘‘Restructuring’’) which weexpect to complete in time for us to pursue the dividend policy.

The Restructuring willentail, in part, the payment of dividends from companies at lower levels of theGroup to their immediate holding companies. The aggregate amount of dividendspayable by Group companies will be equal to the aggregate deficits of all ofthe relevant subsidiaries (except SK Acquisitions). Upon the receipt by therelevant company of a dividend, it will retain a proportion sufficient toeliminate its deficit and will declare a dividend equal to the balance to itsholding company.

In addition, SKAcquisitions has unrealized reserves which were created in 2002 and 2005 by thetransfer to it of shareholdings in Group companies by way of capital contributionsfrom its holding company, SK Funding. The Restructuring will include thecapitalization of an amount of SK Acquisitions’ reserves equal to SKAcquisitions’ current distributable reserves deficit, which will be used toissue new ordinary shares by way of bonus to SK Funding.

Immediately thereafter, SKAcquisitions will reduce its capital by cancelling bonus shares having anominal value equal to the amount of its distributable reserves deficit (as anunlimited company, SK Acquisitions may reduce its capital without recourse tothe courts). The capital reduction will eliminate SK Acquisition’sdistributable reserves deficit.

The net effect of theRestructuring will be the elimination of the deficits in the reserves of therelevant Group companies and, assuming it has sufficient distributablereserves, we will be in a position to pursue the dividend policy outlinedabove.

Thesenior notes indentures, the subordinated notes indentures and the seniorcredit facility contain financial and other restrictive covenants that limitour ability to engage in activities that may be in our long term best interests.For example, these covenants significantly restrict our ability to:

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

·       incuradditional indebtedness;

·       createliens or other encumbrances; and

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

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

**Item 9.**               TheOffer and Listing

The 101¤8% Senior Notes due 2012, the 95¤8% Senior Notes due 2012 and the7.75% Senior Subordinated Notes due 2015 are listed on the LuxembourgStock Exchange.

**Item 10.**        AdditionalInformation

**Memorandum and Articles of Association**

The following is a summaryof SK Funding’s Memorandum and Articles of Association. A copy of theMemorandum and Articles of Association of SK Funding is included as an exhibitto this annual report.

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

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*Objects and Purposes of SK Funding*

Theobjects of SK Funding, as set out more fully in clause 3 of its memorandum ofassociation are as follows:

·       To carry onin any or all of its branches the business of manufacturing, producing,selling, exporting, importing and dealing in and with any and all kinds ofpaper, paperboard, cardboard, strawboard, plastic, paper substitutes and papermaterials generally which may be manufactured or produced from any material orby any process or method and any and all ingredients, by-products and compoundsthereof and all articles, commodities, materials or substances made of theforegoing may be utilized, including, without limiting the generality of theforegoing, cartons, boxes, bags, packaging, books, insulating material, wallboard, corrugated wrappers, plastic wrappers and containers, building supplies,stationery, toilet accessories, clothing and every other kind of goods, waresand merchandise in the manufacture, production or processing of which paper orits components or compositions might be employed and any and all materials thatmay be used or useful in connection with such manufacture or production.

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

***Directors***

SK Funding is managed bydirectors. There shall be no less than two nor more than fourteen directors.The directors may exercise all such powers of SK Funding as are not, under theArticles of Association or the Irish Companies Acts 1963 to 2005, which werefer to as the “Irish Companies Acts” required to be exercised by SK Fundingin the general meeting of shareholders.

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

*Material Interests*

A director who is in anyway, whether directly or indirectly, interested in a contract or a proposedcontract with SK Funding shall declare the nature of his interest at a meeting ofthe directors in accordance with the Irish Companies Acts.

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

*Remuneration*

The remuneration ofdirectors is determined by ordinary resolution of SK Funding and is divisibleamong the directors as they agree, or failing agreement, equally. However, anydirector who holds office for only part of the period in respect of whichremuneration is payable shall be entitled only to rank in such division forportion of remuneration to the period during which he has held office.

Any director who is calledupon to perform extra services which in the opinion of the directors areoutside the scope of the ordinary duties of a director, SK Funding mayremunerate such director either by a fixed sum or by a percentage of profits orotherwise as may be determined by resolution passed and a meeting of thedirectors and such remuneration may be either in addition or in substitutionfor any other remuneration to which he may be entitled as a director.

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

*Borrowing Powers*

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

*Retirement*

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

*Number of Sharesfor Directors’ Qualification*

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

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

*Dividend Rights*

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

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

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

*Capitalization ofDistributable and Non-distributable Profits and Reserves*

At a general meeting ofshareholders, SK Funding may, upon the recommendation of the directors, resolvethat it is advantageous to capitalize any part of the amount for the time beingstanding to the credit of any of SK Funding’s reserve accounts or to the creditof the profit and loss account.

*Voting Rights*

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

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

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

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

*Reserves*

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

*RedemptionProvisions*

Subject to the provisionsof the Companies Act 1990 Act, SK Funding may agree with any shareholder thatall or part of such shareholder’s shares are to be redeemed or are liable to beredeemed at the option of SK Funding or the shareholder on such terms and insuch manner as may be determined by the directors of SK Funding. Also, subjectto the provisions of the Companies Act 1990 Act, SK Funding may issue anyshares of the company which are to be redeemed or are liable to be redeemed atthe option of the company or the shareholder on such terms and in such manneras may be determined by the company in general meeting by special resolution onthe recommendation of the directors.

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

*Disclosure ofInterests*

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

·       hisinterest in such share;

·       interestof all persons having beneficial interest in the share; and/or

·       anyagreement that pertains to the transferability of the share.

Depending on whether theperson who has a beneficial interest in the share is a corporation, trust,society or any other legal entity or association of individuals, the directorsmay require full and accurate information about the names and addresses of theindividuals who control the shares, interest or unit of such corporation,trust, society, or other entity or association.

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*Alteration of ShareCapital*

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

*Transfer of Shares*

All transfers of shares may be effected by transfer inwriting in any usual or common form or in any form acceptable to the directorsand must be executed by or on behalf of the transferor and, if the sharestransferred are not fully paid, by or on behalf of the transferee. Thetransferor will be deemed to remain the holder of the shares transferred untilthe name of the transferee is entered in the register of SK Funding.

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

·       thetransfer of a share warrant if the conditions of issue of any share warrants soauthorize or permit the directors to so refuse; or

·       anytransfer of a share which is not fully paid.

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

·       isaccompanied by the certificate of the shares or share warrants to which itrelates and such other evidence as the directors may reasonably require to showthe right of the transferor to make the transfer;

·       inrespect of only one class of share or share warrant only; and

·       in favor of not more thanfour transferees.

*Restriction ofVoting Rights*

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

·       failureof the holder or holders to pay any call or installment of a call in thecorrect manner and by the time required for such payment;

·       failureof the holder or holders to comply, to the satisfaction of the directors, withthe terms of Article 15 of SK Funding’s Articles of Association regardingdisclosure of beneficial ownership in respect of any notice or notices given tohim or any of them; or

·       thefailure by a transferee named in a transfer presented for registration tocomply, to the satisfaction of the directors, with all or any of the terms of Article 15of the Articles of Association in respect of any notice or notices given to himor any transferee.

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

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*Purchase of OwnShares*

Subject to the provisionsof the Irish Companies Acts and the Articles of Association, SK Funding maypurchase any of its shares (without any obligation to purchase on any pro ratabasis as between shareholders of the same class) on such terms and conditionsin such manner as the directors may determine. SK Funding may cancel any sharesso purchased, hold them as treasury shares or reissue any such shares. Themanner in which shares can be purchased and held is described in Section 211and Section 209 of the Companies Act, 1990.

*General Meetings*

Each year SK Funding shall hold a general meeting asits annual general meeting in addition to any other meeting in that year andshall specify this in the meeting notice. Any general meeting other than the annualgeneral meeting shall be called an extraordinary general meeting. Directors maycall general meetings, and extraordinary meetings may be called on suchrequisition, or in default, in such manner as provided by the Irish CompaniesActs.

Subject to provision of the Irish Companies Acts, anyannual general meeting and a meeting called for passing of a special resolutionshall be called upon at least 21 days’ notice in writing and other meetingsshall be called upon at least 14 days’ notice in writing. The notice periodshall be calculated by excluding the day when notice is given or deemed to begiven and the day for which it is given or on which it is to take effect. Thenotice shall specify the time, place and general nature of the business to betransacted. The accidental omission to give notice of a meeting, or thenon-receipt of notice of a meeting, shall not invalidate the proceedings atthat meeting.

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

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

*Winding-Up*

If SK Funding is wound up,the liquidator may, with the sanction of a special resolution of SK Funding andany other sanction required by the Irish Companies Acts, divide among themembers in specie or kind the whole or any part of the assets of SK Funding(whether they shall consist of property of the same kind or not) and may, forsuch purpose, set such value as he deems fair upon any property to be dividedas aforesaid and may determine how such division shall be carried out asbetween the members or different classes of members. The liquidator may, withthe like sanction, vest the whole or any part of such assets in trustees uponsuch trusts for the benefit of the contributories as the liquidator, with thelike sanction, shall think fit, but so that no member shall be compelled to acceptany shares or other securities whereon there is any liability.

*Untraced Members*

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

·       theholder failed to communicate with SK Funding during the 12 year period;

·       SKFunding by advertisement has indicated its intent to sell the share;

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·       SKFunding has received no communication from the untraced member for three monthsfollowing its advertisement; and

·       ifany shares are listed or dealt in on the Irish Stock Exchange, SK Funding hasfirst given notice in writing to the Irish Stock Exchange of its intention tosell such shares.

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

**Material Contracts**

**Acquisition ofJefferson Smurfit Group plc**

On October 7, 2002, an investor group led byMadison Dearborn Partners and management of SK (the “Transaction”)acquired Jefferson Smurfit Group plc. The following reflect substantially allof the material contracts entered into in connection with the Transaction.

**FinancingArrangements.****  **Thefollowing contracts were entered into by the parties named below to finance theTransaction:

*SeniorCredit Facility.**  *Inconnection with the Transaction, SK Acquisitions (formerly known as JSG Acquisitions)as original borrower entered into a senior credit facility on September 12,2002, with Deutsche Bank AG London, as facility agent and security agent,Deutsche Bank AG London and Merrill Lynch International as joint arrangers andjoint bookrunners, Deutsche Bank AG London and Merrill Lynch CapitalCorporation and others as original lenders, SKCL (formerly known as JeffersonSmurfit Group Limited), SK Funding (formerly known as JSG Funding) and SKAcquisitions as original guarantors, and a syndicate of financial institutionsand institutional lenders. The senior credit facility originally provided forfacilities of up to €2.525billion. This senior credit facility was subsequently refinanced by the seniorcredit facility referred to below on November 30, 2005 as part of thefinancing arrangements for the Merger with Kappa Holding B.V. Where referencesare made to senior credit facility the reference applies to both the 2002senior credit facility and the 2005 senior credit facility as appropriate.

*SeniorNotes due 2012 of SK Funding (formerly known as JSG Funding).**  *As part of the Transaction, SKFunding issued €350million in aggregate principal amount of 101¤8% senior notesdue 2012, pursuant to a Euro Indenture, dated as of September 30, 2002,among SK Funding, SK Acquisitions (formerly known as JSG Acquisitions) andDeutsche Bank Trust Company Americas, as trustee, and $545 million inaggregate principal amount of 95¤8%senior notes due 2012, pursuant to a Dollar Indenture, dated September 30,2002, among SK Funding, SK Acquisitions and Deutsche Bank Trust CompanyAmericas, as trustee. As part of the SSCC Asset Swap (as defined below), SKFunding issued an additional $205 million in aggregate principal amount of 95¤8%senior notes due 2012 under the Dollar Indenture. The senior notes mature on October 1,2012. The senior euro notes bear interest at a rate equal to 101¤8% per annum.The senior dollar notes bear interest at a rate equal to 95¤8% per annum.Through maturity, interest on the senior notes is payable semi-annuallyin arrears on April 1 and October 1 of each year. The senior notesare general, unsecured obligations of SK Funding and rank equally with orsenior in right of payment to all current and future indebtedness of SKFunding. Each series of the senior notes will rank *pari passu*with the other and senior in right of payment to,among other things, the senior subordinated notes. The senior notes effectivelyrank junior to all of the existing and future indebtedness of SK Funding’ssubsidiaries, including those of SK Acquisitions and all borrowing under thesenior credit facility, whether such debt is secured or unsecured. SKAcquisitions is the guarantor of the senior notes on a senior subordinatedbasis. The guarantees rank behind all current and future senior indebtedness ofSK Acquisitions, including all borrowing under the senior credit facility.The guarantees also rank behind 

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all liabilities of SKAcquisitions’ subsidiaries. The indentures governing the senior notes containcustomary covenants and events of default.

*UnitsPrivate Placement.**  *Aspart of the Transaction, SKCL (formerly known as Jefferson Smurfit GroupLimited) and SK Funding (formerly known as JSG Funding) issued 100,000 eurounits and 150,000 dollar units for an aggregate of approximately €252.7million in net proceeds (at the September 23, 2002 exchange rate of €1.00= $0.9822). The units were issued pursuant to a Euro Unit Agreement, dated asof October 2, 2002, among SK Funding, SKCL, Deutsche Bank AG London, asEuro Unit Agent, and Deutsche Bank Trust Company Americas, as Euro Trustee andWarrant Agent, and a Dollar Unit Agreement, dated as of October 3, 2002,among SK Funding, SKCL, Deutsche Bank Trust Company Americas, as Dollar UnitAgent and Deutsche Bank AG London, as Co-Warrant Agent. Each euro unitconsisted of a €1,000principal amount 15.5% subordinated note due 2013 of SK Funding, and a warrantto subscribe for ordinary shares of SKCL. Each dollar unit consists of a $1,000principal amount 15.5% subordinated note due 2013 of SK Funding, and a warrantto subscribe for ordinary shares of SKCL.

*15.5%Subordinated Notes due 2013 of SK Funding (formerly known as JSG Funding).**  *In January 2005, SK Fundingcommenced a tender offer to purchase, for cash, all outstanding existing 15.5%subordinated notes (the “subordinated notes tender offer”). The subordinatednotes tender offer was completed on February 14, 2005. All of the euro 15.5%subordinated notes were tendered. The approximately 0.01% of the 15.5% dollarsubordinated notes not tendered in February 2005 were redeemed on October 28,2005 at a redemption price of 108.0%, in accordance with the terms andconditions of the indenture governing the dollar subordinated notes.

*EquityWarrants.**  *Holdersof the 15.5% subordinated notes received warrants to purchase, in theaggregate, 1.0% of the outstanding ordinary shares of SKCL (formerly known as JeffersonSmurfit Group Limited), inclusive of the ordinary shares issuable upon theexercise of the warrants, at the price of €0.001 per ordinary share,subject to certain anti-dilution protections. The warrants were issued pursuantto a Warrant Agreement, dated as of October 2, 2002, by and among SKCL,Deutsche Bank Trust Company Americas, as Warrant Agent, Deutsche Bank AGLondon, as Co-Warrant Agent and MDCP Co-Investors (as defined therein), asamended by the First Amendment to Warrant Agreement, dated as of March 31,2003, among the Company, the Warrant Agent and the Co-Warrant Agent, and as supplementedby the Supplemental Warrant Agreement, dated as of February 6, 2004, amongSKCL, the Warrant Agent, the Co-Warrant Agent and SKGL and a Second SupplementalWarrant Agreement dated February 16, 2007, among SKGL, the Warrant Agent,the Co-Warrant Agent and SKG plc. In accordance with the terms of theSupplemental Warrant Agreement, SKGL assumed the obligations of SKCL in respectof the warrants and in accordance with the terms of the Second SupplementalWarrant Agreement, SKG plc assumed the obligations of SKGL in respect of thewarrants and, accordingly, the warrants are now in respect of the issue of theoutstanding ordinary shares of SKG plc. The warrants will expire on October 1,2013. In addition, the holders of warrants are entitled to certain registrationrights, tag-along rights and drag-along obligations.

**2005Refinancing Transaction.****  **The following contracts were entered into by theparties named below as part of the Refinancing Transactions to finance therepayment of the 15.5% Subordinated Notes due 2013 of SK Funding.

*7.75%Senior Subordinated Notes due 2015 of SK Funding***(formerly known as JSG Funding).   SK Funding issued the7.75% euro senior subordinated notes in an aggregate principal amount of €217.5million under a Euro Indenture, dated January 31, 2005, between SK Fundingand Deutsche Bank Trust Company Americas, as trustee, Deutsche Bank LuxembourgS.A., as paying agent and transfer agent, and Deutsche Bank AG London, asprincipal paying agent and transfer agent, and issued the 7.75% dollar seniorsubordinated notes in an aggregate principal amount of $200 million under aDollar Indenture, dated as of January 31, 2005, between SK Funding andDeutsche Bank Trust Company Americas, as 

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trustee, and Deutsche BankLuxembourg S.A., as paying agent and transfer agent. The senior subordinatednotes mature on April 1, 2015 and bear interest at a rate equal to 7.75%per annum. Through maturity, the interest on the subordinated notes is payableeach April 1 and October 1 in cash. The senior subordinated notes areunsecured obligations of SK Funding and are subordinated in right of payment toall existing and future senior indebtedness of SK Funding. The subordinatednotes are not guaranteed by any of SK Funding’s subsidiaries. As a result,they also effectively rank behind all current and future liabilities, includingtrade payables, of SK Funding’s subsidiaries. The indentures governing thesenior subordinated notes contain customary covenants and events of default.

*Tenderoffer for 15.5% Subordinated Notes due 2013 of SK Funding (formerly known asJSG Funding).**  *OnJanuary 13, 2005, SK Funding commenced a tender offer to purchase for cashall outstanding SK Funding 15.5% subordinated notes. SK Funding appliedthe net proceeds from the offering of the €217.5 million 7.75%Senior Subordinated Notes due 2015 and the $200 million 7.75% SeniorSubordinated Notes due 2015 to fund the purchase of its 15.5% subordinatednotes.

**SSCCAsset Swap.****  **Pursuantto (i) that certain Stock Purchase Agreement, dated February 20,2003, by and among Smurfit-Stone Container Corporation (“SSCC”), StoneContainer France S.A. (“SIF”) and Smurfit International B.V. (“SIBV”) (the “ECAgreement”) and (ii) that certain Exchange and Sale Agreement, dated February 20,2003, by and among SSCC, Stone, SSCC LUX I S.A.R.L., SSCC LUX VII S.A.R.L. (“LuxVII”), SIBV, SIF and Smurfit Canada Holdings Limited (the “MBI Agreement” andtogether with the EC Agreement, the “Agreements”), SKG purchased substantiallyall of the assets that comprised SSCC’s European operations for JSG’s 50%ownership interest in Smurfit MBI of Canada and a cash payment of approximately€185million (the “SSCC Asset Swap”). The Agreements contain standardrepresentations and warranties as to the respective businesses involved in thetransaction and requires both parties to provide indemnification to the otheragainst certain losses in certain circumstances. The SSCC Asset Swap wascompleted on March 30, 2003.

**Mergerwith Kappa Holding B.V.****  **On December 1, 2005, SK Acquisitions (formerlyknown as JSG Acquisitions) acquired Kappa Holding B.V. (the “Merger”). Thefollowing reflect substantially all of the material contracts entered into inconnection with the Merger.

**Share Purchase Agreement.****  **On November 23, 2005, SmurfitKappa Group Limited (formerly known as JSG Packaging), SK Acquisitions(formerly known as JSG Acquisitions), Smurfit Kappa Feeder G.P. Limited (in itscapacity as general partner of Smurfit Kappa Feeder L.P.), certain investmentfunds managed or advised by Cinven Limited and certain investment funds managedor advised by CVC Capital Partners Limited, which are the controllingshareholders of Kappa, and the other Kappa shareholders entered into a SharePurchase Agreement (the “Share Purchase Agreement”). Pursuant to the SharePurchase Agreement, Smurfit Kappa Group Limited and its subsidiaries and Kappaand its subsidiaries merged their respective operations on December 1,2005. JSG Packaging was re-named Smurfit Kappa Group Limited. The Merger wascompleted through the issue of class B ordinary shares of Parent and the paymentof consideration comprising €238 million in cash andthe issuance of a subordinated promissory note in the amount of approximately €89million to Kappa’s shareholders. As a result of the Merger, Smurfit Kappa GroupLimited’s shareholders owned approximately 58.3% and Kappa’s shareholders ownedapproximately 41.7% of SKGL.

**2005 Senior CreditFacility.****  **Thefollowing contract was entered into by the parties named below in connectionwith the Merger.

On November 30, 2005,SKCL (formerly known as Jefferson Smurfit Group Limited), SK Acquisitions(formerly known as JSG Acquisitions), certain other subsidiaries of SKCL,as borrowers or guarantors, Deutsche Bank AG, London Branch, Citigroup GlobalMarkets Limited, Credit Suisse First Boston International and JP MorganPLC, as arrangers, certain lenders named therein, and Deutsche Bank AG, LondonBranch, as issuing bank, facility agent and security agent, entered into asenior credit 

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facility(the “senior credit facility”). This senior credit facility consists of a €485million amortizing A Tranche maturing in 2012, a €1,188 million B Tranchematuring in 2013 and a €1,189 million C Tranche maturing in 2014. Theborrowers have €875million of additional borrowing availability under the New senior creditfacility, including a €600 million revolving credit facility. On December 1,2005, €2,622million and US$175 million was drawn under the senior credit facility to fundthe initial cash consideration for the Kappa shares, to refinance the existingsenior credit facility of SK Acquisitions and the existing senior creditfacility of Kappa Packaging B.V. (“Kappa Packaging”), and to fund theredemption price for the 105¤8% Senior Subordinated Notes due2009 and the 121⁄2% Senior Subordinated Discount Notes due 2009 issued by KappaBeheer B.V., and to pay related costs and expenses.

**Priority Agreement.****  **The following contract was enteredinto by the parties named below in connection with the senior credit facility.

On November 30, 2005,SKCL (formerly known as Jefferson Smurfit Group Limited), certain subsidiariesof SKCL, as obligors, certain banks and financial institutions named therein assenior creditors, Deutsche Bank Trust Company Americas, as bond trustee,Adavale (Netherlands) B.V., as junior creditor, certain banks and financialinstitutions named therein as hedging banks, and Deutsche Bank AG, LondonBranch, as senior agent and security agent, entered into a priority agreement(the “Priority Agreement”). The Priority Agreement provides, among otherthings, that each of the intercompany loans made by SK Funding to SKAcquisitions is subordinated in right of payment to the prior payment in fullin cash of all obligations of SK Acquisitions in respect of senior obligationsunder the senior credit facility. The intercompany loans consist of SK Funding’sloans to SK Acquisitions of the gross proceeds SK Funding received from theissuance of 95¤8% senior notes due 2012, 101¤8% senior notes due 2012 and 7.75%senior subordinated notes due 2015.

**Management Arrangements.****  **In connection with the Transaction,each of the executive officers of JSG entered into an employment agreement andmanagement equity agreement with Jefferson Smurfit Group Limited. Themanagement equity agreement was amended and restated in December 2005 inconnection with the merger and the formation of SKGL. The employment agreementsand management equity agreement were amended and restated in February 2007and March 2007, respectively, in connection with the initial publicoffering of SKG plc. SKG plc entered into agreements with Sir Michael Smurfitrelating to his retirement. We also adopted the Smurfit Kappa plc 2007 ShareIncentive Plan. A detailed description of each of these contracts is set forthin this Form 20-F under Item 6 under the caption “Management EquityAgreements, “Executive Directors’ Service Contracts” and “Smurfit Kappa plc2007 Share Incentive Plan.”

**Investor Arrangements.****  **In connection with the Transaction,substantially all of the investors in the Transaction (including the managementinvestors) entered into a number of agreements relating to their equityinvestment in Jefferson Smurfit Group Limited. Each of these agreements wereamended and restated in December 2005 in connection with the Merger andthe formation of SKGL. A detailed description of each of these contracts is setforth in this Form 20-F under Item 7 under the captions “RegistrationRights Agreement” and “Shareholders’ and Corporate Governance Agreement.” TheShareholders’ and Corporate Governance Agreement terminated upon Admission.

**Initial Public Offering.****  **On March 14, 2007, SKG plccompleted an initial public offering, with the placing to institutionalinvestors of 78,787,879 new Ordinary Shares in SKG plc, a company formed in January 2007as the ultimate holding company for the Group. This offering, together with theissue of an additional 11,818,181 Ordinary Shares, generated gross proceeds of €1,495 million,which were used to repay certain debt obligations and to prepay the shareholderPIK note issued in connection with the Merger and related costs and expenses.Trading in the shares (“Admission”) on the Irish Stock Exchange and on theLondon Stock Exchange commenced on March 20, 2007. The additional shareswere issued on Admission by Deutsche Bank acting as stabilizing manager underan over-allocation option representing shares up to a maximum of 15% of thetotal number of shares comprised in the initial public offering.

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**GoingPublic Agreement.**   In connection with the initialpublic offering of SKG plc, we entered into a Going Public Agreement with theprincipal investors in SKG plc and members of senior management relating tocertain matters in connection with the initial public offering of SKG plc. Adetailed description of this contract is set forth in this Form 20-Funder Item 7 under the caption “Going Public Agreement.”

**TenderOffers for Senior Notes.*****  ***In March 2007, SK Holdingscompleted a tender offer and consent solicitation for its PIK notes. 90% of thePIK notes were tendered in the tender offer. SK Holdings used a portion of thenet proceeds from the initial public offering proceeds it received from SKG plcto finance the repurchase of notes and to pay fees and expenses related to thetender offer. The 10% of PIK notes not tendered in the tender offer wereredeemed in April 2007.

In March 2007, SKFunding completed a tender offer for up to $470 million of its outstanding 95¤8%Dollar Senior Notes due 2012 (the “Dollar senior notes”) and up to €219million of its outstanding 101¤8%euro Senior Notes due 2012 (the “euro senior notes”). In April 2007, SKFunding completed a further tender offer for up to $208 million of itsoutstanding Dollar senior notes and up to €98 million of itsoutstanding euro senior notes. Upon completion of the second tender offer, $72million aggregate principal amount of Dollar senior notes and €33million of euro senior notes remained outstanding. SK Funding used the netproceeds from the initial public offering proceeds it received from SKG plc tofinance the repurchase of notes and to pay fees and expenses related to thetender offers.

**Exchange Control**

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

**Taxation**

**United StatesTaxation**

The following is a description of the material U.S.tax consequences of the acquisition, ownership and disposition of the 95¤8% senior notes due 2012, the 101¤8% senior notes due 2012and the 7.75% senior subordinated notes due 2015 (collectively, the “notes”).The statements regarding U.S. tax laws and practices set out below, includingthe statements regarding U.S./Irish double taxation convention relating toincome and capital gains, which we refer to as the Tax Treaty, assume that thenotes were issued, and transfers thereof and payments thereon will be made, inaccordance with the applicable notes indenture. For purposes of the Tax Treatyand the U.S. Internal Revenue Code of 1986, as amended to the date hereof,which we refer to as the Code, U.S. Holders of book-entry interests will betreated as owners of the notes underlying such book-entry interests and, exceptas noted below, the tax consequences of owning book-entry interests will be thesame as those applicable to ownership of the notes.

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

This discussion deals only with investors that holdnotes as capital assets. The discussion does not cover all aspects of U.S.federal taxation that may be relevant to, or the actual tax effect that any ofthe matters described herein will have on, the acquisition, ownership ordisposition of notes by particular investors, and does not address state,local, foreign or other tax laws. In particular, this discussion does notaddress all of the tax considerations that may be relevant to certain types ofinvestors subject to special treatment under the U.S. federal income tax laws(such as banks, insurance companies, regulated investment companies, realestate investment trusts, investors liable for the alternative minimum tax,individual retirement accounts and other tax-deferred accounts, tax-exemptorganizations, dealers in securities or currencies, investors that will holdthe notes as part of a straddle or hedging, constructive sale, 

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integrated or conversiontransactions for U.S. federal tax purposes, a person that actually orconstructively owns more than 10% of the voting stock of SKCL, traders insecurities that have elected the mark-to-market method of accountingfor their securities, or investors whose functional currency is not the U.S.dollar).

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

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

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

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

**IRS Circular 230Disclosure**

To ensure compliance withrequirements imposed by the U.S. Internal Revenue Service, we inform you thatany tax advice contained herein was not intended or written to be used, andcannot be used, by any taxpayer for the purpose of (1) avoidingtax-related penalties under the U.S. Internal Revenue Code or (2) promoting,marketing or recommending to another party any tax-related matters addressedherein. Each taxpayer should seek advice based on the taxpayer’s particularcircumstances from an independent tax advisor.

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

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

A U.S. Holder who uses the cash method of accountingfor federal income tax purposes and who receives interest on a euro note, whichwe refer to as a “foreign currency note,” in a currency other than the U.S.dollar, which we refer to as “foreign currency,” will be required to include inincome the U.S. dollar value of such foreign currency, determined using thespot rate in effect on the date such payment is received, regardless of whetherthe payment is in fact converted to U.S. dollars at that time. No currency 

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exchange gain or loss willbe recognized by such holder on such interest payments if the foreign currencyis converted into U.S. dollars on the date received at that spot rate. The U.S.federal income tax consequences to a U.S. Holder of a foreign currency note ofthe conversion of foreign currency received in respect of the foreign currencynote to U.S. dollars are described below. See “—Exchange of Foreign Currencies.”

A U.S. Holder who uses the accrual method ofaccounting for federal income tax purposes will be required to include inincome the U.S. dollar value of the amount of interest income accrued withrespect to a foreign currency note in a taxable year in accordance with eitherof two methods. Under the first method, the U.S. dollar value of such accruedincome will be determined by translating such income at the average rate ofexchange for the relevant interest accrual period, or with respect to anaccrual period that spans two taxable years, at the average rate for theportion of such accrual period within the taxable year. The average rate ofexchange for an interest accrual period (or portion thereof) is the simpleaverage of the spot rates for each business day of such period (or such otheraverage that is reasonably derived and consistently applied). Under the secondmethod, an accrual basis U.S. Holder may elect to translate such accruedinterest income using the spot rate in effect on the last day of the accrualperiod or, with respect to a partial accrual period, using the spot rate ineffect on the last day of the taxable year. If the last day of an accrualperiod is within five business days of the receipt of the accrued interest, aU.S. Holder may translate such interest using the spot rate in effect on thedate of receipt. The above described election must be made in a statement filedwith the U.S. Holder’s first U.S. tax return for which the election iseffective and must be applied consistently to all debt obligations held by theU.S. Holder from year to year and may not be changed without the consent of theInternal Revenue Service. Whether or not such election is made, a U.S. Holdermay recognize exchange gain or loss (which will be treated as ordinary incomeor loss) with respect to accrued interest income on the date such interestincome is actually paid or received (including upon a sale or other dispositionof such note, the receipt of proceeds of which include amounts attributable toaccrued interest previously included in income). The amount of ordinary incomeor loss recognized will be equal to the difference, if any, between the U.S.dollar value of the foreign currency received (determined using the spot ratein effect on the date such payment is received) in respect of such accruedinterest and the U.S. dollar value of the interest income that accrued duringsuch interest accrual period (as determined above). No additional exchange gainor loss will be recognized by such holder if such foreign currency is convertedto U.S. dollars on the date received at that spot rate. The U.S. federal taxconsequences of the conversion of foreign currency into U.S. dollars aredescribed below. See “—Exchange of Foreign Currencies.”

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

If the foreign currency notes are traded on anestablished securities market, a special rule applies for thedetermination of the amount realized and the basis of the foreign currencynotes held by a cash basis 

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taxpayer. Pursuant to thisrule, units of foreign currency paid or received are translated into U.S.dollars at the spot rate on the settlement date of the purchase or sale. Inthat case, no exchange gain or loss will result from currency fluctuationsbetween the trade date and the settlement date of such a purchase or sale. Anaccrual basis taxpayer may elect the same treatment required of cash basistaxpayers with respect to purchases and sales of foreign currency notes thatare traded on an established securities market, provided the election isapplied consistently from year to year. Such election may not be changedwithout the consent of the Internal Revenue Service.

Except as provided below with respect to gain or losson a foreign currency note attributable to currency fluctuations, a U.S. Holder’sgain or loss realized upon the sale, exchange, retirement or other dispositionof a note will generally be treated as U.S. source gain or loss and will be longterm capital gain or loss if, at the time of the sale, exchange, retirement orother disposition of a note, the U.S. Holder has held the note for more thanone year. If a U.S. Holder is an individual and the note being sold, exchanged,or retired is a capital asset held for more than one year, the U.S. Holder maybe eligible for reduced rates of taxation on any capital gain recognized. Theability to deduct capital losses is subject to limitations.

To the extent that the amount realized on a sale, exchange,retirement, or other disposition of a note represents accrued but unpaidinterest, such amount must be taken into account as interest income, if it wasnot previously included in income, and exchange gain or loss may be realized asdescribed above. See “—Payment of Interest.” In the case of a U.S. Holder whoacquired the notes with market discount (discussed below), any gain recognizedupon the sale, exchange, redemption, or other disposition of the notesgenerally will be treated as ordinary income to the extent of the marketdiscount that accrued during the period such U.S. Holder held such notes,unless the U.S. Holder previously had elected to include such accrued marketdiscount in the U.S. Holder’s income on a current basis. See “—Market Discountand Bond Premium.”

Gain or loss realized by aU.S. Holder upon the sale, exchange, or retirement, or other disposition of aforeign currency note that is attributable to fluctuations in the rate ofexchange between the U.S. dollar and the foreign currency will be ordinaryincome or loss and generally will be treated as U.S. source gain or loss. Gainor loss attributable to fluctuations in exchange rates will equal thedifference between (i) the U.S. dollar value of the foreign currencyprincipal amount of the foreign currency note, determined at the spot rate on the date such payment is receivedor the foreign currency  note is disposedof (or, where the foreign currency  noteis traded on an established securities market and the holder is a cash-basistaxpayer or an electing accrual basis taxpayer, on the settlement date), and (ii) theU.S. dollar value of the principal amount of the foreign currency  note, determined at the spot rate on the datethe U.S. Holder acquired the foreign currency note. Such foreign currency exchange gain or loss will be recognizedonly to the extent of the total gain or loss realized by the U.S. Holder on thesale, exchange, retirement, or other disposition of the foreign currency note.

**Market Discount andBond Premium**

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

Any gain on sale of a debt instrument attributable toa U.S. Holder’s unrecognized accrued market discount is generally treated asordinary income to the U.S. Holder. The amount of accrued market 

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discount is calculated ona ratable basis or, at the election of the holder, on a constant yield tomaturity basis. In addition, a U.S. Holder who acquires a debt instrument at amarket discount may be required to defer a portion of any interest expense thatotherwise may be deductible on any indebtedness incurred or maintained topurchase or carry the debt instrument until the U.S. Holder disposes of thedebt instrument in a taxable transaction.

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

Accrued market discount on a foreign currency note(other than market discount that a U.S. Holder has elected to currently includein income) will be translated into U.S. dollars at the spot rate on the datethe foreign currency  note is sold,exchanged, redeemed, or otherwise disposed of. No part of such accrued marketdiscount is treated as exchange gain or loss. Accrued market discount that a U.S.Holder has elected to currently include in income will be translated into U.S.dollars at the average exchange rate for the accrual period. Such U.S. Holdermay recognize exchange gain or loss (which will be treated as ordinary incomeor loss) with respect to market discount on the date such market discount isactually received (including upon a sale or other disposition of such note, thereceipt of the proceeds of which include amounts attributable to accrued marketdiscount previously included in income). The amount of ordinary income or lossrecognized will be equal to the difference, if any, between the U.S. dollarvalue of the foreign currency received (determined using the spot rate ineffect on the date such payment is received) in respect of such accrued marketdiscount and the U.S. dollar value of the market discount that accrued duringsuch accrual period. No additional exchange gain or loss will be recognized bysuch holder if such foreign currency is converted to U.S. dollars on the datereceived at that spot rate. The U.S. federal tax consequences of the conversionof foreign currency into U.S. dollars are described below. See “—Exchange of Foreign Currencies.”

In the event that a note is purchased at a premium,i.e., for an amount in excess of the amount payable at maturity, a U.S. Holdergenerally may elect to offset payments of qualified stated interest on suchnote by an allocable portion of the premium (which will result in acorresponding reduction in such U.S. Holder’s tax basis in the note). Theportion of the premium allocable to each interest payment generally iscalculated based on the U.S. Holder’s yield to maturity for the note. If a U.S.Holder elects to amortize bond premium with respect to the note, such electionwill also apply to all other debt instruments held by such U.S. Holder duringthe year in which the election is made and to all debt instruments acquiredafter that year. The election may not be revoked without the consent of theIRS.

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

*Exchangeof Foreign Currencies.**  *AU.S. Holder will have a tax basis in any foreign currency received as interestor on the sale, exchange, retirement or other disposition of a note equal tosuch currency’s U.S. dollar value at the time such foreign currency isreceived. As discussed above, however, if the foreign currency notes are tradedon an established securities market, cash basis taxpayers (or, upon election,accrual basis taxpayers) will determine the U.S. dollar value of any foreigncurrency received in connection 

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with the sale, exchange,retirement or other disposition by translating such foreign currency receivedat the spot rate of exchange on the settlement date of the sale, exchange,retirement or other disposition. Any gain or loss realized by a U.S. Holder ona sale or other disposition of foreign currency (including the exchange of suchcurrency for U.S. dollars) will be ordinary income or loss and generally willbe U.S. source gain or loss.

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

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

*Interestand Market Discount on the Notes.**  *A Non-U.S. Holder generally willnot be subject to U.S. federal income tax or withholding with respect to theinterest (or market discount) on a note. If, however, the interest (includingmarket discount) on a note is effectively connected to a U.S. trade or businessof the Non-U.S. Holder or, if a tax treaty applies, is attributable to aU.S. permanent establishment of the Non-U.S. Holder, such holder, althoughexempt from U.S. withholding tax, will be subject to U.S. federal income tax onsuch interest (and market discount) on a net income basis in a similar manneras if it were a U.S. Holder. Interest (and market discount) received by aNon-U.S. Holder on a  note generally willbe considered effectively connected with a U.S. trade or business only if theNon-U.S. Holder is (i) an insurance company carrying on a U.S. business towhich such interest (or market discount) is attributable, within the meaning ofthe Code, or (ii) has an office or other fixed place of business in theU.S. to which the interest (or market discount) is attributable and either (x) theinterest (or market discount) is derived in the active conduct of a banking,financing, or similar business within the U.S. or (y) the interest (ormarket discount) is received by a corporation the principal business of whichis trading in stock or securities for its own account. In addition, if suchholder is a foreign corporation, it may be subject to a branch profits taxequal to 30% of its effectively connected earnings and profits for the taxableyear, subject to adjustments. For this purpose, interest (and market discount)on a note will be included in such foreign corporation’s earnings and profits.

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

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

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

**Tax ShelterReporting Requirements**

If a holder of notesrealizes a foreign currency loss in an amount that exceeds a certain threshold,it is possible that the provisions of U.S. Treasury Regulations involving “reportabletransactions” could apply, 

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with aresulting requirement to separately disclose the loss generating transactionsto the IRS. While these regulations are directed towards “tax shelters”, theyare written quite broadly, and apply to transactions that would not typicallybe considered tax shelters. Significant penalties may be imposed for failure tocomply with these requirements. Holders should consult their own tax advisorsconcerning any possible disclosure obligation with respect to the notes.

**Backup Withholdingand Information Reporting**

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

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

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

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

**Irish Taxation**

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

***Withholding Tax***

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

(1)         the notes are representedby a global note and are quoted on a recognized stock exchange, which we referto as “*quoted eurobond*s,” andinterest payments are made:

a)                by or through anon-Irish paying agent; or

b)               by or through anIrish paying agent and:

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

(ii)         an appropriate form ofdeclaration of non-residence is provided to the paying agent by or on behalf ofthe person who is the beneficial owner of the notes and entitled to the 

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interest (or, where theprovisions of Irish tax legislation deem the interest to be that of some otherperson, by that person); or

(2)         the interest is paid inthe ordinary course of a trade or business of SK Funding and the holder is an “*excluded company*”. An excluded company forthese purposes is a company which is tax resident in a Member State of theEuropean Union under the law of that Member State, or in a territory with whichIreland has a double tax treaty under the law of that territory, is not taxresident in Ireland, does not carry on a trade or business in Ireland through abranch or agency with which the interest is connected, and has provided therequired confirmation of same to SK Funding on or before the date on which theinterest is paid; or

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

As the notes are listed on the Luxembourg StockExchange, they will qualify as “*quotedeurobond*s”. Furthermore the paying agent is located outside Ireland.Accordingly, for so long as this is the case, the exemption under 1(a) aboveshould apply to payments of interest on the notes.

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

***Encashment Tax***

A collection or encashmentagent in Ireland obtaining payment of interest whether in Ireland or elsewhereon a note which is a quoted eurobond or realizing in Ireland any interest onbehalf of a holder of a note must withhold income tax at the standard rate(which is currently 20%) on making payments of such interest. This obligationdoes not arise where the person that is the beneficial owner of the note andentitled to the interest is not resident in Ireland and has made a declarationin the prescribed form and has provided that declaration to the collection orencashment agent, and the interest is not deemed, under the provisions of Irishtax legislation, to be that of some other person. Holders should note thatappointment of an Irish collection or encashment agent may (subject to theabove) bring them within the charge to Irish encashment tax. Encashment taxwill not arise by virtue of the clearing of a cheque or the arrangement for theclearing of a cheque, by a banker.

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

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

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

·       theinterest is paid in the ordinary course of business of SK Funding and theholder is an “*excluded company*”as described above;

·       thenotes constitute “quoted eurobonds” and the interest is paid free ofwithholding tax in the circumstances described above, to a person who is taxresident in a Member State of the European 

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Union, or in a territorywith which Ireland has a double taxation treaty and is not resident in Ireland,which we refer to as an *“excluded person”*;or

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

·       corporate holders who carryon a trade in Ireland through a branch or agency may be liable to Irishcorporation tax where the notes are held in connection with the trade.

Ireland operates a self assessment system of tax andany person other than an *“excluded company*”,“*excluded person*” or “*exempt double tax treaty resident*” in receiptof Irish source income comes within its scope, including a person who isneither resident nor ordinarily resident in Ireland. However, in the absence ofa withholding tax there is currently no mechanism to enable the Irish RevenueCommissioners to obtain payment of any liability from a non-resident person andfor that reason to date it has been the practice of the Revenue Commissionersnot to seek to collect the liability from such non-resident persons unless therecipient of the income has any other tax connection with Ireland such as aclaim for repayment of Irish tax deducted at source, an Irish agency, branch,trustee or trade. However, there can be no guarantee that this practice willcontinue.

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

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

On June 3, 2003, theEuropean Union adopted the directive regarding the taxation of savings incomein the form of interest payments from debt-claims. Each Member State wasrequired to implement the Directive before January 1, 2004 and to applythe Directive from January 1, 2005.  With effect from 1 July 2005, theEuropean Savings Directive was incorporated into Irish law. The aim of theDirective is to ensure that individual tax residents within the E.U. aresubject to effective taxation on any interest income received by them. In orderto achieve this, the majority of Member States have adopted a system ofautomatic exchange of information, however, certain States, such as Belgium,Austria and Luxembourg have opted to operate a withholding tax rather thanexchange information. Certain dependant and associated territories of the UK andthe Netherlands, such as Anguilla, Aruba and the British Virgin Islands havealso adopted the Savings Directive from 1 July 2005. In addition, a seriesof agreements between the E.U. and Andorra, Liechtenstein, Monaco, San Marinoand Switzerland also came into effect from 1 July 2005.

***Capital Gains Tax***

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

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

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***Anti Avoidance***

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

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

***Stamp Duty***

No Irish stamp dutywill be payable on the issue of the notes. No Irish stamp duty will be payableon a transfer of the notes provided the following conditions are met:

1.                the notes do notcarry a right of conversion into stocks or marketable securities (other thanloan capital) of a company having a register in Ireland or into loan capitalhaving such a right;

2.                the notes do notcarry rights of the same kind as shares in the capital of a company, includingrights such as voting rights, a share in the profits or a share in the surpluson liquidation;

3.                the notes areredeemable within 30 years of the date of issue and not thereafter;

4.                the notes areissued for a price which is not less than 90% of their nominal value; and

5.                thenotes do not carry a right to a sum in respect of repayment or interest whichis related to certain movements in an index or indices specified in anyinstrument or other document relating to the notes.

***Capital Acquisitions Tax***

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

**Documents onDisplay**

We are subject to the reporting requirements of theSecurities Exchange Act of 1934, as amended, and file reports, including AnnualReports on Form 20-F, and other information with the SEC. You mayread and copy any document we file with the SEC at its public reference roomsat 100 F Street, N.E. Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330for more information on the public 

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reference rooms and theircopy charges. In addition, the SEC maintains an Internet site at *http://www.sec.gov*that contains reportsand other information regarding issuers that file electronically with the SEC.These filings are also available to the public from commercial documentretrieval services.

SK Funding’s annual reporton Form 20-F, current reports on Form 6-K and allamendments to those reports are made available free of charge through ourwebsite (www.smurfitkappa.com) as soon as practicable after such material iselectronically filed with or furnished to the Securities and ExchangeCommission.

**Item 11.**                 Quantitativeand Qualitative Disclosures About Market Risk

***Interest Rate Market Risk***

We are exposed to changesin interest rates. Our senior credit facility is variable rate debt. Interestrate changes therefore generally do not affect the market value of such debtbut do impact the amount of our interest payments and, therefore, our futureearnings and cash flows, assuming other factors are held constant. As at December 31,2006, we had variable rate debt of approximately €1.5billion. Holding other variables constant, including levels of indebtedness, aone percentage point increase in interest rates would have had an estimatedimpact on pre-tax earnings of approximately €15 million. Under theterms of the senior credit facility, we have entered into interest rateprotection agreements establishing a fixed interest rate with respect to someof the outstanding term loan borrowing under the senior credit facility. We arerequired to keep these agreements or their replacements in place for at leasttwo years from December 1, 2005.

***Currency Sensitivity***

The consolidated groupoperates in the following principal currency areas: the euro, the U.S. dollar,the Swedish Krona and sterling. In 2006, we reported a translation gain of €24million on our foreign currency net assets, compared to €6million in 2005. We believe that a strengthening of the euro exchange rate by 1%against all other foreign currencies from December 31, 2006 would reducethe shareholders’ equity at the end of 2006 by approximately €20 million(as compared to approximately €8 million at end of 2005).

***Commodity Pricing Risks***

We are exposed to commodity price risks through ourdependence on recovered paper, the principal raw material used in themanufacture of containerboard. The price of recovered paper is dependent onboth demand and supply conditions. Demand conditions include the production ofrecycled containerboard in Europe and the demand for recovered paper for theproduction of recycled containerboard outside of Europe, principally in Asia.Supply conditions include the rate of recovery of recovered paper, itselfdependant on historic pricing related to the cost of recovery, and have someslight seasonal variations.

Just over 1.05 metric tons of recovered paper are requiredto manufacture 1.0 metric ton of recycled containerboard. Consequently, anincrease in the price of recovered paper of, for example, €20per metric ton would increase the cost of production of recycled containerboardby approximately €21per metric ton. Historically, increases in the cost of recovered paper, ifsustained, have led to a rise in the price of recycled containerboard, with alag of one to two months.

The price of recovered paper using OCC as a basis inEurope has peaked dramatically twice in recent years—in June 2002 and in April 2003.In each case, a relatively low level of supply was matched with a relativelyhigh level of demand, principally caused by increased demand from Asia. In thefirst case, the free-on-board price rose to over €150per metric ton. Within a period of three months, supply and demand 

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conditions leveled toreturn the price to around €100 per metric ton. In thesecond case, the spike was even more rapid with waste prices falling back toprevious levels almost immediately. In 2004, the price per metric ton remainedrelatively stable, fluctuating by a total of €11 per metric ton, butending the year at the same price as January. Similarly, in 2005, there wasrelative stability with the annual peak being €13 per metric ton ahead ofthe trough, and the price ending the year €5 per metric ton above theJanuary price. In 2006, the price of OCC increased by around €10per metric ton between April and May, and stayed at the higher level forthe remainder of the year.

The table below providesinformation about the European OCC price per metric ton at and for the yearsended December 31, 2004, 2005 and 2006.

**Free-on-BoardOCC Prices**

| ** **      | ** ** | **2004**                                 | ** ** | **2005**        | ** ** | **2006** | ** ** |
|-----------------|------------|------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **      | ** ** | **€ per metric ton** | ** ** |
| January         |       |                                     | 54         |            |       |     | 52         |   |   |   | 57 |   |   |
| December        |       |                                     | 55         |            |       |     | 57         |   |   |   | 67 |   |   |
| Highest (month) |       |                                     | 65         |  (April)   |       |     | 65         |  (April) |   |   | 67 |  (December) |   |
| Lowest (month)  |       |                                     | 54         |  (January) |       |     | 52         |  (January) |   |   | 57 |  (January) |   |
| Average         |       |                                     | 59         |            |       |     | 58         |   |   |   | 63 |   |   |

 

The cost of production is also sensitive to the priceof energy. Our main energy exposure is to the cost of gas and electricity.These energy costs have experienced significant price increases and volatilityin recent years, with a corresponding effect on our production costs.Electricity and gas prices have approximately doubled in the last three years.The main drivers for the increase in costs have been the increase in the priceof crude oil, which traded in a range which was predominantly from US$25-30per barrel but increased dramatically to over US$70 per barrel between April andAugust 2006, with a subsequent reduction to the current level of US$55-65per barrel, and a gas shortage in the United Kingdom in 2006, which resulted ina gas price peak in the United Kingdom. In addition to the increased cost ofoil, the price of electricity is also influenced by decreasing overcapacity inelectricity production facilities and the increasing influence of CO2 costs in the electricity price.

As of December 31, 2006, our European operationshad hedged 72% of their electricity costs for 2007, except for Sweden where ouroperations hedged 77% of their electricity costs and purchase the balance atspot prices. The gas exposure is indexed on oil products except for the UnitedKingdom where the gas is linked to the National Balancing Point. Our gas costsare hedged 50% for the main countries in Europe for 2007.

In 2006 our Mexicanoperations hedged 50% of their gas needs and purchased the balance at spotprices. Our Colombian operations source their energy needs from a combinationof electrical energy, natural gas and coal. Our Venezuelan operations’ mainenergy source is natural gas. All energy deficits are supplied by thegovernment electric utility. In Argentina, all of the energy needs are suppliedby the grid, and we use natural gas to supply steam to our paper machines.

***Qualitative Information about Market Risk***

The operating parameters and policies of treasurymanagement are established under formal board authority. The formal treasurypolicy covers the areas of funding, counterparty risk, foreign exchange,controls and derivatives. Risk arising on counterparty default is controlledwithin a framework of dealing with high quality institutions and, by policy,limits the amount of credit exposure to any one bank or institution. We usefinancial instruments, including fixed and variable rate debt, to financeoperations, for capital spending programs and for general corporate purposes.Additionally, financial instruments, 

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including derivativeinstruments, are used to hedge exposure to interest rate and foreign currencyrisks. We do not use financial instruments for trading purposes. We mitigatethe risk that counterparties to derivatives will fail to perform by contractingwith major financial institutions having high credit ratings and consider thelikelihood of counterparty failure to be remote.

The successful management of our currency and interestrate exposure depends on a variety of factors, some of which are outside of ourcontrol. We are exposed to the impact of interest rate changes and foreign currencyfluctuations due to our investing and funding activities and our operations inforeign currencies. We manage interest rate exposure to achieve an appropriatebalance of fixed and variable rate funding. To achieve this objective, we enterinto interest rate swaps, options and forward rate agreements. Interest rateswap agreements are used to change the interest payable or receivable on ourunderlying borrowing and cash from variable to fixed rate or from fixed tovariable rate. At December 31, 2006, the proportion of our total borrowingthat was at fixed interest rates was 68% (as compared to 72% at December 31,2005 and 73% at December 31, 2004).

We manage our balancesheet having regard to the currency exposures arising from our assets beingdenominated in a wide range of currencies. To this end, where foreign currencyassets are funded by local borrowing, such borrowing is generally sourced inthe currency of the related assets. We also hedge our currency exposure throughthe use of currency swaps, options and forward contracts.

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

Not applicable.

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

None.

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

Not applicable.

**Item 15.**                 Controlsand Procedures

We maintain disclosure controls and procedures (asdefined in Rules13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)), that aredesigned to ensure that information we are required to disclose in reports thatare filed or submitted under the Exchange Act is recorded, processed,  summarized and reported within the timeperiods specified in the rules and forms specified by the Securities andExchange Commission and that such information is accumulated and communicatedto our management, including our Group Chief Executive Officer and Group ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. 

In accordance with regulations issued by the EuropeanUnion and Irish law, certain companies are or will be required to prepare theirfinancial statements in compliance with accounting standards (“IFRS”) issued bythe International Accounting Standards Board (“IASB”). We intend to preparefinancial statements in accordance with IFRS with effect from January 1,2007.

In preparation for the adoption of IFRS, we employedthird party consultants, during 2006, to assist in reviewing our accountingpolicies and practices and in the identification of differences between IrishGAAP and IFRS. We also considered the effect of IFRS adoption on our U.S. GAAPreconciliation process as part of this review, due to the IASB and FASBprojects for convergence of IFRS and U.S. GAAP. As a result of this reviewmanagement concluded that its U.S. GAAP accounting treatment for net investmenthedge accounting using a tandem currency debt instrument was not correct at the year ended December 31, 2005. Inaddition, management concluded that its U.S. GAAP accounting treatment for 

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parent company third partydebt was not correct at the year ended December 31, 2005. Details of therestatements arising from this review were provided in Note 35 to theconsolidated financial statements (Differences Between Accounting PrinciplesGenerally Accepted in Ireland and in the United States) in our Report on Form20-F/A, for the year ended December 31, 2005, which was filed on November 24,2006.

As a result of this restatement, we took the followingremedial actions. We continue to implement improved U.S. GAAP accountingprocedures and controls through the use of outside consultants to provideenhanced U.S. GAAP technical expertise and additional training of accountingstaff. We also implemented enhancements to our procedures to ensure fullcompliance with all disclosure requirements.

Our management, including our Group Chief ExecutiveOfficer and Group Chief Financial Officer, have conducted an evaluation of theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this annual report. Based on this evaluation and our responseto the matters noted above, our Group Chief Executive Officer and Group ChiefFinancial Officer concluded that the disclosure controls and procedures areeffective in ensuring that all material information required to file thisannual report has been made known to them in a timely fashion. There have beenno significant changes in internal controls, or in factors that couldsignificantly affect internal controls, subsequent to the date our Group ChiefExecutive Officer and Group Chief Financial Officer completed their evaluation.

The Group is currentlyengaged in a project to comply with Section 404 of the Sarbanes Oxley Act.The Group is not currently required to report on management’s assessment of theeffectiveness of the Group’s internal controls over financial reporting and hasnot undertaken the kind of review of such controls that would be required inorder to make such a report. However, management will be required to report oninternal control over financial reporting when it files an annual report for afiscal year ending on or after December 15, 2007. The Group’s IndependentRegistered Public Accounting Firms attestation report on internal control overfinancial reporting will be required when the Group files an annual report fora fiscal year ending on or after December 15, 2008.

**Item 16.**                 Reserved

**Item 16A.**         AuditCommittee Financial Expert

Mr. ChristopherMcGowan, a director of Madison Dearborn, serves as the Audit Committeefinancial expert.

**Item 16B.**        Codeof Ethics

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

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**Item16C.**        Principal Accountant Feesand Services

| ** **            | ** ** | **2006**                | ** ** | **2005**                | ** ** |
|-----------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **            | ** ** | **€ million** | ** ** | **€ million** | ** ** |
| Audit Fees(1)         |       |                    | 8.4        |                    |       |   | 4.5 |   |   |
| Audit Related Fees(2) |       |                    | 0.2        |                    |       |   | 0.3 |   |   |
| Tax Fees(3)           |       |                    | 0.2        |                    |       |   | 1.6 |   |   |
| All Other Fees(4)     |       |                    | 11.3       |                    |       |   | 0.3 |   |   |
|                  | ** ** | ** **              | **€** | **20.1**                |       | ** ** | ** ** | **€** | **6.7** |   |   |
|                       |            |                         |            |                         |            |  |  |  |  |  |  |

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

(2)          Audit related fees consistprimarily of audits of subsidiaries requested by the Company which was notrequired by statute or regulation and due diligence relating to businesscombinations.

(3)          Tax fees for 2006 and2005 represents fees related to tax compliance (tax returns, refunds andpayment planning) and for tax consultation and planning which provided, or areexpected to provide, benefits to the Company in excess of the fees paid.

(4)          Allother fees consist primarily of fees related to SKG plc’s initial publicoffering and fees related to the Group’s Sarbanes-Oxley project.

***Audit Committee Pre-Approval of Audit and Non-AuditServices***

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

During 2006, all servicesby PricewaterhouseCoopers were pre-approved by the Audit Committee inaccordance with this policy.

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

Not applicable.

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

Not applicable.

**Item 17.**                 FinancialStatements

Not applicable.

106

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**Item 18.**                 FinancialStatements

Thefollowing financial statements and related schedules, together with the reportsthereon of PricewaterhouseCoopers and Ernst & Young are filed as partof this annual report.

|                                                                                                                             | ** ** | **Page**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **SK Funding**                                                                                                              |       |       |       |
| Report of Independent Registered Public Accounting  Firm-PricewaterhouseCoopers                                             |       | F-2        |       |
| Report of  Independent Registered Public Accounting Firm-Ernst & Young                                             |       | F-3        |       |
| Consolidated  Statements of Operations for the years ended December 31, 2006, 2005 and  2004                           |       | F-6        |       |
| Consolidated  Statements of Total Recognized Gains and Losses for the years ended  December 31, 2006, 2005 and 2004    |       | F-7        |       |
| Consolidated  Balance Sheets as at December 31, 2006 and 2005                                                          |       | F-8        |       |
| Consolidated  Statements of Changes in Shareholders’ Equity for the years ended  December 31, 2006, 2005 and 2004 |       | F-9        |       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2006, 2005 and  2004                           |       | F-10       |       |
| **SK  Acquisitions**                                                                                                        | ** ** | ** ** | ** ** |
| Report of Independent Registered Public Accounting  Firm-PricewaterhouseCoopers                                             |       | F-86       |       |
| Report of  Independent Registered Public Accounting Firm-Ernst & Young                                             |       | F-87       |       |
| Consolidated  Statements of Operations for the years ended December 31, 2006, 2005 and  2004                           |       | F-90       |       |
| Consolidated  Statements of Total Recognized Gains and Losses for the years ended  December 31, 2006, 2005 and 2004    |       | F-91       |       |
| Consolidated  Balance Sheets as at December 31, 2006 and 2005                                                          |       | F-92       |       |
| Consolidated  Statements of Changes in Shareholders’ Equity for the years ended  December 31, 2006, 2005 and 2004 |       | F-93       |       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2006, 2005 and  2004                           |       | F-94       |       |
| **SK  Funding**                                                                                                             |       |       |       |
| Schedule II-I—Valuation and Qualifying Accounts for  the years ended December 31, 2006, 2005 and 2004             |       | S-1        |       |
| **SK  Acquisitions**                                                                                                        |       |       |       |
| Schedule  II-II—Valuation and Qualifying Accounts for the years ended December 31,  2006, 2005 and 2004           |       | S-2        |       |

 

107

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**Item 19.**                 Exhibits

Thefollowing exhibits are filed as part of this annual report:

1.1                                    Memorandumand Articles of Association of SK Funding plc (incorporated by reference toExhibit 1.1 to the registrant’s annual report on Form 20-F(File No. 333-101456), filed on April 29, 2005).

2.1                                    EuroIndenture, dated January 31, 2005, among SK Funding plc, Deutsche BankTrust Company Americas, as Trustee, Registrar and Paying Agent, Deutsche BankLuxembourg S.A., as Paying Agent and Transfer Agent and Deutsche Bank AG actingthrough its London Branch, as Principal Paying Agent and Transfer Agent,relating to the 7.75% euro senior subordinated notes (incorporated by referenceto Exhibit 2.1 to the registrant’s annual report on Form 20-F(File No. 333-101456), filed on April 29, 2005).

2.2                                    DollarIndenture, dated January 31, 2005, among SK Funding plc, Deutsche BankTrust Company Americas, as Trustee, Registrar and Paying Agent, Deutsche BankLuxembourg S.A., as Paying Agent and Transfer Agent, relating to the 7.75%dollar senior subordinated notes (incorporated by reference to Exhibit 2.2to the registrant’s annual report on Form 20-F (File No. 333-101456),filed on April 29, 2005).

2.3                                    EuroDeposit and Custody Agreement, dated January 31, 2005, among SK Fundingplc, Deutsche Bank Trust Company Americas, as Book-Entry Depositary and NoteCustodian, relating to the 7.75% euro senior subordinated notes (incorporatedby reference to Exhibit 2.5 to the registrant’s annual report onForm 20-F (File No. 333-101456), filed onApril 29, 2005).

2.4                                    DollarDeposit and Custody Agreement, dated January 31, 2005, among SK Fundingplc, Deutsche Bank AG acting through its London Branch, as Book-EntryDepositary and Note Custodian, relating to the 7.75% dollar senior subordinatednotes (incorporated by reference to Exhibit 2.6 to the registrant’s annualreport on Form 20-F (File No. 333-101456), filed onApril 29, 2005).

2.5                                    EuroIndenture, dated September 30, 2002, among MDP Acquisitions plc (now knownas SK Funding plc), MDCP Acquisitions I (now known as SK Acquisitions),Deutsche Bank Trust Company Americas, as Trustee, Registrar and Paying Agent,Deutsche Bank Luxembourg S.A., as Paying Agent and Transfer Agent, and DeutscheBank AG London, as Principal Paying Agent and Transfer Agent, relating to theeuro senior notes issued on September 30, 2002 (incorporated by referenceto Exhibit 4.3 to the registrant’s registration statement on Form F-4(File No. 333-101456), filed on November 25, 2002).

2.6                                    DollarIndenture, dated September 30, 2002, among MDP Acquisitions plc (now knownas SK Funding plc), MDCP Acquisitions I (now known as SK Acquisitions),Deutsche Bank Trust Company Americas, as Trustee, Registrar and Paying Agent,Deutsche Bank Luxembourg S.A., as Paying Agent and Transfer Agent, relating tothe dollar senior notes issued on September 30, 2002 (incorporated byreference to Exhibit 4.4 to the registrant’s registration statement onForm F-4 (File No. 333-101456), filed onNovember 25, 2002).

2.7                                    SupplementalIndenture, dated February 14, 2003, among MDP Acquisitions plc (now knownas SK Funding plc), MDCP Acquisitions I (now known as SK Acquisitions) andDeutsche Bank Trust Company Americas, as Trustee, relating to the euro seniornotes (incorporated by reference to Exhibit 4.15 to the registrant’sregistration statement on Form F-4 (File No. 333-104617),filed on April 17, 2003).

108

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2.8                                    SupplementalIndenture, dated February 14, 2003, among MDP Acquisitions plc (now knownas SK Funding plc), MDCP Acquisitions I (now known as SK Acquisitions) andDeutsche Bank Trust Company Americas, as Trustee, relating to the dollar seniornotes (incorporated by reference to Exhibit 4.14 to the registrant’sregistration statement on Form F-4/A (File No. 333-101456),filed on March 5, 2003).

2.9                                    EuroDeposit and Custody Agreement, dated September 30, 2002, between MDPAcquisitions plc (now known as SK Funding plc) and Deutsche Bank AG London asthe Euro Book-entry Depositary and the Euro Custodian, relating to the eurosenior notes (incorporated by reference to Exhibit 4.5 to the registrant’sregistration statement on Form F-4 (File No. 333-101456),filed on November 25, 2002).

2.10                             DollarDeposit and Custody Agreement, dated September 30, 2002, between MDP Acquisitionsplc (now known as SK Funding plc) and Deutsche Bank Trust Company Americas asthe Dollar Book-entry Depositary and the Dollar Custodian, relating to thedollar senior notes (incorporated by reference to Exhibit 4.6 to theregistrant’s registration statement on Form F-4 (File No. 333-101456),filed on November 25, 2002).

4.1                                    SharePurchase Agreement, dated November 23, 2005, among SK Packaging Limited,SK Acquisitions, Smurfit Kappa Feeder G.P. Limited (in its capacity as generalpartner of Smurfit Kappa Feeder L.P.), certain investment funds managed oradvised by Cinven Limited and certain investment funds managed by CVC CapitalPartners Limited, which are the controlling shareholders of Kappa Holding B.V.(“Kappa”), and the other Kappa shareholders (incorporated by reference toExhibit 1 to the registrant’s report of foreign private issuer onForm 6-K (File No. 333-101456), filed onDecember 6, 2005).

4.2                                    PurchaseAgreement, dated January 12, 2005, among SK Funding plc and Deutsche BankAG London and Citigroup Global Markets Limited, as initial purchasers, relatingto the 7.75% senior subordinated notes (incorporated by reference to theregistrant’s report of foreign private issuer on Form 6-K (FileNo. 333-101456), filed on January 18, 2005).

4.3                                    Amendmentand Restated Agreement, dated January 31, 2007, for Senior CreditFacility, dated November 30, 2005, among Jefferson Smurfit Group Limited,SK Acquisitions, certain other subsidiaries of Jefferson Smurfit Group Limitedas borrowers or guarantors, Deutsche Bank AG, London Branch, Citigroup GlobalMarkets Limited, Credit Suisse First Boston International and JP Morgan PLC, asarrangers, certain lenders named therein, and Deutsche Bank AG, London Branch,as issuing bank, facility agent and security agent.

4.4                                    BridgeFacility dated September 10, 2002 by and among MDP Acquisitions plc (nowknown as SK Funding plc), Deutsche Bank AG London, Merrill Lynch CapitalCorporation, JP Morgan Chase Bank, Lehman Commercial Paper Inc. and ABN AMROBank N.V. (incorporated by reference to Exhibit 99(b)(2) to theschedule TO/A filed by Jefferson Smurfit Group plc on September 16, 2002(File No. 005-78329)).

4.5                                    Deedof Amendment and Restatement, dated January 31, 2007, for PriorityAgreement, dated November 30, 2005, among Jefferson Smurfit Group Limited,the companies named therein as obligors, the banks and financial institutionsnamed therein as senior creditors, Deutsche Bank Trust Company Americas, asbond trustee, Adavale (Netherlands) B.V., as junior creditor, the banks andfinancial institutions named therein as hedging banks, and Deutsche Bank AG,London Branch, as senior agent and security agent.

4.6                                    IntercompanyLoan Agreement, entered into on September 16, 2002, as amendedSeptember 27, 2002, between MDP Acquisitions plc (now known as SKFunding plc) and MDCP I (now known as SK Acquisitions) (incorporated byreference to Exhibit 10.5 to the 

109

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registrant’sregistration statement on Form F-4 (File No. 333-101456),filed on November 25, 2002).

4.7                                    IntercompanyLoan Agreement, entered into on February 14, 2003, between MDPAcquisitions plc (now known as SK Funding plc) and MDCP I (now known as SKAcquisitions) (incorporated by reference to Exhibit 4.6 to theregistrant’s annual report on Form 20-F (File No. 333-101456),filed on April 29, 2005).

4.8                                    IntercompanyLoan Agreement, dated January 31, 2005, between SK Funding plc, as Lender,and SK Acquisitions, as Borrower (incorporated by reference to Exhibit 4.8to the registrant’s annual report on Form 20-F (File No. 333-101456),filed on April 29, 2005).

4.9                                    SecondAmended and Restated Management Equity Agreement dated as of March 9, 2007among Smurfit Kappa Public Limited Company (now known as Smurfit Kappa Group plc)and each of Gary McGann, Anthony P.J. Smurfit, Ian J. Curley and Sir MichaelW.J. Smurfit.

4.10                             RegistrationRights Agreement dated as of December 1, 2005 among Smurfit Kappa GroupLimited, each of the MDCP co-investors, the CVC/Cinven Partnership and each ofthe other investors listed on the schedule thereto (incorporated by referenceto Exhibit 4.10 to the registrant’s annual report on Form 20­-F(File No. 333-101456), filed on May 1, 2006).

4.11                             Shareholdersand Corporate Governance Agreement dated as of December 1, 2005 amongSmurfit Kappa Group Limited, each of the MDCP co-investors, the CVC/CinvenPartnership and each of the other investors listed on the schedule thereto(incorporated by reference to Exhibit 4.11 to the registrant’s annualreport on Form 20­-F (File No. 333-101456), filed onMay 1, 2006).

4.12                             SmurfitKappa plc 2007 Share Incentive Plan, adopted by the shareholders of SmurfitKappa Group plc on March 12, 2007.

4.13                             LetterAgreement dated October 31, 2003 between Jefferson Smurfit Group Limitedand Dr. Michael W.J. Smurfit (incorporated by reference to Exhibit 4.13 tothe registrant’s annual report on Form 20-F (File No. 333-101456), filed on May1, 2006).

4.14                             LetterAgreement dated October 31, 2003 between S.I. Holdings Limited andDr. Michael W.J. Smurfit (incorporated by reference to Exhibit 4.14 to theregistrant’s annual report on Form 20-F (File No. 333-101456), filed on May 1,2006).

4.15                             LetterAgreement dated as of February 9, 2007 between Smurfit Kappa Group Limitedand Anthony P.J, Smurfit.

4.16                             LetterAgreement dated as of February 9, 2007 between Smurfit Kappa Group Limitedand Gary McGann.

4.17                             LetterAgreement dated as of February 9, 2007 between Smurfit Kappa Group Limitedand Ian Curley.

4.18                             DirectorshipAgreement dated as of December 1, 2005 between SK Packaging Limited (nowknown as Smurfit Kappa Group Limited), Jefferson Smurfit Group Limited and FritsBeurskens (incorporated by reference to Exhibit 4.18 to the registrant’s annualreport on Form 20-F (File No. 333-101456), filed on May 1, 2006).

4.19                             LetterAgreement dated February 9, 2007 between Smurfit Kappa Group Limited andSir Michael W.J. Smurfit.

4.20                             LetterAgreement dated February 9, 2007 between S.I. Holdings Limited and SirMichael W.J. Smurfit.

110

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8.1                                    Listof Subsidiaries.

11.1                             Codeof Ethics (incorporated by reference to Exhibit 11.1 to the registrant’sannual report on Form 20-F (File No. 333-101456), filedon April 19, 2004).

12.1                             Certificationsof Group Chief Executive Officer and Group Chief Financial Officer pursuant toRules 13a-14(a) or 15d-14(b) of the Exchange Act.

13.1                             Certificationsof Group Chief Executive Officer and Group Chief Financial Officer pursuant toRules 13a-14(b) or 15d-14(b) and Section 1350of Chapter 63 of Title 18 of the United States Code.

111

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**Signatures**

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

**SMURFIT KAPPA** FUNDING PLC

| /s/ I. J. CURLEY              |   |
|-------------------------------|--------|
| I. J. Curley                  |   |
| Group Chief Financial Officer |   |
| Date: April 27, 2007     |   |

 

112

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**INDEX TO FINANCIALSTATEMENTS**

**SMURFIT KAPPAFUNDING PLC**

**Audited Consolidated Financial Statements of SmurfitKappa Funding plc and Subsidiary Companies as of December 31, 2006 and2005 and for the years ended December 31, 2006, 2005 and 2004:**

|                                                                                                                    | ** ** | **Page** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent  Registered Public Accounting Firm on Smurfit Kappa Funding plc—PricewaterhouseCoopers  |       | F-2      |       |
| Report of Independent  Registered Public Accounting Firm on Smurfit Kappa Funding plc—Ernst &  Young |       | F-3      |       |
| Report of Independent Registered  Public Accounting Firm on Kappa Holding B.V.—PricewaterhouseCoopers         |       | F-5      |       |
| Consolidated Statements of Operations                                                                              |       | F-6      |       |
| Consolidated Statements of Total Recognized Gains and  Losses                                                      |       | F-7      |       |
| Consolidated Balance Sheets                                                                                        |       | F-8      |       |
| Consolidated Statements of Changes in Shareholders’  Equity                                                   |       | F-9      |       |
| Consolidated Statements of Cash Flows                                                                              |       | F-10     |       |
| Notes  to the Consolidated Financial Statements                                                                    |       | F-11     |       |

 

**SMURFIT KAPPAACQUISITIONS**

**Audited Consolidated Financial Statements of SmurfitKappa Acquisitions and Subsidiary Companies as of December 31, 2006 and2005 and for the years ended December 31, 2006, 2005 and 2004:**

|                                                                                                                    | ** ** | **Page** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of  Independent Registered Public Accounting Firm on Smurfit Kappa Acquisitions—PricewaterhouseCoopers |       | F-86     |       |
| Report of  Independent Registered Public Accounting Firm on Smurfit Kappa  Acquisitions—Ernst & Young     |       | F-87     |       |
| Report of  Independent Registered Public Accounting Firm on Kappa Holdings B.V.—PricewaterhouseCoopers        |       | F-89     |       |
| Consolidated Statements of Operations                                                                              |       | F-90     |       |
| Consolidated Statements of Total Recognized Gains and  Losses                                                      |       | F-91     |       |
| Consolidated Balance Sheets                                                                                        |       | F-92     |       |
| Consolidated Statements of Changes in Shareholders’  Equity                                                   |       | F-93     |       |
| Consolidated Statements of Cash Flows                                                                              |       | F-94     |       |
| Notes  to the Consolidated Financial Statements                                                                    |       | F-95     |       |

 

F-1

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**Smurfit Kappa Funding plc and Subsidiary CompaniesReport of Independent Registered Public Accounting Firm**

To the Board of Directors and Shareholders of Smurfit KappaFunding plc

We have audited theaccompanying consolidated balance sheet of Smurfit Kappa Funding plc and itssubsidiaries (the “Company”) as of December 31, 2006, and the relatedconsolidated statements of operations, total recognized gains and losses,changes in shareholders’ equity, and cash flows for the year then ended.  We have also audited the financial statementschedule for the year ended December 31, 2006 listed in the index appearingunder Item 18. These financial statements and financial statement schedule arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsand financial statement schedule based on our audit.

We conducted ouraudit in accordance with International Standards on Auditing (UK and Ireland)and in accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Smurfit Kappa Funding plc and itssubsidiaries at December 31, 2006 and the results of their operations and theircash flows for the year then ended in conformity with accounting principlesgenerally accepted in Ireland.

Accounting principles generally accepted in Irelandvary in certain significant respects from accounting principles generallyaccepted in the United States of America.  Information relating to thenature and effect of such differences is presented in Note 37 to theconsolidated financial statements.

As describedin Note 2 to the consolidated financial statements, on January 1,2006 the Company changed the manner in which it accounts for share-basedpayments.

We also have audited the adjustments to the 2005 and2004 consolidated financial statements to retrospectively reflect the change inaccounting for share-based payments described in Note 2.  In our opinion, such adjustments areappropriate and have been properly applied. We were not engaged to audit,review, or apply any procedures to the 2005 or 2004 consolidated financialstatements of the Company other than with respect to the adjustments and, accordingly,we do not express an opinion or any other form of assurance on the 2005 or 2004consolidated financial statements taken as a whole.

/s/ PricewaterhouseCoopers

PricewaterhouseCoopersDublin, IrelandApril 27, 2007

F-2

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**Smurfit Kappa Funding plc (formerly known as JSGFunding plc) and Subsidiary CompaniesReport of Independent Registered Public Accounting Firm**

To the Board ofDirectorsSmurfit Kappa Funding plc (formerly known as JSG Funding plc)

We have audited, before the effects of the adjustmentsto retrospectively apply the change in accounting described in Note 2, theaccompanying consolidated balance sheet of Smurfit Kappa Funding plc (formerlyknown as  JSG Funding plc) and subsidiarycompanies (the “Company”) as of December 31, 2005, and the relatedconsolidated statements of operations, total recognized gains and losses,changes in shareholders’ equity, and cash flows for each of the two years inthe period ended December 31, 2005 (the 2005 and 2004 financial statementsbefore the effects of the adjustments discussed in Note 2 are not presentedherein). Our audits also included the financial statement schedule listed inthe Index at Item 18. These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits. We didnot audit the financial statements of Kappa Holding B.V., a  wholly-owned subsidiary, which statementsreflect total assets constituting 35.5% as of December 31, 2005 and totalrevenues constituting 4.5% for the year then ended of the related consolidatedtotals. Those statements were audited by other auditors whose report has beenfurnished to us, and our opinion, insofar as it relates to the amounts includedfor Kappa Holding B.V., is based solely on the report of the other auditors.

We conducted our audits in accordance withInternational Standards on Auditing (UK and Ireland) and the standards of thePublic Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. We were notengaged to perform an audit of the Company’s internal control over financial reporting.Our audit included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits and the report of other auditorsprovide a reasonable basis for our opinion.

In our opinion, based on our audits and the report ofother auditors, the financial statements referred to above, before the effectsof the adjustments to retrospectively apply the change in accounting describedin Note 2, present fairly, in all material respects, the consolidated financialposition of Smurfit Kappa Funding plc (formerly known as JSG Funding plc) andsubsidiary companies at December 31, 2005, and the consolidated results oftheir operations and their cash flows for each of the two years in the periodended December 31, 2005, in conformity with accounting principlesgenerally accepted in Ireland, which differ in certain respects from U.S.generally accepted accounting principles (see Note 37 of the Notes to theConsolidated Financial Statements). Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

F-3

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Wewere not engaged to audit, review, or apply any procedures to the adjustmentsto retrospectively apply the change in accounting described in Note 2 and,accordingly, we do not express an opinion or any other form of assurance aboutwhether such adjustments are appropriate and have been properly applied. Theseadjustments were audited by PricewaterhouseCoopers.

| /s/ ERNST & YOUNG |   |
|----------------------------|--------|
| Ernst &  Young    |   |
| Dublin, Ireland            |   |

 

April 30, 2006, except for Note 37 “US GAAPRestatement Items” as to which the date is November 24, 2006.

F-4

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**Smurfit KappaFunding plc and Subsidiary CompaniesReport of Independent Registered Public Accounting Firm**

To the Board of Directors of Smurfit Kappa Funding plc

We have audited the combined balance sheet of KappaHolding B.V. and its subsidiaries (the “Company”) as of December 31, 2005and the related combined statement of operations, combined statement of cashflows, total recognized gains and losses and changes in shareholders’ equityfor the one month ended December 31, 2005 (not presented separatelyherein). These combined financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesecombined financial statements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly we express no such opinion. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

In our opinion, the combined financial statementsreferred to above present fairly, in all material respects, the financialposition of the Company at December 31, 2005 and the results of itsoperations and cash flows for the one month ended December 31, 2005, inconformity with accounting principles generally accepted in Ireland.

Accounting principles generally accepted in Irelandvary in certain significant respects from accounting principles generallyaccepted in the United States of America. Information relating to the natureand effect of such differences is presented in Note 31 to the combinedfinancial statements.

/s/ PricewaterhouseCoopers

PricewaterhouseCoopersDublin, IrelandApril 30, 2006

F-5

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**SmurfitKappa Funding plc and Subsidiary Companies**

**ConsolidatedStatements of Operations**

| ** **                                                  | ** ** | ** ** | ** ** | ** **    | ** ** | **Restated**(1) | ** **   | **Restated**(1) | ** ** |
|-------------------------------------------------------------|------------|------------|------------|---------------|------------|-----------------|--------------|-----------------|------------|
| ** **                                                  | ** ** | **Note**   | ** ** | **2006**      | ** ** | **2005**        | ** **   | **2004**        | ** ** |
| ** **                                                  | ** ** | ** ** | ** ** | **€000** | ** ** | **€000**   | ** **   | **€000**   | ** ** |
| Net Sales                                                   |       |       | 3          |          |       |            |         |            |       |   |   |
| Continuing operations                                       |       |       |       |          |       | 7,032,713       |         | 4,412,125       |       | 4,278,439 |   |
| Discontinued operations                                     |       |       |       |          |       | —          |         | 25,204          |       | 526,643 |   |
|                                                        |       |       |       |          |       | 7,032,713       |         | 4,437,329       |       | 4,805,082 |   |
| Cost of sales                                               |       |       |       |          |       | 5,064,797       |         | 3,222,705       |       | 3,473,299 |   |
| Impairment of  property, plant and equipment                |       |       | 5          |          |       | 31,299          |         | 45,214          |       | — |   |
| Gross profit                                                |       |       |       |          |       | 1,936,617       |         | 1,169,410       |       | 1,331,783 |   |
| Net operating  expenses                                     |       |       | 4          |          |       | 1,542,183       |         | 982,363         |       | 1,017,748 |   |
| Reorganization  and restructuring costs                     |       |       | 5          |          |       | 196,563         |         | 25,090          |       | 39,430 |   |
| Impairment of  advances to affiliates                       |       |       | 5          |          |       | 52,821          |         | —          |       | — |   |
| Operating income  subsidiaries                              |       |       |       |          |       |            |         |            |       |   |   |
| Continuing operations                                       |       |       |       |          |       | 145,050         |         | 163,801         |       | 218,845 |   |
| Discontinued operations                                     |       |       |       |          |       | —          |         | (1,844          | )          | 55,760 |   |
|                                                        |       |       |       |          |       | 145,050         |         | 161,957         |       | 274,605 |   |
| Share of  associates’ operating income                 |       |       |       |          |       | 11,627          |         | 7,287           |       | 12,611 |   |
| Total operating  income                                     |       |       |       |          |       | 156,677         |         | 169,244         |       | 287,216 |   |
| (Loss)/income on  sale of assets and businesses             |       |       | 5          |          |       | (22,856         | )            | 52,587          |       | 22,173 |   |
| Interest income                                             |       |       |       |          |       | 13,227          |         | 10,730          |       | 8,335 |   |
| Interest expense                                            |       |       | 7          |          |       | (356,182        | )            | (255,351        | )          | (293,641 | ) |
| Loss from early  extinguishment of debt                     |       |       | 7          |          |       | —          |         | (104,658        | )          | (5,697 | ) |
| Other financial  expense                                    |       |       | 24         |          |       | (9,064          | )            | (13,259         | )          | (15,718 | ) |
| Share of  associates’ net interest                     |       |       |       |          |       | (1,950          | )            | (1,336          | )          | (1,301 | ) |
| (Loss)/income  before taxes and equity minority   interests |       |       | 8          |          |       | (220,148        | )            | (142,043        | )          | 1,367 |   |
| Taxes on income                                             |       |       | 9          |          |       | (37,307         | )            | (21,561         | )          | (26,973 | ) |
| (Loss) before  equity minority interests                    |       |       |       |          |       | (257,455        | )            | (163,604        | )          | (25,606 | ) |
| Equity minority  interests                                  |       |       |       |          |       | (14,474         | )            | (18,813         | )          | (16,067 | ) |
| **Net (loss) for the year****(2)**                          | ** ** |       |       |          | ** ** | **€**      | **(271,929** | **)**           | **€** | **(182,417** | **)** | **€** | **(41,673** | **)** |
|                                                             |            |            |            |               |            |                 |              |                 |            |  |  |  |  |  |

----

(1)          Restated to reflect the impact of implementing FRS 20 “Share-BasedPayments”.

(2)          A summary of thesignificant adjustments to net (loss) which would be required if accountingprinciples generally accepted in the United States had been applied instead ofthose generally accepted in Ireland is given in Note 37.

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

F-6

----

**SmurfitKappa Funding plc and Subsidiary Companies**

**ConsolidatedStatements of Total Recognized Gains and Losses**

| ** **                                                         | ** ** | ** ** | ** ** | ** **    | ** ** | **Restated**(1) | ** **   | **Restated**(1) | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|---------------|------------|-----------------|--------------|-----------------|------------|
| ** **                                                         | ** ** | **Note**   | ** ** | **2006**      | ** ** | **2005**        | ** **   | **2004**        | ** ** |
| ** **                                                         | ** ** | ** ** | ** ** | **€000** | ** ** | **€000**   | ** **   | **€000**   | ** ** |
| (Loss)/income for the  year                                        |       |       |       |          |       |            |         |            |       |   |   |
| Group                                                              |       |       |       |          |       | (273,827        | )            | (184,586        | )          | (45,617 | ) |
| Associates                                                         |       |       |       |          |       | 1,898           |         | 2,169           |       | 3,944 |   |
|                                                               |       |       |       |          |       | (271,929        | )            | (182,417        | )          | (41,673 | ) |
| Translation  adjustments on foreign currency net investments       |       |       |       |          |       |            |         |            |       |   |   |
| Group                                                              |       |       |       |          |       | 24,385          |         | 5,529           |       | 15,222 |   |
| Actuarial gain/(loss) recognized in retirement  benefit schemes(2) |       |       | 24         |          |       | 61,654          |         | (17,281         | )          | (6,988 | ) |
| Minority share of  actuarial gain                                  |       |       |       |          |       | (36             | )            | (94             | )          | — |   |
|                                                               |       |       |       |          |       | 61,618          |         | (17,375         | )          | (6,988 | ) |
| Total recognised gains and losses relating to the  year            |       |       |       |          |       | (185,926        | )            | (194,263        | )          | (33,439 | ) |
| Prior year adjustment                                              |       |       |       |          |       | (20,338         | )            | —          |       | — |   |
| Total recognized  gains and losses                                 |       |       |       |          |       |            |         |            |       |   |   |
| Group                                                              |       |       |       |          |       | (208,162        | )            | (196,432        | )          | (37,383 | ) |
| Associates                                                         |       |       |       |          |       | 1,898           |         | 2,169           |       | 3,944 |   |
|                                                               | ** ** |       |       |          | ** ** | **€**      | **(206,264** | **)**           | **€** | **(194,263** | **)** | **€** | **(33,439** | **)** |
|                                                                    |            |            |            |               |            |                 |              |                 |            |  |  |  |  |  |

----

(1)          Restated to reflect theimpact of implementing FRS 20 “Share-Based Payments”.

(2)          Net of related deferredtaxation charge of €19,229,000(2005: a charge of €2,396,000;2004: a credit of €3,303,000).

**Note of HistoricalCost Profits and Losses**

The results disclosed inthe Consolidated Statements of Operations are not materially different to theresults based on an unmodified historical basis.

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

F-7

----

**Smurfit KappaFunding plc and Subsidiary CompaniesConsolidated Balance Sheets**

| ** **                                                               | ** ** | **Note**   | ** ** | **2006**      | ** **    | **Restated**(1)  2005 | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|---------------|---------------|-----------------------|------------|
| ** **                                                               | ** ** | ** ** | ** ** | **€000** | ** **    | **€000**         | ** ** |
| **Assets**                                                               |       |       |       |          |          |                  |       |
| **Current assets**                                                       |       |       |       |          |          |                  |       |
| Cash                                                                     |       | 10         |       | 370,204       |          | 247,807               |       |
| Restricted cash                                                          |       | 10         |       | —        |          | 755,575               |       |
| Accounts receivable and  prepayments                                     |       | 11         |       | 1,344,620     |          | 1,314,728             |       |
| Assets held for sale and  inter-company balances                         |       |       |       | 5,000         |          | 54,404                |       |
| Amounts due by  affiliates                                               |       |       |       | 146           |          | 107                   |       |
| Amounts due by  affiliates after more than one year                      |       |       |       | 210,825       |          | 262,936               |       |
| Inventories                                                              |       | 12         |       | 626,372       |          | 663,131               |       |
| **Total current assets**                                                 |       |       | ** ** | **2,557,167** | ** **    | **3,298,688**         | ** ** |
| **Fixed assets**                                                         |       |       |       |          |          |                  |       |
| Investments                                                              |       | 13         |       | 82,502        |          | 87,746                |       |
| Property, plant and  equipment                                           |       | 14         |       | 3,398,956     |          | 3,499,084             |       |
| Intangible assets                                                        |       | 15         |       | 2,348,747     |          | 2,490,259             |       |
| **Total fixed assets**                                                   |       |       | ** ** | **5,830,205** | ** **    | **6,077,089**         | ** ** |
| **Total assets**                                                         |       |       | ** ** | **€**    | **8,387,372** | ** **            | **€** | **9,375,777** | ** ** |
| **Liabilities, minority interests and  shareholders’ equity**       |       |       |       |          |          |                  |       |
| **Current liabilities**                                                  |       |       |       |          |          |                  |       |
| Bank loans, overdrafts  and other borrowing                              |       | 19         |       | 229,255       |          | 103,777               |       |
| Kappa bonds outstanding                                                  |       | 19         |       | —        |          | 755,575               |       |
| Accounts payable and  accrued liabilities                                |       | 16         |       | 1,544,983     |          | 1,500,413             |       |
| **Total current liabilities**                                            |       |       | ** ** | **1,774,238** | ** **    | **2,359,765**         | ** ** |
| **Non current liabilities**                                              |       |       |       |          |          |                  |       |
| Long term debt and other  long term liabilities                          |       | 18         |       | 4,544,613     |          | 4,537,329             |       |
| Amounts due to  affiliates                                               |       |       |       | 12,520        |          | 10,876                |       |
| Provisions for  liabilities and charges                                  |       | 20         |       | 177,561       |          | 247,733               |       |
| Pension liabilities                                                      |       | 24         |       | 493,763       |          | 655,368               |       |
| Capital grants deferred                                                  |       |       |       | 13,869        |          | 14,460                |       |
| Minority interests  (equity interests)                                   |       |       |       | 129,788       |          | 131,384               |       |
| **Total liabilities and minority  interests**                            |       |       | ** ** | **7,146,352** | ** **    | **7,956,915**         | ** ** |
| **Shareholders equity****(2)**                                           |       |       |       |          |          |                  |       |
| Share capital                                                            |       |       |       | 40            |          | 40                    |       |
| Other reserves                                                           |       | 26         |       | 1,743,291     |          | 1,710,822             |       |
| Retained deficit                                                         |       |       |       | (502,311      | )             | (292,000              | )          |
| **Shareholders’ equity**                                            |       |       | ** ** | **1,241,020** | ** **    | **1,418,862**         | ** ** |
| **Total liabilities, minority interests and  shareholders’ equity** |       |       | ** ** | **€**    | **8,387,372** | ** **            | **€** | **9,375,777** | ** ** |

----

(1)          Restated to reflect the impact of implementing FRS 20 “Share-BasedPayments”.

(2)          A summary of thesignificant adjustments to shareholders’ equity which would be required ifaccounting principles generally accepted in the United States had been appliedinstead of those generally accepted in Ireland is given in Note 37.

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

F-8

----

**Smurfit KappaFunding plc and Subsidiary CompaniesConsolidated Statements of Changes in Shareholders’ Equity**

| ** **                                                     | ** ** | ** ** | ** ** | ** **            | ** ** | ** **                          | ** ** | ** **                          | ** ** | **Restated**(1)                       | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------------|------------|-------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **Note**   | ** ** | **Share  capital**(2) | ** ** | **Restated**(1)  Other  reserves(2) | ** ** | **Restated**(1)  Retained  earnings | ** ** | **Total  shareholders’  equity** | ** ** |
| ** **                                                     | ** ** | ** ** | ** ** | **€’000**   | ** ** | **€’000**                 | ** ** | **€’000**                 | ** ** | **€’000**                   | ** ** |
| **Balance  at December 31, 2003 as reported**             |       |       |       |                  |       |                                | 40         |                                |       | 930,780                               |       | (35,464 | ) | 895,356 |   |
| Effect of  adoption of FRS 20 ‘Share based payments’ |       |       |       |                  |       |                                | —     |                                |       | 8,083                                 |       | (8,083 | ) | — |   |
| **Balance  at December 31, 2003 as restated**             | ** ** | ** ** | ** ** |                  | ** ** | ** **                          | **40**     |                                | ** ** | **938,863**                           | ** ** | **(43,547** | **)** | **895,356** |   |
| Share-based payments                                           |       |       |       |                  |       |                                | —     |                                |       | 7,184                                 |       | — |   | 7,184 |   |
| Loss for the  financial year                                   |       |       |       |                  |       |                                | —     |                                |       | —                                |       | (41,673 | ) | (41,673 | ) |
| Actuarial loss  recognized in retirement benefit schemes(3)    |       |       | 24         |                  |       |                                | —     |                                |       | —                                |       | (6,988 | ) | (6,988 | ) |
| Currency  translation adjustments                              |       |       |       |                  |       |                                | —     |                                |       | 15,222                                |       | — |   | 15,222 |   |
| **Balance  at December 31, 2004**                         | ** ** | ** ** | ** ** |                  | ** ** | ** **                          | **40**     |                                | ** ** | **961,269**                           | ** ** | **(92,208** | **)** | **869,101** |   |
| Capital contribution                                           |       |       |       |                  |       |                                | —     |                                |       | 738,953                               |       | — |   | 738,953 |   |
| Share-based  payments                                          |       |       |       |                  |       |                                | —     |                                |       | 5,071                                 |       | — |   | 5,071 |   |
| Loss for the  financial year                                   |       |       |       |                  |       |                                | —     |                                |       | —                                |       | (182,417 | ) | (182,417 | ) |
| Actuarial loss  recognized in retirement benefit schemes(3)    |       |       | 24         |                  |       |                                | —     |                                |       | —                                |       | (17,281 | ) | (17,281 | ) |
| Minority share of  actuarial gain                              |       |       |       |                  |       |                                | —     |                                |       | —                                |       | (94 | ) | (94 | ) |
| Currency  translation adjustments                              |       |       |       |                  |       |                                | —     |                                |       | 5,529                                 |       | — |   | 5,529 |   |
| **Balance  at December 31, 2005**                         | ** ** | ** ** | ** ** |                  | ** ** | ** **                          | **40**     |                                | ** ** | **1,710,822**                         | ** ** | **(292,000** | **)** | **1,418,862** |   |
| Share-based payments                                           |       |       |       |                  |       |                                | —     |                                |       | 8,084                                 |       | — |   | 8,084 |   |
| Loss for the  financial year                                   |       |       |       |                  |       |                                | —     |                                |       | —                                |       | (271,929 | ) | (271,929 | ) |
| Actuarial gain  recognized in retirement benefit schemes(3)    |       |       | 24         |                  |       |                                | —     |                                |       | —                                |       | 61,654 |   | 61,654 |   |
| Minority share of  actuarial gain                              |       |       |       |                  |       |                                | —     |                                |       | —                                |       | (36 | ) | (36 | ) |
| Currency  translation adjustments                              |       |       |       |                  |       |                                | —     |                                |       | 24,385                                |       | — |   | 24,385 |   |
| **Balance at December 31,  2006**                         | ** ** | ** ** | ** ** |                  | ** ** | ** **                          | **€** | **40**                              |       | ** **                            | **€** | **1,743,291** | ** ** | **€** | **(502,311** | **)** | **€** | **1,241,020** |   |
|                                                                |            |            |            |                       |            |                                     |            |                                     |            |                                       |            |  |  |  |  |  |  |  |  |

----

(1)          Restated to reflect theimpact of implementing FRS 20 “Share-Based Payments”.

(2)          See Note 26 for furtherdetails.

(3)          Net of related deferredtaxation charge of €19,229,000(2005: a charge of €2,396,000;2004: a credit of €3,303,000).

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

F-9

----

**Smurfit Kappa Funding plc and Subsidiary CompaniesConsolidated Statements of Cash Flows**

| ** **                                                              | ** ** | **Note**   | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                              | ** ** | ** ** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Net cash  flow from operating activities**                            |       |       | 28         |          |       | 657,712       |       | 512,869       |       | 640,929 |   |
| **Dividends  received from associates**                                 |       |       |       |          |       | 4,462         |       | 3,062         |       | 2,989 |   |
| **Returns on investments and servicing of finance**                     |       |       |       |          |       |          |       |          |       |   |   |
| Interest  received                                                      |       |       |       |          |       | 13,227        |       | 10,730        |       | 8,370 |   |
| Interest  paid                                                          |       |       |       |          |       | (343,131      | )          | (281,114      | )          | (234,540 | ) |
| Interest  paid on finance leases                                        |       |       |       |          |       | (1,348        | )          | (1,138        | )          | (1,962 | ) |
| Other  financial interest paid                                          |       |       |       |          |       | (9,064        | )          | (13,259       | )          | (15,718 | ) |
| Dividends  to minority interests                                        |       |       |       |          |       | (7,175        | )          | (6,152        | )          | (5,707 | ) |
| Deferred  debt issuance costs                                           |       |       |       |          |       | —        |       | (98,055       | )          | (5,814 | ) |
|                                                                    |       |       |       |          |       | (347,491      | )          | (388,988      | )          | (255,371 | ) |
| **Taxation**                                                            |       |       |       |          |       |          |       |          |       |   |   |
| Irish  corporation tax paid                                             |       |       |       |          |       | (2,651        | )          | (3,480        | )          | (8,515 | ) |
| Overseas  tax paid                                                      |       |       |       |          |       | (38,863       | )          | (39,274       | )          | (50,249 | ) |
| Overseas  tax refunded                                                  |       |       |       |          |       | —        |       | —        |       | 21,433 |   |
|                                                                    |       |       |       |          |       | (41,514       | )          | (42,754       | )          | (37,331 | ) |
| **Capital expenditure and  financial investment**                       |       |       |       |          |       |          |       |          |       |   |   |
| Purchase  of tangible fixed assets                                      |       |       |       |          |       | (344,687      | )          | (192,434      | )          | (206,466 | ) |
| Less  new finance leases                                                |       |       |       |          |       | 2,987         |       | 4,053         |       | 2,963 |   |
|                                                                    |       |       |       |          |       | (341,700      | )          | (188,381      | )          | (203,503 | ) |
| Capital  grants received                                                |       |       |       |          |       | 784           |       | 3,390         |       | 1,874 |   |
| Purchase  of other investments                                          |       |       |       |          |       | (1,500        | )          | (87           | )          | (772 | ) |
| Retirement  of fixed assets                                             |       |       | 30         |          |       | 27,365        |       | 18,198        |       | 36,388 |   |
|                                                                    |       |       |       |          |       | (315,051      | )          | (166,880      | )          | (166,013 | ) |
| **Acquisitions and disposals**                                          |       |       |       |          |       |          |       |          |       |   |   |
| Purchase  of subsidiaries and minorities                                |       |       |       |          |       | (4,836        | )          | (205,532      | )          | (2,731 | ) |
| Deferred  acquisition consideration                                     |       |       |       |          |       | (33,574       | )          | (1,520        | )          | (2,390 | ) |
| Business  disposals                                                     |       |       |       |          |       | 42,438        |       | 572,174       |       | — |   |
| Receipts  from affiliates                                               |       |       |       |          |       | —        |       | 9,899         |       | 11,934 |   |
| Investments  in and advances to associates                              |       |       |       |          |       | 1,145         |       | (351          | )          | (1,194 | ) |
|                                                                    |       |       |       |          |       | 5,173         |       | 374,670       |       | 5,619 |   |
| **Cash  (outflow)/inflow before use of liquid resources and financing** |       |       |       |          |       | (36,709       | )          | 291,979       |       | 190,822 |   |
| **Management  of liquid resources**                                     |       |       | 31         |          |       | 671,881       |       | (789,791      | )          | (16,989 | ) |
| **Financing**                                                           |       |       |       |          |       |          |       |          |       |   |   |
| Issue  of shares including minorities                                   |       |       |       |          |       | —        |       | 5             |       | 27 |   |
| (Decrease)/increase  in term debt                                       |       |       | 31         |          |       | (600,442      | )          | 475,449       |       | (111,101 | ) |
| Advances  from affiliates                                               |       |       |       |          |       | 1,717         |       | 125           |       | 1,102 |   |
| Capital  elements of finance leases repaid                              |       |       |       |          |       | (7,647        | )          | (4,812        | )          | (13,576 | ) |
|                                                                    |       |       |       |          |       | (606,372      | )          | 470,767       |       | (123,548 | ) |
| **Increase/(decrease) in  cash**                                        |       |       | 31         |          | ** ** | **€**    | **28,800** | ** **    | **€** | **(27,045** | **)** | **€** | **50,285** | ** ** |
|                                                                         |            |            |            |               |            |               |            |               |            |  |  |  |  |  |

 

The significant differences between the cash flowstatement prepared under accounting principles generally accepted in the UnitedStates and that prepared under accounting principles generally accepted inIreland are given in Note 37.

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

F-10

----

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

**1 General Information**

Smurfit Kappa Funding plc (“SK Funding” or the “Group”) (formerlyknown as JSG Funding) was incorporated on June 12, 2002. In October, 2002, Smurfit Kappa Acquisitions (“SK Acquisitions”) (formerly knownas JSG Acquisitions), a wholly owned subsidiary of SK Funding completed theacquisition of all of the ordinary shares of Jefferson Smurfit Group plc (“JSG”)in a take private transaction. Prior to this acquisition, SK Funding had nooperations. As part of the acquisition Jefferson Smurfit Group plc distributedits 29.3% interest in Smurfit-Stone Container Corporation (‘SSCC’), itsU.S. affiliate, to its shareholders.

On March 31,2003 the Group completed the acquisition of SSCC’s European Packaging assets.In this transaction, which we refer to as the “SSCC Asset Swap”, SK Fundingexchanged its 50% ownership in Smurfit MBI, Canada and approximately €185 million incash for SSCC’s European assets.

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

On June 16, 2005 wecompleted the sale of The Kildare Hotel & Country Club (The K Club),additional land near The K Club and surplus land near our Dublin head officefor €115million to a company controlled by Sir Michael Smurfit. The proceeds from thesale were applied to debt reduction.

The Munksjö specialtybusinesses and The K Club are reported as discontinued operations in the Consolidated Statements of Operations.

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

Under Irish GAAP fairvalue exercises are required to be completed as soon as practicable after thedate of acquisition with the final fair value adjustments incorporated in thefinancial statements for the first full financial year following theacquisition. The fair value exercise relating to the acquisition of Kappa wasprovisional at December 31, 2005 and has been finalised during 2006. Thesignificant adjustments were in respect of the fair value of land andbuildings, plant and equipment, assets held for sale, post retirement benefits,goodwill and deferred taxation. The actuarial valuations of the various postretirement plans have been completed and have resulted in a decrease in thepension liability of €24 million. We have alsocompleted the exercise in relation to land and buildings and plant andequipment, which has 

F-11

----

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

**1 GeneralInformation—(continued)**

resultedin an increase in fixed assets of €53 million. Assetsheld for sale were fair valued to reflect the final proceeds from the sale ofKappa Graphic Board. This has resulted in an increase to goodwill of over €50 million.The acquisition of Kappa resulted in a net increase in goodwill of €1.1 billion.

**2 Accounting Policies**

***(a) Basis of accounting:***

The financial statements are prepared under thehistorical cost convention as modified by the revaluation of land and buildingsand the measurement of fair value of share options and in accordance withgenerally accepted accounting principles in Ireland (Irish GAAP). They areprepared and presented in euro (€). In preparing thesefinancial statements, certain items have been included in order to comply withaccounting presentation and disclosure requirements applicable in the UnitedStates in respect of foreign registrants. An explanation of the significant differencesbetween Irish and US GAAP as they apply to the Group and a reconciliation to USGAAP are set out in Note 37. The financial statements do not constitute fullgroup accounts within the meaning of Regulation 40(1) of the EuropeanCommunities (Companies: Group Accounts) Regulations, 1992 of Ireland insofar assuch group accounts would have to comply with all of the disclosure and otherrequirements of those Regulations. The auditors have made reports withoutqualification and without reference to an emphasis of matter under Section 193of the Companies Act, 1990, in respect of the consolidated financial statementsfor the years ended December 31, 2006, 2005 and 2004.

The financial statements have been prepared using thesame accounting policies as set out in the financial statements for the yearended December 31, 2005 with the exception of the accounting policy onshare-based payments following the adoption of FRS 20 “Share-Based Payments”. Theadoption of this standard represents a change in accounting policy and thecomparative figures have been restated accordingly.

The effect of the changein accounting policy on share-based payments was to increase the loss by €8,084,000(2005: €5,071,000;2004: €7,184,000)comprising an increase in administrative expenses. The effect of the change inaccounting policy on the Consolidated Balance Sheets of December 31, 2006was to increase the share based compensation reserve by €28,422,000(2005: €20,338,000)with a corresponding reduction in retained earnings.

***(b) Group consolidation:***

The financial statementscomprise a consolidation of the financial statements of SK Funding and its’subsidiaries (the “Group”) made up to December 31, 2006. Associates areaccounted for under the equity method of accounting. Where accounting policiesfollowed by subsidiaries and associates differ significantly from those adoptedfor the purpose of the consolidated financial statements, appropriateadjustments are made in order to achieve a consistent basis of accounting. Theresults of subsidiaries acquired or sold are consolidated, and the Group’sshare of the results of associates are included, for the periods from theireffective date of acquisition or to their effective date of sale.

F-12

----

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

**2Accounting Policies—(continued)**

***(c) Net sales and revenue recognition:***

Net sales comprises thefair value of consideration received or receivable for the sale of goods andservices supplied to customers in the ordinary course of business during theaccounting period, excluding value added tax, returns and allowances forrebates and discounts and after eliminating sales within the Group. Revenue isrecognized to the extent that it is probable that the economic benefits willflow to the Group, that it can be reliably measured and that the significantrisks and rewards of ownership of the goods have passed to the buyer. Thisgenerally occurs at the time of delivery at which point the risks ofobsolescence and loss have been transferred to the buyer. The amount of revenueis not considered to be reliably measurable until all contingencies relating tothe sale have been resolved. The Group bases its estimates of returns andallowances on historical results, taking into consideration the type ofcustomer, the type of transaction and the specifics of each arrangement.

***(d) Goodwill and intangible assets:***

Goodwill represents the excess of the cost of sharesin subsidiaries over the fair value of their net assets acquired based on Groupaccounting policies. It is capitalized and amortized over a period of 40 years,as the directors believe that the durability of the business can bedemonstrated and the value of goodwill is capable of being continuallyreassessed. The carrying value of goodwill is subject to an impairment reviewat the end of the first full year following the year of acquisition andannually thereafter.

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

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

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

***(f) Depreciation:***

Long-lived assets,consisting primarily of property, plant and equipment, comprise a significantportion of the total assets. The annual depreciation charge depends primarilyon the estimated lives of each type of asset and in certain circumstances,estimates of fair values and residual values. The Directors regularly reviewthese asset lives and change them as necessary to reflect current thinking onremaining lives in light of technological change, prospective economic utilizationand physical condition of the assets concerned. Changes in asset lives can havea significant impact on depreciation and amortization charges for the period.It is not practical to quantify the impact of changes in asset lives on anoverall basis, as asset lives are individually determined and there are asignificant number of asset lives in use. Details of the useful lives isincluded in the accounting policy. The impact of any change would varysignificantly depending on the individual changes in assets and the classes ofassets impacted. The depreciation rates are as follows:

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

 

F-13

----

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

**2Accounting Policies—(continued)**

***(g) Timberlands:***

The cost of acquiring,establishing and maintaining forestry plantations are classified as timberlands.Depletion of timberlands represents the charge to income relating to the timberextracted in the year.

***(h) Financial assets:***

Financial assets, areshown at cost less provisions for impairments in value. Income from financialassets, together with any related tax credit, is recognized in the ConsolidatedStatements of Operations in the period in which it is receivable.

***(i) Leasing:***

Tangible fixed assetsacquired under finance leases are included in the Consolidated Balance Sheetsat their equivalent capital value and are depreciated over the shorter of thelease term and their useful lives. The corresponding liabilities are recordedas a creditor and the interest element of the finance lease rentals is chargedto the Consolidated Statements of Operations on an annuity basis. Operatinglease rentals are charged to the Consolidated Statements of Operations on astraight line basis over the lease term.

***(j) Inventory valuation:***

Inventory is valued at thelower of cost and net realizable value. Cost includes direct costs plusapplicable factory and other overheads. Net realizable value is the actual orestimated selling price less all applicable costs incurred or likely to beincurred in the realization of the selling price. Full provision is made for alldamaged, deteriorated, obsolete and unusable materials.

***(k) Debt instruments:***

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

***(l) Derivative instruments:***

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

*Forward foreigncurrency contracts*

The criteria forforward foreign currency contracts are:

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

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

F-14

----

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

**2Accounting Policies—(continued)**

The rates under suchcontracts are used to record the hedged item. As a result, gains and losses areoffset against the foreign exchange gains and losses on the related financial assetsand liabilities, or where the instrument is used to hedge a committed orprobable future transaction, are deferred until the transaction occurs. Gainsand losses arising on hedges of anticipated transactions are recorded in theConsolidated Statements of Operations when such anticipated transactions are nolonger likely to occur.

*Interest rate swaps*

The Group’scriteria for interest rate swaps are:

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

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

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

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

*Currency swaps*

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

***(m) Foreign currencies:***

Foreign currency transactions are translated at therate of exchange ruling at the date of the transaction or, if hedged forward,at the rate of exchange under the related forward currency contract. Monetaryassets and liabilities denominated in foreign currencies are translated at theclosing rate or, if hedged forward, at the rate of exchange under the relatedforward currency contract. The resulting profits or losses are dealt with inthe Consolidated Statements of Operations.

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

***(n) Post retirement benefits:***

The Group accounts forpost retirement benefits in accordance with FRS 17—“Retirement Benefits”. FRS 17applies to all types of benefits that an employer provides after employees havecompleted their service, including pensions and other post retirement benefits.The expected increase in the present value of scheme liabilities arising from employeeservice in the current or prior periods is charged against operating income.The expected returns on the schemes’ assets and the increase during the periodin the 

F-15

----

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

**2Accounting Policies—(continued)**

presentvalue of the schemes’ liabilities arising from the passage of time are includedin the Consolidated Statements of Operations as “Other Financial Expense”.Differences between the expected and the actual return on plan assets, togetherwith the effect of changes in the current or prior assumptions underlying theliabilities are recognized in the Consolidated Statements of Total RecognizedGains and Losses. Scheme assets are valued at fair value and scheme liabilitiesare measured using the projected unit credit method. Net scheme assets andliabilities, reduced by deferred tax amounts, are recorded on the ConsolidatedBalance Sheets as a pension surplus or deficit as appropriate.

***(o) Share-based payments***

The fair value of convertible shares granted under theGroup’s management equity plan is recognized as an expense with a correspondingincrease in equity. The fair value is measured at grant date and spread overthe period during which the awards vest. The fair value is measured using abinomial lattice model, taking into account the terms and conditions upon whichthe options were granted. The convertible shares issued by the Company aresubject to both market-based and non-market based vesting conditions as definedin FRS 20.

Market-based conditions are included in thecalculation of fair value at the date of grant. Non-market vesting conditionsare not taken into account when estimating the fair value of awards as at thegrant date; such conditions are taken into account through adjusting the numberof equity instruments included in the measurement of the transaction amount sothat, ultimately, the amount recognized equates to the number of equityinstruments that actually vest. The expense in the income statement in relationto convertible shares granted represents the product of the total number ofoptions anticipated to vest and the fair value of those shares; this amount isallocated to accounting periods on a straight-line basis over the vestingperiod. The cumulative charge to the Consolidated Statements of Operations isreversed only where the non-market performance condition is not met or where anemployee in receipt of share options relinquishes service prior to completionof the expected vesting period. No reversal of the cumulative charge to theConsolidated Statements of Operations is made where such awards do not vest asa result of the market-based vesting conditions not being achieved.

The proceeds received net of any directly attributabletransaction costs are credited to share capital (nominal value) and sharepremium when vested convertible shares are converted into ordinary shares. Tothe extent that the Group receives a tax deduction relating to the servicespaid in shares, deferred tax in respect of share options is provided on thebasis of the difference between the market price of the underlying equity as atthe date of the financial information and the exercise price of the option; asa result, the deferred tax impact of share options will not directly correlatewith the expense reported in the Group’s Consolidated Statements of Operations.

The Group has nocash-settled share-based payment transactions as defined in FRS 20.

***(p) Taxation and deferred taxation:***

Current tax represents the expected tax payable (orrecoverable) on the taxable profits for the year using tax rates enacted or substantivelyenacted at the balance sheet date and taking into account any adjustmentsarising from prior years.

F-16

----

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

**2Accounting Policies—(continued)**

Deferred tax is provided on all timing differencesthat have originated but not reversed at the balance sheet date wheretransactions or events that result in an obligation to pay more tax in thefuture or a right to pay less tax in the future have occurred at the balancesheet date. Deferred tax assets are only recognized to the extent that taxlosses carried forward are considered more likely than not to be recoverableagainst future taxable profits in the relevant entity.

Timing differences are temporary differences betweenprofits as computed for tax purposes and profits as stated in the financialstatements, which arise because certain items of income and expenditure in thefinancial statements are dealt with in different years for tax purposes.

Deferred tax is measuredat the tax rates that are expected to apply in the years in which the timing differencesare expected to reverse based on tax rates and laws that have been enacted orsubstantively enacted by the balance sheet date. Deferred tax is notdiscounted.

***(q) Research and development:***

Research and developmentexpenditure is written off as incurred.

***(r) Use of estimates:***

Estimates and judgments are continually evaluated andare based on historical experience and other factors, including expectations offuture events that are believed to be reasonable under the circumstances.

The Group makes estimatesand assumptions concerning the future. The resulting accounting estimates will,by definition, rarely equal the related actual results. The estimates andassumptions that have a significant risk of causing a material adjustment tothe carrying amounts of assets and liabilities within the next financial yearare outlined below.

***(i)****             **Estimated impairment of goodwill*

The Group tests annuallywhether goodwill has suffered any impairment, in accordance with theaccounting policy stated above. The recoverable amounts of groups ofcash-generating units have been determined based on value-in-use calculations.Key assumptions include management’s estimates of future profitability,replacement capital expenditure requirements, trade working capital investmentneeds, tax considerations and discount rates. Key assumptions in determiningterminal value include earnings multiples for estimating fair value.

***(ii)****          **Income taxes*

The Group is subject toincome taxes in numerous jurisdictions. Significant judgment is required indetermining the worldwide provision for income taxes. There are manytransactions and calculations for which the ultimate tax determination isuncertain during the ordinary course of business. The Group recognizes liabilitiesfor anticipated tax audit issues based on estimates of whether additional taxeswill be due. Where the final tax outcome of these matters is different from theamounts that were initially recorded, such differences will impact the incometax and deferred tax provisions in the period in which such determinationis made.

F-17

----

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

**2Accounting Policies—(continued)**

***(iii)****       **Measurement of defined benefit obligations*

The Group follows guidanceof FRS 17 to determine the present value of its obligations to current and pastemployees in respect of defined benefit pension obligations and other long termemployee benefits, which are subject to similar fluctuations in value in thelong term. The Group uses a network of professional actuaries co-ordinatedunder a world wide process to value such liabilities designed to ensureconsistency in the quality of the key assumptions underlying the valuations.The critical assumptions and estimates applied are outlined in detail inNote 24.

***(iv)****       **Provisions*

The amount recognized fora provision is the best estimate of the expenditure to be incurred. Provisionsare remeasured at each balance sheet date based on the best estimate of thesettlement amount. Changes to the best estimate of the settlement amount mayresult from changes in the amount or timing of the outflows or changes indiscount rates (when applicable).

***(v)****          **Share-based payments*

The determination of thefair value of awards under the management equity plan involves the use ofjudgements and estimates. The fair value has been estimated using a binomiallattice model in accordance with the judgemental assumptions set out inNote 27.

***(vi)****       **Establishing lives for depreciation purposesof property, plant and equipment*

Long-lived assets,consisting primarily of property, plant and equipment, comprise a significantportion of the total assets. The annual depreciation charge depends primarilyon the estimated lives of each type of asset and in certain circumstances,estimates of fair values and residual values. The directors regularly reviewthese asset lives and change them as necessary to reflect current thinking onremaining lives in light of technological change, prospective economicutilisation and physical condition of the assets concerned. Changes in assetlives can have a significant impact on depreciation and amortization chargesfor the period. It is not practical to quantify the impact of changes in assetlives on an overall basis, as asset lives are individually determined and thereare a significant number of asset lives in use. Details of the useful lives isincluded in the accounting policy. The impact of any change would varysignificantly depending on the individual changes in assets and the classes ofassets impacted.

**3  Segmental Analyses**

The Group is an integrated paper and boardmanufacturer and converter. The Group has identified reportable segments on ageographic basis (Europe and Latin America). In Europe, the Group has tworeportable segments: (1) Packaging and (2) Specialties. Latin Americaconsists of Packaging only. The Packaging segment is highly integrated. Itincludes a system of mills and plants that produces a full line ofcontainerboard that is converted into corrugated containers. The Specialtiessegment primarily consists of graphic board and solidboard businesses, alongwith paper sack and bag-in-box operations. Additionally, there are centralcosts which represent corporate governance costs, including executive costs,and costs of the Group’s legal, company secretarial, pension administration,tax, treasury and controlling functions and other administrative costs.

F-18

----

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

**3  Segmental Analyses—(continued)**

Set out below aresegmental analyses of sales (by source), (loss)/income before taxes and equityminority interests, total assets, long lived assets, net operating assets,capital expenditure, depreciation, depletion and amortization expense andinvestments in equity method investees. Sales by destination are not materiallydifferent from sales by source. The analysis of (loss)/income includes theGroup’s share of the (loss)/income before exceptional items, interest and taxesof associates. A geographical analysis of employees can be found in Note 6 andof income taxes in Note 9.

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

| ** **    | ** ** | **2006**            | ** ** | **2005**            | ** ** | **2004**            | ** ** |
|---------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|
| ** **    | ** ** | **€000**       | ** ** | **€000**       | ** ** | **€000**       | ** ** |
| Packaging     |       | 5,183,095           |       | 3,117,403           |       | 3,093,484           |       |
| Specialties   |       | 977,395             |       | 530,629             |       | 1,009,038           |       |
| Europe        |       | 6,160,490           |       | 3,648,032           |       | 4,102,522           |       |
| Latin America |       | 872, 223            |       | 789,297             |       | 702,560             |       |
|          | ** ** | **€7,032,713** | ** ** | **€4,437,329** | ** ** | **€4,805,082** | ** ** |

 

Third party sales inIreland were: €196,469,000 for the yearended December 31, 2006; €189,244,000 for the yearended December 31, 2005 and €196,346,000 for the yearended December 31, 2004.

**Sales—Group and third party**

| ** **    | ** ** | **2006**      | ** **     | **2005**      | ** ** | **2004**      | ** ** |
|---------------|------------|---------------|----------------|---------------|------------|---------------|------------|
| ** **    | ** ** | **€000** | ** **     | **€000** | ** ** | **€000** | ** ** |
| Packaging     |       | 7,614,751     |           | 4,338,640     |       | 4,255,869     |       |
| Specialties   |       | 1,293,485     |           | 651,972       |       | 1,138,767     |       |
| Europe        |       | 8,908,236     |           | 4,990,612     |       | 5,394,636     |       |
| Latin America |       | 1,349,544     |           | 1,221,240     |       | 1,090,229     |       |
|          | ** ** | **€**    | **10,257,780** | ** **    | **€** | **6,211,852** | ** ** | **€** | **6,484,865** | ** ** |
|               |            |               |                |               |            |               |            |  |  |  |

 

F-19

----

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

**3 Segmental Analyses—(continued)**

**(Loss)/income before taxes and equity minority interests**

| ** **                                                             | ** ** | **2006**      | ** **   | **Restated  2005** | ** ** | **Restated  2004** | ** ** |
|------------------------------------------------------------------------|------------|---------------|--------------|--------------------|------------|--------------------|------------|
| ** **                                                             | ** ** | **€000** | ** **   | **€000**      | ** ** | **€000**      | ** ** |
| Packaging                                                              |       | 338,718       |         | 129,461            |       | 152,000            |       |
| Specialties                                                            |       | 51,212        |         | 33,154             |       | 98,256             |       |
| Associates                                                             |       | 10,192        |         | 6,420              |       | 10,064             |       |
| Europe                                                                 |       | 400,122       |         | 169,035            |       | 260,320            |       |
| Packaging                                                              |       | 128,189       |         | 113,996            |       | 118,443            |       |
| Associates                                                             |       | 1,434         |         | 867                |       | 2,546              |       |
| Latin America                                                          |       | 129,623       |         | 114,863            |       | 120,989            |       |
| Unallocated centre costs                                               |       | (27,832       | )            | (23,335            | )          | (25,272            | )          |
| Income before intangible  amortization, interest and exceptional items |       | 501,913       |         | 260,563            |       | 356,037            |       |
| Share-based payments                                                   |       | (8,084        | )            | (5,071             | )          | (7,184             | )          |
| Amortization of intangible assets                                      |       | (65,533       | )            | (29,203            | )          | (37,925            | )          |
| Group net interest                                                     |       | (342,955      | )            | (244,621           | )          | (285,306           | )          |
| Loss from early extinguishment of debt                                 |       | —        |         | (104,658           | )          | (5,697             | )          |
| Share of associates’ net interest                                 |       | (1,950        | )            | (1,336             | )          | (1,301             | )          |
| (Loss)/income before exceptional items                                 |       | 83,391        |         | (124,326           | )          | 18,624             |       |
| Reorganization and restructuring costs                                 |       | (196,563      | )            | (25,090            | )          | (39,430            | )          |
| Impairment of property, plant and equipment                            |       | (31,299       | )            | (45,214            | )          | —             |       |
| Impairment of advances to affiliates                                   |       | (52,821       | )            | —             |       | —             |       |
| (Loss)/income on sale of assets and businesses                         |       | (22,856       | )            | 52,587             |       | 22,173             |       |
|                                                                   | ** ** | **€**    | **(220,148** | **)**              | **€** | **(142,043**       | **)**      | **€** | **1,367** | ** ** |
|                                                                        |            |               |              |                    |            |                    |            |  |  |  |

 

| ** **                | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|---------------------------|------------|---------------|---------------|---------------|------------|
| ** **                | ** ** | **€000** | ** **    | **€000** | ** ** |
| **Total assets**          |       |          |          |          |       |
| Packaging                 |       | 4,226,967     |          | 5,065,437     |       |
| Specialties               |       | 631,343       |          | 654,357       |       |
| Europe                    |       | 4,858,310     |          | 5,719,794     |       |
| Latin America             |       | 733,156       |          | 774,708       |       |
| Group centre              |       | 236,188       |          | 127,973       |       |
|                      |       | 5,827,654     |          | 6,622,475     |       |
| Intangible assets         |       | 2,348,747     |          | 2,490,259     |       |
| Amounts due by affiliates |       | 210,971       |          | 263,043       |       |
|                      | ** ** | **€**    | **8,387,372** | ** **    | **€** | **9,375,777** | ** ** |
|                           |            |               |               |               |            |  |  |

 

F-20

----

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

**3Segmental Analyses—(continued)**

| ** **            | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|-----------------------|------------|---------------|---------------|---------------|------------|
| ** **            | ** ** | **€000** | ** **    | **€000** | ** ** |
| **Long lived assets** |       |          |          |          |       |
| Packaging             |       | 2,589,590     |          | 2,647,603     |       |
| Specialties           |       | 370,519       |          | 375,213       |       |
| Europe                |       | 2,960,109     |          | 3,022,816     |       |
| Latin America         |       | 438,072       |          | 475,323       |       |
| Group centre          |       | 775           |          | 945           |       |
|                  |       | 3,398,956     |          | 3,499,084     |       |
| Intangible assets     |       | 2,348,747     |          | 2,490,259     |       |
|                  | ** ** | **€**    | **5,747,703** | ** **    | **€** | **5,989,343** | ** ** |
|                       |            |               |               |               |            |  |  |

 

Longlived assets in Ireland were €81,931,000 and €82,952,000at December 31, 2006 and 2005 respectively.

| ** **                     | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|--------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                     | ** ** | **€000** | ** **    | **€000** | ** ** |
| **Net operating assets**       | ** ** | ** **    | ** **    | ** **    | ** ** |
| Packaging                      |       | 2,920,050     |          | 3,091,799     |       |
| Specialties                    |       | 457,332       |          | 479,235       |       |
| Europe                         |       | 3,377,382     |          | 3,571,034     |       |
| Latin America                  |       | 585,332       |          | 627,697       |       |
| Group centre                   |       | (16,062       | )             | (69,969       | )          |
| Net operating assets           |       | 3,946,652     |          | 4,128,762     |       |
| Intangible assets              |       | 2,348,747     |          | 2,490,259     |       |
| Amounts due by affiliates      |       | 210,971       |          | 263,043       |       |
| Unallocated net liabilities    |       | (5,265,350    | )             | (5,463,202    | )          |
| **Shareholders’  equity** | ** ** | **€**    | **1,241,020** | ** **    | **€** | **1,418,862** | ** ** |
|                                |            |               |               |               |            |  |  |

** **

F-21

----

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

**3Segmental Analyses—(continued)**

**A reconciliation of net operating assets above toshareholders’ equity is as follows:**

| ** **                                      | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|-------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                      | ** ** | **€000** | ** **    | **€000** | ** ** |
| Per  segmental analysis of net operating assets |       | 3,946,652     |          | 4,128,762     |       |
| Intangible  assets                              |       | 2,348,747     |          | 2,490,259     |       |
| Amounts  due by affiliates                      |       | 210,971       |          | 263,043       |       |
| Unallocated  assets                             |       | 2,559,718     |          | 2,753,302     |       |
| Net  borrowing                                  |       | (4,503,227    | )             | (4,506,742    | )          |
| Deferred  debt issuance costs                   |       | 113,141       |          | 132,860       |       |
| Amounts  due to affiliates                      |       | (12,520       | )             | (10,876       | )          |
| Corporation  tax                                |       | (43,476       | )             | (20,410       | )          |
| Capital  lease creditors                        |       | (18,156       | )             | (23,549       | )          |
| Provisions  for liabilities and charges         |       | (177,561      | )             | (247,733      | )          |
| Pension  liabilities                            |       | (493,763      | )             | (655,368      | )          |
| Minority  interests (equity interests)          |       | (129,788      | )             | (131,384      | )          |
| Unallocated  net liabilities                    |       | (5,265,350    | )             | (5,463,202    | )          |
| **Shareholders’ equity**                   | ** ** | **€**    | **1,241,020** | ** **    | **€** | **1,418,862** | ** ** |
|                                                 |            |               |               |               |            |  |  |

 

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

| ** **                   | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
|------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                   | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| **Capital expenditure** |       |          |        |          |       |          |       |
| Packaging                    |       | 264,902       |        | 121,300       |       | 114,803       |       |
| Specialties                  |       | 28,820        |        | 28,296        |       | 54,565        |       |
| Europe                       |       | 293,722       |        | 149,596       |       | 169,368       |       |
| Latin  America               |       | 50,811        |        | 42,432        |       | 36,689        |       |
| Group  centre                |       | 154           |        | 406           |       | 409           |       |
|                         | ** ** | **€**    | **344,687** | ** **    | **€** | **192,434**   | ** ** | **€** | **206,466** | ** ** |
|                              |            |               |             |               |            |               |            |  |  |  |

 

F-22

----

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

**3Segmental Analyses—(continued)**

| ** **                                           | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
|------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                           | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| **Depreciation, depletion and amortization expense** |       |          |        |          |       |          |       |
| Packaging                                            |       | 286,064       |        | 177,587       |       | 178,218       |       |
| Specialties                                          |       | 37,193        |        | 21,907        |       | 43,375        |       |
| Europe                                               |       | 323,257       |        | 199,494       |       | 221,593       |       |
| Latin  America                                       |       | 40,239        |        | 40,527        |       | 40,806        |       |
| Group  centre                                        |       | 144           |        | 155           |       | 218           |       |
| Depreciation  and depletion                          |       | 363,640       |        | 240,176       |       | 262,617       |       |
| Amortization  of intangible assets(1)                |       | 65,533        |        | 29,203        |       | 37,925        |       |
|                                                 | ** ** | **€**    | **429,173** | ** **    | **€** | **269,379**   | ** ** | **€** | **300,542** | ** ** |
|                                                      |            |               |             |               |            |               |            |  |  |  |

----

(1)          2006 excludes goodwill written off of €9,643,000 in relationto businesses disposed (2005: €128,422,000; 2004: €2,586,000). These havebeen included within income on sale of assets and operations (Note 5).

| ** **                                  | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|---------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                  | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Investments in equity method  investees** |       |          |       |          |       |
| Europe                                      |       | 62,147        |       | 62,264        |       |
| Latin America                               |       | 12,696        |       | 14,049        |       |
|                                        | ** ** | **€**    | **74,843** | ** **    | **€** | **76,313** | ** ** |
|                                             |            |               |            |               |            |  |  |

 

**4 NetOperating Expenses**

| ** **               | ** ** | **2006**      | ** **    | **Restated  2005** | ** ** | **Restated  2004** | ** ** |
|--------------------------|------------|---------------|---------------|--------------------|------------|--------------------|------------|
| ** **               | ** ** | **€000** | ** **    | **€000**      | ** ** | **€000**      | ** ** |
| Distribution  costs      |       | 597,284       |          | 366,515            |       | 349,047            |       |
| Administrative  expenses |       | 946,871       |          | 618,860            |       | 671,487            |       |
| Other operating  income  |       | (1,972        | )             | (3,012             | )          | (2,786             | )          |
|                     | ** ** | **€**    | **1,542,183** | ** **         | **€** | **982,363**        | ** ** | **€** | **1,017,748** | ** ** |
|                          |            |               |               |                    |            |                    |            |  |  |  |

 

**5 Exceptional Items**

| ** **                                                            | ** ** | **2006**      | ** **   | **2005**      | ** ** | **2004**      | ** ** |
|-----------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                            | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Reorganization  and restructuring costs                               |       | (196,563      | )            | (25,090       | )          | (39,430       | )          |
| (Loss)/income on  sale of assets and operations                       |       | (22,856       | )            | 13,458        |       | 22,173        |       |
| Income on sale of  assets and operations—discontinued operations |       | —        |         | 39,129        |       | —        |       |
| Impairment of  property, plant and equipment                          |       | (31,299       | )            | (45,214       | )          | —        |       |
| Impairment of  advances to affiliates                                 |       | (52,821       | )            | —        |       | —        |       |
| ** **                                                            | ** ** | **€**    | **(303,539** | **)**         | **€** | **(17,717**   | **)**      | **€** | **(17,257** | **)** |
|                                                                       |            |               |              |               |            |               |            |  |  |  |

 

 

F-23

----

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

**5 Exceptional Items—(continued)**

During 2006, following the completion of the mergerwith Kappa Packaging in December 2005, the Group undertook a significantrestructuring program with the objective of fully integrating the combinedoperations of the Jefferson Smurfit Group and Kappa Packaging in order toachieve planned synergy benefits. This program involves the restructuring ofour European paper mills and converting plants and rationalization of our headoffice function. The restructuring expense of €174.0million reflects the substantial progress made in relation to the programduring 2006 and is comprised of redundancy payments and other closure costs.

The paper mill rationalization program has resulted inthe closure of six high-cost containerboard mills; four in France, one inGermany and one in Sweden. In addition, the Group completed the closure of thecoated paper operations at the Townsend Hook mill in the UK. The Group’scorrugated converting plants in Europe were restructured to optimize the enlargedsystem and make it more efficient. The program resulted in the closure of fiveplants; two in France, two in the UK and one in Germany. Other costs aroseacross the operations with provision being made for certain closures which areplanned for the first half of 2007. Within the Specialties operations, theGroup completed the closure of a solid board machine in the Netherlands and theclosure of the Group’s paper sack plant in the UK.

As a result of the restructuring program significantsynergies have been achieved throughout the Group, including paper millrationalization, machine specialization, paper logistics and integration,corrugated system optimization, purchasing savings and central andadministrative overhead reductions.

The Group was subject to a long running court actionin relation to the ownership of its corrugated container plant in the DominicanRepublic. Following the completion of court proceedings in 2006, the Groupincurred settlement costs of €22.6 million. Thesettlement includes the transfer of title to certain assets and payment of cashconsideration in three tranches in January 2007, 2008 and 2009. The Grouphas retained ownership of the plant and equipment and the goodwill of thebusiness. This cost is included within the reorganization, restructuring andexceptional costs of €196.6 million.

An impairment charge of €9.2million is reflected in the Specialties segment and resulted from therestructuring of certain operations in the Netherlands and the resulting impacton recoverable amounts of underlying property, plant and equipment. Animpairment charge amounting to €22.1 million was alsorecognized in relation to a number of entities predominantly located in theEurozone, which results primarily from the restructuring program.

During 2006, the Group completed the disposal of eightfacilities as required under the European Union (“EU”) approval of the mergerwith Kappa Packaging (Kappa) comprising two graphic board mills in theNetherlands; one solid board mill and converting operation in the Netherlands;two corrugated facilities in Sweden; two corrugated facilities in Denmark; andone partition facility in Scotland. Total 

consideration for theeight facilities was approximately €40 million, the netproceeds arising from which was applied to debt reduction. Losses arising onthese disposals, net of other less significant gains and losses, gave rise tothe overall loss of €22.9million above.

In 2005, the Group recorded costs of €25.1million representing reorganization and restructuring costs mainly in theEuropean Packaging division. This figure includes redundancy, closure andreorganization costs. The main closurecosts relate to our Clonskeagh Mill in Ireland, which was permanently closed inthe first quarter of 2005, and to our Gravelines corrugated plant and Cevennescorrugated plant in France, for 

F-24

----

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

**5Exceptional Items—(continued)**

whichclosures were announced in the final quarter of 2005. The related tax relief of€5.4 million is included in Taxes on income.

The Group has also reported costs of €45.2million representing provisions for impairment of property, plant and equipmentprimarily in the European Packaging segment. In measuring the value in use ofthe related assets a discount rate of 7.6% was applied to future cash flows.

The Group has reported a net gain of €52.6million in respect of the sale of assets and operations. The main profit was inrelation to the sale of Munksjö in the first quarter of 2005, partially offsetby a loss on the sale of our Tissues operation in the second quarter of 2005,in addition to the profit on the sale of The K Club in the second quarter of2005.

In 2004, the Group recorded costs of €39.4million representing reorganization and restructuring costs mainly in theEuropean Packaging division. This figure included redundancy, closure andreorganization costs. The main closure costs related to our Cordoba mill inSpain, which was permanently closed in the third quarter of 2004, and to ourTamworth corrugated plant and Witham cartons plant in the United Kingdom, forwhich closures were announced in the final quarter of 2004. The related taxrelief of €4.0million was included in Taxes on income.

The Group reported a gainof €22.2million, in respect of the sale of the Botanic Road property in Dublin, thesale of surplus property in Italy and Spain and the disposal of our investmentin Cartonnerie de Valois. The related tax charge of €1.9 million was includedin Taxes on income.

**6 Employees andRemuneration**

The average number of persons employed by the Group bygeographical area in the financial year was:

| ** **    | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------|------------|------------|------------|------------|------------|------------|------------|
| Europe        |       | 33,480     |       | 21,384     |       | 22,931     |       |
| Latin America |       | 8,779      |       | 7,828      |       | 7,440      |       |
|          | ** ** | **42,259** | ** ** | **29,212** | ** ** | **30,371** | ** ** |

 

| ** **                    | ** ** | **2006**      | ** **    | **Restated  2005** | ** ** | **Restated  2004** | ** ** |
|-------------------------------|------------|---------------|---------------|--------------------|------------|--------------------|------------|
| ** **                    | ** ** | **€000** | ** **    | **€000**      | ** ** | **€000**      | ** ** |
| **The staff costs comprise:** |       |          |          |               |       |               |       |
| Wages and salaries            |       | 1,320,904     |          | 859,131            |       | 890,748            |       |
| Social welfare                |       | 263,922       |          | 188,543            |       | 194,858            |       |
| Pensions                      |       | 89,945        |          | 66,204             |       | 71,623             |       |
| Share-based payments          |       | 8,084         |          | 5,071              |       | 7,184              |       |
|                          | ** ** | **€**    | **1,682,855** | ** **         | **€** | **1,118,949**      | ** ** | **€** | **1,164,413** | ** ** |
|                               |            |               |               |                    |            |                    |            |  |  |  |

 

F-25

----

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

**7Interest Expense**

| ** **                                                | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
|-----------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                                | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Interest payable  and similar charges:                    |       |          |        |          |       |          |       |
| On bank loans and  overdrafts                             |       |          |        |          |       |          |       |
| —repayable within 5 years, by installment            |       | 75,836        |        | 41,857        |       | 25,123        |       |
| —repayable within 5 years, other than by installment |       | 13,712        |        | 17,277        |       | 2,965         |       |
|                                                      |       | 89,548        |        | 59,134        |       | 28,088        |       |
| On all other  loans                                       |       | 266,634       |        | 196,217       |       | 265,553       |       |
| ** **                                                | ** ** | **€**    | **356,182** | ** **    | **€** | **255,351**   | ** ** | **€** | **293,641** | ** ** |
|                                                           |            |               |             |               |            |               |            |  |  |  |

 

In addition to the abovetable, the 2005 loss of €105 million from the earlyextinguishment of debt arose mainly as a result of our refinancing and debtreduction activities during 2005. The early pay down of the original PIK debt, followingthe February 2005 refinancing, resulted in the write-off of €14million in debt issue and other costs as well as cash costs of €53million, primarily the cash premium paid for early redemption. In addition, theGroup wrote off debt issue costs of €10 million in respect ofthe debt repaid with the Munksjö proceeds. The Group wrote off a further €4million in respect of the debt repaid with The K Club proceeds and €24million as a result of the early pay down of some debt in the former JSG aspart of the financing of the merger with Kappa.

**8(Loss)/income Before Taxes**

| ** **                                                        | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                        | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| (Loss)/income before  taxes is stated after charging/(crediting): |       |          |       |          | ** ** | ** **    | ** ** |
| Depreciation, depletion and amortization expense                  |       | 429,173       |       | 269,379       |       | 300,542       |       |
| Auditors’ remuneration (including expenses)                  |       | 6,910         |       | 4,472         |       | 4,073         |       |
| Operating lease rentals plant and machinery                       |       | 35,822        |       | 12,456        |       | 13,042        |       |
| Operating lease rentals other                                     |       | 974           |       | 9,672         |       | 9,171         |       |
| (Gain)/loss on foreign currency borrowing less  deposits          |       | (421          | )          | 1,174         |       | (376          | )          |
| Research and development costs                                    |       | 2,160         |       | 4,292         |       | 4,924         |       |
| Government grants                                                 |       | (1,972        | )          | (3,012        | )          | (2,786        | )          |

 

**Directors’ emoluments, includingpension contributions amounted to**€9,727,000 (2005: €3,563,000; 2004: €4,894,000).Directors’ emoluments, including pension contributions, increased in 2006 asnew directors joined the board.

F-26

----

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

**8(Loss)/income Before Taxes—(continued)**

The following amountsrelating to acquisitions and discontinued operations are included in arrivingat Cost of Sales and Net Operating Expenses in the Consolidated Statements ofOperations.

| ** **                   | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                   | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Cost of sales:**           |       |          |       |          |       |          |       |   |   |
| Acquired  operations         |       |          | —     |          |       | 158,358       |       | — |   |
| Discontinued  operations     |       |          | —     |          |       | 22,737        |       | 398,061 |   |
| **Net  operating expenses:** |       |          |       |          |       |          |       |   |   |
| Acquired  operations         |       |          | —     |          |       | 45,452        |       | — |   |
| Discontinued operations      |       |          | —     |          |       | 4,311         |       | 72,822 |   |

 

**9 Taxes on income**

| ** **                                            | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                            | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Current Taxation**                                  |       |          |       |          |       |          |       |
| Europe                                                |       | 14,543        |       | 18,801        |       | (7,219        | )          |
| United States and  Canada                             |       | 86            |       | (5,378        | )          | —        |       |
| Latin America                                         |       | 25,708        |       | 25,556        |       | 26,975        |       |
|                                                  |       | 40,337        |       | 38,979        |       | 19,756        |       |
| **Deferred Taxation-originating  timing differences** |       |          |       |          |       |          |       |
| Europe                                                |       | 5,489         |       | (13,924       | )          | 3,354         |       |
| United States and  Canada                             |       | —        |       | —        |       | 8             |       |
| Latin America                                         |       | (11,836       | )          | (5,406        | )          | 1,257         |       |
|                                                  |       | (6,347        | )          | (19,330       | )          | 4,619         |       |
| **Taxes on income**                                   |       |          |       |          |       |          |       |
| Holding Company  and subsidiaries                     |       | 33,990        |       | 19,649        |       | 24,375        |       |
| Share of  associates                                  |       | 3,317         |       | 1,912         |       | 2,598         |       |
|                                                  | ** ** | **€**    | **37,307** | ** **    | **€** | **21,561**    | ** ** | **€** | **26,973** | ** ** |
| **Deferred taxation arises as  follows:**             |       |          |       |          |       |          |       |
| Capital  allowances                                   |       | (11,753       | )          | 788           |       | 3,873         |       |
| Other                                                 |       | 5,406         |       | (20,118       | )          | 746           |       |
|                                                  | ** ** | **€**    | **(6,347** | **)**         | **€** | **(19,330**   | **)**      | **€** | **4,619** | ** ** |

 

Current taxation represents corporation tax or itsequivalent on the taxable income in each jurisdiction and unrelieved overseastax on dividends. In 2006, unrelieved overseas tax on dividends amounted to €532,000(2005: €559,000;2004: €486,000).In 2006, the amount of current taxation relating to Ireland was €4,025,000(2005: €1,593,000;2004: nil). In 2006, the amount of deferred taxation relating to Ireland was acredit of €3,697,000(2005: a credit of €1,658,000;2004: a credit of €3,630,000).

The deferred taxation credit of €6,347,000for 2006 includes a credit of €25,769,000 (2005: a chargeof €2,172,000;2004: a charge of €635,000)in respect of pensions. The balance of €19,422,000 (2005: €21,502,000;2004: €3,984,000)is shown as a movement in the liability for Deferred Income Taxes.

F-27

----

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

**9 Taxeson income—(continued)**

The Group has availed of areduced taxation rate of 10%, which applies to certain manufacturing andfinancial service operations in Ireland. This reduced rate expired at the endof 2005 for financial services operations and is due to expire formanufacturing operations at the end of 2010.

**(Loss)/income beforetax is analyzed as follows:**

| ** **                                     | ** ** | **2006**      | ** **   | **Restated2005** | ** ** | **Restated2004** | ** ** |
|------------------------------------------------|------------|---------------|--------------|------------------|------------|------------------|------------|
| ** **                                     | ** ** | **€000** | ** **   | **€000**    | ** ** | **€000**    | ** ** |
| Ireland                                        |       | 23,927        |         | (102,679         | )          | (30,709          | )          |
| Foreign                                        |       | 115,321       |         | 1,605            |       | 75,948           |       |
| Associates                                     |       | 9,676         |         | 5,951            |       | 11,310           |       |
| Unallocated  amortization of intangible assets |       | (65,533       | )            | (29,203          | )          | (37,925          | )          |
| Exceptional items  (Note 5)                    |       | (303,539      | )            | (17,717          | )          | (17,257          | )          |
|                                           | ** ** | **€**    | **(220,148** | **)**            | **€** | **(142,043**     | **)**      | **€** | **1,367** | ** ** |
|                                                |            |               |              |                  |            |                  |            |  |  |  |

 

**The total tax charge in futureperiods will be affected by any changes to the corporation tax rates in forcein the countries in which the Group operates. The current tax charges will alsobe affected by changes in the excess of tax depreciation over book depreciationand the use of tax credits. The total tax charge for 2004 included**€12,771,000 in respectof the discontinued Munksjö specialties and tissue businesses.

No deferred taxation is recognized on the unremittedearnings of overseas subsidiaries, joint venture and associates; as earningsare continually reinvested by the Group, no taxation is expected to be payableon them in the foreseeable future.

Thefollowing table relates the applicable Republic of Ireland statutory tax rateto the effective tax rate of the Group, obtained by computing the tax charge asa percentage of income before taxes and minority shareholders’ interest:

| ** **                                                        | ** ** | **2006**  | ** ** | **Restated2005** | ** ** | **Restated2004** | ** ** |
|-------------------------------------------------------------------|------------|-----------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **%**     | ** ** | **%**            | ** ** | **%**            | ** ** |
| Corporation tax  at Irish statutory rate                          |       | 12.5      |       |             | 12.5       |             |       | 12.5 |   |
| Adjusted for:                                                     | * *   | * *  |       |             |       |             |       |   |   |
| Income subject to  a higher rate of tax than Irish statutory rate |       | (23.1     | )          |             | (20.8      | )                |       | 4,000.9 |   |
| Expenditure not  deductible for tax purposes                      |       | (16.5     | )          |             | 7.1        |             |       | 1,129.9 |   |
| Tax losses (utilized)/unutilized                                  |       | 0.9       |       |             | (4.3       | )                |       | 633.7 |   |
| Adjustments to  tax charge in respect of previous periods         |       | (1.1      | )          |             | (7.2       | )                |       | (3,035.7 | ) |
| Income/(loss)  arising not subject to tax                         |       | 4.5       |       |             | (2.5       | )                |       | (768.1 | ) |
| Previously  unrecognized deferred tax assets now recognized       |       | 5.9       |       |             | —     |             |       | — |   |
|                                                              | ** ** | **(16.9** | **)**      | ** **       | **(15.2**  | **)**            | ** ** | **1,973.2** | ** ** |

 

F-28

----

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

**10Net Borrowing**

| ** **                 | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|----------------------------|------------|---------------|---------------|---------------|------------|
| ** **                 | ** ** | **€000** | ** **    | **€000** | ** ** |
| Cash at bank and  in hand  |       | 370,204       |          | 247,807       |       |
| Restricted cash            |       | —        |          | 755,575       |       |
| Total borrowing  (Note 19) |       | 4,873,431     |          | 5,510,124     |       |
|                       | ** ** | **€**    | **4,503,227** | ** **    | **€** | **4,506,742** | ** ** |
|                            |            |               |               |               |            |  |  |

 

**11 Accounts Receivable andPrepayments**

| ** **                                     | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                     | ** ** | **€000** | ** **    | **€000** | ** ** |
| Amounts falling due  within one year:          | ** ** | ** **    | ** **    | ** **    |       |
| Trade receivables                              |       | 1,247,808     | ** **    | 1,228,689     |       |
| Less: Provision  for bad and doubtful debts    |       | 42,268        |          | 45,831        |       |
|                                           |       | 1,205,540     | ** **    | 1,182,858     |       |
| Amounts owed by  associates                    |       | 4,076         | ** **    | 8,089         |       |
| Other receivables                              |       | 89,046        | ** **    | 79,763        |       |
| Prepayments and  accrued income                |       | 33,280        |          | 28,748        |       |
|                                           |       | 1,331,942     | ** **    | 1,299,458     |       |
| Amounts falling due  after more than one year: |       |          | ** **    | ** **    |       |
| Other receivables                              |       | 12,678        |          | 15,270        |       |
| ** **                                     | ** ** | **€**    | **1,344,620** | ** **    | **€** | **1,314,728** | ** ** |
|                                                |            |               |               |               |            |  |  |

 

**12 Inventories**

| ** **                   | ** ** | **2006**      | ** **  | **2005**      | ** ** |
|------------------------------|------------|---------------|-------------|---------------|------------|
| ** **                   | ** ** | **€000** | ** **  | **€000** | ** ** |
| Raw materials                |       | 174,961       | ** **  | 186,625       |       |
| Work in progress             |       | 33,416        | ** **  | 38,911        |       |
| Finished goods               |       | 279,952       | ** **  | 297,029       |       |
| Consumables and  spare parts |       | 138,043       | ** **  | 140,566       |       |
|                         | ** ** | **€**    | **626,372** | ** **    | **€** | **663,131** | ** ** |
|                              |            |               |             |               |            |  |  |

 

**13 Investments**

| ** **                        | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|-----------------------------------|------------|---------------|------------|---------------|------------|
| ** **                        | ** ** | **€000** | ** ** | **€000** | ** ** |
| Associates (Note  13 (i))         |       | 74,843        |       | 76,313        |       |
| Other investments  (Note 13 (ii)) |       | 7,659         |       | 11,433        |       |
|                              | ** ** | **€**    | **82,502** | ** **    | **€** | **87,746** | ** ** |
|                                   |            |               |            |               |            |  |  |

 

F-29

----

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

**13Investments—(continued)**

**13 (i): Associates**

| ** **                            | ** ** | **Share of**   | ** ** | ** **    | ** ** | ** **    | ** ** |
|---------------------------------------|------------|---------------------|------------|---------------|------------|---------------|------------|
| ** **                            | ** ** | **net assets** | ** ** | **Loans**     | ** ** | **Total**     | ** ** |
| ** **                            | ** ** | **€000**       | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31,  2003               |       |                | 68,973     |          |       | 312           |       | 69,285 |   |
| Additions                             |       |                | 441        |          |       | —        |       | 441 |   |
| Retained earnings                     |       |                | 3,944      |          |       | —        |       | 3,944 |   |
| Sales                                 |       |                | (124       | )             |       | —        |       | (124 | ) |
| Reclassification                      |       |                | (414       | )             |       | —        |       | (414 | ) |
| Currency  adjustment                  |       |                | (837       | )             |       | —        |       | (837 | ) |
| **December 31,  2004**           | ** ** | ** **          | **71,983** |          | ** ** | **312**       | ** ** | **72,295** | ** ** |
| Additions                             |       |                | 305        |          |       | —        |       | 305 |   |
| Acquisitions                          |       |                | 2,643      |          |       | —        |       | 2,643 |   |
| Retained earnings                     |       |                | 2,169      |          |       | —        |       | 2,169 |   |
| Sales                                 |       |                | (873       | )             |       | —        |       | (873 | ) |
| Reclassification                      |       |                | (1,899     | )             |       | (145          | )          | (2,044 | ) |
| Currency  adjustment                  |       |                | 1,814      |          |       | 4             |       | 1,818 |   |
| **December 31,  2005**           | ** ** | ** **          | **76,142** |          | ** ** | **171**       | ** ** | **76,313** | ** ** |
| Additions                             |       |                | 130        |          |       | —        |       | 130 |   |
| Retained earnings                     |       |                | 1,897      |          |       | —        |       | 1,897 |   |
| Sales                                 |       |                | (1,728     | )             |       | —        |       | (1,728 | ) |
| Write off to  statement of operations |       |                | (481       | )             |       | —        |       | (481 | ) |
| Reclassification                      |       |                | (113       | )             |       | —        |       | (113 | ) |
| Currency  adjustment                  |       |                | (1,178     | )             |       | 3             |       | (1,175 | ) |
| **December 31, 2006**            | ** ** | ** **          | **€** | **74,669**    |       | ** **    | **€** | **174** | ** ** | **€** | **74,843** | ** ** |
|                                       |            |                     |            |               |            |               |            |  |  |  |  |  |

 

The Group has oneremaining significant associate—Duropack AG in Austria, of which the Group owns40%.

F-30

----

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

**13Investments—(continued)**

**13 (ii):  Other Investments**

| ** **                            | ** ** | **Listed***   | ** ** | **Unlisted**  | ** ** | ** **    | ** ** |
|---------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                            | ** ** | **Cost**      | ** ** | **Cost**      | ** ** | **Total**     | ** ** |
| ** **                            | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31,  2003               |       | 6,573         |       | 4,784         |       | 11,357        |       |
| Additions                             |       | 231           |       | 541           |       | 772           |       |
| Transfers                             |       | —        |       | (14           | )          | (14           | )          |
| Reclassification                      |       | —        |       | (1,426        | )          | (1,426        | )          |
| Sales                                 |       | (509          | )          | (465          | )          | (974          | )          |
| Currency  adjustment                  |       | 8             |       | (123          | )          | (115          | )          |
| **December 31,  2004**           | ** ** | **6,303**     | ** ** | **3,297**     | ** ** | **9,600**     | ** ** |
| Additions                             |       | 75            |       | 12            |       | 87            |       |
| Acquisitions                          |       | —        |       | 890           |       | 890           |       |
| Reclassification                      |       | —        |       | 921           |       | 921           |       |
| Sales                                 |       | (17           | )          | (219          | )          | (236          | )          |
| Write off to  statement of operations |       | —        |       | (56           | )          | (56           | )          |
| Currency  adjustment                  |       | —        |       | 227           |       | 227           |       |
| **December 31,  2005**           | ** ** | **6,361**     | ** ** | **5,072**     | ** ** | **11,433**    | ** ** |
| Additions                             |       | —        |       | 1,500         |       | 1,500         |       |
| Reclassification                      |       | —        |       | (4,755        | )          | (4,755        | )          |
| Sales                                 |       | (530          | )          | (380          | )          | (910          | )          |
| Write off to  statement of operations |       | (66           | )          | 602           |       | 536           |       |
| Currency  adjustment                  |       | —        |       | (145          | )          | (145          | )          |
| **December 31, 2006**            | ** ** | **€**    | **5,765**  | ** **    | **€** | **1,894**     | ** ** | **€** | **7,659** | ** ** |
|                                       |            |               |            |               |            |               |            |  |  |  |

 

*  Listed on arecognized stock exchange

Other investments arestated at cost. The market value of the listed investments at December 31,2006 was €5,787,000 (2005: €6,371,000; 2004: €6,304,000)

F-31

----

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

**14 Property, Plant andEquipment**

| ** **                                  | ** ** | **Land & Buildings** | ** **    | **Plant and** | ** ** | ** **    | ** ** |
|---------------------------------------------|------------|------------------------------------|---------------|--------------------|------------|---------------|------------|
| ** **                                  | ** ** | **Freehold**                       | ** **    | **Leasehold**      | ** ** | **Equipment** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **€**000                      | ** **    | **€**000      | ** ** | **€**000 | ** ** | **€**000 | ** ** |
| **Cost or  valuation**                      | ** ** | ** **                         | ** **    |               | ** ** | ** **    |       |   | ** ** | ** ** |   | ** ** | ** ** |
| December 31,  2003                     |       | 1,018,681                          |          |               | 38,153     |          |       |   | 2,912,874 |   |   | 3,969,708 |   |
| Fair value  adjustment                      |       | —                             |          |               | —     |          |       |   | 1,195 |   |   | 1,195 |   |
| Reclassification                            |       | 8,849                              |          |               | (8,305     | )             |       |   | (17,952 | ) |   | (17,408 | ) |
| Additions                                   |       | 27,076                             |          |               | 2,950      |          |       |   | 167,634 |   |   | 197,660 |   |
| Retirements                                 |       | (10,567                            | )             |               | (2,726     | )             |       |   | (66,863 | ) |   | (80,156 | ) |
| Currency  adjustment                        |       | (14,254                            | )             |               | 158        |          |       |   | (44,416 | ) |   | (58,512 | ) |
| **December 31,  2004**                 | ** ** | **1,029,785**                      | ** **    |               | **30,230** | ** **    |       |   | **2,952,472** | ** ** |   | **4,012,487** | ** ** |
| Fair value  adjustment                      |       | 40,438                             |          |               | —     |          |       |   | (17,449 | ) |   | 22,989 |   |
| Reclassification                            |       | 21,567                             |          |               | (2,659     | )             |       |   | (42,064 | ) |   | (23,156 | ) |
| Acquisitions                                |       | 525,146                            |          |               | —     |          |       |   | 1,031,986 |   |   | 1,557,132 |   |
| Additions                                   |       | 7,964                              |          |               | 2,315      |          |       |   | 173,314 |   |   | 183,593 |   |
| Businesses sold                             |       | (185,169                           | )             |               | (5,457     | )             |       |   | (301,857 | ) |   | (492,483 | ) |
| Retirements                                 |       | (30,506                            | )             |               | —     |          |       |   | (146,029 | ) |   | (176,535 | ) |
| Currency  adjustment                        |       | 29,750                             |          |               | (288       | )             |       |   | 36,479 |   |   | 65,941 |   |
| **December 31,  2005**                 | ** ** | **1,438,975**                      | ** **    |               | **24,141** | ** **    |       |   | **3,686,852** | ** ** |   | **5,149,968** | ** ** |
| Fair value  adjustment                      |       | 13,638                             |          |               | —     |          |       |   | 16,455 |   |   | 30,093 |   |
| Reclassification                            |       | 23,126                             |          |               | 2,071      |          |       |   | 85,881 |   |   | 111,078 |   |
| Additions                                   |       | 6,398                              |          |               | 233        |          |       |   | 326,882 |   |   | 333,513 |   |
| Businesses sold                             |       | (18,031                            | )             |               | —     |          |       |   | (88,164 | ) |   | (106,195 | ) |
| Retirements                                 |       | (22,550                            | )             |               | (205       | )             |       |   | (123,458 | ) |   | (146,213 | ) |
| Currency  adjustment                        |       | (18,907                            | )             |               | 488        |          |       |   | (54,510 | ) |   | (72,929 | ) |
| **December 31,  2006**                 | ** ** | **1,422,649**                      | ** **    |               | **26,728** | ** **    |       |   | **3,849,938** | ** ** |   | **5,299,315** | ** ** |
| **Depreciation**                            |       |                               |          |               |       |          |       |   |   |   |   |   |   |
| December 31,  2003                     |       | 151,863                            |          |               | 8,884      |          |       |   | 1,423,525 |   |   | 1,584,272 |   |
| Reclassification                            |       | (4,787                             | )             |               | (2,621     | )             |       |   | (6,473 | ) |   | (13,881 | ) |
| Charged                                     |       | 27,895                             |          |               | 1,141      |          |       |   | 227,503 |   |   | 256,539 |   |
| Retirements                                 |       | (1,882                             | )             |               | (713       | )             |       |   | (64,287 | ) |   | (66,882 | ) |
| Currency  adjustment                        |       | (3,487                             | )             |               | 141        |          |       |   | (29,731 | ) |   | (33,077 | ) |
| **December 31,  2004**                 | ** ** | **169,602**                        | ** **    |               | **6,832**  | ** **    |       |   | **1,550,537** | ** ** |   | **1,726,971** | ** ** |
| Impairment  provision                       |       | 2,256                              |          |               | —     |          |       |   | 42,958 |   |   | 45,214 |   |
| Reclassification                            |       | 525                                |          |               | (1,027     | )             |       |   | (18,930 | ) |   | (19,432 | ) |
| Charged                                     |       | 31,596                             |          |               | 1,428      |          |       |   | 201,622 |   |   | 234,646 |   |
| Businesses sold                             |       | (17,020                            | )             |               | —     |          |       |   | (121,533 | ) |   | (138,553 | ) |
| Retirements                                 |       | (11,354                            | )             |               | —     |          |       |   | (128,297 | ) |   | (139,651 | ) |
| Currency  adjustment                        |       | (48                                | )             |               | (306       | )             |       |   | 2,476 |   |   | 2,122 |   |
| **December 31,  2005**                 | ** ** | **175,557**                        | ** **    |               | **6,927**  | ** **    |       |   | **1,528,833** | ** ** |   | **1,711,317** | ** ** |
| Impairment  provision                       |       | 10,147                             |          |               | —     |          |       |   | 21,152 |   |   | 31,299 |   |
| Reclassification                            |       | 17,398                             |          |               | (160       | )             |       |   | 91,861 |   |   | 109,099 |   |
| Charged                                     |       | 48,592                             |          |               | 1,020      |          |       |   | 308,274 |   |   | 357,886 |   |
| Businesses sold                             |       | (8,247                             | )             |               | —     |          |       |   | (63,095 | ) |   | (71,342 | ) |
| Retirements                                 |       | (11,703                            | )             |               | (37        | )             |       |   | (114,354 | ) |   | (126,094 | ) |
| Currency  adjustment                        |       | (6,348                             | )             |               | 355        |          |       |   | (46,701 | ) |   | (52,694 | ) |
| **December 31,  2006**                 | ** ** | **225,396**                        | ** **    |               | **8,105**  | ** **    |       |   | **1,725,970** | ** ** |   | **1,959,471** | ** ** |
| **Net book  amount December 31, 2006** | ** ** | **€**                         | **1,197,253** | ** **         |       | **€**    | **18,623** | ** ** |   |   | **€** | **2,123,968** | ** ** |   | **€** | **3,339,844** | ** ** |
| **Net book  amount December 31, 2005** | ** ** | **€**                         | **1,263,418** | ** **         |       | **€**    | **17,214** | ** ** |   |   | **€** | **2,158,019** | ** ** |   | **€** | **3,438,651** | ** ** |
| **Net book amount  December 31, 2004** | ** ** | **€**                         | **860,183**   | ** **         |       | **€**    | **23,398** | ** ** |   |   | **€** | **1,401,935** | ** ** |   | **€** | **2,285,516** | ** ** |

** **

F-32

----

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

**14Property, Plant and Equipment—(continued)**

 

| ** **                                  | ** ** | **Timberland** | ** **    |
|---------------------------------------------|------------|----------------|---------------|
| ** **                                  | ** ** | **€000**  | ** **    |
| December 31,  2003                     |       | 50,510         |          |
| Additions                                   |       | 8,806          |          |
| Depletion                                   |       | (6,078         | )             |
| Currency  adjustment                        |       | (3,896         | )             |
| **December 31,  2004**                 | ** ** | **49,342**     | ** **    |
| Additions                                   |       | 8,841          |          |
| Disposals                                   |       | (12            | )             |
| Depletion                                   |       | (5,530         | )             |
| Currency  adjustment                        |       | 7,792          |          |
| **December 31,  2005**                 | ** ** | **60,433**     | ** **    |
| Additions                                   |       | 11,174         |          |
| Reclassification                            |       | (172           | )             |
| Depletion                                   |       | (5,754         | )             |
| Currency  adjustment                        |       | (6,569         | )             |
| **December 31,  2006**                 | ** ** | **59,112**     | ** **    |
| **Net book amount December 31, 2006**  | ** ** | **€**     | **3,398,956** | ** ** |
| **Net  book amount December 31, 2005** | ** ** | **€**     | **3,499,084** | ** ** |
| **Net book amount  December 31, 2004** | ** ** | **€**     | **2,334,858** | ** ** |

 

**Land and Buildings**

Included in tangibleassets is an amount for land of €383,477,000 (2005: €410,140,000;2004: €282,021,000).

**Capitalized leasedproperty, plant and equipment**

Included in the net book amount of tangible assets isan amount for capitalized leased assets of €35,053,000(2005: €42,704,000;2004: €50,355,000).The depreciation charge for capitalized leased assets for 2006 was €8,520,000(2005: €6,832,000;2004: €10,139,000)and the related finance charges amounted to €1,009,000 (2005: €1,138,000;2004: €1,962,000).

F-33

----

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

**15 IntangibleAssets**

| ** **                  | ** ** | **Goodwill**  | ** **    | **Other  Intangible  Assets** | ** ** | **Total  Intangible  Assets** | ** ** |
|-----------------------------|------------|---------------|---------------|-------------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **€000** | ** **    | **€000**                 | ** ** | **€000**                 | ** ** |
| December 31,  2003     |       | 1,455,133     |          |                          | —     |                          |       | 1,455,133 |   |
| Acquisitions                |       | 2,731         |          |                          | —     |                          |       | 2,731 |   |
| Disposals                   |       | (2,586        | )             |                          | —     |                          |       | (2,586 | ) |
| Fair value  adjustments     |       | 40,457        |          |                          | —     |                          |       | 40,457 |   |
| Amortization                |       | (37,925       | )             |                          | —     |                          |       | (37,925 | ) |
| Currency  adjustment        |       | (2,680        | )             |                          | —     |                          |       | (2,680 | ) |
| **December 31,  2004** | ** ** | **1,455,130** |          |                          | —     |                          | ** ** | **1,455,130** | ** ** |
| Acquisitions                |       | 1,185,705     |          |                          | 35,000     |                          |       | 1,220,705 |   |
| Disposals                   |       | (128,422      | )             |                          | —     |                          |       | (128,422 | ) |
| Reclassification            |       | (31,247       | )             |                          | —     |                          |       | (31,247 | ) |
| Amortization                |       | (28,914       | )             |                          | (289       | )                             |       | (29,203 | ) |
| Currency  adjustment        |       | 3,296         |          |                          | —     |                          |       | 3,296 |   |
| **December 31,  2005** | ** ** | **2,455,548** | ** **    | ** **                    | **34,711** |                          | ** ** | **2,490,259** | ** ** |
| Disposals                   |       | (9,643        | )             |                          | —     |                          |       | (9,643 | ) |
| Fair value  adjustments     |       | (71,311       | )             |                          | —     |                          |       | (71,311 | ) |
| Amortization                |       | (62,033       | )             |                          | (3,500     | )                             |       | (65,533 | ) |
| Reclassification            |       | 2,780         |          |                          | —     |                          |       | 2,780 |   |
| Currency  adjustment        |       | 2,195         |          |                          | —     |                          |       | 2,195 |   |
| **December 31, 2006**  | ** ** | **€**    | **2,317,536** | ** **                    | ** ** | **€**                    | **31,211** |   | ** ** | **€** | **2,348,747** | ** ** |
|                             |            |               |               |                               |            |                               |            |  |  |  |  |  |

 

Accumulated amortizationat December 31, 2006 and 2005 was €159,184,000and €94,588,000respectively. The expected amortization for other intangible assets is expectedto be €3,500,000for each of the next 5 years.

**16 AccountsPayable and Accrued Liabilities**

| ** **                                        | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|---------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                        | ** ** | **€000** | ** **    | **€000** | ** ** |
| Trade payables                                    |       | 906,673       | ** **    | 905,697       |       |
| Amounts owed to  associates—trading balances |       | 938           | ** **    | 3,289         |       |
| Taxation  creditors (Note 17)                     |       | 89,483        | ** **    | 72,859        |       |
| Deferred  acquisition consideration               |       | 140           | ** **    | 33,713        |       |
| Social welfare                                    |       | 49,821        | ** **    | 51,574        |       |
| Accruals                                          |       | 348,904       | ** **    | 323,315       |       |
| Capital payables                                  |       | 84,206        | ** **    | 50,261        |       |
| Other payables                                    |       | 60,240        | ** **    | 55,573        |       |
| Capitalized lease  obligations                    |       | 4,578         |          | 4,132         |       |
|                                              | ** ** | **€**    | **1,544,983** | ** **    | **€** | **1,500,413** | ** ** |
|                                                   |            |               |               |               |            |  |  |

 

F-34

----

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

**17 TaxationCreditors**

| ** **                 | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|----------------------------|------------|---------------|------------|---------------|------------|
| ** **                 | ** ** | **€000** | ** ** | **€000** | ** ** |
| Current taxation           |       | 43,476        | ** ** | 20,410        |       |
| Payroll taxes              |       | 41,053        | ** ** | 41,020        |       |
| VAT and other  sales taxes |       | 4,954         | ** ** | 11,429        |       |
|                       | ** ** | **€**    | **89,483** | ** **    | **€** | **72,859** | ** ** |
|                            |            |               |            |               |            |  |  |

 

**18 LongTerm Debt and Other Long Term Liabilities**

| ** **                                                  | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|-------------------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                                  | ** ** | **€000** | ** **    | **€000** | ** ** |
| Borrowing—due  after more than one year (Note 19) |       | 4,644,176     |          | 4,650,772     |       |
| Deferred debt  issuance costs                               |       | (113,141      | )             | (132,860      | )          |
| Capitalized lease  obligations                              |       | 13,578        |          | 19,417        |       |
|                                                        | ** ** | **€**    | **4,544,613** | ** **    | **€** | **4,537,329** | ** ** |
|                                                             |            |               |               |               |            |  |  |

 

**19 Borrowing**

| ** **                                                                                                | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                                                                                | ** ** | **€000** | ** **    | **€000** | ** ** |
| Senior credit facility                                                                                    |       |          |          |          |       |
| Revolving credit facility(1)—interest at relevant  interbank rate + 2.25%                            |       | 4,476         |          | 9,210         |       |
| Restructuring facility(2)—interest at relevant  interbank rate + 2.25% until conversion to term loan |       | 103,200       |          | —        |       |
| Tranche A Term loan(3a)—interest at relevant  interbank rate + 2.25%                                 |       | 452,031       |          | 475,856       |       |
| Tranche B Term loan(3b)—interest at relevant  interbank rate + 2.50% euro & 2.375% US$(3d)  |       | 1,188,558     |          | 1,165,518     |       |
| Tranche C Term loan(3c)—interest at relevant  interbank rate + 3.00% euro & 2.875% US$(3d)  |       | 1,188,558     |          | 1,165,518     |       |
| Yankee bonds (including accrued interest)(4)                                                              |       | 253,903       |          | 251,497       |       |
| Kappa bonds(5)                                                                                            |       | —        |          | 755,575       |       |
| Bank loans and overdrafts/(cash)(6)                                                                       |       | (246,650      | )             | (925,752      | )          |
| 2011 Receivables  securitization floating rate notes (including accrued interest)(7)                      |       | 210,278       |          | 210,214       |       |
| Total subsidiary  debt                                                                                    |       | 3,154,354     |          | 3,107,636     |       |
| 2012 Bonds  (including accrued interest)(8)                                                               |       | 971,429       |          | 1,021,347     |       |
| 2015 Cash pay  subordinated notes (including accrued interest)(9)                                         |       | 377,444       |          | 377,759       |       |
| **Net  debt**                                                                                             | ** ** | **4,503,227** | ** **    | **4,506,742** | ** ** |
| Capitalized leases                                                                                        |       | 18,156        |          | 23,549        |       |
| **Net debt including leases**                                                                             | ** ** | **€**    | **4,521,383** | ** **    | **€** | **4,530,291** | ** ** |
|                                                                                                           |            |               |               |               |            |  |  |

----

(1)          Revolving creditfacility of €600million (available under the senior credit facility) to be repaid in full in2012. Includes amounts drawn down under ancillary facilities and amounts drawnunder facilities covered by letters of credit.

F-35

----

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

**19Borrowing—(continued)**

(2)          Restructuring creditfacility of €275million, which converts to Term A, B and C loans on December 1, 2008.

(3a)    Term loan A due to be repaidin certain installments up to 2012.

(3b)   Term loan B due to be repaid infull in 2013.

(3c)    Term loan C due to be repaidin full in 2014.

(3d)   Margins on Tranches B &C reduced by 0.25% on euro term loans and by 0.375% on US Dollar loans in February 2006.

(4)          7.5% senior debenturesdue 2025 of $292.3 million (6.75% senior notes due 2005 of $234 million wererepaid in November 2005).

(5)          Various Kappa bondsrepaid on January 3, 2006.

(6)          Cash at December 31,2005 includes €756 million placed as defeasance deposit with Kappa Bond Trustee.

(7)          Receivablessecuritization floating rate notes mature September 2011.

(8)          10.125% senior notes due2012 of €350million and 9.625% senior notes due 2012 of $750 million.

(9)          €217.5million 7.75% senior subordinated notes due 2015 and $200 million of 7.75%senior subordinated notes due 2015.

| ** **                                  | ** ** | **2006**                             | ** **    | **2005**             | ** ** |
|---------------------------------------------|------------|--------------------------------------|---------------|----------------------|------------|
| ** **                                  | ** ** | **Bank  Loans and  Overdrafts** | ** **    | **Other  Borrowing** | ** ** | **Total** | ** ** | **Bank  Loans and  Overdrafts** | ** ** | **Other  Borrowing** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **€000**                        | ** **    | **€000**        | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Analysis by year of repayment**           | ** ** | ** **                           | ** **    | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bank loans,  overdrafts and other borrowing |       | 195,940                              |          | 33,315               |       | 229,255 |   | 67,609 |   | 36,168 |   | 103,777 |   |
| Kappa Bonds  outstanding                    |       | —                               |          | —               |       | — |   | — |   | 755,575 |   | 755,575 |   |
| Within one year                             |       | 195,940                              |          | 33,315               |       | 229,255 |   | 67,609 |   | 791,743 |   | 859,352 |   |
| Between 1 and 2 years                       |       | 62,507                               |          | 2,093                |       | 64,600 |   | 79,819 |   | 6,254 |   | 86,073 |   |
| Between 2 and 3  years                      |       | 67,929                               |          | 5,988                |       | 73,917 |   | 56,270 |   | 2,172 |   | 58,442 |   |
| Between 3 and 4  years                      |       | 83,447                               |          | 1,956                |       | 85,403 |   | 65,669 |   | 1,972 |   | 67,641 |   |
| Between 4 and 5  years                      |       | 102,412                              |          | 212,267              |       | 314,679 |   | 67,397 |   | 1,761 |   | 69,158 |   |
| Thereafter                                  |       |                                 |          |                 |       |   |   |   |   |   |   |   |   |
| By installment                              |       | 121,340                              |          | 4,559                |       | 125,899 |   | 218,874 |   | 2,928 |   | 221,802 |   |
| Other than by installment                   |       | 2,468,656                            |          | 1,511,022            |       | 3,979,678 |   | 2,316,851 |   | 1,830,805 |   | 4,147,656 |   |
| Due after more  than one year               |       | 2,906,291                            |          | 1,737,885            |       | 4,644,176 |   | 2,804,880 |   | 1,845,892 |   | 4,650,772 |   |
| **Total borrowing**                         | ** ** | **€**                           | **3,102,231** | ** **           | **€** | **1,771,200** | ** ** | **€** | **4,873,431** | ** ** | **€** | **2,872,489** | ** ** | **€** | **2,637,635** | ** ** | **€** | **5,510,124** | ** ** |
|                                             |            |                                      |               |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-36

----

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

**19Borrowing—(continued)**

| ** **                            | ** ** | **2006**                  | ** **  | **2005**                 | ** ** |
|---------------------------------------|------------|---------------------------|-------------|--------------------------|------------|
| ** **                            | ** ** | **Within  One Year** | ** **  | **After  One Year** | ** ** | **Within  One Year** | ** ** | **After  One Year** | ** ** |
| ** **                            | ** ** | **€000**             | ** **  | **€000**            | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Analysis of borrowing**             |       |                      | ** **  | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Secured bank loans and  overdrafts:   |       |                      | ** **  | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Overseas loans                        |       | 50,873                    |        | 777,233                  |       | 14,074 |   | 804,382 |   |
| Domestic loans                        |       | 57,000                    |        | 2,124,869                |       | 12,150 |   | 1,996,648 |   |
|                                  |       | 107,873                   |        | 2,902,102                |       | 26,224 |   | 2,801,030 |   |
| Unsecured bank loans and  overdrafts: |       |                      |        |                     |       |   |   |   |   |
| Overseas loans                        |       | 57,873                    |        | 4,189                    |       | 30,974 |   | 3,850 |   |
| Domestic loans                        |       | 30,194                    |        | —                   |       | 10,411 |   | — |   |
|                                  |       | 88,067                    |        | 4,189                    |       | 41,385 |   | 3,850 |   |
| Total bank loans  and overdrafts      |       | 195,940                   |        | 2,906,291                |       | 67,609 |   | 2,804,880 |   |
| Secured other  loans                  |       | 93                        |        | 436,361                  |       | 384 |   | 455,581 |   |
| Unsecured other  loans                |       | 33,222                    |        | 1,301,524                |       | 35,784 |   | 1,390,311 |   |
| Kappa bonds  outstanding              |       | —                    |        | —                   |       | 755,575 |   | — |   |
| Total other loans                     |       | 33,315                    |        | 1,737,885                |       | 791,743 |   | 1,845,892 |   |
| **Total borrowing**                   | ** ** | **€**                | **229,255** | ** **               | **€** | **4,644,176** | ** ** | **€** | **859,352** | ** ** | **€** | **4,650,772** | ** ** |
|                                       |            |                           |             |                          |            |  |  |  |  |  |  |  |  |

 

Security comprises fixed and floating charges over theassets of certain subsidiaries and pledges over the Group’s shareholding incertain of its subsidiaries. The gross amount of receivables collateralizingthe receivables securitization at December 31, 2006 was €260million (2005: €262million). At December 31, 2006 cash of €10.3 million (2005: €14.1 million)was in securitization bank accounts which was not available for transfer toother group subsidiaries.

Includedin secured other loans are the following long term obligations:

| ** **                                               | ** ** | **‘000** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|
| Guaranteed  Debentures 7.50% due 2025                    |       | $             | 292,300    |   |
| Receivables  securitization floating rate notes due 2011 |       | €        | 210,000    |   |
| Senior credit facility  due between 2012 and 2014        |       | €        | 2,900,000  |   |

 

Includedin unsecured other loans are the following long term obligations:

| ** **                                | ** ** | **‘000** | ** ** |
|-------------------------------------------|------------|---------------|------------|
| Senior Notes  10.125% due 2012            |       | €        | 350,000    |   |
| Senior Notes  9.625% due 2012             |       | $             | 750,000    |   |
| Senior  Subordinated Notes 7.75% due 2015 |       | €        | 217,500    |   |
| Senior Subordinated  Notes 7.75% due 2015 |       | $             | 200,000    |   |

 

F-37

----

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

**19Borrowing—(continued)**

Committed facilitiesamounted to €5,510million (2005: €5,578 million) of which €4,753million (2005: €4,656 million)were utilized at December 31, 2006. The weighted average period until maturityof undrawn committed facilities is 5.0 years (2005: 5.3 years).

| **Maturity of  Undrawn Committed Facilities** | ** ** | ** **    | ** **  | **2006**      | ** ** | **2005**    | ** ** |
|----------------------------------------------------|------------|---------------|-------------|---------------|------------|-------------|------------|
| ** **                                         | ** ** | **€000** | ** **  | **€000** | ** ** |
| Within 1 year                                      |       | 262           |        | 55,546        |       |
| Between 1 and 2 years                              |       | 171,797       |        | —        |       |
| More than 2 years                                  |       | 584,979       |        | 865,790       |       |
|                                               | ** ** | **€**    | **757,038** | ** **    | **€** | **921,336** | ** ** |
|                                                    |            |               |             |               |            |             |            |  |  |

 

**Financialinstruments and risk management**

The operating parameters and policies of treasurymanagement are established under board authority. The formal treasury policycovers the areas of funding, counterparty risk, foreign exchange, controls andderivatives. Risk arising on counterparty default is controlled within aframework of dealing with high quality institutions that meet certain minimumcriteria. The Group uses derivative instruments in the management of interestrate and currency risk.

The Group’s financialinstruments, other than derivatives, comprise borrowing, cash and liquidresources, and various items, such as trade debtors, trade creditors etc, thatarise directly from its operations. The Group uses derivative financial instrumentsprimarily to manage its exposure to market risks from changes in interest andforeign exchange rates. The Group does not enter into or issue derivativefinancial instruments for trading purposes. The Group’s policy is to centrallymanage interest rate and currency exposure.

**(a) Interestrate risk management**

The Group manages interest rate exposure to achieve anappropriate balance of fixed and variable rate funding. To achieve thisobjective, the Group enters into interest rate swaps, options and forward rateagreements. Interest rate swap agreements are used to change the interestreceivable or payable on the Group’s underlying cash and borrowing fromvariable to fixed rates or from fixed to variable rates. At the year end, 68%(2005: 72%) of the Group’s borrowing was at fixed rates after taking account ofinterest rate swaps. As at December 31, 2006,the Group had variable rate debt (adjusted to include fixed rate instruments whichreprice within one year) of approximately €1.5 billion(2005: €1.3billion). Holding all other variables constant, including levels ofindebtedness, a one percentage point increase in interest rates would have hadan estimated impact on pre-tax interest expense of approximately €15 million. Theweighted average interest rate on borrowing outstanding at the year end was6.85% (2005: 6.87%). The weighted average interest rate on short term borrowingwas 7.18% (2005: 5.48%).

F-38

----

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

**19 Borrowing—(continued)**

Outstanding interest rateswap agreements at December 31, 2006 are summarized as follows:

| **Currency** | ** ** | ** ** | ** ** | **Notional  Principal  (Millions)** | ** ** | **Termination  Dates** | ** ** | **% Fixed  Payable** | ** ** | **% Variable  Receivable** | ** ** |
|--------------|------------|------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------------|------------|
| EUR          |       |       | 346        |                                |       |                   | 2007       |                      |       | 3.455 - 3.67                    |       |   | Euribor | (1) |   |
| EUR          |       |       | 480        |                                |       |                   | 2008       |                      |       | 3.36 - 3.489                    |       |   | Euribor |   |   |
| EUR          |       |       | 1,300      |                                |       |                   | 2010       |                      |       | 3.035 - 3.79                    |       |   | Euribor |   |   |

----

(1)          European InterbankOffered Rate

Outstanding interest rateswap agreements at December 31, 2005 are summarized as follows:

| **Currency** | ** ** | ** ** | ** ** | **Notional  Principal  (Millions)** | ** ** | **Termination  Dates** | ** ** | **% Fixed  Payable** | ** ** | **% Variable  Receivable** | ** ** |
|--------------|------------|------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------------|------------|
| EUR          |       |       | 175        |                                |       |                   | 2006       |                      |       | 3.4775 - 3.67                   |       |   | Euribor |   |   |
| EUR          |       |       | 425        |                                |       |                   | 2007       |                      |       | 3.455 - 3.67                    |       |   | Euribor |   |   |
| EUR          |       |       | 480        |                                |       |                   | 2008       |                      |       | 3.165 - 3.615                   |       |   | Euribor |   |   |
| EUR          |       |       | 1,100      |                                |       |                   | 2009       |                      |       | 3.035 - 3.62                    |       |   | Euribor |   |   |

 

**(b) Foreignexchange risk management**

The Group manages its balance sheet having regard tothe currency exposures arising from its assets being denominated in a widerange of currencies. To this end, where foreign currency assets are funded bylocal borrowing, such borrowing is generally sourced in the currency of therelated assets. The Group also hedges a portion of its currency exposurethrough the use of currency swaps and forward contracts. At December 31, 2006the Group had entered into €106 million (2005: €278million) currency equivalent of forward contracts and there were no optionscontracts outstanding (2005: €Nil) in respect of its dayto day trading.

Outstanding currency swapagreements at December 31, 2006 are summarized as follows:

| **Currency swapped  (Millions)** | ** ** | ** ** | ** ** | **Currency received  (Millions)** | ** ** | **Maturity date** | ** ** | **Interest rate paid** | ** ** | **Interest rate received** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------------|------------|------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| USD 176                               |       |       | EUR 172    |                                   |       |                   | 2007       |                             |       | Euribor + 3.32                       |       |   | Libor(1) + 3.00 |   |   |
| USD 222                               |       |       | EUR 190    |                                   |       |                   | 2007       |                             |       | Euribor + 2.59                       |       |   | 7.50 |   |   |
| USD 70                                |       |       | SEK 574    |                                   |       |                   | 2007       |                             |       | Euribor + 2.60                       |       |   | 7.50 |   |   |
| USD 200                               |       |       | EUR 153    |                                   |       |                   | 2010       |                             |       | 6.61                                 |       |   | 7.75 |   |   |
| USD 204                               |       |       | EUR 183    |                                   |       |                   | 2012       |                             |       | 9.98                                 |       |   | 9.65 |   |   |
| USD 545                               |       |       | EUR 414    |                                   |       |                   | 2007       |                             |       | Euribor + 0.04                       |       |   | Libor |   |   |

 

F-39

----

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

**19Borrowing—(continued)**

Outstanding currency swapagreements at December 31, 2005 are summarised as follows:

| **Currency swapped  (Millions)** | ** ** | ** ** | ** ** | **Currency received  (Millions)** | ** ** | **Maturity date** | ** ** | **Interest rate paid** | ** ** | **Interest rate received** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------------|------------|------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| USD 176                               |       |       | EUR 172    |                                   |       |                   | 2007       |                             |       | Euribor + 3.32                       |       |   | Libor(1) + 3.00 |   |   |
| USD 222                               |       |       | EUR 190    |                                   |       |                   | 2007       |                             |       | Euribor + 2.59                       |       |   | 7.50 |   |   |
| USD 70                                |       |       | SEK 574    |                                   |       |                   | 2007       |                             |       | Stibor(2) + 2.60                |       |   | 7.50 |   |   |
| USD 200                               |       |       | EUR 153    |                                   |       |                   | 2010       |                             |       | 6.61                                 |       |   | 7.75 |   |   |
| USD 204                               |       |       | EUR 183    |                                   |       |                   | 2012       |                             |       | 9.98                                 |       |   | 9.65 |   |   |

----

(1)          London Interbank OfferedRate

(2)          Stockholm InterbankOffered Rate

At December 31, 2006 the Group had also enteredinto currency swaps of €317 million equivalent (2005: €374million) as part of its short term liquidity management.

Excluding the Group’sLatin American operations, there were no significant transactional currencyexposures at December 31, 2006, that gave rise to net currency gains andlosses recognized in the statement of operations. Such exposures comprise themonetary assets and liabilities of the Group that are not denominated in theoperating (or ‘functional’) currency of the operating unit involved. As at December 31,2006, transactional currency exposures in the Group’s Latin American operationsamounted to €18 million (2005: €35 million).

**(c) Fair value offinancial instruments**

Thecarrying amounts and estimated fair values of the material financialinstruments of the Group are as follows:

| ** **                                        | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|---------------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                        | ** ** | **Carrying**  | ** ** | **Fair**      | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                        | ** ** | **Amount**    | ** ** | **Value**     | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                        | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Assets**                                        | ** ** | ** **    |       |          |       |   |   |   |   |
| Cash, short term  deposits and liquid investments |       | 370,204       |       | 370,204       |       | 247,807 |   | 247,807 |   |
| Restricted cash                                   |       | —        |       | —        |       | 755,575 |   | 755,575 |   |
| Accounts  receivable and prepayments              |       | 1,331,942     |       | 1,331,942     |       | 1,299,458 |   | 1,299,458 |   |
| **Liabilities**                                   |       |          |       |          |       |   |   |   |   |
| Short term debt                                   |       | 229,255       |       | 229,255       |       | 103,777 |   | 103,777 |   |
| Kappa bonds  outstanding                          |       | —        |       | —        |       | 755,575 |   | 755,575 |   |
| Accounts payable  and accrued liabilities         |       | 1,544,983     |       | 1,544,983     |       | 1,500,413 |   | 1,500,413 |   |
| Medium and long  term debt                        |       | 4,644,176     |       | 4,694,354     |       | 4,650,772 |   | 4,591,030 |   |
| **Derivative  financial instruments**             |       |          |       |          |       |   |   |   |   |
| Interest rate  swap agreements                    |       |          |       | 2,545         |       |   |   | (45,800 | ) |
| Currency swap  agreements                         |       |          |       | (98,650       | )          |   |   | (21,895 | ) |
| Foreign exchange  contracts                       |       |          |       | 151           |       |   |   | 1,063 |   |
| Energy/pulp hedging  contracts                    |       |          | ** ** | (3,424        | )          |   |   | 990 |   |

 

F-40

----

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

**19Borrowing—(continued)**

The following methods andassumptions were used by the Group in estimating its fair value disclosures forfinancial instruments:

**Cash, short term deposits and liquid investments,debtors and creditors:**

The carrying amountreported in the balance sheet approximates fair value because of the shortmaturity of these instruments.

**Short term debt andmedium and long term debt:**

The fair value of theGroup's debt is estimated using either the replacement cost of equivalentinstruments or discounted cash flow analysis, based on the Group's currentincremental borrowing rates for similar types of borrowing arrangements andmaturities.

**Interest rate swapagreements:**

The fair value of theGroup's interest rate swap agreements is estimated using discounted cash flowanalysis.  In addition the fair valueamount includes the interest rate component of currency swaps.

**Currency swapagreements and foreign exchange contracts:**

Thefair value of these instruments is based on the estimated replacement cost ofequivalent instruments at the balance sheet date. The fair value of currencyswaps are included in the carrying amount of Short term debt and Medium andlong term debt.

**(d) Credit risk**

Potential concentrationsof credit risk to the Group consist principally of cash deposits, short terminvestments and trade debtors. The Group only deposits cash surpluses withquality credit rated banks and institutions that meet certain criteria and bypolicy limits the amount of credit exposure to any one bank or institution. Tradedebtors comprise a large, widespread customer base. The Group mitigates therisk that counterparties to derivatives will fail to perform by contractingwith major financial institutions having high credit ratings and considers thelikelihood of counterparty failure to be remote. At December 31, 2006 theGroup did not consider there to be any significant concentration of creditrisk.

F-41

----

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

**20 Provision for Liabilities and Charges**

| ** **                                                             | ** ** | **Deferred**      | ** ** | **Other**         | ** ** | ** **        | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                             | ** ** | **Income**        | ** ** | **Deferred**      | ** ** | ** **        | ** ** |
| ** **                                                             | ** ** | **Taxes**         | ** ** | **Provisions**    | ** ** | **Total**         | ** ** |
| ** **                                                             | ** ** | **€000**     | ** ** | **€000**     | ** ** | **€000**     | ** ** |
| December 31,  2003                                                |       | 176,826           |       | 58,126            |       | 234,952           |       |
| Charge/(credit)  to statement of operations(1)                         |       | 3,984             |       | (42               | )          | 3,942             |       |
| Paid in year                                                           |       | —            |       | (9,769            | )          | (9,769            | )          |
| Acquisitions                                                           |       | 1                 |       | —            |       | 1                 |       |
| Fair value  adjustments                                                |       | (7,134            | )          | —            |       | (7,134            | )          |
| Reclassification                                                       |       | 4,406             |       | (2,592            | )          | 1,814             |       |
| Currency  adjustment                                                   |       | (1,647            | )          | (756              | )          | (2,403            | )          |
| **December 31,  2004**                                            | ** ** | **176,436**       | ** ** | **44,967**        | ** ** | **221,403**       | ** ** |
| (Credit)/charge  to statement of operations(1)                         |       | (21,502           | )          | 14,084            |       | (7,418            | )          |
| Paid in year                                                           |       | —            |       | (5,512            | )          | (5,512            | )          |
| Acquisitions                                                           |       | 65,729            |       | 2,392             |       | 68,121            |       |
| Subsidiaries  disposed                                                 |       | (26,269           | )          | —            |       | (26,269           | )          |
| Reclassification                                                       |       | (1,877            | )          | (5,924            | )          | (7,801            | )          |
| Currency  adjustment                                                   |       | 3,674             |       | 1,535             |       | 5,209             |       |
| **December 31,  2005**                                            | ** ** | **196,191**       | ** ** | **51,542**        | ** ** | **247,733**       | ** ** |
| Charge to  statement of operations(1)                                  |       | 19,422            |       | 14,445            |       | 33,867            |       |
| Fair value  adjustments                                                |       | (76,462           | )          | —            |       | (76,462           | )          |
| Paid in year                                                           |       | —            |       | (4,535            | )          | (4,535            | )          |
| Subsidiaries  disposed                                                 |       | (4,889            | )          | —            |       | (4,889            | )          |
| Reclassification                                                       |       | (23,753           | )          | 6,389             |       | (17,364           | )          |
| Currency adjustment                                                    |       | 395               |       | (1,184            | )          | (789              | )          |
| **December 31,  2006**                                            | ** ** | **€110,904** | ** ** | **€66,657**  | ** ** | **€177,561** | ** ** |
| **Amounts included in current  liabilities at December 31, 2006** | ** ** | ** **        | ** ** | **€132,591** | ** ** | **€132,591** | ** ** |

 

| ** **                                | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| **Deferred taxation arises as  follows:** |       |          |        |          |       |          |       |
| Accelerated  capital allowances           |       | 294,202       |        | 260,686       |       | 158,246       |       |
| Other timing  differences                 |       | (183,298      | )           | (64,495       | )          | 18,190        |       |
| ** **                                | ** ** | **€**    | **110,904** | ** **    | **€** | **196,191**   | ** ** | **€** | **176,436** | ** ** |
|                                           |            |               |             |               |            |               |            |  |  |  |

----

(1)          The 2006 deferred taxcharge to income of €19,422,000(2005: credit of €21,502,000; 2004: €3,984,000)excludes the deferred tax credit relating to pensions of €25,769,000(2005: €2,172,000;2004: €635,000).The 2006 deferred tax credit to income in Note 9 ‘Taxes on income’ includesthis amount.

At December 31, 2006, we had net operating losscarryforwards of €1,187 million, (2005: €1,057 million),the majority of which are available indefinitely. These loss carryforwards havea tax value of €357 million(2005: €294million). Valuation allowances of €173 million (2005: €167million) have been established for a portion of these deferred tax assets. Therealization of these deferred tax assets is 

F-42

----

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

**20 Provision for Liabilities and Charges—(continued)**

dependent on futuretaxable income. Based upon recent levels of taxable income, we expect that ourdeferred tax assets, net of valuation allowances, will be fully utilized.

Deferred tax assets have not been recognised on taxlosses of €173 million, on pension/employee benefits of €17million, on trade and other payables of €6 million and on debtorsof €1million. No deferred tax asset has been recognized in respect of these amountson the grounds that there is insufficient evidence that the assets will berecoverable. In the event that sufficient profits will be generated in therelevant jurisdictions in the future, these assets may be recovered.

Other provisions of €199million include amounts in respect of restructuring (€74million), environmental (€10 million), legal (€33million) and other (€82million).

*Restructuring*

These provisions relate tocommitments relating to restructuring programs throughout the Group. During2006, following the completion of the merger with Kappa Packaging in December 2005,the Group undertook a significant program of restructuring with the objectiveof fully integrating the combined operations of the Jefferson Smurfit Group andKappa Packaging in order to achieve planned synergy benefits. This program was substantiallycompleted in 2006. The Group expects that the majority of these provisions willbe utilized during 2007. In 2005, in response to weak market conditions, theGroup announced the closure or restructuring of a number of operations in ourEuropean packaging business. At January 1, 2006, the balance of therestructuring provisions amounted to €28 million. Theseprovisions were increased by €117 million in 2006due to the significant program of restructuring in the current year. AtDecember 31, 2006, the remaining balance of the restructuring provisionamounted to €74 million.

*Environmental*

Provisions forenvironmental costs mainly relate to the reinstatement of landfill sites andother remediation and improvement costs incurred in compliance with eitherlocal or national environmental regulations together with constructiveobligations stemming from established practice. The timing of settlement ofthese provisions is not certain particularly where provisions are based on pastpractice.

*Legal*

This represents provisionsfor certain legal claims brought against the Group by various parties in theordinary course of business. Provisions are expensed in the income statementwithin administrative expenses. The most significant provision amounts to €22.6million at December 31, 2006 and relates to the outstanding element of thesettlement of litigation in the Dominican Republic. This litigation arose fromthe acquisition in 1996 of a controlling interest in a local corrugator ownedby lndustria Cartonera Dominicana. This matter was settled on December 13,2006 and the outstanding amount is payable between January 2007 and January 2009.Other legal provisions are uncertain as to timing and amount as they are thesubject of ongoing cases.

*Other*

Other comprises a numberof provisions including; liabilities arising from onerous contracts, mainlyrelating to property leases amounting to €20.1million; deferred employee profit sharing provisions in 

F-43

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

**20Provision for Liabilities and Charges—(continued)**

certainof the countries in which we operate amounting to €14.3million; and numerous other items which are not individually significant andare not readily grouped together. The property leases generally have livesranging from five to ten years.

**21 ContingentLiabilities**

Kappa Packaging’ssubsidiary, Kappa Zulpich, is, since May 25, 2004, being investigated bythe German *Bundes Kartellamt*regardingalleged price co-ordination of recovered paper purchases by paper and boardproducers. The Group is co-operating fully with the *Bundes Kartellamt*in respect of itsinvestigation.

The Group’s UK operations were, since July 2004,being investigated by the Office of Fair Trading. The Directors understand thatthe investigation, which centred on the sheet-feeding business, was prompted byconsumer complaints, which were filed during the UK Competition Commission’sinvestigation of the March 2004 acquisition proposal by DS Smith forLinpac Limited, a competitor of the Group’s sheet-feeding business. Theinvestigation looked into the high levels of pricing transparency which existin the sector and which were a function of, inter alia, vertical integration,swaps and market concentration. This investigation was formally closed by wayof letter from the Office of Fair Trading dated September 21, 2006.

On January 16, 2007, representatives of the *Autoridade da Concorrencia*(PortugueseNational Competition Authority) visited the Group’s Portuguese corrugatedplant, located in Sao Paio de Oleiros, as part of what appears to be a localinvestigation affecting several Portuguese companies in the packaging sector.Smurfit Kappa Portugal has co-operated fully with the *Autoridade da Concorrencia*and as of thisdate has not received any news or further communication in relation to thismatter.

In October 2006, a notice of claim was receivedby a former subsidiary of Smurfit Kappa Group from a local CountyAdministrative Board in Sweden requiring it to investigate and remediate anadjacent lake. This lake was polluted by local industry over a very long periodof time. The subsidiary was in dialogue with the County Administrative Boardover the past 30 years as some of its operations require operating permitsunder the local environmental code. The investigation is at a very preliminarystage.

In November 2002, the Group was notified by theSpanish Environmental Enforcement Agency, Seprona, that it had become aware ofan accumulation of rain water mixed with manufacturing waste in the vicinity ofthe Group’s Sanguesa plant and that such concentration posed a potentialenvironmental hazard. The rain water was removed and new procedures were put inplace to prevent any recurrence. Three of the Group’s local managers have beenimputed by the court for an offence against natural resources and the environmentin respect of this matter. This case was adjourned for consideration on September 22,2006 and a decision is expected in due course.

The Group was involved in certain civil and criminalproceedings in Spain arising out of a past acquisition. In November 1988,a subsidiary of Smurfit acquired Industrial Cartonera S.A. (“ICSA”), a Spanishincorporated company, from a subsidiary of Torras. In early 1989, Smurfitacquired a 35% interest in another Spanish company, Industrias del Papel y dela Celulosa, S.A. (‘‘INPACSA’’), a former parent of ICSA. A number ofindividuals associated with Torras were charged by the public prosecutor inMadrid with diverting, for their own use, a substantial part of the purchaseconsideration paid by Smurfit for ICSA. The public prosecutor, on behalf of theminority shareholders of INPACSA, also claimed that certain 

F-44

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

**21Contingent Liabilities—(continued)**

transactions, includingthe transfer of ICSA by INPACSA which took place prior to the Group’sacquisition of ICSA, caused damage to the minority shareholders of INPACSA. In1998, the public prosecutor also charged Smurfit’s Chairman, Sir MichaelSmurfit, as the representative of Smurfit, in these proceedings with respect tothe alleged damage to the minority shareholders of INPACSA and Torras. ASmurfit subsidiary was also one of a number of parties against whom secondarycivil liability had been claimed. Preliminary proceedings commenced in March 2003and on April 11, 2003, the court dismissed the proceedings against SirMichael Smurfit, the Smurfit subsidiary and others. The final decision of thecourt was handed down in March 2004 and confirmed the earlier dismissalwith respect to Sir Michael Smurfit and the Smurfit subsidiary. The decision wasappealed to a higher court by two private complainants but not by the publicprosecutor. In July 2006, the Supreme Court confirmed the decision of thelower court.

No provisions have been recognized in relation to theabove matters, as the Directors believe that these liabilities are contingentliabilities on the basis that any possible obligations arising from past eventswill only be confirmed by the occurrence (or non-occurrence) of future eventsnot wholly within control of the Group.

A Group subsidiary was thesubject of litigation in the Dominican Republic in relation to the ownership ofits corrugated container plant. The lawsuits alleged damages in excess ofUS$300 million. This matter was settled on December 13, 2006. The Groupincurred settlement costs of €22.6 million. Thesettlement included the transfer of title to the Group of certain assets andincluded the payment of cash consideration in three tranches in January 2007,2008 and 2009. As a result, the Group has retained ownership of the plant andequipment and the goodwill of the business.

**22 LeaseObligations**

Obligations under financeleases:

| ** **                                       | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|--------------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                       | ** ** | **€000** | ** ** | **€000** | ** ** |
| Payable within  one year                         |       | 4,963         |       | 4,832         |       |
| Payable in one to  two years                     |       | 3,972         |       | 6,323         |       |
| Payable in two to  three years                   |       | 3,416         |       | 4,197         |       |
| Payable in three  to four years                  |       | 1,312         |       | 3,456         |       |
| Payable in four  to five years                   |       | 1,509         |       | 1,289         |       |
| Payable  thereafter                              |       | 3,993         |       | 5,947         |       |
| Total minimum lease payments                     |       | 19,165        |       | 26,044        |       |
| Less amount representing interest                |       | (1,009        | )          | (2,495        | )          |
| Present value of minimum lease payments          | ** ** | **€**    | **18,156** | ** **    | **€** | **23,549** | ** ** |
| Current  portion of capital lease obligations    |       | 4,578         |       | 4,132         |       |
| Non-current portion of capital lease obligations |       | 13,578        |       | 19,417        |       |
|                                             | ** ** | **€**    | **18,156** | ** **    | **€** | **23,549** | ** ** |

 

F-45

----

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

**22 LeaseObligations—(continued)**

Commitments underoperating leases, payable in the coming year, relate to leases expiring in thefollowing periods:

| ** **                          | ** ** | **Land and** Buildings | ** ** | **Other**     | ** ** | **Total**     | ** ** |
|-------------------------------------|------------|-----------------------------|------------|---------------|------------|---------------|------------|
| ** **                          | ** ** | **€000**               | ** ** | **€000** | ** ** | **€000** | ** ** |
| Within one year                     |       |                        | 1,414      |          |       | 10,609        |       | 12,023 |   |
| Within two to  five years inclusive |       |                        | 2,278      |          |       | 17,981        |       | 20,259 |   |
| Over five years                     |       |                        | 5,943      |          |       | 195           |       | 6,138 |   |
|                                | ** ** | ** **                  | **€** | **9,635**     |       | ** **    | **€** | **28,785** | ** ** | **€** | **38,420** | ** ** |
|                                     |            |                             |            |               |            |               |            |  |  |  |  |  |

 

The total commitmentsunder non-cancellable operating leases at December 31, 2006 are asfollows:

| ** **                      | ** ** | **2006**      | ** **  |
|---------------------------------|------------|---------------|-------------|
| ** **                      | ** ** | **€000** | ** **  |
| Payable within  one year        |       | 38,420        |        |
| Payable in one to  two years    |       | 29,674        |        |
| Payable in two to  three years  |       | 22,340        |        |
| Payable in three  to four years |       | 18,669        |        |
| Payable in four  to five years  |       | 15,961        |        |
| Payable  thereafter             |       | 40,189        |        |
|                            | ** ** | **€**    | **165,253** | ** ** |
|                                 |            |               |             |  |

 

**23 CapitalCommitments**

Thefollowing capital commitments authorized by the directors had not been providedfor in the Group financial statements:

| ** **          | ** ** | **2006**      | ** **  | **2005**      | ** ** |
|---------------------|------------|---------------|-------------|---------------|------------|
| ** **          | ** ** | **€000** | ** **  | **€000** | ** ** |
| Contracted for      |       | 148,239       |        | 124,280       |       |
| Not contracted  for |       | 95,849        |        | 143,035       |       |
|                | ** ** | **€**    | **244,088** | ** **    | **€** | **267,315** | ** ** |
|                     |            |               |             |               |            |  |  |

 

**24 EmployeePension Plans and Similar Obligations**

The Group operates a number ofpension plans and other long-term benefit plans throughout the world, devisedin accordance with local conditions and practice. The larger plans aregenerally of the defined benefit type and are funded by payments to separatelyadministered funds or insurance companies.

The principal plans are in theUnited Kingdom, the Netherlands, Ireland and Germany. The most recent formalvaluations of the significant funded defined benefit plans were carried out asfollows: United Kingdom on March 31, 2005; the Netherlands on December 31,2005; Ireland on January 1, 2004. In general, actuarial valuationsare not available for public inspection; however, the results of valuations areadvised to members of the various schemes.

The majority of the definedbenefit schemes are funded but in certain countries—Germany, Austria andFrance, in accordance with local practices, the scheme’s liabilities are bookreserved in the balance 

F-46

----

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

**24Employee Pension Plans and Similar Obligations—(continued)**

sheetof the Company and hence are unfunded. In these countries, a full actuarialvaluation of the unfunded liabilities is undertaken by independent actuaries onan annual basis.

The pension cost for the Group’smajor occupational pension plans has been determined using the projected unitcredit method. The current agreed rates of contribution for future yearsare comparable to current levels.

The main financialassumptions used to calculate scheme liabilities under FRS 17 are set outbelow:

***Major Assumptions***

| ** **                               | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin America** | ** **   |
|------------------------------------------|------------|-------------|------------|---------|------------|------------------------|--------------|
| ** **                               | ** ** | **%**       | ** ** | **%**   | ** ** | **%**                  | ** **   |
| **December 2006**                   |       |        |       |    |       |                   |         |   |   |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 3.50    |       |                   | 3.25 - 6.08  |   |   |
| Rate of increase  to pensions in payment |       | Nil - 3.00  |       | Nil     |       |                   | Nil          |   |   |
| Discount rate for  scheme liabilities    |       | 4.00 - 5.25 |       | 5.85    |       |                   | 5.85 - 11.17 |   |   |
| Inflation                                |       | 1.50 - 2.90 |       | 2.00    |       |                   | 2.50 - 3.50  |   |   |

 

| ** **                               | ** ** | **Europe**  | ** ** | **USA**     | ** ** | **Latin America** | ** **   |
|------------------------------------------|------------|-------------|------------|-------------|------------|------------------------|--------------|
| ** **                               | ** ** | **%**       | ** ** | **%**       | ** ** | **%**                  | ** **   |
| **December 2005**                   |       |        |       |        |       |                   |         |   |   |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 3.50 - 3.75 |       |                   | 3.25 - 6.08  |   |   |
| Rate of increase  to pensions in payment |       | Nil - 3.00  |       | Nil         |       |                   | Nil          |   |   |
| Discount rate for  scheme liabilities    |       | 4.25 - 5.00 |       | 5.50        |       |                   | 5.25 - 11.17 |   |   |
| Inflation                                |       | 1.25 - 2.75 |       | 1.75        |       |                   | 2.50 - 3.50  |   |   |

 

| ** **                               | ** ** | **Europe**  | ** ** | **USA**     | ** ** | **Latin America** | ** **   |
|------------------------------------------|------------|-------------|------------|-------------|------------|------------------------|--------------|
| ** **                               | ** ** | **%**       | ** ** | **%**       | ** ** | **%**                  | ** **   |
| **December 2004**                   |       |        |       |        |       |                   |         |   |   |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 3.75 - 4.00 |       |                   | 3.50 - 6.85  |   |   |
| Rate of increase  to pensions in payment |       | Nil - 4.00  |       | Nil         |       |                   | Nil          |   |   |
| Discount rate for  scheme liabilities    |       | 4.50 - 6.50 |       | 6.00 - 6.25 |       |                   | 5.25 - 12.00 |   |   |
| Inflation                                |       | 1.25 - 4.00 |       | 2.00        |       |                   | 2.75 - 3.50  |   |   |

 

The expected long termrates of return on the assets of the significant plans were as follows:

| ** **             | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin America** | ** **   |
|------------------------|------------|-------------|------------|---------|------------|------------------------|--------------|
| ** **             | ** ** | **%**       | ** ** | **%**   | ** ** | **%**                  | ** **   |
| **December 2006** |       |        |       |    |       |                   |         |   |   |
| Equities               |       | 7.25 - 8.00 |       | 8.50    |       |                   | 8.25 - 13.75 |   |   |
| Bonds                  |       | 3.25 - 5.50 |       | 4.50    |       |                   | 8.75         |   |   |
| Property               |       | 6.25 - 7.00 |       | n/a     |       |                   | n/a          |   |   |
| Other                  |       | 2.75 - 7.14 |       | 3.50    |       |                   | 7.00         |   |   |

 

F-47

----

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

**24Employee Pension Plans and Similar Obligations—(continued)**

| ** **             | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin America** | ** **   |
|------------------------|------------|-------------|------------|---------|------------|------------------------|--------------|
| ** **             | ** ** | **%**       | ** ** | **%**   | ** ** | **%**                  | ** **   |
| **December 2005** |       |        |       |    |       |                   |         |   |   |
| Equities               |       | 7.25 - 8.00 |       | 8.50    |       |                   | 8.25 - 14.25 |   |   |
| Bonds                  |       | 3.25 - 5.50 |       | 4.50    |       |                   | 4.25 - 9.00  |   |   |
| Property               |       | 6.50 - 7.00 |       | n/a     |       |                   | n/a          |   |   |
| Other                  |       | 2.50 - 7.14 |       | 3.50    |       |                   | 3.25 - 7.00  |   |   |

 

| ** **             | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin America** | ** **   |
|------------------------|------------|-------------|------------|---------|------------|------------------------|--------------|
| ** **             | ** ** | **%**       | ** ** | **%**   | ** ** | **%**                  | ** **   |
| **December 2004** |       |        |       |    |       |                   |         |   |   |
| Equities               |       | 7.50 - 8.00 |       | 8.50    |       |                   | 8.25 - 10.50 |   |   |
| Bonds                  |       | 3.75 - 7.00 |       | 4.50    |       |                   | 4.25 - 5.25  |   |   |
| Property               |       | 6.50 - 7.00 |       | n/a     |       |                   | n/a          |   |   |
| Other                  |       | 2.75 - 7.36 |       | 3.50    |       |                   | 3.25 - 3.50  |   |   |

 

The market values of theassets of the schemes were as follows:

| ** **                           | ** ** | **Europe**    | ** **   | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|--------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2006**               |       |          |         |          |       |                   |       |          |       |   |   |
| Equities                             |       | 657,046       |         | 13,167        |       |                   | 11,732     |          |       | 681,945 |   |
| Bonds                                |       | 531,906       |         | 11,084        |       |                   | 8,543      |          |       | 551,533 |   |
| Property                             |       | 99,422        |         | —        |       |                   | —     |          |       | 99,422 |   |
| Other                                |       | 85,010        |         | 467           |       |                   | 687        |          |       | 86,164 |   |
| Total market  value                  |       | 1,373,384     |         | 24,718        |       |                   | 20,962     |          |       | 1,419,064 |   |
| Present value of  scheme liabilities |       | (1,902,442    | )            | (41,227       | )          |                   | (45,020    | )             |       | (1,988,689 | ) |
| (Deficit) in the  plans              |       | (529,058      | )            | (16,509       | )          |                   | (24,058    | )             |       | (569,625 | ) |
| Deferred tax  asset                  |       | 75,582        |         | —        |       |                   | 280        |          |       | 75,862 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(453,476** | **)**         | **€** | **(16,509**            | **)**      | ** **    | **€** | **(23,778** | **)** | ** ** | **€** | **(493,763** | **)** |
|                                      |            |               |              |               |            |                        |            |               |            |  |  |  |  |  |  |

 

| ** **                           | ** ** | **Europe**    | ** **   | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|--------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2005**               |       |          |         |          |       |                   |       |          |       |   |   |
| Equities                             |       | 628,843       |         | 15,717        |       |                   | 10,018     |          |       | 654,578 |   |
| Bonds                                |       | 487,089       |         | 9,118         |       |                   | 9,822      |          |       | 506,029 |   |
| Property                             |       | 77,451        |         | —        |       |                   | —     |          |       | 77,451 |   |
| Other                                |       | 78,622        |         | 1,016         |       |                   | 531        |          |       | 80,169 |   |
| Total market  value                  |       | 1,272,005     |         | 25,851        |       |                   | 20,371     |          |       | 1,318,227 |   |
| Present value of  scheme liabilities |       | (1,929,671    | )            | (46,506       | )          |                   | (50,194    | )             |       | (2,026,371 | ) |
| (Deficit) in the  plans              |       | (657,666      | )            | (20,655       | )          |                   | (29,823    | )             |       | (708,144 | ) |
| Deferred tax  asset                  |       | 51,483        |         | —        |       |                   | 1,293      |          |       | 52,776 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(606,183** | **)**         | **€** | **(20,655**            | **)**      | ** **    | **€** | **(28,530** | **)** | ** ** | **€** | **(655,368** | **)** |
|                                      |            |               |              |               |            |                        |            |               |            |  |  |  |  |  |  |

 

F-48

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

**24Employee Pension Plans and Similar Obligations—(continued)**

| ** **                           | ** ** | **Europe**    | ** **   | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|--------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2004**               |       |          |         |          |       |                   |       |          |       |   |   |
| Equities                             |       | 299,530       |         | 16,391        |       |                   | 8,006      |          |       | 323,927 |   |
| Bonds                                |       | 237,519       |         | 8,890         |       |                   | 5,999      |          |       | 252,408 |   |
| Property                             |       | 40,117        |         | —        |       |                   | —     |          |       | 40,117 |   |
| Other                                |       | 36,536        |         | 737           |       |                   | 1,380      |          |       | 38,653 |   |
| Total market  value                  |       | 613,702       |         | 26,018        |       |                   | 15,385     |          |       | 655,105 |   |
| Present value of  scheme liabilities |       | (1,027,593    | )            | (42,844       | )          |                   | (40,224    | )             |       | (1,110,661 | ) |
| (Deficit) in the  plans              |       | (413,891      | )            | (16,826       | )          |                   | (24,839    | )             |       | (455,556 | ) |
| Deferred tax  asset                  |       | 42,835        |         | —        |       |                   | 1,484      |          |       | 44,319 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(371,056** | **)**         | **€** | **(16,826**            | **)**      | ** **    | **€** | **(23,355** | **)** | ** ** | **€** | **(411,237** | **)** |
|                                      |            |               |              |               |            |                        |            |               |            |  |  |  |  |  |  |

 

Thefollowing tables set out the components of the defined benefit cost:

***Analysis ofthe amount charged to operating income***

| ** **                            | ** ** | **€000** | ** ** |
|---------------------------------------|------------|---------------|------------|
| **Year ended December 31, 2006** |       |          |       |
| Current service cost                  |       | 50,901        |       |
| Past service cost                     |       | 3,823         |       |
| Gain on  settlements and curtailments |       | (4,189        | )          |
| **Total  operating charge**           | ** ** | **€**    | **50,535** | ** ** |
|                                       |            |               |            |  |

 

| ** **                            | ** ** | **€000** | ** ** |
|---------------------------------------|------------|---------------|------------|
| **Year ended December 31, 2005** |       |          |       |
| Current service cost                  |       | 36,697        |       |
| Past service cost                     |       | 1,527         |       |
| Gain on  settlements and curtailments |       | (6,129        | )          |
| **Total  operating charge**           | ** ** | **€**    | **32,095** | ** ** |
|                                       |            |               |            |  |

 

| ** **                             | ** ** | **€000** | ** ** |
|----------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2004** |       |          |       |
| Current service cost                   |       | 37,163        |       |
| Past service benefit                   |       | (1,793        | )          |
| Gain on  settlements and curtailments  |       | (542          | )          |
| **Total  operating charge**            | ** ** | **€**    | **34,828** | ** ** |
|                                        |            |               |            |  |

 

***Analysis of the amount charged toother financial expense***

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year ended December 31,  2006**      |       |          |       |
| Expected return on pension scheme assets    |       | (80,684       | )          |
| Interest cost on pension scheme liabilities |       | 89,748        |       |
| **Net  charge**                             | ** ** | **€**    | **9,064**  | ** ** |
|                                             |            |               |            |  |

** **

F-49

----

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

**24Employee Pension Plans and Similar Obligations—(continued)**

 

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2005**      |       |          |       |
| Expected return on pension scheme assets    |       | (43,974       | )          |
| Interest cost on pension scheme liabilities |       | 57,233        |       |
| **Net  charge**                             | ** ** | **€**    | **13,259** | ** ** |
|                                             |            |               |            |  |

 

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year ended December 31,  2004**      |       |          |       |
| Expected return on pension scheme assets    |       | (40,137       | )          |
| Interest cost on pension scheme liabilities |       | 55,855        |       |
| **Net  charge**                             | ** ** | **€**    | **15,718** | ** ** |
|                                             |            |               |            |  |

 

***Analysis of the amount recognized inthe statement of recognized gains and losses***

| ** **                                                                     | ** ** | **€000** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------|------------|
| **Year ended December 31,  2006**                                         |       |          |       |
| Actual return less expected return on pension scheme assets                    |       | 26,412        |       |
| Net experience (losses) on scheme liabilities                                  |       | (14,505       | )          |
| Changes in financial assumptions underlying the scheme liabilities             |       | 68,976        |       |
| **Actuarial  gain recognized in the statement of recognized gains and losses** | ** ** | **€**    | **80,883** | ** ** |
|                                                                                |            |               |            |  |

 

| ** **                                                                     | ** ** | **€000** | ** **  |
|--------------------------------------------------------------------------------|------------|---------------|-------------|
| **Year ended December 31,  2005**                                         |       |          |        |
| Actual return less expected return on pension scheme assets                    |       | 78,779        |        |
| Net experience gains on scheme liabilities                                     |       | 4,440         |        |
| Changes in financial assumptions underlying the scheme liabilities             |       | (98,104       | )           |
| **Actuarial  loss recognized in the statement of recognized gains and losses** | ** ** | **€**    | **(14,885** | **)** |
|                                                                                |            |               |             |  |

 

| ** **                                                                     | ** ** | **€000** | ** **  |
|--------------------------------------------------------------------------------|------------|---------------|-------------|
| **Year ended December 31,  2004**                                         |       |          |        |
| Actual return less expected return on pension scheme assets                    |       | 9,573         |        |
| Net experience (losses) on scheme liabilities                                  |       | (5,901        | )           |
| Changes in financial assumptions underlying the scheme liabilities             |       | (13,963       | )           |
| **Actuarial  loss recognized in the statement of recognized gains and losses** | ** ** | **€**    | **(10,291** | **)** |
|                                                                                |            |               |             |  |

 

The analysis of the amount recognized in the statementof recognized gains and losses above excludes deferred tax.

F-50

----

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

**24 Employee Pension Plansand Similar Obligations—(continued)**

**Movement in pension liability**

| ** **                                         | ** ** | **€000** | ** **  |
|----------------------------------------------------|------------|---------------|-------------|
| Deficit in scheme at  December 31, 2003       |       | 446,540       |        |
| Current service cost                               |       | 37,163        |        |
| Past service benefit                               |       | (1,793        | )           |
| Recognition of gain on settlement and curtailments |       | (542          | )           |
| Contributions                                      |       | (51,921       | )           |
| Other finance expense                              |       | 15,718        |        |
| Actuarial loss                                     |       | 10,291        |        |
| Reclassification                                   |       | 2,291         |        |
| Disposals                                          |       | (101          | )           |
| Currency adjustment                                |       | (2,090        | )           |
| **Deficit in scheme at  December 31, 2004**   |       | **455,556**   |        |
| Current service cost                               |       | 36,697        |        |
| Past service cost                                  |       | 1,527         |        |
| Recognition of gain on settlement and curtailments |       | (6,129        | )           |
| Contributions                                      |       | (51,309       | )           |
| Other finance expense                              |       | 13,259        |        |
| Actuarial loss                                     |       | 14,885        |        |
| Acquisitions                                       |       | 256,680       |        |
| Disposals                                          |       | (22,040       | )           |
| Currency adjustment                                |       | 9,018         |        |
| **Deficit in scheme at December 31, 2005**    |       | **708,144**   |        |
| Current service cost                               |       | 50,901        |        |
| Past service cost                                  |       | 3,823         |        |
| Recognition of gain on settlement and curtailments |       | (4,189        | )           |
| Contributions                                      |       | (88,853       | )           |
| Other finance expense                              |       | 9,064         |        |
| Actuarial gain                                     |       | (80,883       | )           |
| Disposals                                          |       | (3,946        | )           |
| Fair value adjustment                              |       | (23,451       | )           |
| Currency adjustment                                |       | (985          | )           |
| **Deficit  in scheme at December 31, 2006**   |       | **€**    | **569,625** |   |
|                                                    |            |               |             |  |

** **

F-51

----

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

**24Employee Pension Plans and Similar Obligations—(continued)**

**History of amountsrecognized in the statement of recognized gains and losses**

*Difference between actual and expected return onpension scheme assets*

| **Year ended December 31,  2006**                                 |       |       |       |
|------------------------------------------------------------------------|------------|------------|------------|
| Amount                                                                 |       | 26,412,000 |       |
| Percentage of scheme assets                                            |       | 2          | %          |
| **Year  ended December 31, 2005**                                 |       |       |       |
| Amount                                                                 |       | 78,779,000 |       |
| Percentage of scheme assets                                            |       | 6          | %          |
| **Year  ended December 31, 2004**                                 |       |       |       |
| Amount                                                                 |       | 9,573,000  |       |
| Percentage of scheme assets                                            |       | 1          | %          |
| **Year  ended December 31, 2003**                                 | ** ** | ** ** | ** ** |
| Amount                                                                 |       | 20,475,000 |       |
| Percentage of scheme assets                                            |       | 3          | %          |
| **Period  from September 3, 2002 through December 31, 2002** |       |       |       |
| Amount                                                                 |       | 7,218,000  |       |
| Percentage of scheme assets                                            |       | 1          | %          |

 

*Experience gains and losses on scheme liabilities*

| **Year ended December 31,  2006**                                 |   |        |   |
|------------------------------------------------------------------------|--------|-------------|--------|
| Amount                                                                 |   | (14,505,000 | )      |
| Percentage of the present value of scheme liabilities                  |   | 1           | %      |
| **Year  ended December 31, 2005**                                 |   |        |   |
| Amount                                                                 |   | 4,440,000   |   |
| Percentage of the present value of scheme liabilities                  |   | 0           | %      |
| **Year  ended December 31, 2004**                                 |   |        |   |
| Amount                                                                 |   | (5,901,000  | )      |
| Percentage of the present value of scheme liabilities                  |   | 1           | %      |
| **Year  ended December 31, 2003**                                 |   |        |   |
| Amount                                                                 |   | 8,901,000   |   |
| Percentage of the present value of scheme liabilities                  |   | 1           | %      |
| **Period  from September 3, 2002 through December 31, 2002** |   |        |   |
| Amount                                                                 |   | 27,515,000  |   |
| Percentage  of the present value of scheme liabilities                 |   | 3           | %      |

** **

F-52

----

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

**24Employee Pension Plans and Similar Obligations—(continued)**

*Total actuarialgains and losses recognized in the statement of recognized gains and losses*

| **Year  ended December 31, 2006**                                 |   |        |   |
|------------------------------------------------------------------------|--------|-------------|--------|
| Amount                                                                 |   | 80,883,000  |   |
| Percentage of the present value of scheme liabilities                  |   | 4           | %      |
| **Year ended December 31, 2005**                                  |   |        |   |
| Amount                                                                 |   | (14,885,000 | )      |
| Percentage of the present value of scheme liabilities                  |   | 1           | %      |
| **Year ended December 31, 2004**                                  |   |        |   |
| Amount                                                                 |   | (10,291,000 | )      |
| Percentage of the present value of scheme liabilities                  |   | 1           | %      |
| **Year ended December 31, 2003**                                  |   |        |   |
| Amount                                                                 |   | 27,800,000  |   |
| Percentage of the present value of scheme liabilities                  |   | 3           | %      |
| **Period  from September 3, 2002 through December 31, 2002** |   |        |   |
| Amount                                                                 |   | 12,507,000  |   |
| Percentage  of the present value of scheme liabilities                 |   | 1           | %      |

 

Some of the schemes are closed schemes and thereforeunder the projected unit method the current service cost would be expected toincrease as the members of the scheme approach retirement and reduce as membersretire or leave service.

In certain countries, in accordance with localpractice, plans are financed internally and the provisions relating to suchcases are included in pension liabilities. At December 31, 2006 theseamount to €438,448,000 (2005: €431,862,000;2004: €277,274,000).

The defined contributionpension scheme expense for the year ended December 31, 2006 was €30,346,000(2005: €20,850,000;2004: €21,077,000).

**25 Related PartyTransactions**

**Transactions withassociates**

We conduct certain transactions with associates in thenormal course of business.

Thetransactions with associates for each period are summarized as follows:

| ** **             | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **             | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Sale of goods          |       | 24,113        |       | 31,277        |       | 28,725        |       |
| Purchase of goods      |       | 13,083        |       | 13,813        |       | 9,930         |       |
| Receiving of  services |       | 6,208         |       | 633           |       | 922           |       |
| Rendering of services  |       | 1,231         |       | 1,544         |       | 776           |       |

 

F-53

----

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

**25Related Party Transactions—(continued)**

These transactions are undertaken and settled in amanner which amounts to an arms length basis. No guarantees are given orreceived by either party. The Group settled a participatory interest in itsDuropack associate during 2006. The par value of this participatory interest,which was included in financial assets, amounted to €2.9million and entitled the Group to a 4.8% share in Duropack’s pre-tax income andwas due to mature in 2010. The Group settled this participation right in 2006for approximately €6.0million, resulting in a gain of approximately €3.0 million recognized ininterest income.

The receivables from related parties arise mainly fromsale transactions and are due two months after the date of sale. Thereceivables are unsecured in nature and bear no interest.

The payables to related parties arise mainly from purchasetransactions and are due two months after the date of purchase. The payablesbear no interest.

No provision has beenrequired in 2006, 2005 and 2004 for the loans made to related parties.

**Transactions withrelated parties**

Inconnection with the take private transaction in 2002, certain non-operatingassets and non-core operating assets of SKG were transferred to the newcos, inexchange for intercompany notes.

| ** **                                | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Transfer of cash  from business disposals |       |          | —     |          |       | 9,899         |       | 11,934 |   |
|                                           |            |               |            |               |            |               |            |  |  |

 

On June 16, 2005, assets comprising The K Club,additional land near The K Club and the site of the former Clonskeagh papermill were disposed for an amount of €115 million to a group ofinvestors which included Sir Michael Smurfit, our Chairman at December 31,2006.

In 2006, the Grouppurchased, in the normal course of business, approximately 47,000 metric tonnes(2005: 28,000) of paper amounting to approximately €20million (2005: €11million) from Savon Sellu, a company controlled by Dr. Dermot Smurfittogether with his brothers Sir Michael Smurfit, our Chairman atDecember 31, 2006, and Dr. Alan Smurfit. At December 31, 2006,an amount of €5.5million (2005: €3.2 million)was owed by SKG to Savon Sellu. Sir Michael Smurfit retired as chairman onMarch 20, 2007.

**26 Share Capital and Other Reserves**

| ** **                                   | ** ** | ** **         | ** ** | ** ** | ** ** | **Other Reserves** | ** ** |
|----------------------------------------------|------------|--------------------|------------|------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **Share  Capital** | ** ** | ** ** | ** ** | **Capital  Reserve**    | ** ** | **Currency  Translation  Adjustments** | ** ** | **Share based  compensation   Reserve** | ** ** | **Total Other  Reserves** | ** ** |
| ** **                                   | ** ** | **€000**      | ** ** | ** ** | ** ** | **€000**           | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31,  2005 as originally stated |       |               | 40         |       |       |                    |       | 1,603,307 |   |   | 87,177 |   |   |   | — |   |   | 1,690,484 |   |
| Prior year  adjustment                       | ** ** | ** **         | **—** |       |       | ** **              | ** ** | — |   |   | — |   |   |   | 20,338 |   |   | 20,338 |   |
| **December 31,  2005 as restated**      |       |               | 40         |       |       |                    |       | 1,603,307 |   |   | 87,177 |   |   |   | 20,338 |   |   | 1,710,822 |   |
| Total recognized  income and expenses        | ** ** | ** **         | **—** |       |       | ** **              | ** ** | — |   |   | 24,385 |   |   |   | — |   |   | 24,385 |   |
| Share-based  payments                        | ** ** | ** **         | **—** |       |       | ** **              | ** ** | — |   |   | — |   |   |   | 8,084 |   |   | 8,084 |   |
| **December 31, 2006**                   | ** ** | ** **         | **€** | **40**     |       | ** **              | ** ** | ** ** | **€** | **1,603,307** |   |   | **€** | **111,562** | ** ** | ** ** | ** ** | **€** | **28,422** |   | ** ** | **€** | **1,743,291** | ** ** |
|                                              |            |                    |            |            |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-54

----

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

**26 Share Capital and OtherReserves—(continued)**

*Share capital*

SK Funding has anauthorized share capital of 100,000 shares of €1each, of which 40,000 were issued.

*Capital reserve*

This reserve includes acapital contribution of €864,354,000 which iscomprised of an investment of €731,960,000 by MadisonDearborn Partners LLC and its affiliates, certain other co-investors andcertain members of management by way of capital contributions and a capitalcontribution by Smurfit Kappa Corporation Limited (“ SKCL”), (formerly known asJefferson Smurfit Group Limited) of €125,000,000. SKCL obtainedthe funds for this contribution by way of a loan from the newcos which theyborrowed under a bank credit facility. The newcos borrowing was non recourse toSK Funding and was fully paid in December 2003; the remaining €7,394,000represents the value ascribed to the warrants to purchase shares in SKCL issuedas part of the PIK units (see Note 19). In addition there were investments in2005 by SKGL of €738,953,000by way of capital contribution.

*Foreign currencytranslation reserve*

The foreign currencytranslation reserve comprises all foreign currency translation adjustmentsarising from the translation of the Group’s net investment in foreign operationsincluding the translation of the income of such operations from the averageexchange rate for the year to the exchange rate at the balance sheet date, aswell as from the translation of liabilities that hedge those net assets.

*Reserve for share-basedcompensation*

This reserve comprisesamounts expensed in the income statement in connection with awards made underthe Management Equity Plan less any exercises or lapses of such awards.

**27Share-based payments**

| ** **                                               | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|----------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                               | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Charge arising  from fair value calculated at grant date |       | 4,676         |       | 6,542         |       | 7,184         |       |
| Reversal of  charge arising from forfeitures             |       | —        |       | (1,471        | )          | —        |       |
| Incremental  charge arising from modifications           |       | 3,408         |       | —        |       | —        |       |
|                                                     | ** ** | **€**    | **8,084**  | ** **    | **€** | **5,071**     | ** ** | **€** | **7,184** | ** ** |
|                                                          |            |               |            |               |            |               |            |  |  |  |

 

*2002 Plan*

In September 2002, the Group adopted the 2002Management Equity Plan (the ‘‘2002 Plan’’). The 2002 Plan is a share-basedpayment agreement that provides for the issuance of class A, class B and classC convertible shares. On November 15, 2002, awards comprising class A,class B and class C convertible shares, proportioned as 40%, 40% and 20%,respectively were made pursuant to the 2002 Plan which were subject to vestingover a three year period ending on December 31, 2007. Vesting for allthree classes of convertible shares is conditional on the participant remainingemployed by the Group. Class B and class C 

F-55

----

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

**27Share-based payments—(continued)**

convertible shares arealso subject to certain additional performance and market conditions. A sale orlisting (IPO) of the ultimate parent SKGL accelerates vesting of all of theclass A convertible shares and subject to the achievement of the marketconditions, could also accelerate vesting of the class B and C convertibleshares. Upon vesting, each class of convertible shares would automaticallyconvert into class D convertible shares. Subject to certain criteria, theseclass D convertible shares could be converted into class A ordinary sharesupon payment of a conversion price, being the fair market value of SKCLordinary shares at the date of the original grant. The Group has no legal orconstructive obligation to repurchase or settle the shares in cash. Managementhave determined that the plans constitute equity settled share-based payments.

When a Participantterminates employment for any reason, the Group reserves the right to redeem orpurchase any unvested convertible shares at their nominal amount resulting inthe forfeiture of the award. Such forfeitures are then reallocated to otherParticipants in the scheme with the same terms and conditions as the originalgrant. Such reallocations are treated as new grants of shares.

*2004 Plan*

In 2004, the 2002 Plan wasamended (the ‘‘2004 Plan’’) and restated to provide a clause that createdvariability in the exercise price for the equity awards based upon interestaccrued on the 2015 senior PIK notes of Smurfit Kappa Holdings plc (“SKHoldings”). In addition, the awards were exchanged for an identical number ofshares in SKGL as part of the exchange transaction. These changes to the 2002Plan took effect in February 2005 following the capital reduction effectedby the drawdown of the 2015 senior PIK notes. All other significant terms andconditions of the 2002 Plan remained unchanged with the amendment. The amendmentis regarded as a modification to the original awards as defined by FRS 20. However,on the basis that the modification did not give rise to an incremental increasein the fair value of the original awards, no additional expense is recognizedin this respect.

*2005 Plan*

In December 2005, the 2004 Plan was amended (the ‘‘2005Plan’’). The amendment gave existing holders of class A, class B and class Cconvertible shares the opportunity to exchange their awards for an equal numberof class E, class F and class G convertible shares having similar terms andconditions. Participants had to exchange their entire award, not just aparticular class of convertible shares. The principal changes to the vestingconditions were that the vesting period was extended to the three years ending December 31,2010 and the performance and market conditions for the class F and class Gconvertible shares were modified compared to those for the class B and class Cconvertible shares, which they replaced. The opportunity to exchange theconvertible shares under the 2005 Plan occurred in January 2006. Thisexchange is regarded as a modification to the original awards and theincremental increase in the fair value of the awards, measured by comparing thefair value of the awards immediately before and after the modification, ischarged to the Consolidated Statements of Operations over the remaining revisedvesting period.

F-56

----

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

**27 Share-based payments—(continued)**

Additionally, in the 2005Plan, the Group introduced class H convertible shares, which automaticallyconvert into class I convertible shares upon vesting which then can beconverted into B ordinary shares of SKGL. The vesting provisions for class Hconvertible shares are similar to class F convertible shares except that once convertedinto class I convertible shares, the exercise price is fixed at €5.6924.The 2005 Plan provides for the issuance of up to a maximum of 8,606,334 Aordinary shares and 2,104,980 B ordinary shares of SKGL. All other significantterms and conditions of the 2004 Plan remained unchanged with the amendment.

| ** **                     | ** ** | **Average exercise   price per share**€ per share | ** ** | **Number of   convertible shares** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| At  January 1, 2005       |       |                                                                                 | 9.99       |                                              |       |   | 8,281,737 |   |   |
| Forfeited in the  year         |       |                                                                                 | 5.12       |                                              |       |   | (798,424 | ) |   |
| Granted in the  year           |       |                                                                                 | 5.69       |                                              |       |   | 2,062,878 |   |   |
| **At  December 31, 2005** | ** ** | ** **                                                                           | **5.25**   |                                              | ** ** | ** ** | **9,546,191** |   |   |
| Forfeited in the  year         |       |                                                                                 | 4.56       |                                              |       |   | (364,900 | ) |   |
| Granted in the  year           |       |                                                                                 | 4.56       |                                              |       |   | 953,124 |   |   |
| **At December 31, 2006**  | ** ** | ** **                                                                           | **4.79**   |                                              | ** ** | ** ** | **10,134,415** |   |   |

 

At December 31, 2006, 282,465 convertible shareshad vested and were convertible to ordinary shares (2005: 170,362). Theexercise price of the class A, B and C shares awarded under the 2002 Plan wasfixed at €9.99. The 2004 Plan introduced variability tothe exercise prices of the class A, B and C shares depending upon the date ofvesting and certain other conditions. The variable exercise price is calculatedby a formula based upon the accrued interest on the PIK notes. The exerciseprice of the E, F and G shares introduced under the 2005 Plan is based on thesame formula laid out in the 2004 Plan while the exercise price for the Hconvertible shares is fixed at €5.6924. The Planterminates on December 1, 2012 at which date all awards not previouslyconverted will lapse.

A binomial lattice approach was used to calculate thevalue of convertible shares at each grant date and any subsequent modificationdates. In the absence of observable market prices, the fair value of theconvertible shares at the valuation dates was determined based upon acalculated Business Enterprise Value using valuation reports or otherinformation from transactions at or on those dates. Based upon this BusinessEnterprise Value the weighted average fair value of an ordinary share at thedate of grant or modification in 2006 was €9.85(2005: €9.85).The expected volatility rates applied were based upon the weighted averagehistorical volatility of comparable companies over an equivalent period to theperiod from valuation dates to expected exit dates. The risk-free interestrates used were based upon euro-denominated government bonds with similarlives. No dividend yield was included in the model as SKG had no history orexpectation of regular dividend payments at the valuation dates. Amarketability discount has been incorporated into the binomial lattice modelbased upon the Finnerty model to adjust the calculated fair value for the lackof an active market in the shares.

F-57

----

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

**27Share-based payments—(continued)**

The following is a summaryof the key assumptions used in calculating the fair value of awards under theplan:

| ** **                       | ** ** | **Expected   Volatility** | ** ** | **Expected Vesting  Dates** | ** ** | **Vesting Periods  (months)** | ** **               | **Risk-free   rate** | ** ** | **Fair Value** | ** ** |
|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|------------------------------------|--------------------------|---------------------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **                     | ** ** | ** **                       | ** ** | ** **                         | ** **               | ** **                | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **€** | ** ** | ** ** |
| *Granted November 15, 2002* | ** ** |                           | ** ** | ** **                       |       |                               | ** **               | ** **                |       |                | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| A Convertible                    |       |                           | 24.58      | %                                |       |                               | Dec-31-05   to Dec-31-07 | ** **                |       |                | 38 to 62   | ** ** |   |   | 4.46 | % |   |   | 4.17 | ** ** |   |
| B Convertible                    |       |                           | 24.58      | %                                |       |                               | Dec-31-05   to Dec-31-07 | ** **                |       |                | 38 to 62   | ** ** |   |   | 4.46 | % |   |   | 3.27 | ** ** |   |
| C Convertible                    |       |                           | 24.58      | %                                |       |                               | Dec-31-05   to Dec-31-07 | ** **                |       |                | 38 to 62   | ** ** |   |   | 4.46 | % |   |   | 2.29 | ** ** |   |
| *Granted December 1, 2005*  |       |                           |       |                             |       |                               |                     | ** **                |       |                |       | ** ** |   |   |   |   |   |   |   | ** ** |   |
| H Convertible                    |       |                           | 14.46      | %                                |       |                               | Dec-31-08                | ** **                |       |                | 37         | ** ** |   |   | 2.99 | % |   |   | 1.20 | ** ** |   |
| *Granted December 21, 2006* |       |                           |       |                             |       |                               |                     | ** **                |       |                |       | ** ** |   |   |   |   |   |   |   | ** ** |   |
| E Convertible                    |       |                           | 16.07      | %                                |       |                               | Jun-30-07                | ** **                |       |                | 6          | ** ** |   |   | 3.67 | % |   |   | 4.95 | ** ** |   |
| F Convertible                    |       |                           | 16.07      | %                                |       |                               | Jun-30-07                | ** **                |       |                | 6          | ** ** |   |   | 3.67 | % |   |   | 0.06 | ** ** |   |
| G Convertible                    |       |                           | 16.07      | %                                |       |                               | Jun-30-07                | ** **                |       |                | 6          | ** ** |   |   | 3.67 | % |   |   | 0.00 | ** ** |   |

 

Thefollowing is a summary of the key assumptions used in calculating theadditional incremental fair value of awards on modification:

| ** **                                  | ** ** | **Expected   Volatility** | ** ** | **Revised Expected  Vesting Dates** | ** ** | **Remaining   Vesting   Periods (months)** | ** ** | **Risk-free   rate** | ** ** | **Incremental   Fair Value** | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | ** **                     | ** ** | ** **                                    | ** ** | ** **                                                | ** ** | ** **                | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **€** | ** ** | ** ** |
| *Modification as at  January 19, 2006* |       |                           |       |                                          |       |                                                      |       |                      |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| A convertible converted to E  Convertible   |       |                           | 16.12      | %                                             |       |                                                      | Dec-31-08  |                      |       |                                   | 36         |   |   |   | 3.06 | % |   |   | 3.31 |   |   |
| B convertible converted to F   Convertible  |       |                           | 16.12      | %                                             |       |                                                      | Dec-31-08  |                      |       |                                   | 36         |   |   |   | 3.06 | % |   |   | 0.91 |   |   |
| C convertible  converted to G   Convertible |       |                           | 16.12      | %                                             |       |                                                      | Dec-31-08  |                      |       |                                   | 36         |   |   |   | 3.06 | % |   |   | 0.23 |   |   |

 

F-58

----

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

**28Net Cash Flow from Operating Activities**

| ** **                                                      | ** ** | ** **    | ** **  | **Restated**  | ** ** | **Restated**  | ** ** |
|-----------------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                                      | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
| ** **                                                      | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Operating income                                                |       | 145,050       |        | 161,957       |       | 274,605       |       |
| Reorganization and restructuring costs                          |       | 82,747        |        | 8,421         |       | 23,231        |       |
| Impairment of financial assets                                  |       | 52,821        |        | —        |       | —        |       |
| Depreciation and depletion (net of government grants amortized) |       | 392,893       |        | 282,378       |       | 259,831       |       |
| Share-based payments                                            |       | 8,084         |        | 5,071         |       | 7,184         |       |
| Amortization of intangible assets                               |       | 65,533        |        | 29,203        |       | 37,925        |       |
| Finance lease interest paid                                     |       | 1,348         |        | 1,138         |       | 1,962         |       |
| (Increase) in other payables and provisions                     |       | (28,697       | )           | (14,291       | )          | (12,891       | )          |
| (Increase)/decrease in working capital                          |       | (61,766       | )           | 40,252        |       | 47,419        |       |
| Currency adjustment                                             |       | (301          | )           | (1,260        | )          | 1,663         |       |
|                                                            | ** ** | **€**    | **657,712** | ** **    | **€** | **512,869**   | ** ** | **€** | **640,929** | ** ** |
|                                                                 |            |               |             |               |            |               |            |  |  |  |

 

**29 Movement in Working Capital**

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** ** |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31, 2005             |       |            | 663,131    |            |       | 1,314,728     |       | (1,475,871    | )          | 501,988 |   |
| Disposed                           |       |            | (13,582    | )               |       | (22,373       | )          | 19,781        |       | (16,174 | ) |
| Reclassification                   |       |            | (17,313    | )               |       | (2,313        | )          | (73,864       | )          | (93,490 | ) |
| Deferred acquisition consideration |       |            | —     |            |       | —        |       | 33,574        |       | 33,574 |   |
| Increase in working capital        |       |            | 2,123      |            |       | 63,250        |       | (3,607        | )          | 61,766 |   |
| Currency adjustment                |       |            | (7,987     | )               |       | (8,672        | )          | 3,058         |       | (13,601 | ) |
| **December 31,  2006**        | ** ** | ** **      | **€** | **626,372**     |       | ** **    | **€** | **1,344,620** |       | **€** | **(1,496,929** | **)** | **€** | **474,063** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |            |  |  |  |  |  |  |

 

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** ** |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31, 2004             |       |            | 452,166    |            |       | 925,048       |       | (1,017,060    | )          | 360,154 |   |
| Acquisitions                       |       |            | 275,804    |            |       | 572,415       |       | (535,081      | )          | 313,138 |   |
| Disposed                           |       |            | (68,698    | )               |       | (62,196       | )          | 69,217        |       | (61,677 | ) |
| Reclassification                   |       |            | (5,282     | )               |       | 16,328        |       | (16,486       | )          | (5,440 | ) |
| Assets held for sale               |       |            | —     |            |       | (79,810       | )          | 25,406        |       | (54,404 | ) |
| Deferred acquisition consideration |       |            | —     |            |       | —        |       | (31,384       | )          | (31,384 | ) |
| Decrease in working capital        |       |            | (7,051     | )               |       | (76,262       | )          | 43,061        |       | (40,252 | ) |
| Currency adjustment                |       |            | 16,192     |            |       | 19,205        |       | (13,544       | )          | 21,853 |   |
| **December 31,  2005**        | ** ** | ** **      | **€** | **663,131**     |       | ** **    | **€** | **1,314,728** | ** ** | **€** | **(1,475,871** | **)** | **€** | **501,988** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |            |  |  |  |  |  |  |

** **

F-59

----

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

**29 Movement in Working Capital—(continued)**

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** **  |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|-------------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** **  |
| December 31, 2003             |       |            | 477,432    |            |       |          | 911,443    |          |        | (967,141 | ) | 421,734 |   |
| Reclassification                   |       |            | 4,151      |            |       |          | (15,903    | )             |        | 3,202 |   | (8,550 | ) |
| Deferred acquisition consideration |       |            | —     |            |       |          | —     |          |        | 854 |   | 854 |   |
| Decrease in working capital        |       |            | (22,434    | )               |       |          | 38,291     |          |        | (63,276 | ) | (47,419 | ) |
| Currency adjustment                |       |            | (6,983     | )               |       |          | (8,783     | )             |        | 9,301 |   | (6,465 | ) |
| **December 31,  2004**        | ** ** | ** **      | **€** | **452,166**     |       | ** **    | ** ** | **€**    | **925,048** |   | ** ** | **€** | **(1,017,060** | **)** | **€** | **360,154** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |             |  |  |  |  |  |  |  |  |

 

*                  Amountsfalling due within one year not including borrowing due within one year,corporation tax, proposed dividends, capitalized lease obligations and amountsdue to affiliates.

**30 Retirement of Fixed Assets**

| ** **                    | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                    | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Property, plant and equipment |       | 25,224        |       | 17,756        |       | 33,860        |       |
| Investments                   |       | 2,141         |       | 442           |       | 2,528         |       |
|                          | ** ** | **€**    | **27,365** | ** **    | **€** | **18,198**    | ** ** | **€** | **36,388** | ** ** |
|                               |            |               |            |               |            |               |            |  |  |  |

 

**31Reconciliation of Net Cash Flow to Movement in Net Debt**

| ** **                                   | ** ** | **2006**      | ** **     | **2005**      | ** ** | **2004**       | ** ** |
|----------------------------------------------|------------|---------------|----------------|---------------|------------|----------------|------------|
| ** **                                   | ** ** | **€000** | ** **     | **€000** | ** ** | **€000**  | ** ** |
| Increase/(decrease) in cash                  |       | 28,800        |           | (27,045       | )          | 50,285         |       |
| Decrease/(increase) term debt                |       | 600,442       |           | (475,449      | )          | 111,101        |       |
| (Decrease)/increase in liquid resources      |       | (671,881      | )              | 789,791       |       | 16,989         |       |
| Capital elements of finance leases repaid    |       | 7,647         |           | 4,812         |       | 13,576         |       |
| Change in net debt resulting from cash flows |       | (34,992       | )              | 292,109       |       | 191,951        |       |
| New finance leases                           |       | (2,987        | )              | (4,053        | )          | (2,963         | )          |
| Loans and finance leases acquired            |       | 808           |           | (1,814,470    | )          | —         |       |
| Loans and finance leases disposed            |       | —        |           | 1,471         |       | —         |       |
| Other non cash movements                     |       | (2,060        | )              | (19,665       | )          | (40,876        | )          |
| Currency adjustment                          |       | 48,139        |           | (72,937       | )          | 40,244         |       |
| Movement in net debt                         |       | 8,908         |           | (1,617,545    | )          | 188,356        |       |
| Net debt at beginning of year                |       | (4,530,291    | )              | (2,912,746    | )          | (3,101,102     | )          |
| **Net debt  at end of year**                 | ** ** | **€**    | **(4,521,383** | **)**         | **€** | **(4,530,291** | **)**      | **€** | **(2,912,746** | **)** |
|                                              |            |               |                |               |            |                |            |  |  |  |

 

F-60

----

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

**32Analysis of Net Debt**

| ** **                               | ** ** | **December  2005** | ** **     | **Cash Flow** | ** ** | **Acquisitions  and  disposals** | ** **    | **Non Cash** | ** ** | **Currency** | ** **    | **December  2006** | ** ** |
|------------------------------------------|------------|--------------------|----------------|--------------------|------------|----------------------------------|---------------|-------------------|------------|--------------|---------------|--------------------|------------|
| ** **                               | ** ** | **€000**      | ** **     | **€000**      | ** ** | ** **                       | **€000** | ** **        | ** ** | ** **   | **€000** | ** **         | ** ** | **€000** | ** ** | **€000** | ** ** |
| Cash                                     |       | 99,542             |           | 47,628             |       |                             | —        |              |       |         | —        |               |       | (557 | ) | 146,613 |   |
| Short term deposits and liquid resources |       | 148,265            |           | 83,694             |       |                             | —        |              |       |         | —        |               |       | (8,368 | ) | 223,591 |   |
| Restricted cash                          |       | 755,575            |           | (755,575           | )          |                             | —        |              |       |         | —        |               |       | — |   | — |   |
| Cash and investments                     |       | 1,003,382          |           | (624,253           | )          |                             | —        |              |       |         | —        |               |       | (8,925 | ) | 370,204 |   |
| Bank overdrafts and demand  loans        |       | (20,018            | )              | (18,828            | )          |                             | —        |              |       |         | —        |               |       | (42 | ) | (38,888 | ) |
| Loans repayable within one year          |       | (83,759            | )              | (105,626           | )          |                             | —        |              |       |         | (2,060        | )                  |       | 1,078 |   | (190,367 | ) |
| Kappa bonds outstanding                  |       | (755,575           | )              | 755,575            |       |                             | —        |              |       |         | —        |               |       | — |   | — |   |
| Short term borrowing                     |       | (859,352           | )              | 631,121            |       |                             | —        |              |       |         | (2,060        | )                  |       | 1,036 |   | (229,255 | ) |
| Long and medium term borrowing           |       | (4,650,772         | )              | (49,507            | )          |                             | —        |              |       |         | —        |               |       | 56,103 |   | (4,644,176 | ) |
| Net borrowing                            |       | (4,506,742         | )              | (42,639            | )          |                             | —        |              |       |         | (2,060        | )                  |       | 48,214 |   | (4,503,227 | ) |
| Finance leases                           |       | (23,549            | )              | 7,647              |       |                             | 808           |              |       |         | (2,987        | )                  |       | (75 | ) | (18,156 | ) |
| **Net debt**                             | ** ** | **€**         | **(4,530,291** | **)**              | **€** | **(34,992**                      | **)**         |              | **€** | **808**      |          |               |       | **€** | **(5,047** | **)** |   | **€** | **48,139** | ** ** | **€** | **(4,521,383** | **)** |
|                                          |            |                    |                |                    |            |                                  |               |                   |            |              |               |                    |            |  |  |  |  |  |  |  |  |  |  |

 

| ** **                               | ** ** | **December  2004** | ** **     | **Cash Flow** | ** ** | **Acquisitions  and  disposals** | ** ** | **Non Cash** | ** **     | **Currency**  | ** ** | **December  2005** | ** ** |
|------------------------------------------|------------|--------------------|----------------|--------------------|------------|----------------------------------|------------|-------------------|----------------|---------------|------------|--------------------|------------|
| ** **                               | ** ** | **€000**      | ** **     | **€000**      | ** ** | **€000**                    | ** ** | **€000**     | ** **     | **€000** | ** ** | **€000**      | ** ** |
| Cash                                     |       | 140,149            |           | (44,246            | )          | —                           |       | —            |           | 3,639         |       | 99,542             |       |
| Short term deposits and liquid resources |       | 107,884            |           | 34,216             |       | —                           |       | —            |           | 6,165         |       | 148,265            |       |
| Restricted cash                          |       | —             |           | 755,575            |       | —                           |       | —            |           | —        |       | 755,575            |       |
| Cash and investments                     |       | 248,033            |           | 745,545            |       | —                           |       |              |           | 9,804         |       | 1,003,382          |       |
| Bank overdrafts and demand  loans        |       | (28,668            | )              | 17,201             |       | —                           |       | —            |           | (8,551        | )          | (20,018            | )          |
| Loans repayable within one year          |       | (76,173            | )              | (21,548            | )          | —                           |       | (8,911            | )              | 22,873        |       | (83,759            | )          |
| Kappa bonds outstanding                  |       | —             |           | (755,575           | )          | —                           |       | —            |           | —        |       | (755,575           | )          |
| Short term borrowing                     |       | (104,841           | )              | (759,922           | )          | —                           |       | (8,911            | )              | 14,322        |       | (859,352           | )          |
| Long and medium term borrowing           |       | (3,038,538         | )              | 301,674            |       | (1,805,992                       | )          | (10,754           | )              | (97,162       | )          | (4,650,772         | )          |
| Net borrowing                            |       | (2,895,346         | )              | 287,297            |       | (1,805,992                       | )          | (19,665           | )              | (73,036       | )          | (4,506,742         | )          |
| Finance leases                           |       | (17,400            | )              | 4,812              |       | (7,007                           | )          | (4,053            | )              | 99            |       | (23,549            | )          |
| **Net debt**                             | ** ** | **€**         | **(2,912,746** | **)**              | **€** | **292,109**                      | ** ** | **€**        | **(1,812,999** | **)**         | **€** | **(23,718**        | **)**      | **€** | **(72,937** | **)** | **€** | **(4,530,291** | **)** |
|                                          |            |                    |                |                    |            |                                  |            |                   |                |               |            |                    |            |  |  |  |  |  |  |

** **

F-61

----

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

**32Analysis of Net Debt—(continued)**

| ** **                               | ** ** | **December  2003** | ** **     | **Cash Flow** | ** ** | **Acquisitions  and  Disposals** | ** ** | **Non Cash** | ** ** | **Currency**  | ** ** | **December  2004** | ** **  |
|------------------------------------------|------------|--------------------|----------------|--------------------|------------|----------------------------------|------------|-------------------|------------|---------------|------------|--------------------|-------------|
| ** **                               | ** ** | **€000**      | ** **     | **€000**      | ** ** | **€000**                    | ** ** | **€000**     | ** ** | **€000** | ** ** | **€000**      | ** **  |
| Cash                                     |       | 86,137             |           | 55,623             |       |                             | —     |              |       | —        |       | (1,611             | )           | 140,149 |   |
| Short term deposits and liquid resources |       | 92,930             |           | 16,989             |       |                             | —     |              |       | (35           | )          | (2,000             | )           | 107,884 |   |
| Cash and investments                     |       | 179,067            |           | 72,612             |       |                             | —     |              |       | (35           | )          | (3,611             | )           | 248,033 |   |
| Bank overdrafts and demand  loans        |       | (22,368            | )              | (5,338             | )          |                             | —     |              |       | —        |       | (962               | )           | (28,668 | ) |
| Loans repayable within one year          |       | (111,447           | )              | 54,348             |       |                             | —     |              |       | 3,698         |       | (22,772            | )           | (76,173 | ) |
| Short term borrowing                     |       | (133,815           | )              | 49,010             |       |                             | —     |              |       | 3,698         |       | (23,734            | )           | (104,841 | ) |
| Long and medium term borrowing           |       | (3,118,074         | )              | 56,753             |       |                             | —     |              |       | (44,539       | )          | 67,322             |        | (3,038,538 | ) |
| Net borrowing                            |       | (3,072,822         | )              | 178,375            |       |                             | —     |              |       | (40,876       | )          | 39,977             |        | (2,895,346 | ) |
| Finance leases                           |       | (28,280            | )              | 13,576             |       |                             | —     |              |       | (2,963        | )          | 267                |        | (17,400 | ) |
| **Net debt**                             | ** ** | **€**         | **(3,101,102** | **)**              | **€** | **191,951**                      |       |              | —     |          | ** ** | **€**         | **(43,839** | **)** | **€** | **40,244** | ** ** | **€** | **(2,912,746** | **)** |
|                                          |            |                    |                |                    |            |                                  |            |                   |            |               |            |                    |             |  |  |  |  |  |  |  |

 

Cashcomprises cash in hand and overnight deposits. The movement in liquid resourcesrepresents movement in all monetary assets (excluding cash, short term depositsand overnight borrowing) which are convertible into cash at, or close to, theircarrying value in the balance sheet. These specifically comprise governmentgilts, commercial paper and deposits, with maturities of less than one yearwhen acquired. They are categorized as held-to-maturity because the Group hasboth the intent and the ability to hold these investments until maturity.

F-62

----

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

**33 Acquisitions and disposals**

**Summary of effectsof the acquisition of Kappa**

Theacquisition of Kappa was completed on  December 1,2005. The provisional fair value exercise relating to the acquisition in 2005was completed in 2006 and is reflected in the schedule below.

| ** **                                     | ** ** | **Book value**     | ** ** | **Policy  Alignment**   | ** ** | **Revaluations  Booked in  2005** | ** ** | **Fair Value at  Year End 2005** | ** ** | **Revaluations  Booked in  2006** | ** ** | **Fair Value at  Year End 2006** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|----------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **€ million** | ** ** | **€ million** | ** ** | **€ million**                | ** ** | **€ million**                              | ** ** | **€ million**                | ** ** | **€ million**                              | ** ** |
| Cash                                           |       |                    | 49         |                    |       |                                   | —     |                                                 |       |                                   | —     |                                                 |       |   | 49 |   |   |   | — |   |   |   | 49 |   |   |
| Accounts  receivable and prepayments           |       |                    | 575        |                    |       |                                   | (2         | )                                                    |       |                                   | (1         | )                                                    |       |   | 572 |   |   |   | (55 | ) |   |   | 517 |   |   |
| Inventories                                    |       |                    | 258        |                    |       |                                   | 18         |                                                 |       |                                   | —     |                                                 |       |   | 276 |   |   |   | (11 | ) |   |   | 265 |   |   |
| Financial assets                               |       |                    | 3          |                    |       |                                   | —     |                                                 |       |                                   | —     |                                                 |       |   | 3 |   |   |   | — |   |   |   | 3 |   |   |
| Property, plant  and equipment                 |       |                    | 1,574      |                    |       |                                   | (17        | )                                                    |       |                                   | 23         |                                                 |       |   | 1,580 |   |   |   | 30 |   |   |   | 1,610 |   |   |
| Intangible assets                              |       |                    | —     |                    |       |                                   | —     |                                                 |       |                                   | 35         |                                                 |       |   | 35 |   |   |   | — |   |   |   | 35 |   |   |
| Accounts payable and accruals                  |       |                    | (581       | )                       |       |                                   | (6         | )                                                    |       |                                   | (8         | )                                                    |       |   | (595 | ) |   |   | (4 | ) |   |   | (599 | ) |   |
| Long term debt and other long term liabilities |       |                    | (1,806     | )                       |       |                                   | —     |                                                 |       |                                   | (4         | )                                                    |       |   | (1,810 | ) |   |   | — |   |   |   | (1,810 | ) |   |
| Provisions for  liabilities and charges        |       |                    | (385       | )                       |       |                                   | 73         |                                                 |       |                                   | —     |                                                 |       |   | (312 | ) |   |   | 116 |   |   |   | (196 | ) |   |
| Minority interest                              |       |                    | (2         | )                       |       |                                   | —     |                                                 |       |                                   | —     |                                                 |       |   | (2 | ) |   |   | — |   |   |   | (2 | ) |   |
| Net (liabilities)/assets  acquired             |       |                    | €     | (315                    | )          |                                   |       | €                                               | 66         |                                   |       |                                                 | €     | 45 |   |   |   | (204 | ) |   |   | 76 |   |   |   | (128 | ) |   |
| Shareholder loans    acquired                  |       |                    |       |                    |       |                                   |       |                                                 |       |                                   |       |                                                 |       |   | (739 | ) |   |   | — |   |   |   | (739 | ) |   |
|                                           |       |                    |       |                    |       |                                   |       |                                                 |       |                                   |       |                                                 |       |   | (943 | ) |   |   | 76 |   |   |   | (867 | ) |   |
| Goodwill                                       |       |                    |       |                    |       |                                   |       |                                                 |       |                                   |       |                                                 |       |   | 1,186 |   |   |   | (72 | ) |   |   | 1,114 |   |   |
| **Total  consideration**                       | ** ** |                    |       |                    |       |                                   |       |                                                 |       |                                   |       |                                                 | ** ** | ** ** | **243** |   | ** ** | ** ** | **4** |   | ** ** | ** ** | **247** |   |   |
| Deferred  consideration                        |       |                    |       |                    |       |                                   |       |                                                 |       |                                   |       |                                                 |       |   | (33 | ) |   |   | — |   |   |   | (33 | ) |   |
| Acquisition costs                              |       |                    |       |                    |       |                                   |       |                                                 |       |                                   |       |                                                 |       |   | — |   |   |   | (4 | ) |   |   | (4 | ) |   |
| **Cash payments**                              | ** ** |                    |       |                    |       |                                   |       |                                                 |       |                                   |       |                                                 | ** ** | ** ** | **€** | **210** |   |   |   | — |   | ** ** | ** ** | **€** | **210** |   |   |
|                                                |            |                         |            |                         |            |                                        |            |                                                      |            |                                        |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theconsolidated financial statements of cash flows for 2005 includes the followingsignificant cash flows in relation to Kappa.

| ** **                              | ** ** | **€ millions** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|
| Net cash flow from operating activities |       |                     | 71         |   |   |
| Interest paid                           |       |                     | (20        | ) |   |
| Purchase  of tangible fixed assets      |       |                     | (25        | ) |   |

 

F-63

----

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

**33Acquisitions and disposals—(continued)**

The summarized statementsof operations and statements of total recognized gains and losses for Kappafrom the beginning of its financial year on January 1, 2005 to November 30,2005 are set out below. These figures are reported in accordance withaccounting standards generally accepted in The Netherlands and are unaudited.

**Summarized statements of operations**

| ** **                   | ** ** | **Jan. 1, 2005  through   Nov. 30, 2005** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                   | ** ** | **€ millions**                                           | ** ** |
| Net sales                    |       |                                                               | 2,585      |   |   |
| Operating income             |       |                                                               | 154        |   |   |
| Exceptional items            |       |                                                               | (11        | ) |   |
| Profit before interest       |       |                                                               | 143        |   |   |
| Net interest                 |       |                                                               | (208       | ) |   |
| Loss before taxes            |       |                                                               | (65        | ) |   |
| Tax                          |       |                                                               | (11        | ) |   |
| **Net loss  for the period** | ** ** | ** **                                                         | **€** | **(76** | **)** | ** ** |
|                              |            |                                                                    |            |  |  |  |

 

**Statements of total recognizedgains and losses**

| ** **                                                 | ** ** | **Jan. 1, 2005  through   Nov. 30, 2005** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **€ millions**                                           | ** ** |
| Net loss for the period                                    |       |                                                               | (76        | ) |   |
| Translation adjustment on foreign currency net investments |       |                                                               | (8         | ) |   |
| **Total  recognized gains and losses**                     | ** ** | ** **                                                         | **€** | **(84** | **)** | ** ** |
|                                                            |            |                                                                    |            |  |  |  |

 

Thenet loss for Kappa for the year ended December 31, 2004 was €79 million.

**34 Parent Undertakings andControlling Parties**

At December 31, 2006, the immediate parent of thecompany is SKCL. The ultimate controlling party and parent undertaking of thelargest group of which the company is a member, and for which group financialstatements are prepared, is SKGL. The parent undertaking of the smallest groupof which the company is a member, and for which group financial statements areprepared, is SK Holdings. SKGL SK Holdings and SKCL are companies incorporatedin Ireland

On January 31, 2007 Smurfit Kappa Group plc (“SKGplc”) completed an exchange offer for the existing shares of SKGL whereby theshareholders of SKGL exchanged their shares for an identical number of sharesof the same classes in the capital of SKG plc (the exchange offer). As aconsequence of the Exchange Offer, with effect from January 31, 2007, SKGplc became the holding company of the Group in place of SKGL.

We are subject to the reporting requirements of theSecurities Exchange Act of 1934, as amended, and file reports, including AnnualReports on Form 20-F, and other information with the SEC. You may 

F-64

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

**34 ParentUndertakings and Controlling Parties—(continued)**

read and copy any documentwe file with the SEC at its public reference rooms at 100 F Street, N.W.Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330for more information on the public reference rooms and their copy charges. Inaddition, the SEC maintains an Internet site at *http://www.sec.gov*that contains reports and otherinformation regarding issuers that file electronically with the SEC. Thesefilings are also available to the public from commercial document retrievalservices.

SK Funding’s annual reporton Form 20-F, current reports on Form 6-K and allamendments to those reports are made available free of charge through ourwebsite (*www.smurfitkappa.com*) as soon aspracticable after such material is electronically filed with or furnished tothe Securities and Exchange Commission.

**35 Companies (Amendment)Act, 1963 to 2005**

The financial statementsin this report do not comprise ‘full group accounts’ within the meaning ofRegulation 40(1) of the European Communities (Companies: Group Accounts)Regulations, 1992 of Ireland in so far as such group accounts would have tocomply with the disclosure and other requirements of those Regulations. Theauditors have made reports without qualification and without reference to anemphasis of matter under Section193 of the Companies Act, 1990, in respect ofthe consolidated financial statements for the years ended December 31,2005 and 2004. Full accounts for SKGL for the year ended December 31, 2005and 2004 have also been filed with the Registrar of Companies. Full accountsfor SKGL for the year ended December 31, 2006 upon which an unqualifiedopinion has been issued will be filed with the Registrar in due course.

**36 Comparative Figures**

Certain figures for theprior years have been adjusted to conform with 2005 classifications anddisclosure requirements.

**37 Differences BetweenAccounting Principles Generally Accepted in Ireland and in the United States**

The Group’s consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in Ireland (“Irish GAAP”), which differ in certain respectsfrom accounting principles generally accepted in the United States (“US GAAP”).The significant differences as they apply to the Group and the necessaryadjustments are summarized below.

**Goodwill**

Irish GAAP, FRS 10—“Goodwill and Intangible Assets,”requires goodwill to be capitalized as an intangible fixed asset and amortizedin the Consolidated Statements of Operations over its estimated useful life.For US GAAP, the Group applies SFAS No. 142 “Goodwill and Other IntangibleAssets”. Under SFAS No. 142, goodwill is no longer amortized, but istested for impairment on an annual basis and whenever indicators of impairmentarise.

The goodwill impairment test, which is based on fairvalue, is to be performed on a reporting unit level using a two-step impairmenttest. A reporting unit is an operating segment as defined by SFAS No. 131,

F-65

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

‘‘Disclosures aboutSegments of an Enterprise and Related Information’’, or one level lower. In thefirst step, the fair value of a reporting unit, calculated on an undiscountedcash flow basis, is compared with its carrying amount, including goodwill. Ifthe fair value of the reporting unit exceeds its carrying amount, goodwill isnot deemed to be impaired and step two of the impairment test is not required.If the fair value of the reporting unit is lower than its carrying amount, steptwo needs to be performed to measure the amount of impairment. The second stepof the goodwill impairment test, used to measure the amount of impairment loss,compares the implied fair value of reporting unit goodwill with the carryingamount of that goodwill. If the carrying amount of reporting unit goodwillexceeds the implied fair value of that goodwill, an impairment loss shall berecognized in an amount equal to that excess. The loss recognized cannot exceedthe carrying amount of goodwill.

The fair value of each reporting unit was determinedbased upon SKG’s segment reporting. According to these calculations, the fairvalue of the reporting units exceeded the carrying value of their net assets.Therefore, the additional analysis was not required and there was no impairmentof goodwill upon adoption of SFAS No. 142. The Group performed an annualimpairment test in the last quarter of 2004, 2005 and 2006. No indicators ofimpairment were identified.

Under Irish GAAP, theGroup accounts for goodwill arising on the acquisition of a foreign entity as aeuro functional asset. Under US GAAP, SFAS No. 52 requires goodwill andany fair value adjustments arising out of the purchase of a foreign entity tobe treated as currency assets and liabilities of the foreign operation andtranslated at the closing rates with differences taken to the currencytranslation adjustment recorded in other comprehensive income as a component ofshareholders’ equity.

**Intangible Assets**

Under US GAAP, €176million representing the allocated value in purchase accounting for customerrelationships has been accounted for as intangible assets under US GAAP. IrishGAAP does not require the separate recognition of such assets and thus hasincluded the €176million amount in goodwill under Irish GAAP. Such goodwill is amortized underIrish GAAP on a straight-line basis over 40 years. The separately identifiedintangible assets have been amortized on a straight-line basis over 5 - 8 yearsunder US GAAP. Additional amortization expense under US GAAP for intangibleassets is expected to be approximately €31 million for each of thenext 5 years.

**Deferred taxation**

Irish GAAP, FRS 19—“DeferredTax’’ requires full provision to be made for deferred tax arising from timingdifferences between the recognition of gains and losses in the financialstatements and their recognition in tax computations. In adopting FRS 19, wehave chosen not to discount deferred tax assets and liabilities. This standardeliminated a number of the differences between accounting for deferred taxunder Irish and US GAAP. However, under SFAS No. 109—“Accounting forIncome Taxes’’, deferred taxation would also be provided under US GAAP on thedifference between the accounting and taxation bases of assets and liabilitiesof subsidiaries acquired. Deferred income taxes on the taxable US GAAPadjustments are included within the reconciliations.

F-66

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

**37 Differences Between Accounting Principles GenerallyAccepted in Ireland and in the United States—(continued)**

**Retirement benefits**

Under Irish GAAP, FRS 17—“RetirementBenefits” requires that scheme assets are valued at fair value and schemeliabilities are measured using the Projected Unit Credit method. Net schemeassets and liabilities, reduced by deferred tax amounts, are required to beshown on the face of the Consolidated Balance Sheets as a pension asset or liabilityas appropriate. SK Funding has also adopted Urgent Issues Task Force abstract 35—“Death-in-serviceand incapacity benefits’’ (‘‘UITF 35’’). Effective December 31, 2006, SKFunding adopted the provisions of SFAS No. 158, “Employer’s Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment to FASBStatements No. 87, 88, 106 and 132(R)”. SFAS No. 158 requires thatthe funded status of the company’s pension and non-pension postretirementbenefit plans be recognized as an asset or liability in the Consolidated BalanceSheets.

In addition, therecognition of any changes in that funded status in the year in which changesoccur and the recognition of the previously unrecognized gains/(losses), priorservice costs/(credits) and transition assets now form part of the component ofthe Accumulated Other Comprehensive Income which does not affect retainedearnings.

As a result of thischange, under US GAAP, the main differences with Irish GAAP arise in relationto the amortization of accumulated gains and losses in the Consolidated Statementsof Operations and the treatment of death-in-service and incapacity benefits. Inaddition, under US GAAP, net scheme assets and liabilities are required to beshown gross of deferred tax amounts.

**Functional currency**

Under Irish GAAP the Groupaccounts for the activities of its subsidiaries in Mexico, Colombia, Venezuelaand Argentina, which historically have high rates of inflation, using the USdollar as the functional currency.

Under US GAAP for each ofthe periods presented, Mexico, Colombia, Argentina and Venezuela would not beregarded as hyper-inflationary and the Mexican Peso, the Colombian Peso, theArgentinean Peso and the Venezuelan Bolivar respectively would have been usedas the functional currency.

Net income for 2006 hasbeen increased by €4 million due todepreciation.

**Stock-based employee compensation expense**

Effective January 1, 2006,under Irish GAAP, share-based payments are measured at fair value. Refer to Note27 for further information.

Under US GAAP, prior to January 1, 2006, weaccounted for stock-based compensation based on the intrinsic-value-basedmethod prescribed by Accounting Principles Board Opinion 25, “Accounting forStock Issued to Employees” (“APB 25”) and related interpretations. Under thismethod, compensation expense is accrued and booked to income over the vestingperiod. The vesting period commences when it becomes probable that theunderlying targets attaching to the options will be achieved and the number ofshares will be known and ends with the date when the granting of the shares isnot contingent upon the performance of additional services or other conditions.Compensation expense would be booked on a period by period basis to reflect thedifference between the price an employee must pay to acquire the sharesunderlying the option and the market price of the shares, at the end of eachaccounting period until the final vesting date.

F-67

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

**37 Differences BetweenAccounting Principles Generally Accepted in Ireland and in the United States—(continued)**

Effective January 1,2006, we adopted the fair value recognition provisions of SFAS 123 (revised2004), “Share-Based Payment” (“SFAS 123R”) using the prospective transitionmethod. Accordingly, equity-classified awards are measured at grant date fairvalue and are not subsequently remeasured. We do not have anyliability-classified awards.

**Debt instrumentsissue costs**

Under Irish GAAP debtissue costs are deducted from the proceeds of the relevant debt instruments.Under US GAAP such costs would be shown as deferred charges in the ConsolidatedBalance Sheets. In both cases the amount of such costs are expensed at aconstant rate of interest on the outstanding balance of the debt.

**Accounting forassociates**

Irish GAAP requiresseparate disclosure of operating earnings, net interest, exceptional items andthe taxation charge arising in associates. Under US GAAP earnings ofassociates, net of taxation would be shown as a single line item in arriving atnet income.

**Financialinstruments**

Under Irish GAAP all hedging instruments are matchedwith their underlying hedged item. Each instrument’s gain or loss is broughtinto the Consolidated Statements of Operations its fair value into the ConsolidatedBalance Sheets at the same time as is the matched underlying asset, liability,income or cost.

Under SFAS No. 133, ‘‘Accounting for DerivativeInstruments and Hedging Activities’’ all derivative instruments are recognizedon the Consolidated Balance Sheets at their fair values. Changes in fair valueare either recognized periodically in income or in shareholders’ equity as acomponent of comprehensive income depending on whether the derivative qualifiesfor hedge accounting in accordance with the requirements of SFAS No. 133,and if so, whether it qualifies as a fair value hedge or cash flow hedge.Changes in fair value of derivatives accounted for as fair value hedges arerecorded in income along with the corresponding portions of the changes in thefair value of the hedged items, to the extent they are effective as hedges.Changes in fair value of derivatives accounted for as cash flow hedges, to theextent they are effective as hedges, are recorded in other comprehensive incomenet of deferred taxes. Changes in fair values of derivatives not qualifying ashedges are reported in net income.

Under Irish GAAP the functional currency of the Group’soperations in Latin America is the US$. The Group’s investment in theseoperations is financed by US$ borrowing. The carrying amounts of theseoperations are translated at the end of each accounting period at the closingrates of exchange. The resulting exchange differences are taken directly toreserves. Exchange gains or losses on the related US$ borrowing are then offsetas a reserve movement against the exchange differences.

Under US GAAP thefunctional currency of our Latin American operations is the local currency ofeach of the countries in which we operate. While net investment hedgeaccounting is permitted, the use of a different functional currency for ourLatin American operations results in our US$ debt not directly matching thelocal currency net assets. The Group does not meet the US GAAP criteria for netinvestment hedge accounting using a tandem currency debt instrument and as aresult the translation gains and losses 

F-68

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

on thedebt instrument are recorded in the statement of operations rather than inother comprehensive income.

**Currency swaps**

Under Irish GAAP, the fairvalue of currency swaps relating to outstanding debt is an adjustment to thecarrying value of debt. Under US GAAP, it would be separately recorded as partof other assets or liabilities.

**Impairmentwritedowns**

Under Irish GAAP,impairment writedowns are included in accumulated depreciation. Under US GAAPthey would be deducted from the cost of the assets identified as beingimpaired.

**Insurance receipts**

Under Irish GAAP insurance receipts related to theinterruption of business are deferred and released to income against therelated costs.

Under US GAAP, FIN 30, SOP96-1 and EITF 01-13 require insurance receipts to be recognized onreceipt.

**Restructuring andintegration costs**

The rules forrecognizing restructuring and integration costs in the statement of operationsare generally consistent between Irish and US GAAP. However, under Irish GAAP,on the acquisition of a business, costs in connection with restructuring wouldnot be recorded in purchase accounting but would be expensed as incurred postacquisition. Under US GAAP, a purchase accounting liability would be recordedfor qualifying costs and goodwill increased if certain requirements aresatisfied as prescribed by EITF 95-3.

**Rollover investment by SKG management**

UnderUS GAAP, because of the application of the EITF issue 88-16, ‘‘Basis inLeveraged Buyout Transactions’’, only partial purchase accounting applied tothe acquisition of JSG in 2002. The approximate 8% rollover investment bysenior management shareholders would be valued at their predecessor basis inJSG as opposed to the inherent new basis in successor. The primary effect ofthat adjustment was to reduce goodwill and shareholders’ equity. Under IrishGAAP, no such adjustment is required.

**Composition of SKFunding Group—consolidation of companies sold to affiliates**

SK Funding has an amountadvanced to affiliates arising from assets sold to affiliates in 2002. UnderIrish GAAP, the affiliates are not consolidated. Under US GAAP, the affiliatesare consolidated, resulting in an increase to net income under US GAAP ofapproximately €23 million and a decreaseto shareholders’ equity under US GAAP of approximately €155million.

F-69

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

**Consolidation ofassets held for sale**

The European Commission approval of the Kappaacquisition in December 2005 required the divestment by the Group ofcertain Kappa assets acquired and certain assets already owned and consolidatedby SK Funding.

Under Irish GAAP, consolidated assets held fordisposal continue to be consolidated until the date of sale whereas, assets fordisposition acquired in a business combination are included as available forsale and are recognized in current assets at the lower of cost or netrealizable value. The results of assets for disposition acquired in a businesscombination are not consolidated.

Under US GAAP both the Kappa assets and the SK Fundingassets would be consolidated but treated as held for sale under SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets”. The assetsand liabilities would be included at fair value less costs to sell and would beshown as current assets and liabilities. Any fair value adjustment on the Kappaassets acquired would be treated as part of the purchase price allocation withsubsequent fair value adjustments taken to the consolidated statement ofoperations. The results from operations for assets held for sale in 2005 areincluded in the Consolidated Statements of Operations whereas they are excludedunder Irish GAAP.

All of the assetsconcerned were sold in October. Assets held for sale at December 31, 2006amounted to €5,000,000. Assets held for sale at December 2005includes assets of €92,901,000and liabilities of €38,497,000which are included in the European Specialties segment.

**Inventory valuation—fairvalue**

Under Irish GAAP the fair value of inventory in anacquisition would be based either on the current cost to the acquired entity ofreproducing the inventory or on the historical cost of the inventory (includingthe interest cost of holding the inventory) where it is difficult to findreplacement cost as replacement would be impossible.

UnderUS GAAP, inventory acquired in a transaction accounted for under the purchasemethod is as follows: (a) finished goods are valued at estimated sellingprices less the sum of the costs of disposal and a normal profit; (b) workin process inventories are valued at estimated selling prices less the sum ofthe costs of completion, costs of disposal, and a normal profit; and (c) rawmaterial inventories are valued at current replacement cost. The differences invaluation of inventory acquired in the Kappa transaction under Irish GAAP andUS GAAP resulted in an adjustment to goodwill in the reconciliations.

**Long-termreceivables**

Under Irish GAAP, certainlong-term receivables are included in current assets. Under US GAAP, they areincluded in long term assets.

**CurrencyTranslation Adjustment**

Adjustments arising ontranslation of the results of non-euro entities’ operations at average ratesand on restatement of the opening net assets at closing rates into the consolidatedfinancial statements are dealt with in the Consolidated Statements of Total RecognizedGains and Losses under Irish GAAP and in 

F-70

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

thestatement of Other Comprehensive Income under US GAAP. The currency translationadjustment included in other comprehensive income includes the translationimpact of the adjustments to net loss under US GAAP for each year. Furthermore,the currency translation adjustment for each Irish GAAP to US GAAP reconcilingitem has been included in their respective line items in the shareholders’reconciliation itself.

**Scope ofConsolidation—push-down of PIK notes**

On December 1,2005 SKGL, SK Acquisitions and the shareholders of Kappa Holding B.V. (“Kappa”)concluded an agreement resulting in the merger of the operations of both groupsof companies. The merger was completed through the issue of shares by SKGL andthe payment of consideration comprising cash of approximately €238million and an €89million subordinated promissory note, primarily to Kappa’s former shareholders.These 9% shareholder PIK notes mature on December 31, 2016.

In January 2005, SK Holdings completed anoffering of €325 million in aggregate principal amount of11.5% senior PIK notes due 2015. Through a series of transactions substantiallyall of the net proceeds were paid to shareholders by means of a capitalreduction under Irish law.

Under Irish GAAP, transactions of both SKGL and SKHoldings are not consolidated in the Group’s consolidated financial statements.

Under US GAAP in certain circumstances, parent companythird party debt and associated costs would be pushed-down to the reportingentity.

Effectively, the Group is deemed to absorb a majorityof the risk of certain of the debt transactions of SK Holdings and SKGL. As such, these aforementioned debt transactions have beenpushed down into the consolidated financial statements as of December 31,2006. The SK Holdings transaction is reflected as an increase of outstandingdebt with the resulting proceeds treated as a distribution to shareholders. TheSKGL transaction is reflected as an increase of outstanding debt with an equalreduction in equity. The accrued interest associated with these notes isrecorded in the statement of operations.

The fair value of the11.5% senior PIK notes due 2015 and of the 9% subordinated promissory notes asat December 31, 2006 was €403.1 million and €97.7million respectively.

**Gain on Munksjödisposal**

The Company disposed of its Munksjö pulp, specialtypaper and tissue operations during the year ended December 31, 2005. Asthe carrying value of these entities differed under Irish GAAP and US GAAP, thereconciliation of income includes an adjustment to the gain on disposalaccordingly.

F-71

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

**Other**

Other comprises minor adjustments including a reversalof part of an impairment charge due to a difference in the underlying assetvalue between Irish GAAP and US GAAP.

The following is a summary of the significantadjustments to net loss and shareholders’ equity which would be required if USGAAP were to be applied instead of Irish GAAP:

| **Income**                                                                                   | ** ** | ** **    | ** **   | **2006**      | ** ** | **Restated  2005** | ** ** | **Restated  2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                   | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**      | ** ** |
| Net  loss reported in the consolidated statement of operations                               | ** ** | (271,929      | )            | (182,417      | )          | (41,673            | )          |
| Adjustments:                                                                                 |       |          |         |          |       |               |       |
| Goodwill  amortization                                                                       |       | 62,033        |         | 28,914        |       | 37,925             |       |
| Other  intangible amortization                                                               |       | (31,131       | )            | (2,038        | )          | —             |       |
| Functional  currency—property, plant and equipment                                      |       | 4,029         |         | —        |       | —             |       |
| Retirement  benefits                                                                         |       | (5,623        | )            | (8,118        | )          | (3,061             | )          |
| Deferred  taxation                                                                           |       | 17,156        |         | 4,936         |       | 9,309              |       |
| Stock-based  compensation expense                                                            |       | —        |         | (12,625       | )          | 6,854              |       |
| Inventory  valuation—fair value                                                         |       | —        |         | (5,451        | )          | —             |       |
| Management  rollover investment                                                              |       | 590           |         | 614           |       | 616                |       |
| Financial  instruments—fair value                                                       |       | 12,580        |         | 11,414        |       | (33,275            | )          |
| Translation  gains/(losses) arising on net investment hedging                                |       | 48,182        |         | (66,808       | )          | 44,056             |       |
| Consolidation  of companies sold to affiliates                                               |       | 23,086        |         | (34,053       | )          | (8,195             | )          |
| Adjustment  to gain on Munksjö disposal                                                 |       | —        |         | 2,597         |       | —             |       |
| Consolidation  of assets held for sale                                                       |       | —        |         | 163           |       | —             |       |
| Insurance  receipts                                                                          |       | (540          | )            | (398          | )          | —             |       |
| PIK  interest                                                                                |       | (51,461       | )            | (36,959       | )          | —             |       |
| Provisions                                                                                   |       | 8,770         |         | —        |       | —             |       |
| Other                                                                                        |       | 2,281         |         | —        |       | —             |       |
| ** **                                                                                   |       | 89,952        |         | (117,812      | )          | 54,229             |       |
| **Net  (loss)/income as adjusted to accord with US GAAP**                                    | ** ** | **€**    | **(181,977** | **)**         | **€** | **(300,229**       | **)**      | **€**         | **12,556** | ** ** |
| Arising from:                                                                                |       |          |         |          |       |               |       |
| Continuing  operations                                                                       |       | (181,977      | )            | (271,804      | )          | (21,332            | )          |
| Acquired  activities                                                                         |       | —        |         | (26,181       | )          | —             |       |
| Discontinued  activities                                                                     |       | —        |         | (2,244        | )          | 33,888             |       |
| **Net (loss)/income  available to ordinary shareholders as adjusted to accord with US GAAP** | ** ** | **€**    | **(181,977** | **)**         | **€** | **(300,229**       | **)**      | **€**         | **12,556** | ** ** |

 

F-72

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

**37 Differences BetweenAccounting Principles Generally Accepted in Ireland and in the United States—(continued)**

| ** **                                                              | ** ** | ** **    | ** **  | ** **    | ** ** |
|-------------------------------------------------------------------------|------------|---------------|-------------|---------------|------------|
| ** **                                                              | ** ** | ** **    | ** **  | **Restated**  | ** ** |
| **Shareholders’ Equity**                                      | ** ** | ** **    | ** **  | **2006**      | ** ** | **2005** | ** ** |
| ** **                                                              | ** ** | **€000** | ** **  | **€000** | ** ** |
| Shareholders’ equity as reported in the consolidated balance sheet |       | 1,241,020     |        | 1,418,862     |       |
| Adjustments:                                                            |       |          |        |          |       |
| Goodwill—Gross                                                     |       | 180,546       |        | 112,436       |       |
| —Aggregate amortization                                            |       | 163,639       |        | 101,606       |       |
| Other intangible amortization                                           |       | (33,169       | )           | (2,038        | )          |
| Functional currency—property, plant and equipment                  |       | 6,144         |        | 53,319        |       |
| Functional currency—investments                                    |       | 1,858         |        | 310           |       |
| Retirement benefits                                                     |       | (10,664       | )           | (30,597       | )          |
| Deferred taxation                                                       |       | (205,739      | )           | (137,896      | )          |
| Financial instruments—fair value                                   |       | 6,332         |        | (30,059       | )          |
| Minority share of US GAAP adjustments                                   |       | (1,771        | )           | (6,376        | )          |
| Consolidation of companies sold to affiliates                           |       | (154,859      | )           | (176,859      | )          |
| Rollover investment by SKG management                                   |       | (74,370       | )           | (74,961       | )          |
| Insurance receipts                                                      |       | —        |        | 540           |       |
| Provisions                                                              |       | —        |        | (8,770        | )          |
| Push down of PIK notes                                                  |       | (494,043      | )           | (442,582      | )          |
| Other                                                                   |       | 2,281         |        | —        |       |
|                                                                    |       | (613,815      | )           | (641,927      | )          |
| **Shareholders’ equity as  adjusted to accord with US GAAP**       | ** ** | **€**    | **627,205** | ** **    | **€** | **776,935** | ** ** |
|                                                                         |            |               |             |               |            |  |  |  |  |

 

**Cash Flows**

The Consolidated Statements of Cash Flows preparedunder Irish GAAP presents substantially the same information as that requiredunder US GAAP by SFAS No. 95—“Statement of Cash Flows”. This standarddiffers, however, with regard to the classification of items within thestatements and as regards the definition of cash and cash equivalents. Under USGAAP, cash would not include bank overdrafts. The movements on such bankoverdrafts are required to be included in financing activities under SFAS No. 95.Under US GAAP only short term investments with a maturity of three months orless at the date of acquisition are included in cash equivalents. Under IrishGAAP movements in short term investments are classified as management of liquidresources. Under Irish GAAP, cash flows are presented separately for operatingactivities, dividends received from associates, returns on investments andservicing of finance, taxation, capital expenditure and financial investment,acquisitions and disposals, equity dividends paid, management of liquid resourcesand financing. US GAAP, however, requires only three categories of cash flowactivity to be reported: operating, investing and financing.

Cash flows from taxation and returns on investmentsand servicing of finance shown under Irish GAAP would be included as operatingactivities under US GAAP. Cash flows from capital expenditure, financialinvestment and acquisitions and disposals would be included as investingactivities under US GAAP. The payment of dividends would be included as afinancing activity under US GAAP. Under US GAAP, capitalized interest istreated as part of the cost of the asset to which it relates and is thusincluded 

F-73

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

as part of investing cashflows; under Irish GAAP all interest is treated as part of returns oninvestments and servicing of finance.

The categories of cashflow activity under US GAAP are summarized as follows:

| ** **                                       | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
|--------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                       | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Cash inflow from operating activities            |       | 280,342       |        | 188,396       |       | 362,737       |       |
| Cash inflow/(outflow) on investing activities    |       | 445,698       |        | (530,701      | )          | (174,770      | )          |
| Cash (outflow)/inflow from financing activities  |       | (594,718      | )           | 349,360       |       | (129,731      | )          |
| Increase in cash and cash equivalents            |       | 131,322       |        | 7,055         |       | 58,236        |       |
| Currency adjustment on cash and cash equivalents |       | (8,925        | )           | 9,804         |       | (3,611        | )          |
| Cash and cash equivalents at beginning of year   |       | 247,807       |        | 230,948       |       | 176,323       |       |
| **Cash and  cash equivalents at end of year**    | ** ** | **€**    | **370,204** | ** **    | **€** | **247,807**   | ** ** | **€** | **230,948** | ** ** |
|                                                  |            |               |             |               |            |               |            |  |  |  |

 

**Deferred taxation—additionalinformation required by SFAS No. 109**

The analysis of the USGAAP deferred taxation liability required by SFAS No. 109 is as follows:

| ** **                                          | ** ** | **2006**      | ** **  | **2005**      | ** ** |
|-----------------------------------------------------|------------|---------------|-------------|---------------|------------|
| ** **                                          | ** ** | **€000** | ** **  | **€000** | ** ** |
| **Deferred taxation liabilities:**                  |       |          |        |          |       |
| Excess of book value over tax value of fixed assets |       | 444,824       |        | 386,203       |       |
| Other timing differences                            |       | 91,163        |        | 81,974        |       |
|                                                |       | 535,987       |        | 468,177       |       |
| **Deferred taxation assets:**                       |       |          |        |          |       |
| Net operating loss carry forwards                   |       | (356,925      | )           | (293,035      | )          |
| Valuation allowances                                |       | 173,113       |        | 167,005       |       |
| Retirement benefits                                 |       | (77,283       | )           | (58,264       | )(1)       |
| Other timing differences                            |       | (34,111       | )           | (2,573        | )          |
|                                                |       | (295,206      | )           | (186,867      | )          |
|                                                | ** ** | **€**    | **240,781** | ** **    | **€** | **281,310** | ** ** |
| **Split as follows:**                               |       |          |        |          |       |
| Current                                             |       | 21,258        |        | (14,418       | )          |
| Non current                                         |       | 219,523       |        | 295,728       |       |
|                                                | ** ** | **€**    | **240,781** | ** **    | **€** | **281,310** | ** ** |

----

(1)          Retirement benefitsincludes €75,862,000(2005: €52,776,000)in relation to deferred tax which has been recorded within ‘Pension liabilities’under Irish GAAP (Note 24).

Valuation allowances areset up for losses carried forward in those jurisdictions in which it is morelikely than not that the losses carried forward will not be utilized to offsetfuture taxable income or in which there is no deferred tax liability againstwhich the related asset can be offset prior to expiry.

F-74

----

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

**Share optionschemes—additional information required by SFAS No. 123**

Prior to January 1,2006, we accounted for stock-based compensation based on theintrinsic-value-based method prescribed by Accounting Principles Board Opinion25, “Accounting for Stock Issued to Employees” (“APB 25”), and relatedinterpretations. Under this method, compensation expense was recorded only ifon the date of grant the current market price of the underlying stock exceededthe exercise price or the exercise price was not fixed at the grant date. SFAS123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and SFAS 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123” (“SFAS 148”) established accounting and disclosure requirementsusing a fair-value-based method of accounting for stock-based employeecompensation plans. As permitted by SFAS 123 and SFAS 148, we elected tocontinue to apply the intrinsic-value-based method of accounting describedabove and adopted only the disclosure requirements of SFAS 123 until SFAS 123Rwas adopted on January 1, 2006. The following table illustrates the effecton net income and on earnings per share if the fair-value-based method had beenapplied to all outstanding and unvested awards in periods prior to January 1,2006.

| ** **                                                                                                       | ** ** | **Restated  2005** | ** **   | **Restated  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------|--------------|--------------------|------------|
| ** **                                                                                                       | ** ** | **€000**      | ** **   | **€000**      | ** ** |
| Net  loss attributable to common shareholders under US GAAP                                                      |       |               |         |               |       |
| As reported (restated)                                                                                           |       | (300,229           | )            | 12,556             |       |
| Add: Stock based employee compensation expense included in reported net  loss                                    |       | 17,696             |         | 259                |       |
| Deduct: Total stock based employee compensation expense determined  under fair value based method for all awards |       | (1,316             | )            | (1,073             | )          |
| **Pro forma (restated)**                                                                                         | ** ** | **€**         | **(283,849** | **)**              | **€** | **11,742** | ** ** |
|                                                                                                                  |            |                    |              |                    |            |  |  |

 

**Pension costs andtermination indemnities—information required by SFAS No. 87, SFAS No. 88,SFAS No. 106 and SFAS No. 132 amended by SFAS No. 158**

The components of thedefined benefit net pension expense for the Group’s defined benefit plans,termination indemnities and post retirement healthcare defined benefit plans,under US GAAP, for the years ended December 31, 2006, 2005 and 2004 areestimated to be as follows:

| ** **                                                   | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                   | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Service cost                                                 |       | 52,285        |       | 37,450        |       | 38,470        |       |
| Interest cost                                                |       | 89,857        |       | 57,731        |       | 56,282        |       |
| Expected return on plan assets                               |       | (80,614       | )          | (44,259       | )          | (40,627       | )          |
| Amortization of unrecognized transition  obligation or asset |       | —        |       | 112           |       | —        |       |
| Recognized gains and losses                                  |       | 936           |       | 5,453         |       | 61            |       |
| Recognized prior service cost                                |       | 1,172         |       | (451          | )          | 57            |       |
| Gain due to settlement or curtailment                        |       | (366          | )          | (2,564        | )          | (636          | )          |
|                                                         | ** ** | **€**    | **63,270** | ** **    | **€** | **53,472**    | ** ** | **€** | **53,607** | ** ** |
|                                                              |            |               |            |               |            |               |            |  |  |  |

 

F-75

----

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

The estimated fund statusof the Group’s defined benefit plans, termination indemnities and postretirement healthcare defined benefit plans under US GAAP was as follows:

| ** **                                                                           | ** ** | **2006**      | ** **   | **2005**      | ** **   |
|--------------------------------------------------------------------------------------|------------|---------------|--------------|---------------|--------------|
| ** **                                                                           | ** ** | **€000** | ** **   | **€000** | ** **   |
| **Change in benefit obligation**                                                     | ** ** | ** **    | ** **   | ** **    | ** **   |
| Benefit obligation at beginning of year                                              |       | 2,043,374     |         | 1,123,272     |         |
| Service cost                                                                         |       | 52,285        |         | 37,450        |         |
| Interest cost                                                                        |       | 89,857        |         | 57,731        |         |
| Contributions by plan participants                                                   |       | 9,542         |         | 7,180         |         |
| Actuarial gains and losses                                                           |       | (60,309       | )            | 89,686        |         |
| Benefits paid                                                                        |       | (95,091       | )            | (58,201       | )            |
| Curtailments and settlements                                                         |       | (7,690        | )            | (8,997        | )            |
| Plan amendments                                                                      |       | 1,957         |         | (61           | )            |
| Acquisitions                                                                         |       | —        |         | 799,806       |         |
| Disposals                                                                            |       | (13,446       | )            | (29,741       | )            |
| Adjustment to fair value                                                             |       | (27,458       | )            | —        |         |
| Currency adjustments                                                                 |       | 6,514         |         | 25,249        |         |
| Benefit obligation at end of year                                                    |       | 1,999,535     |         | 2,043,374     |         |
| **Change in plan assets**                                                            | ** ** | ** **    | ** **   | ** **    | ** **   |
| Fair value of plan assets at beginning of year                                       |       | 1,319,191     |         | 655,105       |         |
| Actual return on assets                                                              |       | 105,252       |         | 121,834       |         |
| Contributions by employer                                                            |       | 87,885        |         | 51,077        |         |
| Contributions by plan participants                                                   |       | 9,542         |         | 7,180         |         |
| Benefits paid                                                                        |       | (95,091       | )            | (58,201       | )            |
| Curtailments and settlements                                                         |       | (3,501        | )            | (3,048        | )            |
| Acquisitions                                                                         |       | —        |         | 536,793       |         |
| Disposals                                                                            |       | (9,500        | )            | (7,705        | )            |
| Adjustment to fair value                                                             |       | (2,511        | )            | —        |         |
| Currency adjustment                                                                  |       | 7,979         |         | 16,156        |         |
| Fair value of plan assets at end of year                                             |       | 1,419,246     |         | 1,319,191     |         |
| **Funded status of the plans**                                                       | ** ** | **€**    | **(580,289** | **)**         | **€**   | **(724,183** | **)** |
| Amounts  available to be applied as an increase/(reduction) of future pension costs: |       |          |         |          |         |
| Unrecognized actuarial gains or losses                                               |       | N/A           | *            | (7,003        | )            |
| Unrecognized prior service cost                                                      |       | N/A           | *            | (1,535        | )            |
| Minimum pension liability                                                            |       | N/A           | *            | (6,020        | )            |
| **(Accrued)  pension costs**                                                         |       | N/A           | *            | **€**    | **(738,741** | **)** |
|                                                                                      |            |               |              |               |              |  |  |

 

*                    N/A—Notapplicable. In accordance with the provisions of SFAS No. 158, under USGAAP the funded status would be recognized in the Consolidated Balance Sheetsand any unrecognized gains/(losses), prior service costs/(credits) andtransition assets/(obligations) would be recognized in 

F-76

----

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

the Consolidated Statementof Shareholders’ Equity at December 31, 2006. In addition, the minimumpension liability would be eliminated upon the adoption of SFAS No. 158.

The following tablepresents a reconciliation of the (accrued) benefit cost for the Group’s definedbenefit plans, termination indemnities and post retirement healthcare definedbenefit plans under US GAAP:

| ** **                                                                                          | ** ** | **2006**      | ** **   |
|-----------------------------------------------------------------------------------------------------|------------|---------------|--------------|
| ** **                                                                                          | ** ** | **€000** | ** **   |
| (Accrued) pension cost at beginning of year                                                         |       | (738,741      | )            |
| Net periodic cost                                                                                   |       | (63,270       | )            |
| Employer contributions                                                                              |       | 87,885        |         |
| Disposals                                                                                           |       | 2,962         |         |
| Adjustment to fair value                                                                            |       | 24,947        |         |
| Amount recognized in accumulated other comprehensive income upon the  adoption of SFAS No. 158 |       | 99,038        |         |
| Minimum pension liability charge for the year                                                       |       | 1,066         |         |
| Minimum pension liability eliminated upon the adoption of SFAS  No. 158                        |       | 4,954         |         |
| Currency adjustment                                                                                 |       | 870           |         |
| Funded  status of the plans at end of year                                                          | ** ** | **€**    | **(580,289** | **)** |
|                                                                                                     |            |               |              |  |

 

The following tablepresents the amounts that would be recognized in the Consolidated Balance Sheetsfor the Group’s defined benefit plans, termination indemnities and postretirement healthcare defined benefit plans at December 31, 2006 under USGAAP:

| ** **              | ** ** | **2006**      | ** **   |
|-------------------------|------------|---------------|--------------|
| ** **              | ** ** | **€000** | ** **   |
| Non current assets      |       | 17,778        |         |
| Current liabilities     |       | (36,811       | )            |
| Non current liabilities |       | (561,256      | )            |
|                    | ** ** | **€**    | **(580,289** | **)** |
|                         |            |               |              |  |

 

The following tablepresents the pre-tax net actuarial (gain) and prior service (credit) that wouldbe recognized in the accumulated other comprehensive income amounts notaffecting retained earnings for the Group’s defined benefit plans, terminationindemnities and post retirement healthcare defined benefit plans under US GAAPat December 31, 2006:

| ** **             | ** ** | **2006**      | ** **  |
|------------------------|------------|---------------|-------------|
| ** **             | ** ** | **€000** | ** **  |
| Net actuarial (gain)   |       | (98,471       | )           |
| Prior service (credit) |       | (567          | )           |
|                   | ** ** | **€**    | **(99,038** | **)** |
|                        |            |               |             |  |

 

F-77

----

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

**37 Differences BetweenAccounting Principles Generally Accepted in Ireland and in the United States—(continued)**

Thefollowing table presents the change in the accumulated other comprehensiveincome amounts that would be recognized under SFAS 158:

| ** **                                                  | ** ** | **2006**      | ** **  |
|-------------------------------------------------------------|------------|---------------|-------------|
| ** **                                                  | ** ** | **€000** | ** **  |
| Accumulated other comprehensive income at beginning of year |       | —        |        |
| (Decrease) due to adoption of SFAS No. 158             |       | (99,038       | )           |
|                                                        | ** ** | **€**    | **(99,038** | **)** |
|                                                             |            |               |             |  |

 

Thefollowing table presents the estimated actuarial net (gain) and estimated priorservice (credits) of the Group’s benefit plans that will be amortized fromaccumulated gains and (losses) not affecting retained earnings into netperiodic cost/(income) under US GAAP and recorded in the ConsolidatedStatements of Operations in 2007:

| ** **             | ** ** | **2007**      | ** ** |
|------------------------|------------|---------------|------------|
| ** **             | ** ** | **€000** | ** ** |
| Net actuarial (gain)   |       | (2,566        | )          |
| Prior service (credit) |       | (152          | )          |
|                   | ** ** | **€**    | **(2,718** | **)** |
|                        |            |               |            |  |

 

The Group’s postretirement healthcare defined benefitschemes are in the US. The estimated fund status of these schemes at December 31,2006 was €1,994,000 (2005: €2,412,000).

Plan assets less than projected benefit obligationsinclude overfunded plans at December 31, 2006, €17,778,000(2005: €3,200,000)and underfunded plans at December 31, 2006 of €598,067,000 (2005: €727,383,000).

Thefollowing assumptions were used to determine the defined benefit expense forthe Group.

| ** **                                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average assumed discount rate                              |       |     | 4.6        | %        |       |     | 4.9        | % |   |   | 5.5 | % |   |
| Weighted average rates of compensation increase                     |       |     | 3.0        | %        |       |     | 3.1        | % |   |   | 3.3 | % |   |
| Weighted  average expected long term rates of return on plan assets |       |     | 6.1        | %        |       |     | 6.1        | % |   |   | 6.7 | % |   |

 

The calculation of the projected benefit obligation atDecember 31, 2006 assumed a discount rate of approximately 5.0% (2005:4.6%) and a compensation increase of 3.2% (2005: 3.0%).

The assets of the plans are invested primarily inequities, fixed interest securities, insurance contracts and real estate.

F-78

----

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

The weighted-average assetallocations at December 31, 2006 and 2005 by asset category of the definedbenefit pension schemes is shown below:

| ** **        | ** ** | **Plan assets** | ** ** |
|-------------------|------------|----------------------|------------|
| ** **        | ** ** | **Target**           | ** ** | **Percentage of Plan** | ** ** |
| ** **        | ** ** | **Allocation**       | ** ** | **Assets at December 31,** | ** ** |
| ** **        | ** ** | ** **           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Equity securities |       |                 | 15  - 80%  |   |   |   | 48 | % |   |   | 50 | % |   |
| Debt securities   |       |                 | 20  - 85%  |   |   |   | 39 | % |   |   | 38 | % |   |
| Real Estate       |       |                 | 0 -  10%   |   |   |   | 7 | % |   |   | 6 | % |   |
| Other             |       |                 | 0 -  10%   |   |   |   | 6 | % |   |   | 6 | % |   |
| Total             |       |                 |       |   |   |   | 100 | % |   |   | 100 | % |   |

 

The Group maintains target allocation percentagesamong various asset classes based on an investment policy established for thepension plans which is designed to achieve long term rate of return objectives,while mitigating against downside risk and considering expected cash flows. Ourinvestment policy is reviewed from time to time to ensure consistency with ourlong term objective of funding 100% of the projected benefit obligation.

The expected long term rate of return on plan assetsreflects the average return rates expected on the funds invested or to beinvested to provide for the benefits included in the projected benefit obligation.In estimating those rates, appropriate consideration is given to the currentreturns being earned by the plan assets in the fund and the rates of returnexpected to be available for reinvestment.

The Group’s expected return on assets of the definedbenefit schemes is based on recommendations from the plan actuaries, havingconsidered anticipated future long term performance of individual assetclasses. Consideration is also given to the appropriate asset allocationstrategy, given the anticipated requirements of the plan to determine theaverage rate of return expected on the funds invested to provide for thepension plan benefits. While appropriate consideration is given to recent fundperformance and historical returns, the assumption is primarily a long-term,prospective rate. Based on our most recent study, the expected long term returnassumption effective January 1, 2007 will be 6.3%.

The expected employee and employer contributions tothe funded defined benefit plans are anticipated to be €11,616,000and €48,330,000respectively for the year ended December 31, 2007. The expected employercontributions to the unfunded defined benefit plans is expected to be €36,281,000for the year ended December 31, 2007. The accumulated benefit obligationof all schemes at December 31, 2006 is €1,754,838,000 (2005: €1,819,813,000).

F-79

----

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

Expectedfuture benefit payments for each of the next five fiscal years and in theaggregate for the five fiscal years thereafter are shown below:

| **Year**     | ** ** | ** **    | ** ** | **Benefit Payments** | ** ** |
|--------------|------------|---------------|------------|---------------------------|------------|
| ** **   | ** ** | **€000** | ** ** |
| 2007         |       |          | 90,331     |                      |       |
| 2008         |       |          | 95,292     |                      |       |
| 2009         |       |          | 100,080    |                      |       |
| 2010         |       |          | 103,751    |                      |       |
| 2011         |       |          | 110,758    |                      |       |
| 2012  - 2016 |       |          | 571,308    |                      |       |

 

**BusinessCombinations—Additional Information Required**

Pro-forma sales and netincome/(loss) for Group under US GAAP for the year ended December 31, 2005 were€7,022million (unaudited) and (€141.6) million (unaudited), respectively(2004: €7,649 million(unaudited) and net income of €63.8 million (unaudited),respectively). Pro forma net income for 2005 includes early debt extinguishmentcosts of €104.7million (unaudited) which are not expected to reoccur.

**US GAAP RestatementItems**

**The following is an extract fromNote 35 to the consolidated financial statements included in our reportForm 20-F/A, which was filed on November 24, 2006. Theserestatement items were adjusted in that Form 20-F/A filing.**

**SFAS No. 52 requires goodwilland any fair value adjustments arising out of the purchase of a foreign  entity to be treated as currency assets andliabilities of the foreign operation and translated at the closing  rates with differences taken to the currencytranslation adjustment recorded in other comprehensive income as a component ofshareholders’ equity. Accordingly, in performing this goodwill allocation tosubsidiaries and applicable currency translation, the Group has restatedfinancial statement amounts presented in accordance with US GAAP to reflect thecurrency movement associated with goodwill in the years 2003 and 2004. Thisresulted in a cumulative increase in currency translation adjustment of**€93,533,000 as ofDecember 31, 2004 leading to a reduction in both goodwill andshareholders’ equity reported under US GAAP for an identical amount.Consequently, the currency translation adjustment in other comprehensive  loss for the years ended December 31,2004 and 2003 increased by €8,409,000 and €85,124,000, respectively, thereby increasing othercomprehensive loss by identical amounts in both years. This restatement did notimpact the consolidated statement of operations or cash flows for the years endedDecember 31, 2004 and 2003 as presented in accordance with US GAAP.

**US GAAP requires parent companythird party debt and associated issue costs to be pushed down to the reportingentity under certain circumstances. Accordingly, on analysis of parent companythird party debt, the Group considers it appropriate to adopt pushdownaccounting in respect of the issuance of PIK notes by SKGL with regard to theKappa acquisition. This resulted in a cumulative increase in third party**

F-80

----

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

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

**debt of**€89,620,000as of December 31, 2005 leading to a reduction in income of €667,000 and a reductionin shareholders’ equity reported under US GAAP of €89,620,000. The Grouphas also pushed down debt issue costs of €8,330,000 related to the €325,000,000 PIK notesissued by JSG Holdings which leads to an increase in net loss of €751,000 for the yearended December 31, 2005 and an increase in deferred debt issue costs andan increase in shareholders’ equity reported under US GAAP of €7,579,000. Theserestatements did not impact the consolidated statement of operations, balancesheet or cash flows for the years ended December 31, 2004 and 2003 aspresented in accordance with US GAAP.

**Under US GAAP the functionalcurrency of the Group’s Latin American operations is the local currency of eachof the countries in which it operates. The Group did not meet the criteria fornet investment hedge accounting using a tandem currency debt instrument underUS GAAP and as a result the Group has restated the statements of operations andother comprehensive income reclassifying the translation gains and losses onthe debt instrument. For 2003 and 2004 net income under US GAAP increased by**€116,054,000 and €44,056,000 with acorresponding decrease in other comprehensive income. For 2005 net income underUS GAAP decreased by €66,808,000 with a corresponding increase in othercomprehensive income. These restatements do not impact the shareholders’ equityor cash flows reported under US GAAP for any of the years presented.

**The Group has restatedshareholders’ equity presented in accordance with US GAAP to correct certainclerical errors in relation to the fair value adjustments arising on the acquisitionof Kappa. These restatements decreased shareholders’ equity reported under USGAAP by**€2,544,000 at December 31, 2005. They did not impact theconsolidated statement of operations or cash flows for the years endedDecember 31, 2005, 2004 and 2003 as presented in accordance with US GAAP.

**38 New AccountingStandards**

**US GAAP**

In February 2006, the Financial AccountingStandards Board (‘FASB’) issued SFAS No. 155, ‘*Accounting for Certain Hybrid Financial Instruments—an amendment ofFASB Statements No. 133 and 140*,’ (‘SFAS 155’). SFAS 155 amendsSFAS No. 133, ‘*Accounting forDerivative Instruments and Hedging Activities*,’ and SFAS No. 140,‘*Accounting for Transfers and Servicing ofFinancial Assets and Extinguishment of Liabilities*.’ SFAS 155resolves issues addressed in Statement 133 Implementation Issue No. D1, ‘*Application of Statement 133 to Beneficial Interestsin Securitized Financial Assets*.’ Among other provisions, the new rule(a) permits fair value remeasurement for any hybrid financial instrumentthat contains an embedded derivative that otherwise would require bifurcation, (b) clarifieswhich interest-only strips and principal-only strips are not subject to therequirements of Statement 133, (c) establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation, (d) clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivates, and (e) amends Statement 140 to eliminate the prohibition on aqualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. SFAS 155 is effective for fiscal years beginning after September 15,2006 and is required to be adopted by the Group in the first quarter of fiscalyear 2007, beginning January 1, 2007. We are currently evaluating theeffect that the adoption of SFAS 155 will have on our consolidated results ofoperations, financial position and cash flows, but we do not expect it to havea material impact.

F-81

----

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

**38 NewAccounting Standards—(continued)**

In March 2006, the FASB issued SFAS No. 156,‘*Accounting for Servicing of Financial Assets—anamendment of FASB Statement No. 140*,’ (‘SFAS 156’). SFAS 156amends SFAS No. 140, ‘*Accounting for**Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities*,’ with respect to the accounting for separatelyrecognized servicing assets and servicing liabilities. SFAS 156 is effectivefor fiscal years beginning after September 15, 2006 and is required to beadopted by the Group in the first quarter of fiscal year 2007, beginning January 1,2007. The Group is currently evaluating the effect that the adoption of SFAS156 will have on our consolidated results of operations, financial position andcash flows, but we do not expect it to have a material impact.

In July 2006, the FASB issued FinalInterpretation No. 48, ‘*Accounting forUncertainty in Income Taxes*’(‘FIN 48’). FIN 48 is aninterpretation of FASB Statement No. 109, *‘Accounting for Income Taxes*’. FIN 48 clarifies the accountingfor income taxes by prescribing the minimum recognition threshold a taxposition is required to meet before being recognized in the financialstatements. It also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition. The provisions of FIN 48 are effective from January 1,2007. Differences between the amounts recognized in the Consolidated Balance Sheetsprior to the adoption of FIN 48 and the amounts reported after adoption will beaccounted for as a cumulative-effect adjustment recorded to the beginningbalance of retained earnings. We are currently evaluating the impact of adoptingFIN 48 on our financial statements.

In September 2006, the FASB issued SFAS No. 157,*‘FairValue Measurements’* (‘SFAS157’). SFAS 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles and expands disclosuresabout fair value measurements. SFAS 157 does not require any additional fairvalue measurements; however it eliminates inconsistencies in the guidanceprovided in previous accounting pronouncements. We expect to adopt SFAS 157effective January 1, 2008, as required. We are currently evaluating theimpact of adopting SFAS 157, but do not expect its adoption to have a materialimpact on our consolidated financial position, results of operations or cashflows.

In September 2006, the FASB issued SFAS No. 158,‘*Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans—An Amendment of FASB No. 87, 88, 106 and132(R)*’ (SFAS 158). SFAS 158 requires that the funded status ofdefined benefit postretirement plans (other than multiemployer plans) berecognized on the Group Consolidated Balance Sheet, and that changes in thefunded status be reflected in comprehensive income in the year in which thechanges occur; effective fiscal years ending after June 15, 2007. Thestandard also requires companies to measure the funded status of these plans asof the date of its fiscal year-end, effective for years ending after December 15,2008. For both of these changes early adoption is encouraged. We adopted SFAS158 with effect from January 1, 2006 in our US GAAP financial statements.The adoption of SFAS 158, changing from the corridor approach to therecognition of the full liability resulted in a reduction in the liability of €104million—see Note 37.

In September 2006,the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (‘SAB’)No. 108, “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements”, to eliminatethe diversity of practice surrounding how public companies quantify financialstatement misstatements. Traditionally, there have been two widely-recognizedmethods for quantifying the effects of financial statement misstatements: the ‘roll-over’method and the ‘iron curtain’ method. The roll-over method focuses primarily onthe impact of a misstatement on 

F-82

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

**38 NewAccounting Standards—(continued)**

the income statement, including the reversing effectof prior year misstatements, but its use can lead to the accumulation ofmisstatements in the balance sheet. The iron-curtain method, on the other hand,focuses primarily on the effect of correcting the period-end balance sheet withless emphasis on the reversing effects of prior year errors on the incomestatement. In SAB No. 108, the SEC Staff established an approach thatrequires quantification of financial statement misstatements based on theeffects of the misstatements on each financial statement and the relatedfinancial statement disclosures. This model is commonly referred to as a ‘dualapproach’ because it requires quantification of errors under both the ironcurtain and the roll-over methods. The Group adopted SAB No. 108 in thefourth quarter of 2006. This adoption did not have a material impact on theGroup’s consolidated results of operations, financial position or cash flows.

**InternationalFinancial Reporting Standards**

In 2002 the European Unionissued regulations requiring all companies with securities admitted to tradingon a regulated market in any European Economic Area (EEA) State to preparetheir financial statements in accordance with accounting standards issued bythe International Accounting Standards Board (IASB). For Irish public limited companies with equity securitiespublicly traded, the regulations apply for accounting periods starting on orafter January 1, 2005. For Irish public limited companies whose debtsecurities only are publicly traded the regulations may be applied for accountingperiods starting on or after January 1, 2007. Our equity and debtsecurities are not traded on a regulated market of an EEA Member State, howeverwe will prepare financial statements in accordance with standards issued by theIASB with effect from January 1, 2007.

**39 Post Balance SheetEvents**

**Facture Fire**

A fire occurred in anelectrical station in early January 2007 and shut down one of the largermachines in the Group’s Facture operations. The machine re-opened in mid April.The situation was insured, and the Directors believe that the overall impact onthe Group’s results will not be significant.

**Initial PublicOffering**

On March 14, 2007, SKG completed an initialpublic offering, with the placing to institutional investors of 78,787,879 newordinary shares in SKG plc (the “Ordinary Shares”), a company formed inJanuary 2007 as the ultimate holding company for the Group. This offering,together with the issue of an additional 11,818,181 Ordinary Shares, generatedgross proceeds of €1,495 million, whichwere used by us to repay certain debt obligations and to prepay the shareholderPIK note issued in connection with the Merger. Trading in the shares(“Admission”) on the Irish Stock Exchange and on the London Stock Exchange commencedon March 20, 2007. The additional shares were issued on Admission byDeutsche Bank acting as stabilizing manager under an over-allocation optionrepresenting shares up to a maximum of 15% of the total number of sharescomprised in the initial public offering.

F-83

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

**40 OrganizationalStructure**

Eachof SKG plc, SKGL, SK Holdings, SKCL, SK Funding and  SK Acquisitions are holding companies with nooperations of their own. A listing of our principal subsidiaries is set outbelow.

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

 

F-84

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

**40Organizational Structure—(continued)**

| **Subsidiaries**                                                                                                             | ** ** | ** **                                                                                                                                                                                             | ** ** | **Principal Activities** | ** ** | **Country of  Incorporation** | ** ** | **Holding %** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------|------------|--------------------|------------|
| **Smurfit Deutschland GmbH &  Co KG******Tilsiter Strasse 144, 22047 Hamburg, Germany                               |       | Holding company for German operations which  manufacture paperboard and packaging products                                                                                                             | ** ** | **Germany**                   |       |                               | 100        |               |       |
| **Smurfit International B.V.******Fred Roeskestraat 123, 1076 EE  Amsterdam, The Netherlands                                 |       | Principal international holding company                                                                                                                                                                | ** ** | **The Netherlands**           |       |                               | 100        |               |       |
| **Smurfit International France S.A.******2 rue Goethe, 75116 Paris, France                                                   |       | Holding company for French operations whose  activities are the manufacture of paperboard and packaging products                                                                                       | ** ** | **France**                    |       |                               | 100        |               |       |
| **Smurfit Investments UK Limited******Darlington Road, West Auckland,  Bishop Auckland, Co. Durham  DL14 9PE, United Kingdom |       | Holding company for UK operations whose principal  activities are the manufacture of paperboard and packaging products                                                                                 | ** ** | **United Kingdom**            |       |                               | 100        |               |       |
| **Smurfit Kappa Ireland Limited******Beech Hill, Clonskeagh, Dublin 4, Ireland                                               |       | Manufacture of paperboard and packaging products and  printing                                                                                                                                         | ** ** | **Ireland**                   |       |                               | 100        |               |       |
| **Smurfit Nervion, S.A.******B Arriandi s/n, 48215 lurreta, Vizcaya, Spain                                                   |       | Manufacture of sack paper and holding company for  Spanish, Portuguese and sack converting operations whose principal activities  are the manufacture of paperboard, packaging and paper sack products | ** ** | **Spain**                     |       |                               | 99         |               |       |
| **Smurfit  SISA, S.p.A******Strada Serravalle 30, 15067 Novi Ligure (AL), Italy                                              |       | Manufacture of  paperboard and packaging products                                                                                                                                                      | ** ** | **Italy**                     |       |                               | 90         |               |       |

 

F-85

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**Smurfit Kappa Acquisitions and Subsidiary CompaniesReport of Independent Registered Public Accounting Firm**

To the Board ofDirectors and Shareholders of Smurfit Kappa Acquisitions

We have audited theaccompanying consolidated balance sheet of Smurfit Kappa Acquisitons and itssubsidiaries (the “Company”) as of December 31, 2006, and the relatedconsolidated statements of operations, total recognized gains and losses,changes in shareholders’ equity, and cash flows for the year then ended.  We have also audited the financial statementschedule for the year ended December 31, 2006 listed in the index appearingunder Item 18. These financial statements and financial statement schedule arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audit.

We conducted ouraudit in accordance with International Standards on Auditing (UK and Ireland)and in accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Smurfit Kappa Acquisitions and itssubsidiaries at December 31, 2006 and the results of their operations and theircash flows for the year then ended in conformity with accounting principlesgenerally accepted in Ireland.

Accounting principles generally accepted in Irelandvary in certain significant respects from accounting principles generallyaccepted in the United States of America.  Information relating to thenature and effect of such differences is presented in Note 37 to theconsolidated financial statements.

As describedin Note 2 to the consolidated financial statements, on January 1,2006 the Company changed the manner in which it accounts for share-basedpayments.

We also have audited the adjustments to the 2005 and2004 consolidated financial statements to retrospectively reflect the change inaccounting for share-based payments described in Note 2.  In our opinion, such adjustments areappropriate and have been properly applied. We were not engaged to audit,review, or apply any procedures to the 2005 or 2004 consolidated financialstatements of the Company other than with respect to the adjustments and,accordingly, we do not express an opinion or any other form of assurance on the2005 or 2004 consolidated financial statements taken as a whole.

/s/ PricewaterhouseCoopers

PricewaterhouseCoopersDublin, IrelandApril 27, 2007

F-86

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**Smurfit Kappa Acquisitions (formerly known as JSGAcquisitions) and Subsidiary CompaniesReport of Independent Registered Public Accounting Firm**

To the Board ofDirectorsSmurfit Kappa Acquisitions (formerly known as JSG Acquisitions)

**We have audited, before the effectsof the adjustments to retrospectively apply the change in accounting describedin Note 2, the accompanying consolidated balance sheet of Smurfit KappaAcquisitions (formerly known as  JSGAcquisitions) and subsidiary companies (the “Company”) as of December 31,2005, and the related consolidated statements of operations, total recognizedgains and losses, changes in shareholders’ equity, and cash flows for each ofthe two years in the period ended December 31, 2005 (the 2005 and 2004financial statements before the effects of the adjustments discussed in Note 2are not presented herein). Our audits also included the financial statementschedule listed in the Index at Item 18. These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits. We did not audit the financial statements of Kappa Holding B.V.,a  wholly-owned subsidiary, whichstatements reflect total assets constituting 35.5% as of December 31, 2005and total revenues constituting 4.5% for the year then ended of the related consolidatedtotals. Those statements were audited by other auditors whose report has beenfurnished to us, and our opinion, insofar as it relates to the amounts includedfor Kappa Holding B.V., is based solely on the report of the other auditors.**

**We conducted our audits inaccordance with International Standards on Auditing (UK and Ireland) and thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits and the report of otherauditors provide a reasonable basis for our opinion.**

**In our opinion, based on our auditsand the report of other auditors, the financial statements referred to above,before the effects of the adjustments to retrospectively apply the change inaccounting described in Note 2, present fairly, in all material respects, theconsolidated financial position of Smurfit Kappa Acquisitions (formerly knownas JSG Acquisitions) and subsidiary companies at December 31, 2005, andthe consolidated results of their operations and their cash flows for each ofthe two years in the period ended December 31, 2005, in conformity withaccounting principles generally accepted in Ireland, which differ in certainrespects from U.S. generally accepted accounting principles (see Note 37 of theNotes to the Consolidated Financial Statements). Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.**

F-87

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**Wewere not engaged to audit, review, or apply any procedures to the adjustmentsto retrospectively apply the change in accounting described in Note 2 and, accordingly,we do not express an opinion or any other form of assurance about whether suchadjustments are appropriate and have been properly applied. These adjustmentswere audited by PricewaterhouseCoopers.**

| /s/ ERNST & YOUNG |   |
|----------------------------|--------|
| Ernst &  Young    |   |
| Dublin, Ireland            |   |

 

April 30, 2006, except for Note 37 “US GAAPRestatement Items” as to which the date is November 24, 2006.

F-88

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**Smurfit KappaAcquisitions and Subsidiary CompaniesReport of Independent Registered Public Accounting Firm**

To the Board of Directors of Smurfit KappaAcquisitions

We have audited the combined balance sheet of KappaHolding B.V. and its subsidiaries (the “Company”) as of December 31, 2005and the related combined statement of operations, combined statement of cashflows, total recognized gains and losses and changes in shareholders’ equityfor the one month ended December 31, 2005 (not presented separatelyherein). These combined financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesecombined financial statements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internal controlover financial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly we express no such opinion. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

In our opinion, the combined financial statementsreferred to above present fairly, in all material respects, the financialposition of the Company at December 31, 2005 and the results of itsoperations and cash flows for the one month ended December 31, 2005, inconformity with accounting principles generally accepted in Ireland.

Accounting principles generally accepted in Irelandvary in certain significant respects from accounting principles generallyaccepted in the United States of America. Information relating to the natureand effect of such differences is presented in Note 31 to the combinedfinancial statements.

/s/ PricewaterhouseCoopers

PricewaterhouseCoopersDublin, IrelandApril 30, 2006

F-89

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**Smurfit Kappa Acquisitions and Subsidiary CompaniesConsolidated Statements of Operations**

| ** **                                                  | ** ** | ** ** | ** ** | ** **    | ** ** | **Restated**(1) | ** **   | **Restated**(1) | ** ** |
|-------------------------------------------------------------|------------|------------|------------|---------------|------------|-----------------|--------------|-----------------|------------|
| ** **                                                  | ** ** | **Note**   | ** ** | **2006**      | ** ** | **2005**        | ** **   | **2004**        | ** ** |
| ** **                                                  | ** ** | ** ** | ** ** | **€000** | ** ** | **€000**   | ** **   | **€000**   | ** ** |
| Net Sales                                                   | ** ** |       | ** ** | ** **    |       | ** **      | ** **   | ** **      | ** ** | ** ** | ** ** |
| Continuing  operations                                      |       |       |       | ** **    |       | 7,032,713       |         | 4,412,125       |       | 4,278,439 |   |
| Discontinued  operations                                    |       |       |       | ** **    |       | —          |         | 25,204          |       | 526,643 |   |
|                                                        |       |       | 3          | ** **    |       | 7,032,713       |         | 4,437,329       |       | 4,805,082 |   |
| Cost of sales                                               |       |       |       | ** **    |       | 5,064,797       |         | 3,222,705       |       | 3,473,299 |   |
| Impairment of  property, plant and equipment                |       |       | 5          | ** **    |       | 31,299          |         | 45,214          |       | — |   |
| Gross profit                                                |       |       |       | ** **    |       | 1,936,617       |         | 1,169,410       |       | 1,331,783 |   |
| Net operating  expenses                                     |       |       | 4          | ** **    |       | 1,542,183       |         | 982,363         |       | 1,017,749 |   |
| Reorganization  and restructuring costs                     |       |       | 5          | ** **    |       | 196,563         |         | 25,090          |       | 39,430 |   |
| Impairment of  advances to affiliates                       |       |       | 5          | ** **    |       | 52,821          |         | —          |       | — |   |
| Operating income  subsidiaries                              |       |       |       | ** **    |       |            |         |            |       |   |   |
| Continuing  operations                                      |       |       |       | ** **    |       | 145,050         |         | 163,801         |       | 218,844 |   |
| Discontinued  operations                                    |       |       |       | ** **    |       | —          |         | (1,844          | )          | 55,760 |   |
|                                                        |       |       |       | ** **    |       | 145,050         |         | 161,957         |       | 274,604 |   |
| Share of  associates’ operating income                 |       |       |       | ** **    |       | 11,627          |         | 7,287           |       | 12,611 |   |
| Total operating  income                                     |       |       |       | ** **    |       | 156,677         |         | 169,244         |       | 287,215 |   |
| (Loss)/income on  sale of assets and businesses             |       |       | 5          | ** **    |       | (22,856         | )            | 52,587          |       | 22,173 |   |
| Interest income                                             |       |       |       | ** **    |       | 13,225          |         | 10,730          |       | 8,335 |   |
| Interest expense                                            |       |       | 7          | ** **    |       | (356,177        | )            | (249,475        | )          | (293,009 | ) |
| Loss from early  extinguishment of debt                     |       |       | 7          | ** **    |       | —          |         | (104,658        | )          | (5,697 | ) |
| Other financial  expense                                    |       |       | 24         | ** **    |       | (9,064          | )            | (13,259         | )          | (15,718 | ) |
| Share of  associates’ net interest                     |       |       |       | ** **    |       | (1,950          | )            | (1,336          | )          | (1,301 | ) |
| (Loss)/income  before taxes and equity minority   interests |       |       | 8          | ** **    |       | (220,145        | )            | (136,167        | )          | 1,998 |   |
| Taxes on income                                             |       |       | 9          | ** **    |       | (37,307         | )            | (21,561         | )          | (26,973 | ) |
| (Loss) before  equity minority interests                    |       |       |       | ** **    |       | (257,452        | )            | (157,728        | )          | (24,975 | ) |
| Equity minority  interests                                  |       |       |       | ** **    |       | (14,474         | )            | (18,813         | )          | (16,067 | ) |
| **Net (loss) for the year****(2)**                          | ** ** |       | ** ** | ** **    |       | **€**      | **(271,926** | **)**           | **€** | **(176,541** | **)** | **€** | **(41,042** | **)** |
|                                                             |            |            |            |               |            |                 |              |                 |            |  |  |  |  |  |

----

(1)          Restated to reflect theimpact of implementing FRS 20 “Share-Based Payments”.

(2)          A summary of thesignificant adjustments to net (loss) which would be required if accountingprinciples generally accepted in the United States had been applied instead ofthose generally accepted in Ireland is given in Note 37.

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

F-90

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**Smurfit Kappa Acquisitions and Subsidiary CompaniesConsolidated Statementsof Total Recognized Gains and Losses**

| ** **                                                         | ** ** | ** ** | ** ** | ** **    | ** ** | **Restated**(1) | ** **   | **Restated**(1) | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|---------------|------------|-----------------|--------------|-----------------|------------|
| ** **                                                         | ** ** | **Note**   | ** ** | **2006**      | ** ** | **2005**        | ** **   | **2004**        | ** ** |
| ** **                                                         | ** ** | ** ** | ** ** | **€000** | ** ** | **€000**   | ** **   | **€000**   | ** ** |
| (Loss)/income for the  year                                        |       |       |       |          |       |            |         |            |       |   |   |
| Group                                                              |       |       |       |          |       | (273,824        | )            | (178,710        | )          | (44,986 | ) |
| Associates                                                         |       |       |       |          |       | 1,898           |         | 2,169           |       | 3,944 |   |
|                                                               |       |       |       |          |       | (271,926        | )            | (176,541        | )          | (41,042 | ) |
| Translation  adjustments on foreign currency net investments       |       |       |       |          |       |            |         |            |       |   |   |
| Group                                                              |       |       |       |          |       | 24,385          |         | 5,529           |       | 15,222 |   |
| Actuarial gain/(loss) recognized in retirement  benefit schemes(2) |       |       | 24         |          |       | 61,654          |         | (17,281         | )          | (6,988 | ) |
| Minority share of  actuarial gain                                  |       |       |       |          |       | (36             | )            | (94             | )          | — |   |
|                                                               |       |       |       |          |       | 61,618          |         | (17,375         | )          | (6,988 | ) |
| Total recognized gains and losses relating to the  year            |       |       |       |          |       | (185,923        | )            | (188,387        | )          | (32,808 | ) |
| Prior year adjustment                                              |       |       |       |          |       | (20,338         | )            | —          |       | — |   |
| Total recognized gains and losses since last financial  statements |       |       |       |          |       |            |         |            |       |   |   |
| Group                                                              |       |       |       |          |       | (208,159        | )            | (190,556        | )          | (36,752 | ) |
| Associates                                                         |       |       |       |          |       | 1,898           |         | 2,169           |       | 3,944 |   |
|                                                               | ** ** |       |       |          | ** ** | **€**      | **(206,261** | **)**           | **€** | **(188,387** | **)** | **€** | **(32,808** | **)** |
|                                                                    |            |            |            |               |            |                 |              |                 |            |  |  |  |  |  |

----

(1)          Restatedto reflect the impact of implementing FRS 20 “Shared-Based Payments”.

(2)          Netof related deferred taxation charge of €19,229,000 (2005: a chargeof €2,396,000;2004: a credit of €3,303,000).

**Note of HistoricalCost Profits and Losses**

The results disclosed inthe Consolidated Statements of Operations are not materially different to theresults based on an unmodified historical basis.

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

F-91

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**SmurfitKappa Acquisitions and Subsidiary CompaniesConsolidated Balance Sheets**

| ** **                                                               | ** ** | ** ** | ** ** | ** **    | ** ** | **Restated**(1) | ** **    |
|--------------------------------------------------------------------------|------------|------------|------------|---------------|------------|-----------------|---------------|
| ** **                                                               | ** ** | **Note**   | ** ** | **2006**      | ** ** | **2005**        | ** **    |
| ** **                                                               | ** ** | ** ** | ** ** | **€000** | ** ** | **€000**   | ** **    |
| **Assets**                                                               |       |       |       |          |       |            |          |   |   |
| **Current assets**                                                       |       |       |       |          |       |            |          |   |   |
| Cash                                                                     |       |       | 10         |          |       | 370,121         |          | 247,727 |   |
| Restricted cash                                                          |       |       | 10         |          |       | —          |          | 755,575 |   |
| Accounts receivable and  prepayments                                     |       |       | 11         |          |       | 1,344,620       |          | 1,314,728 |   |
| Assets held for sale and  inter-company balances                         |       |       |       |          |       | 5,000           |          | 54,404 |   |
| Amounts due by  affiliates                                               |       |       |       |          |       | 146             |          | 107 |   |
| Amounts due by  affiliates after more than one year                      |       |       |       |          |       | 211,003         |          | 263,115 |   |
| Inventories                                                              |       |       | 12         |          |       | 626,372         |          | 663,131 |   |
| **Total  current assets**                                                | ** ** |       |       |          | ** ** | **2,557,262**   | ** **    | **3,298,787** | ** ** |
| **Fixed assets**                                                         |       |       |       |          |       |            |          |   |   |
| Investments                                                              |       |       | 13         |          |       | 82,502          |          | 87,746 |   |
| Property, plant and  equipment                                           |       |       | 14         |          |       | 3,398,956       |          | 3,499,084 |   |
| Intangible assets                                                        |       |       | 15         |          |       | 2,348,733       |          | 2,490,245 |   |
| **Total  fixed assets**                                                  | ** ** |       |       |          | ** ** | **5,830,191**   | ** **    | **6,077,075** | ** ** |
| **Total  assets**                                                        | ** ** |       |       |          | ** ** | **€**      | **8,387,453** | ** ** | **€** | **9,375,862** | ** ** |
| **Liabilities, minority interests and  shareholders’ equity**       |       |       |       |          |       |            |          |   |   |
| **Current liabilities**                                                  |       |       |       |          |       |            |          |   |   |
| Bank loans, overdrafts  and other borrowing                              |       |       | 19         |          |       | 199,536         |          | 72,555 |   |
| Kappa bonds outstanding                                                  |       |       | 19         |          |       | —          |          | 755,575 |   |
| Accounts payable and  accrued liabilities                                |       |       | 16         |          |       | 1,544,983       |          | 1,500,413 |   |
| **Total  current liabilities**                                           | ** ** |       |       |          | ** ** | **1,744,519**   | ** **    | **2,328,543** | ** ** |
| **Non current liabilities**                                              |       |       |       |          |       |            |          |   |   |
| Long term debt and other  long term liabilities                          |       |       | 18         |          |       | 3,255,777       |          | 3,164,540 |   |
| Amounts due to  affiliates                                               |       |       |       |          |       | 1,331,106       |          | 1,414,925 |   |
| Provisions for  liabilities and charges                                  |       |       | 20         |          |       | 177,561         |          | 247,733 |   |
| Pension liabilities                                                      |       |       | 24         |          |       | 493,763         |          | 655,368 |   |
| Capital grants deferred                                                  |       |       |       |          |       | 13,869          |          | 14,460 |   |
| Minority interests  (equity interests)                                   |       |       |       |          |       | 129,788         |          | 131,384 |   |
| **Total  liabilities and minority interests**                            | ** ** |       |       |          | ** ** | **7,146,383**   | ** **    | **7,956,953** | ** ** |
| **Shareholders equity****(2)**                                           |       |       |       |          |       |            |          |   |   |
| Share capital                                                            |       |       |       |          |       | 40              |          | 40 |   |
| Other reserves                                                           |       |       | 26         |          |       | 1,735,897       |          | 1,703,428 |   |
| Retained deficit                                                         |       |       |       |          |       | (494,867        | )             | (284,559 | ) |
| **Shareholders’ equity**                                            | ** ** |       |       |          | ** ** | **1,241,070**   | ** **    | **1,418,909** | ** ** |
| **Total liabilities, minority interests and  shareholders’ equity** | ** ** |       |       |          | ** ** | **€**      | **8,387,453** | ** ** | **€** | **9,375,862** | ** ** |

----

(1)          Restatedto reflect the impact of implementing FRS 20 “Share-Based Payments”.

(2)          Asummary of the significant adjustments to shareholder’s equity which would berequired if accounting principles generally accepted in the United States hadbeen applied instead of those generally accepted in Ireland is given in Note37.

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

F-92

----

**Smurfit Kappa Acquisitions and Subsidiary CompaniesConsolidated Statements of Changes in Shareholders’ Equity**

 

| ** **                                                     | ** ** | ** ** | ** ** | ** **            | ** ** | ** **                              | ** ** | ** **                          | ** ** | **Restated**(1)                       | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **Note**   | ** ** | **Share  capital**(2) | ** ** | **Restated**(1) Other  reserves(2) | ** ** | **Restated**(1)  Retained  earnings | ** ** | **Total  shareholders’  equity** | ** ** |
| ** **                                                     | ** ** | ** ** | ** ** | **€’000**   | ** ** | **€’000**                     | ** ** | **€’000**                 | ** ** | **€’000**                   | ** ** |
| **Balance  at December 31, 2003 as reported**             | ** ** |       | ** ** | ** **            |       |                                    | **40**     | ** **                          |       | **923,386**                           | ** ** | **(34,530** | **)** |   | **888,896** | ** ** |   |
| Effect of  adoption of FRS 20 ‘Share based payments’ |       |       |       | ** **            |       |                                    | —     | ** **                          |       | 8,083                                 |       | (8,083 | ) |   | — |   |   |
| **Balance  at December 31, 2003 as restated**             | ** ** |       | ** ** | ** **            |       |                                    | **40**     | ** **                          |       | **931,469**                           | ** ** | **(42,613** | **)** |   | **888,896** | ** ** |   |
| Share-based  payments                                          |       |       |       | ** **            |       |                                    | —     | ** **                          |       | 7,184                                 |       | — |   |   | 7,184 |   |   |
| Loss for the  financial year                                   |       |       |       | ** **            |       |                                    | —     | ** **                          |       | —                                |       | (41,042 | ) |   | (41,042 | ) |   |
| Actuarial loss  recognized in retirement benefit schemes(3)    |       |       | 24         | ** **            |       |                                    | —     | ** **                          |       | —                                |       | (6,988 | ) |   | (6,988 | ) |   |
| Currency translation  adjustments                              |       |       |       | ** **            |       |                                    | —     | ** **                          |       | 15,222                                |       | — |   |   | 15,222 |   |   |
| **Balance  at December 31, 2004**                         | ** ** |       | ** ** | ** **            |       |                                    | **40**     | ** **                          |       | **953,875**                           | ** ** | **(90,643** | **)** |   | **863,272** | ** ** |   |
| Capital contribution                                           |       |       |       | ** **            |       |                                    | —     | ** **                          |       | 738,953                               |       | — |   |   | 738,953 |   |   |
| Share-based  payments                                          |       |       |       | ** **            |       |                                    | —     | ** **                          |       | 5,071                                 |       | — |   |   | 5,071 |   |   |
| Loss for the  financial year                                   |       |       |       | ** **            |       |                                    | —     | ** **                          |       | —                                |       | (176,541 | ) |   | (176,541 | ) |   |
| Actuarial loss  recognized in retirement benefit schemes(3)    |       |       | 24         | ** **            |       |                                    | —     | ** **                          |       | —                                |       | (17,281 | ) |   | (17,281 | ) |   |
| Minority share of  actuarial gain                              |       |       |       | ** **            |       |                                    | —     | ** **                          |       | —                                |       | (94 | ) |   | (94 | ) |   |
| Currency  translation adjustments                              |       |       |       | ** **            |       |                                    | —     | ** **                          |       | 5,529                                 |       | — |   |   | 5,529 |   |   |
| **Balance  at December 31, 2005**                         | ** ** |       | ** ** | ** **            |       |                                    | **40**     | ** **                          |       | **1,703,428**                         | ** ** | **(284,559** | **)** |   | **1,418,909** | ** ** |   |
| Share-based payments                                           |       |       |       | ** **            |       |                                    | —     | ** **                          |       | 8,084                                 |       | — |   |   | 8,084 |   |   |
| Loss for the  financial year                                   |       |       |       | ** **            |       |                                    | —     | ** **                          |       | —                                |       | (271,926 | ) |   | (271,926 | ) |   |
| Actuarial gain  recognized in retirement benefit schemes(3)    |       |       | 24         | ** **            |       |                                    | —     | ** **                          |       | —                                |       | 61,654 |   |   | 61,654 |   |   |
| Minority share of  actuarial gain                              |       |       |       | ** **            |       |                                    | —     | ** **                          |       | —                                |       | (36 | ) |   | (36 | ) |   |
| Currency  translation adjustments                              |       |       |       | ** **            |       |                                    | —     | ** **                          |       | 24,385                                |       | — |   |   | 24,385 |   |   |
| **Balance at December 31,  2006**                         | ** ** |       | ** ** | ** **            |       |                                    | **€** | **40**                              | ** ** |                                  | **€** | **1,735,897** | ** ** | **€** | **(494,867** | **)** |   | **€** | **1,241,070** | ** ** |   |
|                                                                |            |            |            |                       |            |                                         |            |                                     |            |                                       |            |  |  |  |  |  |  |  |  |  |  |

----

(1)          Restated to reflect theimpact of implementing FRS 20 “Share-Based Payments”.

(2)          See Note 26 for furtherdetail.

(3)          Net of related deferredtaxation charge of €19,229,000(2005: a charge of €2,396,000;2004: a credit of €3,303,000).

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

F-93

----

**Smurfit KappaAcquisitions and Subsidiary Companies**

**Consolidated Statements ofCash Flows**

| ** **                                                              | ** ** | **Note**   | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                              | ** ** | ** ** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Net cash  flow from operating activities**                            |       |       | 28         |          |       | 657,712       |       | 512,871       |       | 640,928 |   |
| **Dividends  received from associates**                                 |       |       |       |          |       | 4,462         |       | 3,062         |       | 2,989 |   |
| **Returns on investments and servicing of finance**                     |       |       |       |          |       |          |       |          |       |   |   |
| Interest  received                                                      |       |       |       |          |       | 13,225        |       | 10,730        |       | 8,370 |   |
| Interest  paid                                                          |       |       |       |          |       | (343,126      | )          | (286,814      | )          | (278,449 | ) |
| Interest  paid on finance leases                                        |       |       |       |          |       | (1,348        | )          | (1,138        | )          | (1,962 | ) |
| Other  financial interest paid                                          |       |       |       |          |       | (9,064        | )          | (13,259       | )          | (15,718 | ) |
| Dividends  to minority interests                                        |       |       |       |          |       | (7,175        | )          | (6,152        | )          | (5,707 | ) |
| Deferred  debt issuance costs                                           |       |       |       |          |       | —        |       | (98,055       | )          | (5,814 | ) |
|                                                                    |       |       |       |          |       | (347,488      | )          | (394,688      | )          | (299,280 | ) |
| **Taxation**                                                            |       |       |       |          |       |          |       |          |       |   |   |
| Irish  corporation tax paid                                             |       |       |       |          |       | (2,631        | )          | (3,480        | )          | (8,515 | ) |
| Overseas  tax paid                                                      |       |       |       |          |       | (38,883       | )          | (39,274       | )          | (50,249 | ) |
| Overseas  tax refunded                                                  |       |       |       |          |       | —        |       | —        |       | 21,433 |   |
|                                                                    |       |       |       |          |       | (41,514       | )          | (42,754       | )          | (37,331 | ) |
| **Capital expenditure and financial investment**                        |       |       |       |          |       |          |       |          |       |   |   |
| Purchase  of tangible fixed assets                                      |       |       |       |          |       | (344,687      | )          | (192,434      | )          | (206,466 | ) |
| Less  new finance leases                                                |       |       |       |          |       | 2,987         |       | 4,053         |       | 2,963 |   |
|                                                                    |       |       |       |          |       | (341,700      | )          | (188,381      | )          | (203,503 | ) |
| Capital  grants received                                                |       |       |       |          |       | 784           |       | 3,390         |       | 1,874 |   |
| Purchase  of other investments                                          |       |       |       |          |       | (1,500        | )          | (87           | )          | (772 | ) |
| Retirement  of fixed assets                                             |       |       | 30         |          |       | 27,365        |       | 18,198        |       | 36,388 |   |
|                                                                    |       |       |       |          |       | (315,051      | )          | (166,880      | )          | (166,013 | ) |
| **Acquisitions and disposals**                                          |       |       |       |          |       |          |       |          |       |   |   |
| Purchase  of subsidiaries and minorities                                |       |       |       |          |       | (4,836        | )          | (205,532      | )          | (2,731 | ) |
| Deferred  acquisition consideration                                     |       |       |       |          |       | (33,574       | )          | (1,520        | )          | (2,390 | ) |
| Business  disposals                                                     |       |       |       |          |       | 42,438        |       | 572,174       |       | — |   |
| Receipts  from affiliates                                               |       |       |       |          |       | —        |       | 9,899         |       | 11,934 |   |
| Investments  in and advances to associates                              |       |       |       |          |       | 1,145         |       | (351          | )          | (1,194 | ) |
|                                                                    |       |       |       |          |       | 5,173         |       | 374,670       |       | 5,619 |   |
| **Cash  (outflow)/inflow before use of liquid resources and financing** |       |       |       |          |       | (36,706       | )          | 286,281       |       | 146,912 |   |
| **Management  of liquid resources**                                     |       |       | 31         |          |       | 671,797       |       | (789,786      | )          | (16,914 | ) |
| **Financing**                                                           |       |       |       |          |       |          |       |          |       |   |   |
| Issue  of shares including minorities                                   |       |       |       |          |       | —        |       | 5             |       | 27 |   |
| (Decrease)/increase  in term debt                                       |       |       | 31         |          |       | (600,361      | )          | 481,142       |       | (67,266 | ) |
| Advances  from affiliates                                               |       |       |       |          |       | 1,717         |       | 125           |       | 1,102 |   |
| Capital  elements of finance leases repaid                              |       |       |       |          |       | (7,647        | )          | (4,812        | )          | (13,576 | ) |
|                                                                    |       |       |       |          |       | (606,291      | )          | 476,460       |       | (79,713 | ) |
| **Increase/(decrease) in  cash**                                        |       |       | 31         |          | ** ** | **€**    | **28,800** | ** **    | **€** | **(27,045** | **)** | **€** | **50,285** | ** ** |
|                                                                         |            |            |            |               |            |               |            |               |            |  |  |  |  |  |

 

The significantdifferences between the cash flow statement prepared under accountingprinciples generally accepted in the United States and that prepared underaccounting principles generally accepted in Ireland are given in Note 37.

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

F-94

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements**

**1General Information**

Smurfit KappaAcquisitions (“SK Acquisitions”) is a wholly owned subsidiary of SmurfitKappa Funding plc (“SK Funding”). In October,2002, SK Acquisitions (formerly known as JSG Acquisitions) completed theacquisition of all of the ordinary shares of Jefferson Smurfit Group plc (“JSG”)in a take private transaction. Prior to this acquisition, SK Acquisitions hadno operations.

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

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

On June 16, 2005 we completed the sale of TheKildare Hotel & Country Club (The K Club), additional land near The KClub and surplus land near our Dublin head office for €115million to a company controlled by Sir Michael Smurfit. The proceeds from thesale were applied to debt reduction.

The Munksjö specialty businesses and The K Club arereported as discontinued operations in theConsolidated Statements of Operations.

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

Under Irish GAAP fairvalue exercises are required to be completed as soon as practicable after thedate of acquisition with the final fair value adjustments incorporated in thefinancial statements for the first full financial year following theacquisition. The fair value exercise relating to the acquisition of Kappa wasprovisional at December 31, 2005 and has been finalised during 2006. Thesignificant adjustments were in respect of the fair value of land andbuildings, plant and equipment, assets held for sale, post retirement benefits,goodwill and deferred taxation. The actuarial valuations of the various postretirement plans have been completed and have resulted in a decrease in thepension liability of €24 million. We have alsocompleted the exercise in relation to land and buildings and plant andequipment, which has resulted in an increase in fixed assets of €53 million.Assets held for sale were fair valued to reflect the final proceeds from thesale of Kappa Graphic Board. This has resulted in an increase to goodwill ofover €50 million.The acquisition of Kappa resulted in a net increase in goodwill of €1.1 billion.

F-95

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**2 Accounting Policies**

***(a) Basis of accounting:***

The financial statements are prepared under thehistorical cost convention as modified by the revaluation of land and buildingsand the measurement of fair value of share options and in accordance withgenerally accepted accounting principles in Ireland (Irish GAAP). They areprepared and presented in euro (€). In preparing thesefinancial statements, certain items have been included in order to comply withaccounting presentation and disclosure requirements applicable in the UnitedStates in respect of foreign registrants. An explanation of the significant differencesbetween Irish and US GAAP as they apply to the Group and a reconciliation to USGAAP are set out in Note 37. The financial statements do not constitute fullgroup accounts within the meaning of Regulation 40(1) of the EuropeanCommunities (Companies: Group Accounts) Regulations, 1992 of Ireland insofar assuch group accounts would have to comply with all of the disclosure and otherrequirements of those Regulations. The auditors have made reports withoutqualification and without reference to an emphasis of matter under Section 193of the Companies Act, 1990, in respect of the consolidated financial statementsfor the years ended December 31, 2006, 2005 and 2004.

The financial statements have been prepared using thesame accounting policies as set out in the financial statements for the yearended December 31, 2005 with the exception of the accounting policy onshare-based payments following the adoption of FRS 20 “Share-Based Payments”. Theadoption of this standard represents a change in accounting policy and thecomparative figures have been restated accordingly.

The effect of the changein accounting policy on share-based payments was to increase the loss by €8,084,000(2005: €5,071,000;2004: €7,184,000)comprising an increase in administrative expenses. The effect of the change inaccounting policy on the Consolidated Balance Sheets of December 31, 2006was to increase the share based compensation reserve by €28,422,000(2005: €20,338,000)with a corresponding reduction in retained earnings.

***(b) Group consolidation:***

The financial statementscomprise a consolidation of the financial statements of SK Acquisitions and its’subsidiaries (the “Group”) made up to December 31, 2006. Associates areaccounted for under the equity method of accounting. Where accounting policiesfollowed by subsidiaries and associates differ significantly from those adoptedfor the purpose of the consolidated financial statements, appropriateadjustments are made in order to achieve a consistent basis of accounting. Theresults of subsidiaries acquired or sold are consolidated, and the Group’sshare of the results of associates are included, for the periods from theireffective date of acquisition or to their effective date of sale.

***(c) Net sales and revenue recognition:***

Net sales comprises thefair value of consideration received or receivable for the sale of goods andservices supplied to customers in the ordinary course of business during theaccounting period, excluding value added tax, returns and allowances forrebates and discounts and after eliminating sales within the Group. Revenue isrecognized to the extent that it is probable that the economic benefits willflow to the Group, that it can be reliably measured and that the significantrisks and rewards of ownership of the goods have passed to the buyer. Thisgenerally occurs at the time of delivery at which point the risks ofobsolescence and loss have been transferred to the buyer. The amount of revenueis not considered to be 

F-96

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**2Accounting Policies—(continued)**

reliablymeasurable until all contingencies relating to the sale have been resolved. TheGroup bases its estimates of returns and allowances on historical results,taking into consideration the type of customer, the type of transaction and thespecifics of each arrangement.

***(d) Goodwill and intangible assets:***

Goodwill represents the excess of the cost of sharesin subsidiaries over the fair value of their net assets acquired based on Groupaccounting policies. It is capitalized and amortized over a period of 40 years,as the directors believe that the durability of the business can bedemonstrated and the value of goodwill is capable of being continuallyreassessed. The carrying value of goodwill is subject to an impairment reviewat the end of the first full year following the year of acquisition andannually thereafter.

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

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

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

***(f) Depreciation:***

Long-lived assets, consisting primarily of property,plant and equipment, comprise a significant portion of the total assets. Theannual depreciation charge depends primarily on the estimated lives of eachtype of asset and in certain circumstances, estimates of fair values andresidual values. The Directors regularly review these asset lives and changethem as necessary to reflect current thinking on remaining lives in light oftechnological change, prospective economic utilization and physical conditionof the assets concerned. Changes in asset lives can have a significant impacton depreciation and amortization charges for the period. It is not practical toquantify the impact of changes in asset lives on an overall basis, as assetlives are individually determined and there are a significant number of assetlives in use. Details of the useful lives is included in the accounting policy.The impact of any change would vary significantly depending on the individualchanges in assets and the classes of assets impacted. The depreciation ratesare as follows:

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

 

***(g) Timberlands:***

The cost of acquiring,establishing and maintaining forestry plantations are classified as timberlands.Depletion of timberlands represents the charge to income relating to the timberextracted in the year.

***(h) Financial assets:***

Financial assets, areshown at cost less provisions for impairments in value. Income from financialassets, together with any related tax credit, is recognized in the ConsolidatedStatements of Operations in the period in which it is receivable.

F-97

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**2Accounting Policies—(continued)**

***(i) Leasing:***

Tangible fixed assetsacquired under finance leases are included in the Consolidated Balance Sheetsat their equivalent capital value and are depreciated over the shorter of thelease term and their useful lives. The corresponding liabilities are recordedas a creditor and the interest element of the finance lease rentals is chargedto the Consolidated Statements of Operations on an annuity basis. Operatinglease rentals are charged to the Consolidated Statements of Operations on astraight line basis over the lease term.

***(j) Inventory valuation:***

Inventory is valued at thelower of cost and net realizable value. Cost includes direct costs plusapplicable factory and other overheads. Net realizable value is the actual orestimated selling price less all applicable costs incurred or likely to beincurred in the realization of the selling price. Full provision is made forall damaged, deteriorated, obsolete and unusable materials.

***(k) Debt instruments:***

The finance costs of debtinstruments, which is the difference between the net proceeds and the totalamount payable under the instrument, are accounted for over the life of the instrumentat a constant rate of interest on the outstanding balance. The proceeds of debtinstruments, net of issue costs, are shown as liabilities on the Consolidated BalanceSheets.

***(l) Derivative instruments:***

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

*Forward foreigncurrency contracts*

The criteria forforward foreign currency contracts are:

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

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

The rates under suchcontracts are used to record the hedged item. As a result, gains and losses areoffset against the foreign exchange gains and losses on the related financialassets and liabilities, or where the instrument is used to hedge a committed orprobable future transaction, are deferred until the transaction occurs. Gainsand losses arising on hedges of anticipated transactions are recorded in theconsolidated statements of operations when such anticipated transactions are nolonger likely to occur.

*Interest rate swaps*

The Group’scriteria for interest rate swaps are:

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

F-98

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**2Accounting Policies—(continued)**

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

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

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

*Currency swaps*

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

***(m) Foreign currencies:***

Foreign currency transactions are translated at therate of exchange ruling at the date of the transaction or, if hedged forward,at the rate of exchange under the related forward currency contract. Monetaryassets and liabilities denominated in foreign currencies are translated at theclosing rate or, if hedged forward, at the rate of exchange under the relatedforward currency contract. The resulting profits or losses are dealt with inthe Consolidated Statements of Operations.

The balance sheets ofsubsidiaries are translated using the closing rate method. The ConsolidatedStatements of Operations and cash flow statement are translated at averagerates ruling for the relevant period. Resulting currency differences, togetherwith those arising on hedging activities, are dealt with in reserves. Thetransactions of operations in hyper-inflationary economies are reported using arelatively stable currency as the functional currency. The translation gainsand losses arising are recognized in the Consolidated Statements of Operations.

***(n) Post retirement benefits:***

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

F-99

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**2Accounting Policies—(continued)**

***(o) Share-based payments***

The fair value of convertible shares granted under theGroup’s management equity plan is recognized as an expense with a correspondingincrease in equity. The fair value is measured at grant date and spread overthe period during which the awards vest. The fair value is measured using abinomial lattice model, taking into account the terms and conditions upon whichthe options were granted. The convertible shares issued by the Company aresubject to both market-based and non-market based vesting conditions as definedin FRS 20.

Market-based conditions are included in thecalculation of fair value at the date of grant. Non-market vesting conditionsare not taken into account when estimating the fair value of awards as at the grantdate; such conditions are taken into account through adjusting the number ofequity instruments included in the measurement of the transaction amount sothat, ultimately, the amount recognized equates to the number of equityinstruments that actually vest. The expense in the income statement in relationto convertible shares granted represents the product of the total number ofoptions anticipated to vest and the fair value of those shares; this amount isallocated to accounting periods on a straight-line basis over the vestingperiod. The cumulative charge to the Consolidated Statements of Operations isreversed only where the non-market performance condition is not met or where anemployee in receipt of share options relinquishes service prior to completionof the expected vesting period. No reversal of the cumulative charge to theConsolidated Statements of Operations is made where such awards do not vest asa result of the market-based vesting conditions not being achieved.

The proceedsreceived net of any directly attributable transaction costs are credited toshare capital (nominal value) and share premium when vested convertible sharesare converted into ordinary shares. To the extent that the Group receives a taxdeduction relating to the services paid in shares, deferred tax in respect ofshare options is provided on the basis of the difference between the marketprice of the underlying equity as at the date of the financial information andthe exercise price of the option; as a result, the deferred tax impact of shareoptions will not directly correlate with the expense reported in the Group’sConsolidated Statements of Operations.

The Group has nocash-settled share-based payment transactions as defined in FRS 20.

***(p) Taxation and deferred taxation:***

Current tax represents the expected tax payable (orrecoverable) on the taxable profits for the year using tax rates enacted or substantivelyenacted at the balance sheet date and taking into account any adjustmentsarising from prior years.

Deferred tax is provided on all timing differencesthat have originated but not reversed at the balance sheet date wheretransactions or events that result in an obligation to pay more tax in thefuture or a right to pay less tax in the future have occurred at the balancesheet date. Deferred tax assets are only recognized to the extent that taxlosses carried forward are considered more likely than not to be recoverableagainst future taxable profits in the relevant entity.

Timing differences are temporary differences betweenprofits as computed for tax purposes and profits as stated in the financialstatements, which arise because certain items of income and expenditure in thefinancial statements are dealt with in different years for tax purposes.

F-100

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**2 AccountingPolicies—(continued)**

Deferred tax is measuredat the tax rates that are expected to apply in the years in which the timing differencesare expected to reverse based on tax rates and laws that have been enacted orsubstantively enacted by the balance sheet date. Deferred tax is notdiscounted.

***(q) Research and development:***

Research and developmentexpenditure is written off as incurred.

***(r) Use of estimates:***

Estimates and judgments are continually evaluated andare based on historical experience and other factors, including expectations offuture events that are believed to be reasonable under the circumstances.

The Group makesestimates and assumptions concerning the future. The resulting accountingestimates will, by definition, rarely equal the related actual results. Theestimates and assumptions that have a significant risk of causing a materialadjustment to the carrying amounts of assets and liabilities within the nextfinancial year are outlined below.

*(i)**              Estimatedimpairment of goodwill*

The Group testsannually whether goodwill has suffered any impairment, in accordancewith the accounting policy stated above. The recoverable amounts of groupsof cash-generating units have been determined based on value-in-usecalculations. Key assumptions include management’s estimates of futureprofitability, replacement capital expenditure requirements, trade workingcapital investment needs, tax considerations and discount rates. Keyassumptions in determining terminal value include earnings multiples forestimating fair value.

*(ii)**           Incometaxes*

The Group is subject to income taxes in numerousjurisdictions. Significant judgment is required in determining the worldwideprovision for income taxes. There are many transactions and calculations forwhich the ultimate tax determination is uncertain during the ordinary course ofbusiness. The Group recognizes liabilities for anticipated tax audit issuesbased on estimates of whether additional taxes will be due. Where the final taxoutcome of these matters is different from the amounts that were initiallyrecorded, such differences will impact the income tax and deferred taxprovisions in the period in which such determination is made.

*(iii)**        Measurementof defined benefit obligations*

The Group followsguidance of FRS 17 to determine the present value of its obligations to currentand past employees in respect of defined benefit pension obligations and otherlong term employee benefits, which are subject to similar fluctuations in valuein the long term. The Group uses a network of professional actuariesco-ordinated under a world wide process to value such liabilities designed toensure consistency in the quality of the key assumptions underlying thevaluations. The critical assumptions and estimates applied are outlined indetail in Note 24.

*(iv)**        Provisions*

The amount recognized for a provision is the bestestimate of the expenditure to be incurred. Provisions are remeasured at eachbalance sheet date based on the best estimate of the settlement amount. 

F-101

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**2Accounting Policies—(continued)**

Changesto the best estimate of the settlement amount may result from changes in theamount or timing of the outflows or changes in discount rates (whenapplicable).

*(v)**           Share-basedpayments*

The determinationof the fair value of awards under the management equity plan involves the useof judgements and estimates. The fair value has been estimated using a binomiallattice model in accordance with the judgemental assumptions set out inNote 27.

*(vi)**        Establishinglives for depreciation purposes of property, plant and equipment*

Long-lived assets,consisting primarily of property, plant and equipment, comprise a significantportion of the total assets. The annual depreciation charge depends primarilyon the estimated lives of each type of asset and in certain circumstances,estimates of fair values and residual values. The directors regularly reviewthese asset lives and change them as necessary to reflect current thinking onremaining lives in light of technological change, prospective economicutilisation and physical condition of the assets concerned. Changes in assetlives can have a significant impact on depreciation and amortization chargesfor the period. It is not practical to quantify the impact of changes in assetlives on an overall basis, as asset lives are individually determined and thereare a significant number of asset lives in use. Details of the useful lives isincluded in the accounting policy. The impact of any change would varysignificantly depending on the individual changes in assets and the classes ofassets impacted.

**3 Segmental Analyses**

The Group is an integrated paper and boardmanufacturer and converter. The Group has identified reportable segments on ageographic basis (Europe and Latin America). In Europe, the Group has tworeportable segments: (1) Packaging and (2) Specialties. Latin Americaconsists of Packaging only. The Packaging segment is highly integrated. Itincludes a system of mills and plants that produces a full line ofcontainerboard that is converted into corrugated containers. The Specialtiessegment primarily consists of graphic board and solidboard businesses, alongwith paper sack and bag-in-box operations. Additionally, there are centralcosts which represent corporate governance costs, including executive costs,and costs of the Group’s legal, company secretarial, pension administration,tax, treasury and controlling functions and other administrative costs.

Set out below aresegmental analyses of sales (by source), (loss)/income before taxes and equityminority interests, total assets, long lived assets, net operating assets,capital expenditure, depreciation, depletion and amortization expense andinvestments in equity method investees. Sales by destination are not materiallydifferent from sales by source. The analysis of (loss)/income includes theGroup’s share of the (loss)/income before exceptional items, interest and taxesof associates. A geographical analysis of employees can be found in Note 6 andof income taxes in Note 9.

F-102

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**3Segmental Analyses—(continued)**

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

| ** **    | ** ** | **2006**      | ** **    | **2005**      | ** ** | **2004**      | ** ** |
|---------------|------------|---------------|---------------|---------------|------------|---------------|------------|
| ** **    | ** ** | **€000** | ** **    | **€000** | ** ** | **€000** | ** ** |
| Packaging     |       | 5,183,095     |          | 3,117,403     |       | 3,093,484     |       |
| Specialties   |       | 977,395       |          | 530,629       |       | 1,009,038     |       |
| Europe        |       | 6,160,490     |          | 3,648,032     |       | 4,102,522     |       |
| Latin America |       | 872,223       |          | 789,297       |       | 702,560       |       |
|          | ** ** | **€**    | **7,032,713** | ** **    | **€** | **4,437,329** | ** ** | **€** | **4,805,082** | ** ** |
|               |            |               |               |               |            |               |            |  |  |  |

 

Third party sales inIreland were: €196,469,000 for the yearended December 31, 2006; €189,244,000 for the yearended December 31, 2005 and €196,346,000 for the yearended December 31, 2004.

**Sales—Group and third party**

| ** **    | ** ** | **2006**      | ** **     | **2005**      | ** ** | **2004**      | ** ** |
|---------------|------------|---------------|----------------|---------------|------------|---------------|------------|
| ** **    | ** ** | **€000** | ** **     | **€000** | ** ** | **€000** | ** ** |
| Packaging     |       | 7,614,751     |           | 4,338,640     |       | 4,255,869     |       |
| Specialties   |       | 1,293,485     |           | 651,972       |       | 1,138,767     |       |
| Europe        |       | 8,908,236     |           | 4,990,612     |       | 5,394,636     |       |
| Latin America |       | 1,349,544     |           | 1,221,240     |       | 1,090,229     |       |
|          | ** ** | **€**    | **10,257,780** | ** **    | **€** | **6,211,852** | ** ** | **€** | **6,484,865** | ** ** |
|               |            |               |                |               |            |               |            |  |  |  |

** **

F-103

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**3Segmental Analyses—(continued)**

**(Loss)/income before taxes and equity minority interests**

| ** **                                                             | ** ** | ** **    | ** **   | **Restated**  | ** ** | **Restated**  | ** ** |
|------------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                             | ** ** | **2006**      | ** **   | **2005**      | ** ** | **2004**      | ** ** |
| ** **                                                             | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Packaging                                                              |       | 338,718       |         | 129,461       |       | 152,000       |       |
| Specialties                                                            |       | 51,212        |         | 33,154        |       | 98,256        |       |
| Associates                                                             |       | 10,192        |         | 6,420         |       | 10,064        |       |
| Europe                                                                 |       | 400,122       |         | 169,035       |       | 260,320       |       |
| Packaging                                                              |       | 128,189       |         | 113,996       |       | 118,443       |       |
| Associates                                                             |       | 1,434         |         | 867           |       | 2,546         |       |
| Latin America                                                          |       | 129,623       |         | 114,863       |       | 120,989       |       |
| Unallocated centre costs                                               |       | (27,832       | )            | (23,335       | )          | (25,273       | )          |
| Income before intangible  amortization, interest and exceptional items |       | 501,913       |         | 260,563       |       | 356,036       |       |
| Share-based payments                                                   |       | (8,084        | )            | (5,071        | )          | (7,184        | )          |
| Amortization of intangible assets                                      |       | (65,533       | )            | (29,203       | )          | (37,925       | )          |
| Group net interest                                                     |       | (342,952      | )            | (238,745      | )          | (284,674      | )          |
| Loss from early extinguishment of debt                                 |       | —        |         | (104,658      | )          | (5,697        | )          |
| Share of associates’ net interest                                 |       | (1,950        | )            | (1,336        | )          | (1,301        | )          |
| (Loss)/income before exceptional items                                 |       | 83,394        |         | (118,450      | )          | 19,255        |       |
| Reorganization and restructuring costs                                 |       | (196,563      | )            | (25,090       | )          | (39,430       | )          |
| Impairment of property, plant and equipment                            |       | (31,299       | )            | (45,214       | )          | —        |       |
| Impairment of  advances to affiliates                                  |       | (52,821       | )            | —        |       | —        |       |
| (Loss)/income on sale of assets and businesses                         |       | (22,856       | )            | 52,587        |       | 22,173        |       |
|                                                                   | ** ** | **€**    | **(220,145** | **)**         | **€** | **(136,167**  | **)**      | **€** | **1,998** | ** ** |
|                                                                        |            |               |              |               |            |               |            |  |  |  |

 

**Total assets**

| ** **                | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|---------------------------|------------|---------------|---------------|---------------|------------|
| ** **                | ** ** | **€000** | ** **    | **€000** | ** ** |
| Packaging                 |       | 4,226,967     |          | 5,065,437     |       |
| Specialties               |       | 631,343       |          | 654,357       |       |
| Europe                    |       | 4,858,310     |          | 5,719,794     |       |
| Latin America             |       | 733,156       |          | 774,708       |       |
| Group centre              |       | 236,105       |          | 127,893       |       |
|                      |       | 5,827,571     |          | 6,622,395     |       |
| Intangible assets         |       | 2,348,733     |          | 2,490,245     |       |
| Amounts due by affiliates |       | 211,149       |          | 263,222       |       |
|                      | ** ** | **€**    | **8,387,453** | ** **    | **€** | **9,375,862** | ** ** |
|                           |            |               |               |               |            |  |  |

 

F-104

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**3 Segmental Analyses—(continued)**

**Long lived assets**

| ** **        | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|-------------------|------------|---------------|---------------|---------------|------------|
| ** **        | ** ** | **€000** | ** **    | **€000** | ** ** |
| Packaging         |       | 2,589,590     |          | 2,647,603     |       |
| Specialties       |       | 370,519       |          | 375,213       |       |
| Europe            |       | 2,960,109     |          | 3,022,816     |       |
| Latin America     |       | 438,072       |          | 475,323       |       |
| Group centre      |       | 775           |          | 945           |       |
|              |       | 3,398,956     |          | 3,499,084     |       |
| Intangible assets |       | 2,348,733     |          | 2,490,245     |       |
|              | ** ** | **€**    | **5,747,689** | ** **    | **€** | **5,989,329** | ** ** |
|                   |            |               |               |               |            |  |  |

 

Long lived assets inIreland were €81,931,000 and €82,952,000 at December 31,2006 and 2005 respectively.

**Net operating assets**

| ** **                     | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|--------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                     | ** ** | **€000** | ** **    | **€000** | ** ** |
| Packaging                      |       | 2,920,050     |          | 3,091,799     |       |
| Specialties                    |       | 457,332       |          | 479,235       |       |
| Europe                         |       | 3,377,382     |          | 3,571,034     |       |
| Latin America                  |       | 585,332       |          | 627,697       |       |
| Group centre                   |       | (16,062       | )             | (69,969       | )          |
| Net operating assets           |       | 3,946,652     |          | 4,128,762     |       |
| Intangible assets              |       | 2,348,733     |          | 2,490,245     |       |
| Amounts due by affiliates      |       | 211,149       |          | 263,222       |       |
| Unallocated net liabilities    |       | (5,265,464    | )             | (5,463,320    | )          |
| **Shareholders’  equity** | ** ** | **€**    | **1,241,070** | ** **    | **€** | **1,418,909** | ** ** |
|                                |            |               |               |               |            |  |  |

 

F-105

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**3Segmental Analyses—(continued)**

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

| ** **                                     | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                     | ** ** | **€000** | ** **    | **€000** | ** ** |
| Per segmental analysis of net operating assets |       | 3,946,652     |          | 4,128,762     |       |
| Intangible assets                              |       | 2,348,733     |          | 2,490,245     |       |
| Amounts due by affiliates                      |       | 211,149       |          | 263,222       |       |
| Unallocated assets                             |       | 2,559,882     |          | 2,753,467     |       |
| Net borrowing                                  |       | (3,184,755    | )             | (3,102,811    | )          |
| Deferred debt issuance costs                   |       | 113,141       |          | 132,860       |       |
| Amounts due to affiliates                      |       | (1,331,106    | )             | (1,414,925    | )          |
| Corporation tax                                |       | (43,476       | )             | (20,410       | )          |
| Capital lease creditors                        |       | (18,156       | )             | (23,549       | )          |
| Provisions for liabilities and charges         |       | (177,561      | )             | (247,733      | )          |
| Pension liabilities                            |       | (493,763      | )             | (655,368      | )          |
| Minority interests (equity interests)          |       | (129,788      | )             | (131,384      | )          |
| Unallocated net liabilities                    |       | (5,265,464    | )             | (5,463,320    | )          |
| **Shareholders’  equity**                 | ** ** | **€**    | **1,241,070** | ** **    | **€** | **1,418,909** | ** ** |
|                                                |            |               |               |               |            |  |  |

 

Total assets comprisefixed assets and current assets. Long lived assets comprise property, plant andequipment and intangible assets. Net operating assets comprise total assetsless total liabilities but exclude all assets and liabilities of a financingnature.

**Capital expenditure**

| ** **    | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
|---------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **    | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Packaging     |       | 264,902       |        | 121,300       |       | 114,803       |       |
| Specialties   |       | 28,820        |        | 28,296        |       | 54,565        |       |
| Europe        |       | 293,722       |        | 149,596       |       | 169,368       |       |
| Latin America |       | 50,811        |        | 42,432        |       | 36,689        |       |
| Group centre  |       | 154           |        | 406           |       | 409           |       |
|          | ** ** | **€**    | **344,687** | ** **    | **€** | **192,434**   | ** ** | **€** | **206,466** | ** ** |
|               |            |               |             |               |            |               |            |  |  |  |

 

F-106

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**3Segmental Analyses—(continued)**

**Depreciation, depletion and amortization expense**

| ** **                            | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
|---------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                            | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Packaging                             |       | 286,064       |        | 177,587       |       | 178,218       |       |
| Specialties                           |       | 37,193        |        | 21,907        |       | 43,375        |       |
| Europe                                |       | 323,257       |        | 199,494       |       | 221,593       |       |
| Latin America                         |       | 40,239        |        | 40,527        |       | 40,806        |       |
| Group centre                          |       | 144           |        | 155           |       | 218           |       |
| Depreciation and depletion            |       | 363,640       |        | 240,176       |       | 262,617       |       |
| Amortization of intangible  assets(1) |       | 65,533        |        | 29,203        |       | 37,925        |       |
|                                  | ** ** | **€**    | **429,173** | ** **    | **€** | **269,379**   | ** ** | **€** | **300,542** | ** ** |
|                                       |            |               |             |               |            |               |            |  |  |  |

----

(1)          2006excludes goodwill written off of €9,643,000 in relation tobusinesses disposed  (2005:  €128,422,000; 2004:  €2,586,000). These havebeen included within income on sale of assets and operations (Note 5).

**Investments in equity method investees**

| ** **    | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|---------------|------------|---------------|------------|---------------|------------|
| ** **    | ** ** | **€000** | ** ** | **€000** | ** ** |
| Europe        |       | 62,147        |       | 62,264        |       |
| Latin America |       | 12,696        |       | 14,049        |       |
|          | ** ** | **€**    | **74,843** | ** **    | **€** | **76,313** | ** ** |
|               |            |               |            |               |            |  |  |

 

**4 Net Operating Expenses**

| ** **               | ** ** | ** **    | ** **    | **Restated**  | ** ** | **Restated**  | ** ** |
|--------------------------|------------|---------------|---------------|---------------|------------|---------------|------------|
| ** **               | ** ** | **2006**      | ** **    | **2005**      | ** ** | **2004**      | ** ** |
| ** **               | ** ** | **€000** | ** **    | **€000** | ** ** | **€000** | ** ** |
| Distribution  costs      |       | 597,284       |          | 366,515       |       | 349,047       |       |
| Administrative  expenses |       | 946,871       |          | 618,860       |       | 671,488       |       |
| Other operating  income  |       | (1,972        | )             | (3,012        | )          | (2,786        | )          |
|                     | ** ** | **€**    | **1,542,183** | ** **    | **€** | **982,363**   | ** ** | **€** | **1,017,749** | ** ** |
|                          |            |               |               |               |            |               |            |  |  |  |

 

**5 Exceptional Items**

| ** **                                                            | ** ** | **2006**      | ** **   | **2005**      | ** ** | **2004**      | ** ** |
|-----------------------------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                                            | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Reorganization  and restructuring costs                               |       | (196,563      | )            | (25,090       | )          | (39,430       | )          |
| (Loss)/income on  sale of assets and operations                       |       | (22,856       | )            | 13,458        |       | 22,173        |       |
| Income on sale of  assets and operations—discontinued operations |       | —        |         | 39,129        |       | —        |       |
| Impairment of  property, plant and equipment                          |       | (31,299       | )            | (45,214       | )          | —        |       |
| Impairment of  advances to affiliates                                 |       | (52,821       | )            | —        |       | —        |       |
|                                                                  | ** ** | **€**    | **(303,539** | **)**         | **€** | **(17,717**   | **)**      | **€** | **(17,257** | **)** |
|                                                                       |            |               |              |               |            |               |            |  |  |  |

 

F-107

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**5Exceptional Items—(continued)**

During 2006, following the completion of the mergerwith Kappa Packaging in December 2005, the Group undertook a significantrestructuring program with the objective of fully integrating the combinedoperations of the Jefferson Smurfit Group and Kappa Packaging in order toachieve planned synergy benefits. This program involves the restructuring ofour European paper mills and converting plants and rationalization of our headoffice function. The restructuring expense of €174.0million reflects the substantial progress made in relation to the programduring 2006 and is comprised of redundancy payments and other closure costs.

The paper mill rationalization program has resulted inthe closure of six high-cost containerboard mills; four in France, one inGermany and one in Sweden. In addition, the Group completed the closure of thecoated paper operations at the Townsend Hook mill in the UK. The Group’scorrugated converting plants in Europe were restructured to optimize the enlargedsystem and make it more efficient. The program resulted in the closure of fiveplants; two in France, two in the UK and one in Germany. Other costs aroseacross the operations with provision being made for certain closures which areplanned for the first half of 2007. Within the Specialties operations, theGroup completed the closure of a solid board machine in the Netherlands and theclosure of the Group’s paper sack plant in the UK.

As a result of the restructuring program significantsynergies have been achieved throughout the Group, including paper millrationalization, machine specialization, paper logistics and integration,corrugated system optimization, purchasing savings and central andadministrative overhead reductions.

The Group was subject to a long running court actionin relation to the ownership of its corrugated container plant in the DominicanRepublic. Following the completion of court proceedings in 2006, the Groupincurred settlement costs of €22.6 million. Thesettlement includes the transfer of title to certain assets and payment of cashconsideration in three tranches in January 2007, 2008 and 2009. The Grouphas retained ownership of the plant and equipment and the goodwill of thebusiness. This cost is included within the reorganization, restructuring andexceptional costs of €196.6 million.

An impairment charge of €9.2million is reflected in the Specialties segment and resulted from therestructuring of certain operations in the Netherlands and the resulting impacton recoverable amounts of underlying property, plant and equipment. Animpairment charge amounting to €22.1 million was alsorecognized in relation to a number of entities predominantly located in theEurozone, which results primarily from the restructuring program.

During 2006, the Group completed the disposal of eightfacilities as required under the European Union (‘‘EU’’) approval of the mergerwith Kappa Packaging (Kappa) comprising two graphic board mills in theNetherlands; one solid board mill and converting operation in the Netherlands;two corrugated facilities in Sweden; two corrugated facilities in Denmark; andone partition facility in Scotland. Total consideration for the eightfacilities was approximately €40 million, the netproceeds arising from which was applied to debt reduction. Losses arising onthese disposals, net of other less significant gains and losses, gave rise tothe overall loss of €22.9million above.

In 2005, the Group recorded costs of €25.1million representing reorganization and restructuring costs mainly in theEuropean Packaging division. This figure includes redundancy, closure andreorganization costs. The main closurecosts relate to our Clonskeagh Mill in Ireland, which was permanently closed inthe first quarter of 2005, and to our Gravelines corrugated plant and Cevennescorrugated plant in France, for which closures were announced in the finalquarter of 2005. The related tax relief of €5.4 million is included in Taxes on income.

F-108

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**5Exceptional Items—(continued)**

The Group has also reported costs of €45.2million representing provisions for impairment of property, plant and equipmentprimarily in the European Packaging segment. In measuring the value in use ofthe related assets a discount rate of 7.6% was applied to future cash flows.

The Group has reported a net gain of €52.6million in respect of the sale of assets and operations. The main profit was inrelation to the sale of Munksjö in the first quarter of 2005, partially offsetby a loss on the sale of our Tissues operation in the second quarter of 2005,in addition to the profit on the sale of The K Club in the second quarter of2005.

In 2004, the Group recorded costs of €39.4million representing reorganization and restructuring costs mainly in theEuropean Packaging division. This figure included redundancy, closure andreorganization costs. The main closure costs related to our Cordoba mill inSpain, which was permanently closed in the third quarter of 2004, and to ourTamworth corrugated plant and Witham cartons plant in the United Kingdom, forwhich closures were announced in the final quarter of 2004. The related taxrelief of €4.0million was included in Taxes on income.

The Group reported a gainof €22.2million, in respect of the sale of the Botanic Road property in Dublin, thesale of surplus property in Italy and Spain and the disposal of our investmentin Cartonnerie de Valois. The related tax charge of €1.9 million was includedin Taxes on income.

**6 Employees and Remuneration**

Theaverage number of persons employed by the Group by geographical area in thefinancial year was:

| ** **    | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------|------------|------------|------------|------------|------------|------------|------------|
| Europe        |       | 33,480     | ** ** | 21,384     |       | 22,931     |       |
| Latin America |       | 8,779      | ** ** | 7,828      |       | 7,440      |       |
|          | ** ** | **42,259** | ** ** | **29,212** | ** ** | **30,371** | ** ** |

 

| ** **                                   | ** ** | ** **    | ** **    | **Restated**  | ** ** | **Restated**  | ** ** |
|----------------------------------------------|------------|---------------|---------------|---------------|------------|---------------|------------|
| ** **                                   | ** ** | **2006**      | ** **    | **2005**      | ** ** | **2004**      | ** ** |
| ** **                                   | ** ** | **€000** | ** **    | **€000** | ** ** | **€000** | ** ** |
| **The staff costs comprise:** |       |          | ** **    |          |       |          |       |
| Wages and  salaries                          |       | 1,320,904     | ** **    | 859,131       |       | 890,748       |       |
| Social welfare                               |       | 263,922       | ** **    | 188,543       |       | 194,858       |       |
| Pensions                                     |       | 89,945        | ** **    | 66,204        |       | 71,623        |       |
| Share-based payments                         |       | 8,084         |          | 5,071         |       | 7,184         |       |
|                                         | ** ** | **€**    | **1,682,855** | ** **    | **€** | **1,118,949** | ** ** | **€** | **1,164,413** | ** ** |
|                                              |            |               |               |               |            |               |            |  |  |  |

 

F-109

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**7 InterestExpense**

| ** **                                                | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
|-----------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                                | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Interest payable and  similar charges:                    |       |          |        |          |       |          |       |
| On bank loans and  overdrafts                             |       |          |        |          |       |          |       |
| —repayable within 5 years, by installment            |       | 75,836        |        | 41,857        |       | 25,123        |       |
| —repayable within 5 years, other than by installment |       | 13,712        |        | 17,277        |       | 2,965         |       |
|                                                      |       | 89,548        |        | 59,134        |       | 28,088        |       |
| Payable to  affiliates                                    |       | 122,971       |        | 125,204       |       | 137,730       |       |
| On all other  loans                                       |       | 143,658       |        | 65,137        |       | 127,191       |       |
| ** **                                                | ** ** | **€**    | **356,177** | ** **    | **€** | **249,475**   | ** ** | **€** | **293,009** | ** ** |
|                                                           |            |               |             |               |            |               |            |  |  |  |

 

In addition to the abovetable, the 2005 loss of €105 million from the earlyextinguishment of debt arose mainly as a result of our refinancing and debtreduction activities during 2005. The early pay down of the original PIK debt,following the February 2005 refinancing, resulted in the write-off of €14million in debt issue and other costs as well as cash costs of €53million, primarily the cash premium paid for early redemption. In addition, theGroup wrote off debt issue costs of €10 million in respect ofthe debt repaid with the Munksjö proceeds. The Group wrote off a further €4million in respect of the debt repaid with The K Club proceeds and €24million as a result of the early pay down of some debt in the former JSG aspart of the financing of the merger with Kappa.

**8 (Loss)/incomeBefore Taxes**

| ** **                                                        | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                        | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| (Loss)/income before  taxes is stated after charging/(crediting): |       |          |       |          |       |          |       |
| Depreciation, depletion and amortization expense                  |       | 429,173       |       | 269,379       |       | 300,542       |       |
| Auditors’ remuneration (including expenses)                  |       | 6,910         |       | 4,388         |       | 4,059         |       |
| Operating lease rentals plant and machinery                       |       | 35,822        |       | 12,456        |       | 13,042        |       |
| Operating lease rentals other                                     |       | 974           |       | 9,672         |       | 9,171         |       |
| (Gain)/loss on foreign currency borrowing less  deposits          |       | (421          | )          | 1,174         |       | (376          | )          |
| Research and development costs                                    |       | 2,160         |       | 4,292         |       | 4,924         |       |
| Government grants                                                 |       | (1,972        | )          | (3,012        | )          | (2,786        | )          |

 

Directors’ emoluments, including pension contributionsamounted to €9,727,000 (2005: €7,757,000;  2004: €10,005,000).

F-110

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**8 (Loss)/income BeforeTaxes—(continued)**

The following amountsrelating to acquisitions and discontinued operations are included in arrivingat Cost of Sales and Net Operating Expenses in the Consolidated Statements ofOperations.

| ** **                  | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                  | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Cost of sales:**          |       |          |       |          |       |          |       |   |   |
| Acquired  operations        |       |          | —     |          |       | 158,358       |       | — |   |
| Discontinued  operations    |       |          | —     |          |       | 22,737        |       | 398,061 |   |
| **Net operating expenses:** |       |          |       |          |       |          |       |   |   |
| Acquired  operations        |       |          | —     |          |       | 45,452        |       | — |   |
| Discontinued operations     |       |          | —     |          |       | 4,311         |       | 72,822 |   |

 

**9 Taxeson income**

| ** **                                            | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                            | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Current Taxation**                                  |       |          |       |          |       |          |       |
| Europe                                                |       | 14,543        |       | 18,801        |       | (7,219        | )          |
| United States and  Canada                             |       | 86            |       | (5,378        | )          | —        |       |
| Latin America                                         |       | 25,708        |       | 25,556        |       | 26,975        |       |
|                                                  |       | 40,337        |       | 38,979        |       | 19,756        |       |
| **Deferred Taxation-originating  timing differences** |       |          |       |          |       |          |       |
| Europe                                                |       | 5,489         |       | (13,924       | )          | 3,354         |       |
| United States and  Canada                             |       | —        |       | —        |       | 8             |       |
| Latin America                                         |       | (11,836       | )          | (5,406        | )          | 1,257         |       |
|                                                  |       | (6,347        | )          | (19,330       | )          | 4,619         |       |
| **Taxes on income**                                   |       |          |       |          |       |          |       |
| Holding Company  and subsidiaries                     |       | 33,990        |       | 19,649        |       | 24,375        |       |
| Share of  associates                                  |       | 3,317         |       | 1,912         |       | 2,598         |       |
|                                                  | ** ** | **€**    | **37,307** | ** **    | **€** | **21,561**    | ** ** | **€** | **26,973** | ** ** |
| **Deferred taxation arises as  follows:**             |       |          |       |          |       |          |       |
| Capital  allowances                                   |       | (11,753       | )          | 788           |       | 3,873         |       |
| Other                                                 |       | 5,406         |       | (20,118       | )          | 746           |       |
|                                                  | ** ** | **€**    | **(6,347** | **)**         | **€** | **(19,330**   | **)**      | **€** | **4,619** | ** ** |

 

Current taxation represents corporation tax or itsequivalent on the taxable income in each jurisdiction and unrelieved overseastax on dividends. In 2006, unrelieved overseas tax on dividends amounted to €532,000(2005: €559,000;2004: €486,000).In 2006, the amount of current taxation relating to Ireland was €4,025,000(2005: €1,593,000;2004: nil). In 2006, the amount of deferred taxation relating to Ireland was acredit of €3,697,000(2005: a credit of €1,658,000;2004: a credit of €3,630,000).

The deferred taxation credit of €6,347,000for 2006 includes a credit of €25,769,000 (2005:a chargeof €2,172,000;2004: a charge of €635,000)in respect of pensions. The balance of €19,422,000 (2005: €21,502,000;2004: €3,984,000)is shown as a movement in the liability for Deferred Income Taxes.

F-111

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**9 Taxeson income—(continued)**

The Group has availed of areduced taxation rate of 10%, which applies to certain manufacturing andfinancial service operations in Ireland. This reduced rate expired at the endof 2005 for financial service operations and is due to expire for manufacturingoperations at the end of 2010.

**(Loss)/income before tax is analyzed as follows:**

| ** **                                     | ** ** | ** **    | ** **   | **Restated**  | ** ** | **Restated**  | ** ** |
|------------------------------------------------|------------|---------------|--------------|---------------|------------|---------------|------------|
| ** **                                     | ** ** | **2006**      | ** **   | **2005**      | ** ** | **2004**      | ** ** |
| ** **                                     | ** ** | **€000** | ** **   | **€000** | ** ** | **€000** | ** ** |
| Ireland                                        |       | 23,930        |         | (96,803       | )          | (30,078       | )          |
| Foreign                                        |       | 115,321       |         | 1,605         |       | 75,948        |       |
| Associates                                     |       | 9,676         |         | 5,951         |       | 11,310        |       |
| Unallocated  amortization of intangible assets |       | (65,533       | )            | (29,203       | )          | (37,925       | )          |
| Exceptional items  (Note 5)                    |       | (303,539      | )            | (17,717       | )          | (17,257       | )          |
|                                           | ** ** | **€**    | **(220,145** | **)**         | **€** | **(136,167**  | **)**      | **€** | **1,998** | ** ** |
|                                                |            |               |              |               |            |               |            |  |  |  |

 

The total tax charge in future periods will beaffected by any changes to the corporation tax rates in force in the countriesin which the Group operates. The current tax charges will also be affected by changesin the excess of tax depreciation over book depreciation and the use of taxcredits. The total tax charge for 2004 included €12,771,000in respect of discontinued Munksjö specialties and tissue businesses.

No deferred taxation is recognized on the unremittedearnings of overseas subsidiaries, joint venture and associates; as earningsare continually reinvested by the Group, no taxation is expected to be payableon them in the foreseeable future.

Thefollowing table relates the applicable Republic of Ireland statutory tax rateto the effective tax rate of the Group, obtained by computing the tax charge asa percentage of income before taxes and minority shareholders’ interest:

| ** **                                                        | ** ** | ** ** | ** ** | **Restated** | ** ** | **Restated** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|--------------|------------|--------------|------------|
| ** **                                                        | ** ** | **2006**   | ** ** | **2005**     | ** ** | **2004**     | ** ** |
| ** **                                                        | ** ** | **%**      | ** ** | **%**        | ** ** | **%**        | ** ** |
| Corporation tax at  Irish statutory rate                          |       | 12.5       |       |         | 12.5       |         |       | 12.5 |   |
| Adjusted for:                                                     |       |       |       |         |       |         |       |   |   |
| Income subject to  a higher rate of tax than Irish statutory rate |       | (23.1      | )          |         | (21.7      | )            |       | 2,737.1 |   |
| Expenditure not  deductible for tax purposes                      |       | (16.5      | )          |         | 7.4        |         |       | 769.0 |   |
| Tax losses (utilized)/unutilized                                  |       | 0.9        |       |         | (3.8       | )            |       | 433.4 |   |
| Adjustments to  tax charge in respect of previous periods         |       | (1.1       | )          |         | (7.6       | )            |       | (2,076.7 | ) |
| Income/(loss)  arising not subject to tax                         |       | 4.5        |       |         | (2.6       | )            |       | (525.3 | ) |
| Previously  unrecognized deferred tax assets now recognized       |       | 5.9        |       |         | —     |         |       | — |   |
|                                                              | ** ** | **(16.9**  | **)**      | ** **   | **(15.8**  | **)**        | ** ** | **1,350.0** | ** ** |

 

F-112

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**10 NetBorrowing**

| ** **                 | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|----------------------------|------------|---------------|---------------|---------------|------------|
| ** **                 | ** ** | **€000** | ** **    | **€000** | ** ** |
| Cash at bank and  in hand  |       | 370,121       |          | 247,727       |       |
| Restricted cash            |       | —        |          | 755,575       |       |
| Total borrowing  (Note 19) |       | 3,554,876     |          | 4,106,113     |       |
|                       | ** ** | **€**    | **3,184,755** | ** **    | **€** | **3,102,811** | ** ** |
|                            |            |               |               |               |            |  |  |

 

**11 AccountsReceivable and Prepayments**

| ** **                                     | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                     | ** ** | **€000** | ** **    | **€000** | ** ** |
| Amounts falling due  within one year:          | ** ** | ** **    | ** **    | ** **    |       |
| Trade receivables                              |       | 1,247,808     | ** **    | 1,228,689     |       |
| Less: Provision  for bad and doubtful debts    |       | 42,268        |          | 45,831        |       |
|                                           |       | 1,205,540     | ** **    | 1,182,858     |       |
| Amounts owed by  associates                    |       | 4,076         | ** **    | 8,089         |       |
| Other receivables                              |       | 89,046        | ** **    | 79,763        |       |
| Prepayments and  accrued income                |       | 33,280        |          | 28,748        |       |
|                                           |       | 1,331,942     | ** **    | 1,299,458     |       |
| Amounts falling due  after more than one year: |       |          | ** **    | ** **    |       |
| Other receivables                              |       | 12,678        |          | 15,270        |       |
| ** **                                     | ** ** | **€**    | **1,344,620** | ** **    | **€** | **1,314,728** | ** ** |
|                                                |            |               |               |               |            |  |  |

 

**12 Inventories**

| ** **                   | ** ** | **2006**      | ** **  | **2005**      | ** ** |
|------------------------------|------------|---------------|-------------|---------------|------------|
| ** **                   | ** ** | **€000** | ** **  | **€000** | ** ** |
| Raw materials                |       | 174,961       | ** **  | 186,625       |       |
| Work in progress             |       | 33,416        | ** **  | 38,911        |       |
| Finished goods               |       | 279,952       | ** **  | 297,029       |       |
| Consumables and  spare parts |       | 138,043       | ** **  | 140,566       |       |
| ** **                   | ** ** | **€**    | **626,372** | ** **    | **€** | **663,131** | ** ** |
|                              |            |               |             |               |            |  |  |

 

**13 Investments**

| ** **                        | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|-----------------------------------|------------|---------------|------------|---------------|------------|
| ** **                        | ** ** | **€000** | ** ** | **€000** | ** ** |
| Associates (Note  13 (i))         |       | 74,843        |       | 76,313        |       |
| Other investments  (Note 13 (ii)) |       | 7,659         |       | 11,433        |       |
|                              | ** ** | **€**    | **82,502** | ** **    | **€** | **87,746** | ** ** |
|                                   |            |               |            |               |            |  |  |

 

F-113

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**13Investments—(continued)**

**13 (i): Associates**

| ** **                            | ** ** | **Share of**   | ** ** | ** **    | ** ** | ** **    | ** ** |
|---------------------------------------|------------|---------------------|------------|---------------|------------|---------------|------------|
| ** **                            | ** ** | **net assets** | ** ** | **Loans**     | ** ** | **Total**     | ** ** |
| ** **                            | ** ** | **€000**       | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31,  2003               |       |                | 68,973     |          |       | 312           |       | 69,285 |   |
| Additions                             |       |                | 441        |          |       | —        |       | 441 |   |
| Retained earnings                     |       |                | 3,944      |          |       | —        |       | 3,944 |   |
| Sales                                 |       |                | (124       | )             |       | —        |       | (124 | ) |
| Reclassification                      |       |                | (414       | )             |       | —        |       | (414 | ) |
| Currency  adjustment                  |       |                | (837       | )             |       | —        |       | (837 | ) |
| **December 31,  2004**           | ** ** | ** **          | **71,983** |          | ** ** | **312**       | ** ** | **72,295** | ** ** |
| Additions                             |       |                | 305        |          |       | —        |       | 305 |   |
| Acquisitions                          |       |                | 2,643      |          |       | —        |       | 2,643 |   |
| Retained earnings                     |       |                | 2,169      |          |       | —        |       | 2,169 |   |
| Sales                                 |       |                | (873       | )             |       | —        |       | (873 | ) |
| Reclassification                      |       |                | (1,899     | )             |       | (145          | )          | (2,044 | ) |
| Currency  adjustment                  |       |                | 1,814      |          |       | 4             |       | 1,818 |   |
| **December 31,  2005**           | ** ** | ** **          | **76,142** |          | ** ** | **171**       | ** ** | **76,313** | ** ** |
| Additions                             |       |                | 130        |          |       | —        |       | 130 |   |
| Retained earnings                     |       |                | 1,897      |          |       | —        |       | 1,897 |   |
| Sales                                 |       |                | (1,728     | )             |       | —        |       | (1,728 | ) |
| Write off to  statement of operations |       |                | (481       | )             |       | —        |       | (481 | ) |
| Reclassification                      |       |                | (113       | )             |       | —        |       | (113 | ) |
| Currency  adjustment                  |       |                | (1,178     | )             |       | 3             |       | (1,175 | ) |
| **December 31, 2006**            | ** ** | ** **          | **€** | **74,669**    |       | ** **    | **€** | **174** | ** ** | **€** | **74,843** | ** ** |
|                                       |            |                     |            |               |            |               |            |  |  |  |  |  |

 

The Group has oneremaining significant associate—Duropack AG in Austria, of which the Group owns40%

F-114

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**13Investments—(continued)**

**13 (ii):  OtherInvestments**

| ** **                            | ** ** | **Listed***   | ** ** | **Unlisted**  | ** ** | ** **    | ** ** |
|---------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                            | ** ** | **Cost**      | ** ** | **Cost**      | ** ** | **Total**     | ** ** |
| ** **                            | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31,  2003               |       | 6,573         |       | 4,784         |       | 11,357        |       |
| Additions                             |       | 231           |       | 541           |       | 772           |       |
| Transfers                             |       | —        |       | (14           | )          | (14           | )          |
| Reclassification                      |       | —        |       | (1,426        | )          | (1,426        | )          |
| Sales                                 |       | (509          | )          | (465          | )          | (974          | )          |
| Currency  adjustment                  |       | 8             |       | (123          | )          | (115          | )          |
| **December 31,  2004**           | ** ** | **6,303**     | ** ** | **3,297**     | ** ** | **9,600**     | ** ** |
| Additions                             |       | 75            |       | 12            |       | 87            |       |
| Acquisitions                          |       | —        |       | 890           |       | 890           |       |
| Reclassification                      |       | —        |       | 921           |       | 921           |       |
| Sales                                 |       | (17           | )          | (219          | )          | (236          | )          |
| Write off to  statement of operations |       | —        |       | (56           | )          | (56           | )          |
| Currency  adjustment                  |       | —        |       | 227           |       | 227           |       |
| **December 31,  2005**           | ** ** | **6,361**     | ** ** | **5,072**     | ** ** | **11,433**    | ** ** |
| Additions                             |       | —        |       | 1,500         |       | 1,500         |       |
| Reclassification                      |       | —        |       | (4,755        | )          | (4,755        | )          |
| Retirements                           |       | (530          | )          | (380          | )          | (910          | )          |
| Write off to  statement of operations |       | (66           | )          | 602           |       | 536           |       |
| Currency  adjustment                  |       | —        |       | (145          | )          | (145          | )          |
| **December 31, 2006**            | ** ** | **€**    | **5,765**  | ** **    | **€** | **1,894**     | ** ** | **€** | **7,659** | ** ** |
|                                       |            |               |            |               |            |               |            |  |  |  |

 

*                    Listed on arecognized stock exchange

Other investments are stated at cost. The market valueof the listed investments at December 31, 2006 was €5,787,000  (2005: €6,371,000; 2004: €6,304,000)

F-115

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**14Property, Plant and Equipment**

| ** **                                  | ** ** | **Land & Buildings** | ** **    | **Plant and** | ** ** | ** **    | ** ** |
|---------------------------------------------|------------|------------------------------------|---------------|--------------------|------------|---------------|------------|
| ** **                                  | ** ** | **Freehold**                       | ** **    | **Leasehold**      | ** ** | **Equipment** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **€000**                      | ** **    | **€000**      | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Cost or valuation**                       | ** ** | ** **                         | ** **    |               | ** ** | ** **    |       | ** ** | ** ** | ** ** | ** ** |
| December 31,  2003                     |       | 1,018,681                          |          |               | 38,153     |          |       | 2,912,874 |   | 3,969,708 |   |
| Fair value  adjustment                      |       | —                             |          |               | —     |          |       | 1,195 |   | 1,195 |   |
| Reclassification                            |       | 8,849                              |          |               | (8,305     | )             |       | (17,952 | ) | (17,408 | ) |
| Additions                                   |       | 27,076                             |          |               | 2,950      |          |       | 167,634 |   | 197,660 |   |
| Retirements                                 |       | (10,567                            | )             |               | (2,726     | )             |       | (66,863 | ) | (80,156 | ) |
| Currency  adjustment                        |       | (14,254                            | )             |               | 158        |          |       | (44,416 | ) | (58,512 | ) |
| **December 31,  2004**                 | ** ** | **1,029,785**                      | ** **    |               | **30,230** | ** **    |       | **2,952,472** | ** ** | **4,012,487** | ** ** |
| Fair value  adjustment                      |       | 40,438                             |          |               | —     |          |       | (17,449 | ) | 22,989 |   |
| Reclassification                            |       | 21,567                             |          |               | (2,659     | )             |       | (42,064 | ) | (23,156 | ) |
| Acquisitions                                |       | 525,146                            |          |               | —     |          |       | 1,031,986 |   | 1,557,132 |   |
| Additions                                   |       | 7,964                              |          |               | 2,315      |          |       | 173,314 |   | 183,593 |   |
| Businesses sold                             |       | (185,169                           | )             |               | (5,457     | )             |       | (301,857 | ) | (492,483 | ) |
| Retirements                                 |       | (30,506                            | )             |               | —     |          |       | (146,029 | ) | (176,535 | ) |
| Currency  adjustment                        |       | 29,750                             |          |               | (288       | )             |       | 36,479 |   | 65,941 |   |
| **December 31,  2005**                 | ** ** | **1,438,975**                      | ** **    |               | **24,141** | ** **    |       | **3,686,852** | ** ** | **5,149,968** | ** ** |
| Fair value adjustment                       |       | 13,638                             |          |               | —     |          |       | 16,455 |   | 30,093 |   |
| Reclassification                            |       | 23,126                             |          |               | 2,071      |          |       | 85,881 |   | 111,078 |   |
| Additions                                   |       | 6,398                              |          |               | 233        |          |       | 326,882 |   | 333,513 |   |
| Businesses sold                             |       | (18,031                            | )             |               | —     |          |       | (88,164 | ) | (106,195 | ) |
| Retirements                                 |       | (22,550                            | )             |               | (205       | )             |       | (123,458 | ) | (146,213 | ) |
| Currency  adjustment                        |       | (18,907                            | )             |               | 488        |          |       | (54,510 | ) | (72,929 | ) |
| **December 31,  2006**                 | ** ** | **1,422,649**                      | ** **    |               | **26,728** | ** **    |       | **3,849,938** | ** ** | **5,299,315** | ** ** |
| **Depreciation**                            |       |                               |          |               |       |          |       |   |   |   |   |
| December 31,  2003                     |       | 151,863                            |          |               | 8,884      |          |       | 1,423,525 |   | 1,584,272 |   |
| Reclassification                            |       | (4,787                             | )             |               | (2,621     | )             |       | (6,473 | ) | (13,881 | ) |
| Charged                                     |       | 27,895                             |          |               | 1,141      |          |       | 227,503 |   | 256,539 |   |
| Retirements                                 |       | (1,882                             | )             |               | (713       | )             |       | (64,287 | ) | (66,882 | ) |
| Currency  adjustment                        |       | (3,487                             | )             |               | 141        |          |       | (29,731 | ) | (33,077 | ) |
| **December 31,  2004**                 | ** ** | **169,602**                        | ** **    |               | **6,832**  | ** **    |       | **1,550,537** | ** ** | **1,726,971** | ** ** |
| Impairment  provision                       |       | 2,256                              |          |               | —     |          |       | 42,958 |   | 45,214 |   |
| Reclassification                            |       | 525                                |          |               | (1,027     | )             |       | (18,930 | ) | (19,432 | ) |
| Charged                                     |       | 31,596                             |          |               | 1,428      |          |       | 201,622 |   | 234,646 |   |
| Businesses sold                             |       | (17,020                            | )             |               | —     |          |       | (121,533 | ) | (138,553 | ) |
| Retirements                                 |       | (11,354                            | )             |               | —     |          |       | (128,297 | ) | (139,651 | ) |
| Currency  adjustment                        |       | (48                                | )             |               | (306       | )             |       | 2,476 |   | 2,122 |   |
| **December 31,  2005**                 | ** ** | **175,557**                        | ** **    |               | **6,927**  | ** **    |       | **1,528,833** | ** ** | **1,711,317** | ** ** |
| Impairment  provision                       |       | 10,147                             |          |               | —     |          |       | 21,152 |   | 31,299 |   |
| Reclassification                            |       | 17,398                             |          |               | (160       | )             |       | 91,861 |   | 109,099 |   |
| Charged                                     |       | 48,592                             |          |               | 1,020      |          |       | 308,274 |   | 357,886 |   |
| Businesses sold                             |       | (8,247                             | )             |               | —     |          |       | (63,095 | ) | (71,342 | ) |
| Retirements                                 |       | (11,703                            | )             |               | (37        | )             |       | (114,354 | ) | (126,094 | ) |
| Currency  adjustment                        |       | (6,348                             | )             |               | 355        |          |       | (46,701 | ) | (52,694 | ) |
| **December 31,  2006**                 | ** ** | **225,396**                        | ** **    |               | **8,105**  | ** **    |       | **1,725,970** | ** ** | **1,959,471** | ** ** |
| **Net book  amount December 31, 2006** | ** ** | **€**                         | **1,197,253** | ** **         |       | **€**    | **18,623** | ** ** |   | **€** | **2,123,968** | ** ** | **€** | **3,339,844** | ** ** |
| **Net book  amount December 31, 2005** | ** ** | **€**                         | **1,263,418** | ** **         |       | **€**    | **17,214** | ** ** |   | **€** | **2,158,019** | ** ** | **€** | **3,438,651** | ** ** |
| **Net book  amount December 31, 2004** | ** ** | **€**                         | **860,183**   | ** **         |       | **€**    | **23,398** | ** ** |   | **€** | **1,401,935** | ** ** | **€** | **2,285,516** | ** ** |

 

F-116

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**14 Property, Plant and Equipment—(continued)**

| ** **                                  | ** ** | **Timberland** | ** **    |
|---------------------------------------------|------------|----------------|---------------|
| ** **                                  | ** ** | **€000**  | ** **    |
| December 31,  2003                     |       | 50,510         |          |
| Additions                                   |       | 8,806          |          |
| Depletion                                   |       | (6,078         | )             |
| Currency  adjustment                        |       | (3,896         | )             |
| **December 31,  2004**                 | ** ** | **49,342**     | ** **    |
| Additions                                   |       | 8,841          |          |
| Disposals                                   |       | (12            | )             |
| Depletion                                   |       | (5,530         | )             |
| Currency  adjustment                        |       | 7,792          |          |
| **December 31,  2005**                 | ** ** | **60,433**     | ** **    |
| Additions                                   |       | 11,174         |          |
| Reclassification                            |       | (172           | )             |
| Depletion                                   |       | (5,754         | )             |
| Currency  adjustment                        |       | (6,569         | )             |
| **December 31,  2006**                 | ** ** | **59,112**     | ** **    |
| **Net book  amount December 31, 2006** | ** ** | **€**     | **3,398,956** | ** ** |
| **Net book  amount December 31, 2005** | ** ** | **€**     | **3,499,084** | ** ** |
| **Net book amount  December 31, 2004** | ** ** | **€**     | **2,334,858** | ** ** |

 

**Land and Buildings**

Included in tangibleassets is an amount for land of €383,477,000 (2005: €410,140,000;2004: €282,021,000).

**Capitalized leasedproperty, plant and equipment**

Included in the net bookamount of tangible assets is an amount for capitalized leased assets of €35,053,000(2005: €42,704,000;2004: €50,355,000).The depreciation charge for capitalized leased assets for 2006 was €8,520,000(2005: €6,832,000;2004:  €10,139,000)and the related finance charges amounted to €1,009,000 (2005: €1,138,000;2004: €1,962,000).

F-117

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**15Intangible Assets**

| ** **                  | ** ** | **Goodwill**  | ** **    | **Other  Intangible  Assets** | ** ** | **Total  Intangible  Assets** | ** ** |
|-----------------------------|------------|---------------|---------------|-------------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **€000** | ** **    | **€000**                 | ** ** | **€000**                 | ** ** |
| December 31,  2003     |       | 1,455,119     |          |                          | —     |                          |       | 1,455,119 |   |
| Acquisitions                |       | 2,731         |          |                          | —     |                          |       | 2,731 |   |
| Disposals                   |       | (2,586        | )             |                          | —     |                          |       | (2,586 | ) |
| Fair value  adjustments     |       | 40,457        |          |                          | —     |                          |       | 40,457 |   |
| Amortization                |       | (37,925       | )             |                          | —     |                          |       | (37,925 | ) |
| Currency  adjustment        |       | (2,680        | )             |                          | —     |                          |       | (2,680 | ) |
| **December 31,  2004** | ** ** | **1,455,116** | ** **    | ** **                    | **—** |                          | ** ** | **1,455,116** | ** ** |
| Acquisitions                |       | 1,185,705     |          |                          | 35,000     |                          |       | 1,220,705 |   |
| Disposals                   |       | (128,422      | )             |                          | —     |                          |       | (128,422 | ) |
| Reclassification            |       | (31,247       | )             |                          | —     |                          |       | (31,247 | ) |
| Amortization                |       | (28,914       | )             |                          | (289       | )                             |       | (29,203 | ) |
| Currency  adjustment        |       | 3,296         |          |                          | —     |                          |       | 3,296 |   |
| **December 31,  2005** | ** ** | **2,455,534** | ** **    | ** **                    | **34,711** |                          | ** ** | **2,490,245** | ** ** |
| Disposals                   |       | (9,643        | )             |                          | —     |                          |       | (9,643 | ) |
| Fair value  adjustments     |       | (71,311       | )             |                          | —     |                          |       | (71,311 | ) |
| Amortization                |       | (62,033       | )             |                          | (3,500     | )                             |       | (65,533 | ) |
| Reclassification            |       | 2,780         |          |                          | —     |                          |       | 2,780 |   |
| Currency  adjustment        |       | 2,195         |          |                          | —     |                          |       | 2,195 |   |
| **December 31, 2006**  | ** ** | **€**    | **2,317,522** | ** **                    | ** ** | **€**                    | **31,211** |   | ** ** | **€** | **2,348,733** | ** ** |
|                             |            |               |               |                               |            |                               |            |  |  |  |  |  |

 

Accumulated amortizationat December 31, 2006 and 2005 was €159,184,000and €94,588,000respectively. The expected amortization for other intangible assets is expectedto be €3,500,000for each of the next 5 years.

**16Accounts Payable and Accrued Liabilities**

| ** **                                        | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|---------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                        | ** ** | **€000** | ** **    | **€000** | ** ** |
| Trade payables                                    |       | 906,673       |          | 905,697       |       |
| Amounts owed to  associates—trading balances |       | 938           |          | 3,289         |       |
| Taxation  creditors (Note 17)                     |       | 89,483        |          | 72,859        |       |
| Deferred  acquisition consideration               |       | 140           |          | 33,713        |       |
| Social welfare                                    |       | 49,821        |          | 51,574        |       |
| Accruals                                          |       | 348,904       |          | 323,315       |       |
| Capital payables                                  |       | 84,206        |          | 50,261        |       |
| Other payables                                    |       | 60,240        |          | 55,573        |       |
| Capitalized lease  obligations                    |       | 4,578         |          | 4,132         |       |
|                                              | ** ** | **€**    | **1,544,983** | ** **    | **€** | **1,500,413** | ** ** |
|                                                   |            |               |               |               |            |  |  |

 

F-118

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**17Taxation Creditors**

| ** **                 | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|----------------------------|------------|---------------|------------|---------------|------------|
| ** **                 | ** ** | **€000** | ** ** | **€000** | ** ** |
| Current taxation           |       | 43,476        |       | 20,410        |       |
| Payroll taxes              |       | 41,053        |       | 41,020        |       |
| VAT and other  sales taxes |       | 4,954         |       | 11,429        |       |
|                       | ** ** | **€**    | **89,483** | ** **    | **€** | **72,859** | ** ** |
|                            |            |               |            |               |            |  |  |

 

**18Long Term Debt and Other Long Term Liabilities**

| ** **                                             | ** ** | **2006**      | ** **    | **2005**      | ** ** |
|--------------------------------------------------------|------------|---------------|---------------|---------------|------------|
| ** **                                             | ** ** | **€000** | ** **    | **€000** | ** ** |
| Borrowing—due  after more than one year (Note 19) |       | 3,355,340     |          | 3,277,983     |       |
| Deferred debt  issuance costs                          |       | (113,141      | )             | (132,860      | )          |
| Capitalized lease  obligations                         |       | 13,578        |          | 19,417        |       |
|                                                   | ** ** | **€**    | **3,255,777** | ** **    | **€** | **3,164,540** | ** ** |
|                                                        |            |               |               |               |            |  |  |

 

**19 Borrowing**

| ** **                                                                                               | ** ** | **2006**            | ** **    | **2005**            | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------|---------------|---------------------|------------|
| ** **                                                                                               | ** ** | **€’000** | ** **    | **€’000** | ** ** |
| Senior credit facility:                                                                                  |       |                |          |                |       |
| Revolving credit facility(1)—interest at relevant  interbank rate + 2.25%                           |       | 4,476               |          | 9,210               |       |
| Restructuring facility(2—interest at relevant  interbank rate + 2.25% until conversion to term loan |       | 103,200             |          | —              |       |
| Tranche A Term loan(3a)—interest at relevant  interbank rate + 2.25%                                |       | 452,031             |          | 475,856             |       |
| Tranche B Term loan(3b)—interest at relevant  interbank rate + 2.50% euro& 2.375% US$(3d)       |       | 1,188,558           |          | 1,165,518           |       |
| Tranche C Term loan(3c)—interest at relevant  interbank rate + 3.00% euro& 2.875% US$(3d)       |       | 1,188,558           |          | 1,165,518           |       |
| Yankee bonds  (including accrued interest)(4)                                                            |       | 253,903             |          | 251,497             |       |
| Kappa bonds(5)                                                                                           |       | —              |          | 755,575             |       |
| Bank loans and  overdrafts/(cash)(6)                                                                     |       | (216,249            | )             | (930,577            | )          |
| 2011 Receivables  securitization floating rate notes (including accrued interest)(7)                     |       | 210,278             |          | 210,214             |       |
| **Net  debt**                                                                                            | ** ** | **3,184,755**       | ** **    | **3,102,811**       | ** ** |
| Capitalized  leases                                                                                      |       | 18,156              |          | 23,549              |       |
| **Net debt including leases**                                                                            | ** ** | **€**          | **3,202,911** | ** **          | **€** | **3,126,360** | ** ** |
|                                                                                                          |            |                     |               |                     |            |  |  |

----

(1)          Revolving creditfacility of €600million (available under the senior credit facility) to be repaid in full in2012. Includes amounts drawn down under ancillary facilities and amounts drawnunder facilities covered by letters of credit.

(2)          Restructuring creditfacility of €275million, which converts to Term A, B and C loans on December 1, 2008.

(3a)    Term loan A due to be repaidin certain installments up to 2012.

F-119

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19Borrowing—(continued)**

(3b)   Term loan B due to be repaid infull in 2013. 

(3c)    Term loan C due to be repaidin full in 2014.

(3d)   Margins on TranchesB & C reduced by 0.25% on euro term loans and by 0.375% on US Dollarloans in February 2006.

(4)          7.5% senior debenturesdue 2025 of $292.3 million (6.75% senior notes due 2005 of $234 million wererepaid in November 2005).

(5)          Various Kappa bondsrepaid on January 3, 2006.

(6)          Cash atDecember 31, 2005 includes €756 million placed asdefeasance deposit with Kappa Bond Trustee.

(7)          Receivablessecuritization floating rate notes mature September 2011.

| ** **                                  | ** ** | **2006**           | ** **    | **2005**      | ** ** |
|---------------------------------------------|------------|--------------------|---------------|---------------|------------|
| ** **                                  | ** ** | **Bank**           | ** **    | **Bank**      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Loans and** | ** **    | **Other**     | ** ** | ** ** | ** ** | **Loans and** | ** ** | **Other** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Overdrafts**     | ** **    | **Borrowing** | ** ** | **Total** | ** ** | **Overdrafts** | ** ** | **Borrowing** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **€000**      | ** **    | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Analysis by year of repayment**           | ** ** | ** **         | ** **    | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bank loans,  overdrafts and other borrowing |       | 195,940            |          | 3,596         |       | 199,536 |   | 67,609 |   | 4,946 |   | 72,555 |   |
| Kappa bonds outstanding                     |       | —             |          | —        |       | — |   | — |   | 755,575 |   | 755,575 |   |
| Within one year                             |       | 195,940            |          | 3,596         |       | 199,536 |   | 67,609 |   | 760,521 |   | 828,130 |   |
| Between 1 and 2 years                       |       | 62,507             |          | 2,093         |       | 64,600 |   | 79,819 |   | 6,254 |   | 86,073 |   |
| Between 2 and 3  years                      |       | 67,929             |          | 5,988         |       | 73,917 |   | 56,270 |   | 2,172 |   | 58,442 |   |
| Between 3 and 4  years                      |       | 83,447             |          | 1,956         |       | 85,403 |   | 65,669 |   | 1,972 |   | 67,641 |   |
| Between 4 and 5  years                      |       | 102,412            |          | 212,267       |       | 314,679 |   | 67,397 |   | 1,761 |   | 69,158 |   |
| Thereafter                                  |       |               |          |          |       |   |   |   |   |   |   |   |   |
| By installment                              |       | 121,340            |          | 4,559         |       | 125,899 |   | 218,874 |   | 2,928 |   | 221,802 |   |
| Other than by installment                   |       | 2,468,656          |          | 222,186       |       | 2,690,842 |   | 2,316,851 |   | 458,016 |   | 2,774,867 |   |
| Due after more  than one year               |       | 2,906,291          |          | 449,049       |       | 3,355,340 |   | 2,804,880 |   | 473,103 |   | 3,277,983 |   |
| **Total borrowing**                         | ** ** | **€**         | **3,102,231** | ** **    | **€** | **452,645** | ** ** | **€** | **3,554,876** | ** ** | **€** | **2,872,489** | ** ** | **€** | **1,233,624** | ** ** | **€** | **4,106,113** | ** ** |
|                                             |            |                    |               |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

F-120

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19 Borrowing—(continued)**

| ** **                            | ** ** | **2006**          | ** **  | **2005**          | ** ** |
|---------------------------------------|------------|-------------------|-------------|-------------------|------------|
| ** **                            | ** ** | **Within**        | ** **  | **After**         | ** ** | **Within** | ** ** | **After** | ** ** |
| ** **                            | ** ** | **One Year** | ** **  | **One Year** | ** ** | **One Year** | ** ** | **One Year** | ** ** |
| ** **                            | ** ** | **€000**     | ** **  | **€000**     | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Analysis of borrowing**             | ** ** | ** **        |        |              |       |   |   |   |   |
| Secured bank loans and  overdrafts:   | ** ** | ** **        |        |              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Overseas loans                        |       | 50,873            |        | 777,233           |       | 14,074 |   | 804,382 |   |
| Domestic loans                        |       | 57,000            |        | 2,124,869         |       | 12,150 |   | 1,996,648 |   |
|                                  |       | 107,873           |        | 2,902,102         |       | 26,224 |   | 2,801,030 |   |
| Unsecured bank  loans and overdrafts: |       |              |        |              |       |   |   |   |   |
| Overseas loans                        |       | 57,873            |        | 4,189             |       | 30,974 |   | 3,850 |   |
| Domestic loans                        |       | 30,194            |        | —            |       | 10,411 |   | — |   |
|                                  |       | 88,067            |        | 4,189             |       | 41,385 |   | 3,850 |   |
| Total bank loans and overdrafts       |       | 195,940           |        | 2,906,291         |       | 67,609 |   | 2,804,880 |   |
| Secured other loans                   |       | 93                |        | 436,361           |       | 384 |   | 455,581 |   |
| Unsecured other  loans                |       | 3,503             |        | 12,688            |       | 4,562 |   | 17,522 |   |
| Kappa bonds outstanding               |       | —            |        | —            |       | 755,575 |   | — |   |
| Total other loans                     |       | 3,596             |        | 449,049           |       | 760,521 |   | 473,103 |   |
| **Total  borrowing**                  | ** ** | **€**        | **199,536** | ** **        | **€** | **3,355,340** | ** ** | **€** | **828,130** | ** ** | **€** | **3,277,983** | ** ** |
|                                       |            |                   |             |                   |            |  |  |  |  |  |  |  |  |

 

Security comprises fixed and floating charges over theassets of certain subsidiaries and pledges over the Group’s shareholding incertain of its subsidiaries. The gross amount of receivables collateralizingthe receivables securitization at December 31, 2006 was €260million (2005: €262million). At December 31, 2006 cash of €10.3 million (2005: €14.1 million)was in securitization bank accounts which was not available for transfer toother group subsidiaries.

Included in secured otherloans are the following long term obligations:

| ** **                                               | ** ** | **‘000** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|
| Guaranteed  Debentures 7.50% due 2025                    |       | $             | 292,300    |   |
| Receivables  securitization floating rate notes due 2011 |       | €        | 210,000    |   |
| Senior credit facility  due between 2012 and 2014        |       | €        | 2,900,000  |   |

 

Committed facilitiesamounted to €4,221million (2005: €4,205 million) of which €3,464million (2005: €3,284 million)were utilized at December 31, 2006. The weighted average period untilmaturity of undrawn committed facilities is 5.0 years (2005: 5.3 years).

F-121

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19Borrowing—(continued)**

***Maturity of Undrawn Committed Facilities***

| ** **            | ** ** | **2006**      | ** **  | **2005**      | ** ** |
|-----------------------|------------|---------------|-------------|---------------|------------|
| ** **            | ** ** | **€000** | ** **  | **€000** | ** ** |
| Within 1 year         |       | 262           |        | 55,546        |       |
| Between 1 and 2 years |       | 171,797       |        | —        |       |
| More than 2 years     |       | 584,979       |        | 865,790       |       |
|                  | ** ** | **€**    | **757,038** | ** **    | **€** | **921,336** | ** ** |
|                       |            |               |             |               |            |  |  |

 

**Financialinstruments and risk management**

The operating parameters and policies of treasurymanagement are established under board authority. The formal treasury policycovers the areas of funding, counterparty risk, foreign exchange, controls andderivatives. Risk arising on counterparty default is controlled within aframework of dealing with high quality institutions that meet certain minimumcriteria. The Group uses derivative instruments in the management of interestrate and currency risk.

The Group’s financialinstruments, other than derivatives, comprise borrowing, cash and liquidresources, and various items, such as trade debtors, trade creditors etc, thatarise directly from its operations. The Group uses derivative financialinstruments primarily to manage its exposure to market risks from changes ininterest and foreign exchange rates. The Group does not enter into or issuederivative financial instruments for trading purposes. The Group’s policy is tocentrally manage interest rate and currency exposure.

**(a) Interestrate risk management**

The Group manages interest rate exposure to achieve anappropriate balance of fixed and variable rate funding. To achieve thisobjective, the Group enters into interest rate swaps, options and forward rateagreements. Interest rate swap agreements are used to change the interestreceivable or payable on the Group’s underlying cash and borrowing fromvariable to fixed rates or from fixed to variable rates. At the year end, 57%(2005: 60%) of the Group’s borrowing was at fixed rates after taking account ofinterest rate swaps. As at December 31, 2006, the Group had variable ratedebt (adjusted to include fixed rate instruments which reprice within one year)of approximately €1.5 billion (2005: €1.3billion). Holding all other variables constant, including levels ofindebtedness, a one percentage point increase in interest rates would have hadan estimated impact on pre-tax interest expense of approximately €15 million.The weighted average interest rate on borrowing outstanding at the year end was6.04% (2005: 6.00%). The weighted average interest rate on short term borrowingwas 7.18% (2005: 5.48%).

F-122

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19Borrowing—(continued)**

Outstanding interest rateswap agreements at December 31, 2006 are summarized as follows:

| **Currency** | ** ** | ** ** | ** ** | **Notional  Principal  (Millions)** | ** ** | **Termination  Dates** | ** ** | **% Fixed  Payable** | ** ** | **% Variable  Receivable** | ** ** |
|--------------|------------|------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------------|------------|
| EUR          |       |       | 346        |                                |       |                   | 2007       |                      |       | 3.455 - 3.67                    |       |   | Euribor | (1) |   |
| EUR          |       |       | 480        |                                |       |                   | 2008       |                      |       | 3.36 - 3.489                    |       |   | Euribor |   |   |
| EUR          |       |       | 1,300      |                                |       |                   | 2010       |                      |       | 3.035 - 3.79                    |       |   | Euribor |   |   |

----

(1)          European InterbankOffered Rate

Outstandinginterest rate swap agreements at December 31, 2005 are summarized asfollows:

| **Currency** | ** ** | ** ** | ** ** | **Notional  Principal  (Millions)** | ** ** | **Termination  Dates** | ** ** | **% Fixed  Payable** | ** ** | **% Variable  Receivable** | ** ** |
|--------------|------------|------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------------|------------|
| EUR          |       |       | 175        |                                |       |                   | 2006       |                      |       | 3.4775 - 3.67                   |       |   | Euribor |   |   |
| EUR          |       |       | 425        |                                |       |                   | 2007       |                      |       | 3.455 - 3.67                    |       |   | Euribor |   |   |
| EUR          |       |       | 480        |                                |       |                   | 2008       |                      |       | 3.165 - 3.615                   |       |   | Euribor |   |   |
| EUR          |       |       | 1,100      |                                |       |                   | 2009       |                      |       | 3.035 - 3.62                    |       |   | Euribor |   |   |

 

**(b) Foreignexchange risk management**

The Group manages its balance sheet having regard tothe currency exposures arising from its assets being denominated in a widerange of currencies. To this end, where foreign currency assets are funded bylocal borrowing, such borrowing is generally sourced in the currency of therelated assets. The Group also hedges a portion of its currency exposurethrough the use of currency swaps and forward contracts. At December 31,2006 the Group had entered into €106 million (2005: €278million) currency equivalent of forward contracts and there were no optionscontracts outstanding (2005: €Nil) in respect of its dayto day trading.

Outstanding currency swapagreements at December 31, 2006 are summarized as follows:

| **Currency swapped  (Millions)** | ** ** | ** ** | ** **          | **Currency received  (Millions)** | ** ** | **Maturity date** | ** ** | **Interest rate paid** | ** ** | **Interest rate received** | ** ** |
|---------------------------------------|------------|------------|---------------------|----------------------------------------|------------|------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| USD   176                   |       |       | EUR   172 |                                   |       |                   | 2007       |                             |       | Euribor + 3.32                       |       |   | Libor (1) + 3.00 |   |   |
| USD   222                   |       |       | EUR   190 |                                   |       |                   | 2007       |                             |       | Euribor + 2.59                       |       |   | 7.50 |   |   |
| USD   70                    |       |       | SEK   574 |                                   |       |                   | 2007       |                             |       | Euribor + 2.60                       |       |   | 7.50 |   |   |
| USD   200                   |       |       | EUR   153 |                                   |       |                   | 2010       |                             |       | 6.61                                 |       |   | 7.75 |   |   |
| USD   204                   |       |       | EUR   183 |                                   |       |                   | 2012       |                             |       | 9.98                                 |       |   | 9.65 |   |   |
| USD   545                   |       |       | EUR   414 |                                   |       |                   | 2007       |                             |       | Euribor + 0.04                       |       |   | Libor |   |   |

 

F-123

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19Borrowing—(continued)**

Outstanding currency swapagreements at December 31, 2005 are summarised as follows:

| **Currency swapped  (Millions)** | ** ** | ** ** | ** **          | **Currency received  (Millions)** | ** ** | **Maturity date** | ** ** | **Interest rate paid** | ** ** | **Interest rate received** | ** ** |
|---------------------------------------|------------|------------|---------------------|----------------------------------------|------------|------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| USD   176                   |       |       | EUR   172 |                                   |       |                   | 2007       |                             |       | Euribor + 3.32                       |       |   | Libor(1) + 3.00 |   |   |
| USD   222                   |       |       | EUR   190 |                                   |       |                   | 2007       |                             |       | Euribor + 2.59                       |       |   | 7.50 |   |   |
| USD   70                    |       |       | SEK   574 |                                   |       |                   | 2007       |                             |       | Stibor (2) + 2.60               |       |   | 7.50 |   |   |
| USD   200                   |       |       | EUR   153 |                                   |       |                   | 2010       |                             |       | 6.61                                 |       |   | 7.75 |   |   |
| USD   204                   |       |       | EUR   183 |                                   |       |                   | 2012       |                             |       | 9.98                                 |       |   | 9.65 |   |   |

----

(1)          London Interbank OfferedRate

(2)          Stockholm InterbankOffered Rate

At December 31, 2006 the Group had also enteredinto currency swaps of €317 million equivalent (2005: €374million) as part of its short term liquidity management.

Excluding the Group’sLatin American operations, there were no significant transactional currencyexposures at December 31, 2006, that gave rise to net currency gains andlosses recognized in the statement of operations. Such exposures comprise themonetary assets and liabilities of the Group that are not denominated in theoperating (or ‘functional’) currency of the operating unit involved. As at December 31,2006, transactional currency exposures in the Group’s Latin American operationsamounted to €18 million (2005: €35 million).

**(c) Fair value offinancial instruments**

Thecarrying amounts and estimated fair values of the material financialinstruments of the Group are as follows:

| ** **                                        | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|---------------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                        | ** ** | **Carrying**  | ** ** | **Fair**      | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                        | ** ** | **Amount**    | ** ** | **Value**     | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                        | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| **Assets**                                        | ** ** | ** **    |       |          |       |   |   |   |   |
| Cash, short term  deposits and liquid investments |       | 370,121       |       | 370,121       |       | 247,727 |   | 247,727 |   |
| Restricted cash                                   |       | —        |       | —        |       | 755,575 |   | 755,575 |   |
| Accounts  receivable and prepayments              |       | 1,331,942     |       | 1,331,942     |       | 1,299,458 |   | 1,299,458 |   |
| **Liabilities**                                   |       |          |       |          |       |   |   |   |   |
| Short term debt                                   |       | 199,536       |       | 199,536       |       | 72,555 |   | 72,555 |   |
| Kappa bonds outstanding                           |       | —        |       | —        |       | 755,575 |   | 755,575 |   |
| Accounts payable  and accrued liabilities         |       | 1,544,983     |       | 1,544,983     |       | 1,500,413 |   | 1,500,413 |   |
| Medium and long  term debt                        |       | 3,355,340     |       | 3,344,243     |       | 3,277,983 |   | 3,218,241 |   |
| **Derivative financial instruments**              |       |          |       |          |       |   |   |   |   |
| Interest rate  swap agreements                    |       |          |       | 2,545         |       |   |   | (45,800 | ) |
| Currency swap  agreements                         |       |          |       | (98,650       | )          |   |   | (21,895 | ) |
| Foreign exchange  contracts                       |       |          |       | 151           |       |   |   | 1,063 |   |
| Energy/pulp hedging  contracts                    |       |          | ** ** | (3,424        | )          |   |   | 990 |   |

 

F-124

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**19Borrowing—(continued)**

The following methods andassumptions were used by the Group in estimating its fair value disclosures forfinancial instruments:

**Cash, short term deposits and liquid investments,debtors and creditors:**

The carrying amountreported in the balance sheet approximates fair value because of the short maturityof these instruments.

**Short term debt andmedium and long term debt:**

The fair value of theGroup's debt is estimated using either the replacement cost of equivalentinstruments or discounted cash flow analysis, based on the Group's currentincremental borrowing rates for similar types of borrowing arrangements andmaturities.

**Interest rate swapagreements:**

The fair value of theGroup's interest rate swap agreements is estimated using discounted cash flowanalysis.  In addition the fair valueamount includes the interest rate component of currency swaps.

**Currency swapagreements and foreign exchange contracts:**

Thefair value of these instruments is based on the estimated replacement cost ofequivalent instruments at the balance sheet date. The fair value of currencyswaps are included in the carrying amount of Short term debt and Medium andlong term debt.

**(d) Credit risk**

Potential concentrations of credit risk to the Groupconsist principally of cash deposits, short term investments and trade debtors.The Group only deposits cash surpluses with quality credit rated banks andinstitutions that meet certain criteria and by policy limits the amount ofcredit exposure to any one bank or institution. Trade debtors comprise a large,widespread customer base. The Group mitigates the risk that counterparties toderivatives will fail to perform by contracting with major financialinstitutions having high credit ratings and considers the likelihood ofcounterparty failure to be remote. At December 31, 2006 the Group did notconsider there to be any significant concentration of credit risk.

F-125

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**20Provision for Liabilities and Charges**

| ** **                                                             | ** ** | **Deferred**  | ** **  | ** **     | ** **  | ** **    | ** ** |
|------------------------------------------------------------------------|------------|---------------|-------------|----------------|-------------|---------------|------------|
| ** **                                                             | ** ** | **Income**    | ** **  | **Other**      | ** **  | ** **    | ** ** |
| ** **                                                             | ** ** | **Taxes**     | ** **  | **Provisions** | ** **  | **Total**     | ** ** |
| ** **                                                             | ** ** | **€000** | ** **  | **€000**  | ** **  | **€000** | ** ** |
| December 31,  2003                                                |       | 176,826       |        | 58,126         |        | 234,952       |       |
| Charge/(credit)  to statement of operations(1)                         |       | 3,984         |        | (42            | )           | 3,942         |       |
| Paid in year                                                           |       | —        |        | (9,769         | )           | (9,769        | )          |
| Acquisitions                                                           |       | 1             |        | —         |        | 1             |       |
| Fair value  adjustments                                                |       | (7,134        | )           | —         |        | (7,134        | )          |
| Reclassification                                                       |       | 4,406         |        | (2,592         | )           | 1,814         |       |
| Currency  adjustment                                                   |       | (1,647        | )           | (756           | )           | (2,403        | )          |
| **December 31,  2004**                                            | ** ** | **176,436**   | ** **  | **44,967**     | ** **  | **221,403**   | ** ** |
| (Credit)/charge  to statement of operations(1)                         |       | (21,502       | )           | 14,084         |        | (7,418        | )          |
| Paid in year                                                           |       | —        |        | (5,512         | )           | (5,512        | )          |
| Acquisitions                                                           |       | 65,729        |        | 2,392          |        | 68,121        |       |
| Subsidiaries  disposed                                                 |       | (26,269       | )           | —         |        | (26,269       | )          |
| Reclassification                                                       |       | (1,877        | )           | (5,924         | )           | (7,801        | )          |
| Currency  adjustment                                                   |       | 3,674         |        | 1,535          |        | 5,209         |       |
| **December 31,  2005**                                            | ** ** | **196,191**   | ** **  | **51,542**     | ** **  | **247,733**   | ** ** |
| Charge to  statement of operations(1)                                  |       | 19,422        |        | 14,445         |        | 33,867        |       |
| Fair value  adjustments                                                |       | (76,462       | )           | —         |        | (76,462       | )          |
| Paid in year                                                           |       | —        |        | (4,535         | )           | (4,535        | )          |
| Subsidiaries  disposed                                                 |       | (4,889        | )           | —         |        | (4,889        | )          |
| Reclassification                                                       |       | (23,753       | )           | 6,389          |        | (17,364       | )          |
| Currency  adjustment                                                   |       | 395           |        | (1,184         | )           | (789          | )          |
| **December 31,  2006**                                            | ** ** | **€**    | **110,904** | ** **     | **€**  | **66,657**    | ** ** | **€** | **177,561** | ** ** |
| **Amounts  included in current liabilities at December 31, 2006** | ** ** | ** **    |        | **€**     | **132,591** | ** **    | **€** | **132,591** | ** ** |
|                                                                        |            |               |             |                |             |               |            |  |  |  |

 

| ** **                                | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| **Deferred taxation arises as  follows:** |       |          |        |          |       |          |       |
| Accelerated  capital allowances           |       | 294,202       |        | 260,686       |       | 158,246       |       |
| Other timing  differences                 |       | (183,298      | )           | (64,495       | )          | 18,190        |       |
| ** **                                | ** ** | **€**    | **110,904** | ** **    | **€** | **196,191**   | ** ** | **€** | **176,436** | ** ** |
|                                           |            |               |             |               |            |               |            |  |  |  |

----

(1)          The 2006 deferred taxcharge to income of €19,422,000(2005: creditof €21,502,000; 2004: €3,984,000) excludes thedeferred tax credit relating to pensions of €25,769,000 (2005: €2,172,000;2004: €635,000).The 2006 deferred tax charge to income in Note 9 ‘Taxes on income’ includesthis amount.

At December 31,2006, we had net operating loss carryforwards of €1,187 million(2005: €1,057 million),which were available indefinitely. These loss carryforwards have a tax value of€357 million(2005: €294 million).Valuation allowances of €173 million (2005: €167 million)have been established for a portion of these deferred tax assets. Therealization of these deferred tax assets is dependent on future taxable income.Based upon recent levels of taxable income, we expect that our deferred taxassets, net of valuation allowances, will be fully utilized.

F-126

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**20Provision for Liabilities and Charges—(continued)**

Deferred tax assets have not been recognised on taxlosses of €173 million, on pension/employee benefits of €17million, on trade and other payables of €6 million and on debtorsof €1million. No deferred tax asset has been recognized in respect of these amountson the grounds that there is insufficient evidence that the assets will berecoverable. In the event that sufficient profits will be generated in therelevant jurisdictions in the future, these assets may be recovered.

Other provisions of €199million include amounts in respect of restructuring (€74million), environmental (€10 million), legal (€33million) and other (€82million).

*Restructuring*

These provisions relate tocommitments relating to restructuring programs throughout the Group. During2006, following the completion of the merger with Kappa Packaging in December 2005,the Group undertook a significant program of restructuring with the objectiveof fully integrating the combined operations of the Jefferson Smurfit Group andKappa Packaging in order to achieve planned synergy benefits. This program was substantiallycompleted in 2006. The Group expects that the majority of these provisions willbe utilized during 2007. In 2005, in response to weak market conditions, theGroup announced the closure or restructuring of a number of operations in ourEuropean packaging business. At January 1, 2006, the balance of therestructuring provisions amounted to €28 million. Theseprovisions were increased by €117 million in 2006 due tothe significant program of restructuring in the current year. At December 31,2006, the remaining balance of the restructuring provision amounted to €74million.

*Environmental*

Provisions forenvironmental costs mainly relate to the reinstatement of landfill sites andother remediation and improvement costs incurred in compliance with eitherlocal or national environmental regulations together with constructiveobligations stemming from established practice. The timing of settlement ofthese provisions is not certain particularly where provisions are based on pastpractice.

*Legal*

This represents provisionsfor certain legal claims brought against the Group by various parties in theordinary course of business. Provisions are expensed in the income statementwithin administrative expenses. The most significant provision amounts to €22.6million at December 31, 2006 and relates to the outstanding element of thesettlement of litigation in the Dominican Republic. This litigation arose fromthe acquisition in 1996 of a controlling interest in a local corrugator ownedby lndustria Cartonera Dominicana. This matter was settled on December 13,2006 and the outstanding amount is payable between January 2007 and January 2009.Other legal provisions are uncertain as to timing and amount as they are thesubject of ongoing cases.

*Other*

Other comprises a numberof provisions including; liabilities arising from onerous contracts, mainlyrelating to property leases amounting to €20.1million; deferred employee profit sharing provisions in certain of thecountries in which we operate amounting to €14.3 million; and numerousother items which are not individually significant and are not readily groupedtogether. The property leases generally have lives ranging from five to tenyears.

F-127

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**21 Contingent Liabilities**

Kappa Packaging’s subsidiary,Kappa Zulpich, is, since May 25, 2004, being investigated by the German *Bundes Kartellamt* regarding alleged price co-ordination ofrecovered paper purchases by paper and board producers. The Group is co-operatingfully with the *Bundes Kartellamt* in respect ofits investigation.

The Group’s UK operations were,since July 2004, being investigated by the Office of Fair Trading. TheDirectors understand that the investigation, which centred on the sheet-feedingbusiness, was prompted by consumer complaints, which were filed during the UKCompetition Commission’s investigation of the March 2004 acquisitionproposal by DS Smith for Linpac Limited, a competitor of the Group’ssheet-feeding business. The investigation looked into the high levels ofpricing transparency which exist in the sector and which were a function of,inter alia, vertical integration, swaps and market concentration. Thisinvestigation was formally closed by way of letter from the Office of FairTrading dated September 21, 2006.

On January 16, 2007,representatives of the *Autoridade da Concorrencia*(Portuguese National Competition Authority) visited the Group’s Portuguesecorrugated plant, located in Sao Paio de Oleiros, as part of what appears to bea local investigation affecting several Portuguese companies in the packagingsector. Smurfit Kappa Portugal has co-operated fully with the *Autoridade da Concorrencia*and as of this date has notreceived any news or further communication in relation to this matter.

In October 2006, a noticeof claim was received by a former subsidiary of Smurfit Kappa Group from alocal County Administrative Board in Sweden requiring it to investigate andremediate an adjacent lake. This lake was polluted by local industry over avery long period of time. The subsidiary was in dialogue with the CountyAdministrative Board over the past 30 years as some of its operations requireoperating permits under the local environmental code. The investigation is at avery preliminary stage.

In November 2002, the Groupwas notified by the Spanish Environmental Enforcement Agency, Seprona, that ithad become aware of an accumulation of rain water mixed with manufacturingwaste in the vicinity of the Group’s Sanguesa plant and that such concentrationposed a potential environmental hazard. The rain water was removed and newprocedures were put in place to prevent any recurrence. Three of the Group’slocal managers have been imputed by the court for an offence against naturalresources and the environment in respect of this matter. This case wasadjourned for consideration on September 22, 2006 and a decision isexpected in due course.

The Group was involved incertain civil and criminal proceedings in Spain arising out of a pastacquisition. In November 1988, a subsidiary of Smurfit acquired IndustrialCartonera S.A. (“ICSA”), a Spanish incorporated company, from a subsidiary ofTorras. In early 1989, Smurfit acquired a 35% interest in another Spanishcompany, Industrias del Papel y de la Celulosa, S.A. (‘‘INPACSA’’), a formerparent of ICSA. A number of individuals associated with Torras were charged bythe public prosecutor in Madrid with diverting, for their own use, asubstantial part of the purchase consideration paid by Smurfit for ICSA. Thepublic prosecutor, on behalf of the minority shareholders of INPACSA, alsoclaimed that certain transactions, including the transfer of ICSA by INPACSAwhich took place prior to the Group’s acquisition of ICSA, caused damage to theminority shareholders of INPACSA. In 1998, the public prosecutor also chargedSmurfit’s Chairman, Sir Michael Smurfit, as the representative of Smurfit, inthese proceedings with respect to the alleged damage to the minorityshareholders of INPACSA and Torras. A 

F-128

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**21Contingent Liabilities—(continued)**

Smurfitsubsidiary was also one of a number of parties against whom secondary civilliability had been claimed. Preliminary proceedings commenced in March 2003and on April 11, 2003, the court dismissed the proceedings against SirMichael Smurfit, the Smurfit subsidiary and others. The final decision of thecourt was handed down in March 2004 and confirmed the earlier dismissalwith respect to Sir Michael Smurfit and the Smurfit subsidiary. The decisionwas appealed to a higher court by two private complainants but not by thepublic prosecutor. In July 2006, the Supreme Court confirmed the decisionof the lower court.

No provisions have beenrecognized in relation to the above matters, as the Directors believe thatthese liabilities are contingent liabilities on the basis that any possibleobligations arising from past events will only be confirmed by the occurrence(or non-occurrence) of future events not wholly within control of the Group.

A Group subsidiary was the subject of litigation in theDominican Republic in relation to the ownership of its corrugated containerplant. The lawsuits alleged damages in excess of US$300 million. This matterwas settled on December 13, 2006. The Group incurred settlement costs of €22.6 million. Thesettlement included the transfer of title to the Group of certain assets andincluded the payment of cash consideration in three tranches in January 2007,2008 and 2009. As a result, the Group has retained ownership of the plant andequipment and the goodwill of the business.

**22 Lease Obligations**

**Obligations under finance leases:**

| ** **                                       | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|--------------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                       | ** ** | **€000** | ** ** | **€000** | ** ** |
| Payable within  one year                         |       | 4,963         |       | 4,832         |       |
| Payable in one to  two years                     |       | 3,972         |       | 6,323         |       |
| Payable in two to  three years                   |       | 3,416         |       | 4,197         |       |
| Payable in three  to four years                  |       | 1,312         |       | 3,456         |       |
| Payable in four  to five years                   |       | 1,509         |       | 1,289         |       |
| Payable  thereafter                              |       | 3,993         |       | 5,947         |       |
| Total minimum lease payments                     |       | 19,165        |       | 26,044        |       |
| Less amount representing interest                |       | (1,009        | )          | (2,495        | )          |
| Present value of minimum lease payments          | ** ** | **€**    | **18,156** |          | **€** | **23,549** | ** ** |
| Current  portion of capital lease obligations    |       | 4,578         |       | 4,132         |       |
| Non-current portion of capital lease obligations |       | 13,578        |       | 19,417        |       |
|                                             | ** ** | **€**    | **18,156** |          | **€** | **23,549** | ** ** |

 

F-129

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**22 LeaseObligations—(continued)**

Commitmentsunder operating leases, payable in the coming year, relate to leases expiringin the following periods:

| ** **                          | ** ** | **Land and** | ** ** | ** **    | ** ** | ** **    | ** ** |
|-------------------------------------|------------|-------------------|------------|---------------|------------|---------------|------------|
| ** **                          | ** ** | **Buildings**     | ** ** | **Other**     | ** ** | **Total**     | ** ** |
| ** **                          | ** ** | **€000**     | ** ** | **€000** | ** ** | **€000** | ** ** |
| Within one year                     |       |              | 1,414      |          |       | 10,609        |       | 12,023 |   |
| Within two to  five years inclusive |       |              | 2,278      |          |       | 17,981        |       | 20,259 |   |
| Over five years                     |       |              | 5,943      |          |       | 195           |       | 6,138 |   |
|                                | ** ** | ** **        | **€** | **9,635**     |       | ** **    | **€** | **28,785** | ** ** | **€** | **38,420** | ** ** |
|                                     |            |                   |            |               |            |               |            |  |  |  |  |  |

 

The totalcommitments under non-cancellable operating leases at December 31, 2006 are asfollows:

| ** **                      | ** ** | **2006**      | ** **  |
|---------------------------------|------------|---------------|-------------|
| ** **                      | ** ** | **€000** | ** **  |
| Payable within  one year        |       | 38,420        |        |
| Payable in one to  two years    |       | 29,674        |        |
| Payable in two to  three years  |       | 22,340        |        |
| Payable in three  to four years |       | 18,669        |        |
| Payable in four  to five years  |       | 15,961        |        |
| Payable  thereafter             |       | 40,189        |        |
|                            | ** ** | **€**    | **165,253** | ** ** |
|                                 |            |               |             |  |

 

**23 Capital Commitments**

**The following capital commitmentsauthorized by the directors had not been provided for in the Group financialstatements:**

| ** **          | ** ** | **2006**      | ** **  | **2005**      | ** ** |
|---------------------|------------|---------------|-------------|---------------|------------|
| ** **          | ** ** | **€000** | ** **  | **€000** | ** ** |
| Contracted for      |       | 148,239       |        | 124,280       |       |
| Not contracted  for |       | 95,849        |        | 143,035       |       |
|                | ** ** | **€**    | **244,088** | ** **    | **€** | **267,315** | ** ** |
|                     |            |               |             |               |            |  |  |

 

**24 Employee Pension Plansand Similar Obligations**

The Group operates a number ofpension plans and other long-term benefit plans throughout the world, devisedin accordance with local conditions and practice. The larger plans aregenerally of the defined benefit type and are funded by payments to separatelyadministered funds or insurance companies.

The principal plans are in theUnited Kingdom, the Netherlands, Ireland and Germany. The most recent formalvaluations of the significant funded defined benefit plans were carried out asfollows: United Kingdom on March 31, 2005; the Netherlands on December 31,2005; Ireland on January 1, 2004. In general, actuarial valuationsare not available for public inspection; however, the results of valuations areadvised to members of the various schemes.

F-130

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24 Employee Pension Plansand Similar Obligations—(continued)**

The majority of the definedbenefit schemes are funded but in certain countries—Germany, Austria andFrance, in accordance with local practices, the scheme’s liabilities are bookreserved in the balance sheet of the Company and hence are unfunded. In thesecountries, a full actuarial valuation of the unfunded liabilities is undertakenby independent actuaries on an annual basis.

The pension cost for the Group’smajor occupational pension plans has been determined using the projected unitcredit method. The current agreed rates of contribution for future yearsare comparable to current levels.

The main financialassumptions used to calculate scheme liabilities under FRS 17 are set outbelow:

**Major Assumptions**

| ** **                               | ** ** | **Europe**  | ** ** | **USA** | ** ** | **Latin  America** | ** ** |
|------------------------------------------|------------|-------------|------------|---------|------------|--------------------|------------|
| ** **                               | ** ** | **%**       | ** ** | **%**   | ** ** | **%**              | ** ** |
| **December 2006**                   |       |        |       |    |       |               |       |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 3.50    |       | 3.25 - 6.08        |       |
| Rate of increase  to pensions in payment |       | Nil - 3.00  |       | Nil     |       | Nil                |       |
| Discount rate for  scheme liabilities    |       | 4.00 - 5.25 |       | 5.85    |       | 5.85 - 11.17       |       |
| Inflation                                |       | 1.50 - 2.90 |       | 2.00    |       | 2.50 - 3.50        |       |

 

| ** **                               | ** ** | **Europe**  | ** ** | **USA**     | ** ** | **Latin  America** | ** ** |
|------------------------------------------|------------|-------------|------------|-------------|------------|--------------------|------------|
| ** **                               | ** ** | **%**       | ** ** | **%**       | ** ** | **%**              | ** ** |
| **December 2005**                   | ** ** | ** **  | ** ** | ** **  | ** ** | ** **         | ** ** |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 3.50 - 3.75 |       | 3.25 - 6.08        |       |
| Rate of increase  to pensions in payment |       | Nil - 3.00  |       | Nil         |       | Nil                |       |
| Discount rate for  scheme liabilities    |       | 4.25 - 5.00 |       | 5.50        |       | 5.25 - 11.17       |       |
| Inflation                                |       | 1.25 - 2.75 |       | 1.75        |       | 2.50 - 3.50        |       |

 

| ** **                               | ** ** | **Europe**  | ** ** | **USA**     | ** ** | **Latin America** | ** **   |
|------------------------------------------|------------|-------------|------------|-------------|------------|------------------------|--------------|
| ** **                               | ** ** | **%**       | ** ** | **%**       | ** ** | **%**                  | ** **   |
| **December 2004**                   | ** ** | ** **  | ** ** | ** **  | ** ** |                   | ** **   | ** ** |   |
| Rate of increase  in salaries            |       | 1.50 - 4.00 |       | 3.75 - 4.00 |       |                   | 3.50 - 6.85  | ** ** |   |
| Rate of increase  to pensions in payment |       | Nil - 4.00  |       | Nil         |       |                   | Nil          | ** ** |   |
| Discount rate for  scheme liabilities    |       | 4.50 - 6.50 |       | 6.00 - 6.25 |       |                   | 5.25 - 12.00 | ** ** |   |
| Inflation                                |       | 1.25 - 4.00 |       | 2.00        |       |                   | 2.75 - 3.50  | ** ** |   |

 

Theexpected long term rates of return on the assets of the significant plans wereas follows:

| ** **             | ** ** | **Europe**  | ** ** | **USA**    | ** ** | **Latin America** | ** **  |
|------------------------|------------|-------------|------------|------------|------------|------------------------|-------------|
| ** **             | ** ** | **%**       | ** ** | **%**      | ** ** | **%**                  | ** **  |
| **December 2006** | ** ** | ** **  | ** ** | ** ** | ** ** |                   | ** **  | ** ** |   |
| Equities               |       | 7.25 - 8.00 |       | 8.50       |       |                   | 8.25 -13.75 | ** ** |   |
| Bonds                  |       | 3.25 - 5.50 |       | 4.50       |       |                   | 8.75        | ** ** |   |
| Property               |       | 6.25 - 7.00 |       | n/a        |       |                   | n/a         | ** ** |   |
| Other                  |       | 2.75 - 7.14 |       | 3.50       |       |                   | 7.00        | ** ** |   |

 

F-131

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24 Employee Pension Plans and Similar Obligations—(continued)**

| ** **             | ** ** | **Europe**  | ** ** | **USA**    | ** ** | **Latin America** | ** **   |
|------------------------|------------|-------------|------------|------------|------------|------------------------|--------------|
| ** **             | ** ** | **%**       | ** ** | **%**      | ** ** | **%**                  | ** **   |
| **December 2005** | ** ** | ** **  | ** ** | ** ** | ** ** |                   | ** **   | ** ** |   |
| Equities               |       | 7.25 - 8.00 |       | 8.50       |       |                   | 8.25 - 14.25 | ** ** |   |
| Bonds                  |       | 3.25 - 5.50 |       | 4.50       |       |                   | 4.25 - 9.00  | ** ** |   |
| Property               |       | 6.50 - 7.00 |       | n/a        |       |                   | n/a          | ** ** |   |
| Other                  |       | 2.50 - 7.14 |       | 3.50       |       |                   | 3.25 - 7.00  | ** ** |   |

 

| ** **             | ** ** | **Europe**  | ** ** | **USA**    | ** ** | **Latin America** | ** **   |
|------------------------|------------|-------------|------------|------------|------------|------------------------|--------------|
| ** **             | ** ** | **%**       | ** ** | **%**      | ** ** | **%**                  | ** **   |
| **December 2004** | ** ** | ** **  | ** ** | ** ** | ** ** |                   | ** **   | ** ** |   |
| Equities               |       | 7.50 - 8.00 |       | 8.50       |       |                   | 8.25 - 10.50 | ** ** |   |
| Bonds                  |       | 3.75 - 7.00 |       | 4.50       |       |                   | 4.25 - 5.25  | ** ** |   |
| Property               |       | 6.50 - 7.00 |       | n/a        |       |                   | n/a          | ** ** |   |
| Other                  |       | 2.75 - 7.36 |       | 3.50       |       |                   | 3.25 - 3.50  | ** ** |   |

 

The market values of theassets of the schemes were as follows:

| ** **                           | ** ** | **Europe**    | ** **   | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|--------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **   | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2006**               | ** ** | ** **    | ** **   | ** **    | ** ** |                   | ** ** | ** **    |       | ** ** | ** ** |
| Equities                             |       | 657,046       |         | 13,167        |       |                   | 11,732     |          |       | 681,945 |   |
| Bonds                                |       | 531,906       |         | 11,084        |       |                   | 8,543      |          |       | 551,533 |   |
| Property                             |       | 99,422        |         | —        |       |                   | —     |          |       | 99,422 |   |
| Other                                |       | 85,010        |         | 467           |       |                   | 687        |          |       | 86,164 |   |
| Total market  value                  |       | 1,373,384     |         | 24,718        |       |                   | 20,962     |          |       | 1,419,064 |   |
| Present value of  scheme liabilities |       | (1,902,442    | )            | (41,227       | )          |                   | (45,020    | )             |       | (1,988,689 | ) |
| (Deficit) in the  plans              |       | (529,058      | )            | (16,509       | )          |                   | (24,058    | )             |       | (569,625 | ) |
| Deferred tax  asset                  |       | 75,582        |         | —        |       |                   | 280        |          |       | 75,862 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(453,476** | **)**         | **€** | **(16,509**            | **)**      |          | **€** | **(23,778** | **)** |   | **€** | **(493,763** | **)** |
|                                      |            |               |              |               |            |                        |            |               |            |  |  |  |  |  |  |

 

| ** **                           | ** ** | **Europe**    | ** **          | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|---------------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **          | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2005**               | ** ** | ** **    | ** **          | ** **    | ** ** |                   | ** ** | ** **    |       | ** ** | ** ** |
| Equities                             |       | 628,843       |                | 15,717        |       |                   | 10,018     |          |       | 654,578 |   |
| Bonds                                |       | 487,089       |                | 9,118         |       |                   | 9,822      |          |       | 506,029 |   |
| Property                             |       | 77,451        |                | —        |       |                   | —     |          |       | 77,451 |   |
| Other                                |       | 78,622        |                | 1,016         |       |                   | 531        |          |       | 80,169 |   |
| Total market  value                  |       | 1,272,005     |                | 25,851        |       |                   | 20,371     |          |       | 1,318,227 |   |
| Present value of  scheme liabilities |       | (1,929,671    | )    | (46,506       | )     |                   | (50,194    | )             |       | (2,026,371 | ) |
| (Deficit) in the  plans              |       | (657,666      | )                   | (20,655       | )          |                   | (29,823    | )             |       | (708,144 | ) |
| Deferred tax  asset                  |       | 51,483        |                | —        |       |                   | 1,293      |          |       | 52,776 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(606,183**        | **)**         | **€** | **(20,655**            | **)**      |          | **€** | **(28,530** | **)** |   | **€** | **(655,368** | **)** |
|                                      |            |               |                     |               |            |                        |            |               |            |  |  |  |  |  |  |

** **

F-132

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24 Employee Pension Plans and Similar Obligations—(continued)**

| ** **                           | ** ** | **Europe**    | ** **          | **USA**       | ** ** | **Latin America** | ** ** | **Total**     | ** ** |
|--------------------------------------|------------|---------------|---------------------|---------------|------------|------------------------|------------|---------------|------------|
| ** **                           | ** ** | **€000** | ** **          | **€000** | ** ** | **€000**          | ** ** | **€000** | ** ** |
| **December 2004**               | ** ** | ** **    | ** **          | ** **    | ** ** |                   | ** ** | ** **    |       | ** ** | ** ** |
| Equities                             |       | 299,530       |                | 16,391        |       |                   | 8,006      |          |       | 323,927 |   |
| Bonds                                |       | 237,519       |                | 8,890         |       |                   | 5,999      |          |       | 252,408 |   |
| Property                             |       | 40,117        |                | —        |       |                   | —     |          |       | 40,117 |   |
| Other                                |       | 36,536        |                | 737           |       |                   | 1,380      |          |       | 38,653 |   |
| Total market  value                  |       | 613,702       |                | 26,018        |       |                   | 15,385     |          |       | 655,105 |   |
| Present value of  scheme liabilities |       | (1,027,593    | )    | (42,844       | )     |                   | (40,224    | )             |       | (1,110,661 | ) |
| (Deficit) in the  plans              |       | (413,891      | )                   | (16,826       | )          |                   | (24,839    | )             |       | (455,556 | ) |
| Deferred tax  asset                  |       | 42,835        |                | —        |       |                   | 1,484      |          |       | 44,319 |   |
| **Net pension (liability)**          | ** ** | **€**    | **(371,056**        | **)**         | **€** | **(16,826**            | **)**      |          | **€** | **(23,355** | **)** |   | **€** | **(411,237** | **)** |
|                                      |            |               |                     |               |            |                        |            |               |            |  |  |  |  |  |  |

 

Thefollowing tables set out the components of the defined benefit cost:

**Analysis of the amount charged to operating income**

| ** **                            | ** ** | **€000** | ** ** |
|---------------------------------------|------------|---------------|------------|
| **Year ended December 31, 2006** | ** ** | ** **    | ** ** |
| Current service cost                  |       | 50,901        |       |
| Past service cost                     |       | 3,823         |       |
| Gain on  settlements and curtailments |       | (4,189        | )          |
| **Total  operating charge**           | ** ** | **€**    | **50,535** | ** ** |
|                                       |            |               |            |  |

 

| ** **                             | ** ** | **€000** | ** ** |
|----------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2005** | ** ** | ** **    | ** ** |
| Current service cost                   |       | 36,697        |       |
| Past service cost                      |       | 1,527         |       |
| Gain on  settlements and curtailments  |       | (6,129        | )          |
| **Total  operating charge**            | ** ** | **€**    | **32,095** | ** ** |
|                                        |            |               |            |  |

 

| ** **                            | ** ** | **€000** | ** ** |
|---------------------------------------|------------|---------------|------------|
| **Year ended December 31, 2004** | ** ** | ** **    | ** ** |
| Current service cost                  |       | 37,163        |       |
| Past service benefit                  |       | (1,793        | )          |
| Gain on  settlements and curtailments |       | (542          | )          |
| **Total  operating charge**           | ** ** | **€**    | **34,828** | ** ** |
|                                       |            |               |            |  |

 

**Analysis of theamount charged to other financial expense**

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2006**      | ** ** | ** **    | ** ** |
| Expected return on pension scheme assets    |       | (80,684       | )          |
| Interest cost on pension scheme liabilities |       | 89,748        |       |
| **Net  charge**                             | ** ** | **€**    | **9,064**  | ** ** |
|                                             |            |               |            |  |

** **

F-133

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24 Employee Pension Plans and Similar Obligations—(continued)**

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2005**      | ** ** | ** **    | ** ** |
| Expected return on pension scheme assets    |       | (43,974       | )          |
| Interest cost on pension scheme liabilities |       | 57,233        |       |
| **Net  charge**                             | ** ** | **€**    | **13,259** | ** ** |
|                                             |            |               |            |  |

 

| ** **                                  | ** ** | **€000** | ** ** |
|---------------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2004**      | ** ** | ** **    | ** ** |
| Expected return on pension scheme assets    |       | (40,137       | )          |
| Interest cost on pension scheme liabilities |       | 55,855        |       |
| **Net  charge**                             | ** ** | **€**    | **15,718** | ** ** |
|                                             |            |               |            |  |

 

**Analysis of theamount recognized in the statement of recognized gains and losses**

| ** **                                                                     | ** ** | **€000** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------|------------|
| **Year  ended December 31, 2006**                                         | ** ** | ** **    | ** ** |
| Actual return less expected return on pension scheme assets                    |       | 26,412        |       |
| Net experience (losses) on scheme liabilities                                  |       | (14,505       | )          |
| Changes in financial assumptions underlying the scheme liabilities             |       | 68,976        |       |
| **Actuarial  gain recognized in the statement of recognized gains and losses** | ** ** | **€**    | **80,883** | ** ** |
|                                                                                |            |               |            |  |

 

| ** **                                                                     | ** ** | **€000** | ** **  |
|--------------------------------------------------------------------------------|------------|---------------|-------------|
| **Year  ended December 31, 2005**                                         | ** ** | ** **    | ** **  |
| Actual return less expected return on pension scheme assets                    |       | 78,779        |        |
| Net experience gains on scheme liabilities                                     |       | 4,440         |        |
| Changes in financial assumptions underlying the scheme liabilities             |       | (98,104       | )           |
| **Actuarial  loss recognized in the statement of recognized gains and losses** | ** ** | **€**    | **(14,885** | **)** |
|                                                                                |            |               |             |  |

 

| ** **                                                                     | ** ** | **€000** | ** **  |
|--------------------------------------------------------------------------------|------------|---------------|-------------|
| **Year  ended December 31, 2004**                                         | ** ** | ** **    | ** **  |
| Actual return less expected return on pension scheme assets                    |       | 9,573         |        |
| Net experience (losses) on scheme liabilities                                  |       | (5,901        | )           |
| Changes in financial assumptions underlying the scheme liabilities             |       | (13,963       | )           |
| **Actuarial  loss recognized in the statement of recognized gains and losses** | ** ** | **€**    | **(10,291** | **)** |
|                                                                                |            |               |             |  |

 

F-134

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24Employee Pension Plans and Similar Obligations—(continued)**

The analysis of the amountrecognized in the statement of recognized gains and losses above excludesdeferred tax.

**Movement in pensionliability**

| ** **                                          | ** ** | **€000** | ** **  |
|-----------------------------------------------------|------------|---------------|-------------|
| Deficit in scheme at December 31, 2003         |       | 446,540       |        |
| Current service cost                                |       | 37,163        |        |
| Past service benefit                                |       | (1,793        | )           |
| Recognition of  gain on settlement and curtailments |       | (542          | )           |
| Contributions                                       |       | (51,921       | )           |
| Other finance expense                               |       | 15,718        |        |
| Actuarial loss                                      |       | 10,291        |        |
| Reclassification                                    |       | 2,291         |        |
| Disposals                                           |       | (101          | )           |
| Currency adjustment                                 |       | (2,090        | )           |
| **Deficit in scheme at December 31, 2004**     | ** ** | **455,556**   | ** **  |
| Current service cost                                |       | 36,697        |        |
| Past service cost                                   |       | 1,527         |        |
| Recognition of  gain on settlement and curtailments |       | (6,129        | )           |
| Contributions                                       |       | (51,309       | )           |
| Other finance expense                               |       | 13,259        |        |
| Actuarial loss                                      |       | 14,885        |        |
| Acquisitions                                        |       | 256,680       |        |
| Disposals                                           |       | (22,040       | )           |
| Currency adjustment                                 |       | 9,018         |        |
| **Deficit  in scheme at December 31, 2005**    | ** ** | **708,144**   | ** **  |
| Current service  cost                               |       | 50,901        |        |
| Past service cost                                   |       | 3,823         |        |
| Recognition of  gain on settlement and curtailments |       | (4,189        | )           |
| Contributions                                       |       | (88,853       | )           |
| Other finance  expense                              |       | 9,064         |        |
| Actuarial gain                                      |       | (80,883       | )           |
| Disposals                                           |       | (3,946        | )           |
| Fair value  adjustment                              |       | (23,451       | )           |
| Currency  adjustment                                |       | (985          | )           |
| **Deficit in scheme at  December 31, 2006**    | ** ** | **€**    | **569,625** | ** ** |
|                                                     |            |               |             |  |

 

 

F-135

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24 Employee Pension Plansand Similar Obligations—(continued)**

**History of amountsrecognized in the statement of recognized gains and losses**

*Difference between actual and expected return onpension scheme assets*

| **Year ended December 31,  2006**                                 |     |        |     |
|------------------------------------------------------------------------|----------|-------------|----------|
| Amount                                                                 |     | 26,412,000  |     |
| Percentage of scheme assets                                            |     | 2           | %        |
| **Year  ended December 31, 2005**                                 |     |        |     |
| Amount                                                                 |     | 78,779,000  |     |
| Percentage of scheme assets                                            |     | 6           | %        |
| **Year  ended December 31, 2004**                                 |     |        |     |
| Amount                                                                 |     | 9,573,000   |     |
| Percentage of scheme assets                                            |     | 1           | %        |
| **Year  ended December 31, 2003**                                 |     |        |     |
| Amount                                                                 |     | 20,475,000  |     |
| Percentage of scheme assets                                            |     | 3           | %        |
| **Period  from September 3, 2002 through December 31, 2002** |     |        |     |
| Amount                                                                 |     | 7,218,000   |     |
| Percentage of scheme assets                                            |     | 1           | %        |
| *Experience  gains and losses on scheme liabilities*                   | * * | * *    | * * |
| **Year  ended December 31, 2006**                                 |     |        |     |
| Amount                                                                 |     | (14,505,000 | )        |
| Percentage of the present value of scheme liabilities                  |     | 1           | %        |
| **Year  ended December 31, 2005**                                 |     |        |     |
| Amount                                                                 |     | 4,440,000   |     |
| Percentage of the present value of scheme liabilities                  |     | 0           | %        |
| **Year  ended December 31, 2004**                                 |     |        |     |
| Amount                                                                 |     | (5,901,000  | )        |
| Percentage of the present value of scheme liabilities                  |     | 1           | %        |
| **Year  ended December 31, 2003**                                 |     |        |     |
| Amount                                                                 |     | 8,901,000   |     |
| Percentage of the present value of scheme liabilities                  |     | 1           | %        |
| **Period  from September 3, 2002 through December 31, 2002** |     |        |     |
| Amount                                                                 |     | 27,515,000  |     |
| Percentage of the present value of scheme liabilities                  |     | 3           | %        |

** **

F-136

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**24Employee Pension Plans and Similar Obligations—(continued)**

| *Total  actuarial gains and losses recognized in the statement of recognized gains  and losses* |   |        |   |
|-------------------------------------------------------------------------------------------------|--------|-------------|--------|
| **Year ended December 31, 2006**                                                           |   |        |   |
| Amount                                                                                          |   | 80,883,000  |   |
| Percentage of the present value of scheme liabilities                                           |   | 4           | %      |
| **Year ended  December 31, 2005**                                                          |   | (14,885,000 | )      |
| Amount                                                                                          |   | 1           | %      |
| Percentage  of the present value of scheme liabilities                                          |   |        |   |
| **Year ended December 31, 2004**                                                           |   |        |   |
| Amount                                                                                          |   | (10,291,000 | )      |
| Percentage of the present  value of scheme liabilities                                          |   | 1           | %      |
| **Year ended December 31, 2003**                                                           |   |        |   |
| Amount                                                                                          |   | 27,800,000  |   |
| Percentage of the present value of scheme liabilities                                           |   | 3           | %      |
| **Period  from September 3, 2002 through December 31, 2002**                          |   |        |   |
| Amount                                                                                          |   | 12,507,000  |   |
| Percentage of the present  value of scheme liabilities                                          |   | 1           | %      |

 

Some of the schemes are closed schemes and thereforeunder the projected unit method the current service cost would be expected toincrease as the members of the scheme approach retirement and reduce as membersretire or leave service.

In certain countries, in accordance with localpractice, plans are financed internally and the provisions relating to suchcases are included in pension liabilities. At December 31, 2006 theseamount to €438,448,000 (2005: €431,862,000;2004: €277,274,000).

The defined contributionpension scheme expense for the year ended December 31, 2006 was €30,346,000(2005: €20,850,000;2004: €21,077,000).

F-137

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**25 Related PartyTransactions**

**Transactions withassociates**

We conduct certain transactions with associates in thenormal course of business.

The transactions withassociates for each period are summarized as follows:

| ** **             | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **             | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Sale of goods          |       | 24,113        |       | 31,277        |       | 28,725        |       |
| Purchase of goods      |       | 13,083        |       | 13,813        |       | 9,930         |       |
| Receiving of  services |       | 6,208         |       | 633           |       | 922           |       |
| Rendering of services  |       | 1,231         |       | 1,544         |       | 776           |       |

 

These transactions are undertaken and settled in amanner which amounts to an arms length basis. No guarantees are given orreceived by either party. The Group settled a participatory interest in itsDuropack associate during 2006. The par value of this participatory interest,which was included in financial assets, amounted to €2.9million and entitled the Group to a 4.8% share in Duropack’s pre-tax income andwas due to mature in 2010. The Group settled this participation right in 2006for approximately €6.0million, resulting in a gain of approximately €3.0 million recognized ininterest income.

The receivables from related parties arise mainly fromsale transactions and are due two months after the date of sale. Thereceivables are unsecured in nature and bear no interest.

The payables to related parties arise mainly from purchasetransactions and are due two months after the date of purchase. The payablesbear no interest.

No provision has beenrequired in 2006, 2005 and 2004 for the loans made to related parties.

**Transactions withrelated parties**

Inconnection with the take private transaction in 2002, certain non-operatingassets and non-core operating  assets ofSKG were transferred to the newcos, in exchange for intercompany notes.

| ** **                                | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Transfer of cash  from business disposals |       |          | —     |          |       | 9,899         |       | 11,934 |   |
|                                           |            |               |            |               |            |               |            |  |  |

 

On June 16, 2005, assets comprising The K Club,additional land near The K Club and the site of the former Clonskeagh papermill were disposed for an amount of €115 million to a group ofinvestors which included Sir Michael Smurfit, our Chairman at December 31,2006.

In 2006, the Grouppurchased, in the normal course of business, approximately 47,000 metric tonnes(2005: 28,000) of paper amounting to approximately €20million (2005: €11million) from Savon Sellu, a company controlled by Dr. Dermot Smurfittogether with his brothers Sir Michael Smurfit, our Chairman atDecember 31, 2006, and Dr. Alan Smurfit. At December 31, 2006,an amount of €5.5million (2005: €3.2 million)was owed by SKG to Savon Sellu. Sir Michael Smurfit retired as chairman onMarch 20, 2007.

F-138

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**26 ShareCapital and Other Reserves**

| ** **                                   | ** ** | ** **                  | ** ** | ** ** | ** ** | **Other Reserves**       | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **Share  Capital**€000 | ** ** | ** ** | ** ** | **Capital  Reserve**€000 | ** ** | **Currency  Translation  Adjustments**€000 | ** ** | **Share based  compensation  Reserve**€000 | ** ** | **Total Other  Reserves**€000 | ** ** |
| December 31,  2005 as originally stated |       |                        | 40         |       |       |                          |       | 1,595,913 |   |   | 87,177 |   |   |   | — |   |   | 1,683,090 |   |
| Prior year  adjustment                       |       |                        | —     |       |       |                          |       | — |   |   | — |   |   |   | 20,338 |   |   | 20,338 |   |
| December 31,  2005 as restated          |       |                        | 40         |       |       |                          |       | 1,595,913 |   |   | 87,177 |   |   |   | 20,338 |   |   | 1,703,428 |   |
| Total recognized  income and expenses        |       |                        | —     |       |       |                          |       | — |   |   | 24,385 |   |   |   | — |   |   | 24,385 |   |
| Share-based  payments                        |       |                        | —     |       |       |                          |       | — |   |   | — |   |   |   | 8,084 |   |   | 8,084 |   |
| **December 31, 2006**                   | ** ** | ** **                  | **€** | **40**     |       | ** **                    | ** ** | ** ** | **€** | **1,595,913** |   |   | **€** | **111,562** |   |   |   | **€** | **28,422** |   | ** ** | **€** | **1,735,897** |   |
|                                              |            |                             |            |            |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Share capital*

SK Acquisitions has an authorized share capital of100,000 shares of €1 each, of which 40,000were issued.

*Capital Reserves*

This reserve includes €856,960,000of investments by SK Funding by way of capital contributions in 2002 andinvestments by SKGL of €738,953,000 by way of capital contributionsin 2005.

*Foreign currencytranslation reserve*

The foreign currencytranslation reserve comprises all foreign currency translation adjustmentsarising from the translation of the Group’s net investment in foreignoperations including the translation of the income of such operations from theaverage exchange rate for the year to the exchange rate at the balance sheetdate, as well as from the translation of liabilities that hedge those netassets.

*Reserve forshare-based compensation*

This reserve comprisesamounts expensed in the income statement in connection with awards made underthe Management Equity Plan less any exercises or lapses of such awards.

**27Share-based payments**

| ** **                                               | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|----------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                               | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Charge arising  from fair value calculated at grant date |       | 4,676         |       | 6,542         |       | 7,184         |       |
| Reversal of  charge arising from forfeitures             |       | —        |       | (1,471        | )          | —        |       |
| Incremental  charge arising from modifications           |       | 3,408         |       | —        |       | —        |       |
|                                                     | ** ** | **€**    | **8,084**  | ** **    | **€** | **5,071**     | ** ** | **€** | **7,184** | ** ** |
|                                                          |            |               |            |               |            |               |            |  |  |  |

 

*2002 Plan*

In September 2002, the Group adopted the 2002Management Equity Plan (the ‘‘2002 Plan’’). The 2002 Plan is a share-basedpayment agreement that provides for the issuance of class A, class B and classC convertible shares. On November 15, 2002, awards comprising class A,class B and class C convertible shares, proportioned as 40%, 40% and 20%,respectively were made pursuant to the 2002 Plan which were 

F-139

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**27Share-based payments—(continued)**

subject to vesting over athree year period ending on December 31, 2007. Vesting for all threeclasses of convertible shares is conditional on the participant remainingemployed by the Group. Class B and class C convertible shares are alsosubject to certain additional performance and market conditions. A sale orlisting (IPO) of the ultimate parent SKGL accelerates vesting of all of theclass A convertible shares and subject to the achievement of the marketconditions, could also accelerate vesting of the class B and C convertibleshares. Upon vesting, each class of convertible shares would automaticallyconvert into class D convertible shares. Subject to certain criteria, theseclass D convertible shares could be converted into class A ordinary shares uponpayment of a conversion price, being the fair market value of Smurfit KappaCorporation Limited (“ SKCL”), (formerly known as Jefferson Smurfit GroupLimited) ordinary shares at the date of the original grant. The Group has nolegal or constructive obligation to repurchase or settle the shares in cash.Management have determined that the plans constitute equity settled share-basedpayments.

When a Participantterminates employment for any reason, the Group reserves the right to redeem orpurchase any unvested convertible shares at their nominal amount resulting inthe forfeiture of the award. Such forfeitures are then reallocated to otherParticipants in the scheme with the same terms and conditions as the originalgrant. Such reallocations are treated as new grants of shares.

*2004 Plan*

In 2004, the 2002 Plan wasamended (the ‘‘2004 Plan’’) and restated to provide a clause that createdvariability in the exercise price for the equity awards based upon interestaccrued on the 2015 senior PIK notes of Smurfit Kappa Holdings plc (“SKHoldings”). In addition, the awards were exchanged for an identical number ofshares in SKGL as part of the exchange transaction. These changes to the 2002Plan took effect in February 2005 following the capital reduction effectedby the drawdown of the 2015 senior PIK notes. All other significant terms andconditions of the 2002 Plan remained unchanged with the amendment. Theamendment is regarded as a modification to the original awards as defined byFRS 20. However, on the basis that the modification did not give rise to anincremental increase in the fair value of the original awards, no additionalexpense is recognized in this respect.

*2005 Plan*

In December 2005, the 2004 Plan was amended (the ‘‘2005Plan’’). The amendment gave existing holders of class A, class B and class Cconvertible shares the opportunity to exchange their awards for an equal numberof class E, class F and class G convertible shares having similar terms andconditions. Participants had to exchange their entire award, not just aparticular class of convertible shares. The principal changes to the vestingconditions were that the vesting period was extended to the three years ending December 31,2010 and the performance and market conditions for the class F and class Gconvertible shares were modified compared to those for the class B and class Cconvertible shares, which they replaced. The opportunity to exchange theconvertible shares under the 2005 Plan occurred in January 2006. Thisexchange is regarded as a modification to the original awards and theincremental increase in the fair value of the awards, measured by comparing thefair value of the awards immediately before and after the modification, ischarged to the Consolidated Statements of Operations over the remaining revisedvesting period.

F-140

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**27Share-based payments—(continued)**

Additionally, in the 2005 Plan, the Group introducedclass H convertible shares, which automatically convert into class Iconvertible shares upon vesting which then can be converted into B ordinaryshares of SKGL. The vesting provisions for class H convertible shares aresimilar to class F convertible shares except that once converted into class Iconvertible shares, the exercise price is fixed at €5.6924.The 2005 Plan provides for the issuance of up to a maximum of 8,606,334 Aordinary shares and 2,104,980 B ordinary shares of SKGL. All other significantterms and conditions of the 2004 Plan remained unchanged with the amendment.

| ** **                     | ** ** | **Average exercise  price per share**€ per share | ** ** | **Number of  convertible shares** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| At  January 1, 2005       |       |                                                                           | 9.99       |                                        |       |   | 8,281,737 |   |   |
| Forfeited in the  year         |       |                                                                           | 5.12       |                                        |       |   | (798,424 | ) |   |
| Granted in the  year           |       |                                                                           | 5.69       |                                        |       |   | 2,062,878 |   |   |
| **At  December 31, 2005** | ** ** | ** **                                                                     | **5.25**   |                                        | ** ** | ** ** | **9,546,191** |   |   |
| Forfeited in the  year         |       |                                                                           | 4.56       |                                        |       |   | (364,900 | ) |   |
| Granted in the  year           |       |                                                                           | 4.56       |                                        |       |   | 953,124 |   |   |
| **At December 31, 2006**  | ** ** | ** **                                                                     | **4.79**   |                                        | ** ** | ** ** | **10,134,415** |   |   |

 

At December 31, 2006, 282,465 convertible shareshad vested and were convertible to ordinary shares (2005: 170,362). Theexercise price of the class A, B and C shares awarded under the 2002 Plan wasfixed at €9.99. The 2004 Plan introduced variability tothe exercise prices of the class A, B and C shares depending upon the date ofvesting and certain other conditions. The variable exercise price is calculatedby a formula based upon the accrued interest on the PIK notes. The exerciseprice of the E, F and G shares introduced under the 2005 Plan is based on thesame formula laid out in the 2004 Plan while the exercise price for the Hconvertible shares is fixed at €5.6924. The Planterminates on December 1, 2012 at which date all awards not previouslyconverted will lapse.

A binomial lattice approach was used to calculate thevalue of convertible shares at each grant date and any subsequent modificationdates. In the absence of observable market prices, the fair value of theconvertible shares at the valuation dates was determined based upon acalculated Business Enterprise Value using valuation reports or otherinformation from transactions at or on those dates. Based upon this BusinessEnterprise Value the weighted average fair value of an ordinary share at thedate of grant or modification in 2006 was €9.85(2005: €9.85).The expected volatility rates applied were based upon the weighted averagehistorical volatility of comparable companies over an equivalent period to theperiod from valuation dates to expected exit dates. The risk-free interestrates used were based upon euro-denominated government bonds with similarlives. No dividend yield was included in the model as SKG had no history orexpectation of regular dividend payments at the valuation dates. Amarketability discount has been incorporated into the binomial lattice modelbased upon the Finnerty model to adjust the calculated fair value for the lackof an active market in the shares.

F-141

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**27Share-based payments—(continued)**

The following is a summaryof the key assumptions used in calculating the fair value of awards under theplan:

| ** **                        | ** ** | **Expected  Volatility** | ** ** | **Expected Vesting  Dates** | ** ** | **Vesting Periods  (months)** | ** **              | **Risk-free  rate** | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|--------------------------|------------|----------------------------------|------------|------------------------------------|-------------------------|---------------------|------------|---------------------|------------|
| ** **                        | ** ** | ** **               | ** ** | ** **                       | ** ** | ** **                         | ** **              | ** **          | ** ** | **€**          | ** ** |
| *Granted November 15, 2002*  | * *   |                     | * *   | * *                         |       |                               | * *                | * *            |       |                | * *   | * * |   |   | * * | * * |   |   | * * | * * |   |
| A Convertible                     |       |                     | 24.58      | *%*                              |       |                               | Dec-31-05  to Dec-31-07 | * *            |       |                | 38 to 62   | * * |   |   | 4.46 | *%* |   |   | 4.17 | * * |   |
| B Convertible                     |       |                     | 24.58      | *%*                              |       |                               | Dec-31-05  to Dec-31-07 | * *            |       |                | 38 to 62   | * * |   |   | 4.46 | *%* |   |   | 3.27 | * * |   |
| C Convertible                     |       |                     | 24.58      | *%*                              |       |                               | Dec-31-05  to Dec-31-07 | * *            |       |                | 38 to 62   | * * |   |   | 4.46 | *%* |   |   | 2.29 | * * |   |
| *Granted  December 1, 2005*  | * *   |                     | * *   | * *                         |       |                               | * *                | * *            |       |                | * *   | * * |   |   | * * | * * |   |   | * * | * * |   |
| H Convertible                     |       |                     | 14.46      | *%*                              |       |                               | Dec-31-08               | * *            |       |                | 37         | * * |   |   | 2.99 | *%* |   |   | 1.20 | * * |   |
| *Granted  December 21, 2006* |       |                     |       | * *                         |       |                               |                    | * *            |       |                |       | * * |   |   |   | * * |   |   |   | * * |   |
| E Convertible                     |       |                     | 16.07      | *%*                              |       |                               | Jun-30-07               | * *            |       |                | 6          | * * |   |   | 3.67 | *%* |   |   | 4.95 | * * |   |
| F Convertible                     |       |                     | 16.07      | *%*                              |       |                               | Jun-30-07               | * *            |       |                | 6          | * * |   |   | 3.67 | *%* |   |   | 0.06 | * * |   |
| G Convertible                     |       |                     | 16.07      | *%*                              |       |                               | Jun-30-07               | * *            |       |                | 6          | * * |   |   | 3.67 | *%* |   |   | 0.00 | * * |   |

 

Thefollowing is a summary of the key assumptions used in calculating theadditional incremental fair value of awards on modification:

| ** **                                  | ** ** | **Expected  Volatility** | ** ** | **Revised Expected  Vesting Dates** | ** ** | **Remaining  Vesting  Periods  (months)** | ** ** | **Risk-free  rate** | ** ** | **Incremental  Fair Value** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | ** **               | ** ** | ** **                                    | ** ** | ** **                                | ** ** | ** **          | ** ** | **€**                       | ** ** |
| *Modification as at  January 19, 2006* | ** ** |                     | ** ** | ** **                                    |       |                                      | ** ** | ** **          |       |                             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| A convertible converted to E Convertible    |       |                     | 16.12      | %                                             |       |                                      | Dec-31-08  | ** **          |       |                             | 36         | ** ** |   |   | 3.06 | % |   |   | 3.31 | ** ** |   |
| B convertible converted to F Convertible    |       |                     | 16.12      | %                                             |       |                                      | Dec-31-08  | ** **          |       |                             | 36         | ** ** |   |   | 3.06 | % |   |   | 0.91 | ** ** |   |
| C convertible converted  to G Convertible   |       |                     | 16.12      | %                                             |       |                                      | Dec-31-08  | ** **          |       |                             | 36         | ** ** |   |   | 3.06 | % |   |   | 0.23 | ** ** |   |

 

F-142

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**28 Net Cash Flow from Operating Activities**

| ** **                                                      | ** ** | **2006**      | ** **  | **Restated  2005** | ** ** | **Restated  2004** | ** ** |
|-----------------------------------------------------------------|------------|---------------|-------------|--------------------|------------|--------------------|------------|
| ** **                                                      | ** ** | **€000** | ** **  | **€000**      | ** ** | **€000**      | ** ** |
| Operating income                                                |       | 145,050       |        | 161,957            |       | 274,604            |       |
| Reorganization and restructuring costs                          |       | 82,747        |        | 8,421              |       | 23,231             |       |
| Impairment of  financial assets                                 |       | 52,821        |        | —             |       | —             |       |
| Depreciation and depletion (net of government grants amortized) |       | 392,893       |        | 282,378            |       | 259,831            |       |
| Share-based  payments                                           |       | 8,084         |        | 5,071              |       | 7,184              |       |
| Amortization of intangible assets                               |       | 65,533        |        | 29,203             |       | 37,925             |       |
| Finance lease interest paid                                     |       | 1,348         |        | 1,138              |       | 1,962              |       |
| (Increase) in other payables and provisions                     |       | (28,697       | )           | (14,291            | )          | (12,891            | )          |
| (Increase)/decrease in working capital                          |       | (61,766       | )           | 40,252             |       | 47,419             |       |
| Currency adjustment                                             |       | (301          | )           | (1,258             | )          | 1,663              |       |
|                                                            | ** ** | **€**    | **657,712** | ** **         | **€** | **512,871**        | ** ** | **€** | **640,928** | ** ** |
|                                                                 |            |               |             |                    |            |                    |            |  |  |  |

 

**29 Movement in Working Capital**

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** ** |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31, 2005             |       |            | 663,131    |            |       | 1,314,728     |       | (1,475,871    | )          | 501,988 |   |
| Disposed                           |       |            | (13,582    | )               |       | (22,373       | )          | 19,781        |       | (16,174 | ) |
| Reclassification                   |       |            | (17,313    | )               |       | (2,313        | )          | (73,864       | )          | (93,490 | ) |
| Deferred acquisition consideration |       |            | —     |            |       | —        |       | 33,574        |       | 33,574 |   |
| Increase in working capital        |       |            | 2,123      |            |       | 63,250        |       | (3,607        | )          | 61,766 |   |
| Currency adjustment                |       |            | (7,987     | )               |       | (8,672        | )          | 3,058         |       | (13,601 | ) |
| **December 31,  2006**        | ** ** | ** **      | **€** | **626,372**     |       | ** **    | **€** | **1,344,620** | ** ** | **€** | **(1,496,929** | **)** | **€** | **474,063** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |            |  |  |  |  |  |  |

 

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** ** |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** ** |
| December 31, 2004             |       |            | 452,166    |            |       | 925,048       |       | (1,017,060    | )          | 360,154 |   |
| Acquisitions                       |       |            | 275,804    |            |       | 572,415       |       | (535,081      | )          | 313,138 |   |
| Disposed                           |       |            | (68,698    | )               |       | (62,196       | )          | 69,217        |       | (61,677 | ) |
| Reclassification                   |       |            | (5,282     | )               |       | 16,328        |       | (16,486       | )          | (5,440 | ) |
| Assets held for sale               |       |            | —     |            |       | (79,810       | )          | 25,406        |       | (54,404 | ) |
| Deferred acquisition consideration |       |            | —     |            |       | —        |       | (31,384       | )          | (31,384 | ) |
| Decrease in working capital        |       |            | (7,051     | )               |       | (76,262       | )          | 43,061        |       | (40,252 | ) |
| Currency adjustment                |       |            | 16,192     |            |       | 19,205        |       | (13,544       | )          | 21,853 |   |
| **December 31,  2005**        | ** ** | ** **      | **€** | **663,131**     |       | ** **    | **€** | **1,314,728** | ** ** | **€** | **(1,475,871** | **)** | **€** | **501,988** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |            |  |  |  |  |  |  |

 

F-143

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**29Movement in Working Capital—(continued)**

| ** **                         | ** ** | **Inventories** | ** ** | **Receivables** | ** ** | **Payables*** | ** ** | **Total**     | ** **  |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|---------------|-------------|
| ** **                         | ** ** | **€000**   | ** ** | **€000**   | ** ** | **€000** | ** ** | **€000** | ** **  |
| December 31, 2003             |       |            | 477,432    |            |       |          | 911,443    |          |        | (967,141 | ) | 421,734 |   |
| Reclassification                   |       |            | 4,151      |            |       |          | (15,903    | )             |        | 3,202 |   | (8,550 | ) |
| Deferred acquisition consideration |       |            | —     |            |       |          | —     |          |        | 854 |   | 854 |   |
| Decrease in working capital        |       |            | (22,434    | )               |       |          | 38,291     |          |        | (63,276 | ) | (47,419 | ) |
| Currency adjustment                |       |            | (6,983     | )               |       |          | (8,783     | )             |        | 9,301 |   | (6,465 | ) |
| **December 31,  2004**        | ** ** | ** **      | **€** | **452,166**     |       | ** **    | ** ** | **€**    | **925,048** |   | ** ** | **€** | **(1,017,060** | **)** | **€** | **360,154** | ** ** |
|                                    |            |                 |            |                 |            |               |            |               |             |  |  |  |  |  |  |  |  |

 

*                    Amounts falling due within one year not includingborrowing due within one year, corporation tax, proposed dividends, capitalizedlease obligations and amounts due to affiliates.

**30 Retirement of Fixed Assets**

| ** **                    | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                    | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Property, plant and equipment |       | 25,224        |       | 17,756        |       | 33,860        |       |
| Investments                   |       | 2,141         |       | 442           |       | 2,528         |       |
|                          | ** ** | **€**    | **27,365** | ** **    | **€** | **18,198**    | ** ** | **€** | **36,388** | ** ** |
|                               |            |               |            |               |            |               |            |  |  |  |

 

**31Reconciliation of Net Cash Flow to Movement in Net Debt**

| ** **                                   | ** ** | **2006**      | ** **     | **2005**      | ** ** | **2004**       | ** ** |
|----------------------------------------------|------------|---------------|----------------|---------------|------------|----------------|------------|
| ** **                                   | ** ** | **€000** | ** **     | **€000** | ** ** | **€000**  | ** ** |
| Increase/(decrease) in cash                  |       | 28,800        |           | (27,045       | )          | 50,285         |       |
| Decrease/(increase) in term debt             |       | 600,361       |           | (481,142      | )          | 67,266         |       |
| (Decrease)/increase in liquid resources      |       | (671,797      | )              | 789,786       |       | 16,914         |       |
| Capital elements of finance leases repaid    |       | 7,647         |           | 4,812         |       | 13,576         |       |
| Change in net debt resulting from cash flows |       | (34,989       | )              | 286,411       |       | 148,041        |       |
| New finance leases                           |       | (2,987        | )              | (4,053        | )          | (2,963         | )          |
| Loans and finance leases acquired            |       | 808           |           | (1,814,470    | )          | —         |       |
| Loans and finance leases disposed            |       | —        |           | 1,471         |       | —         |       |
| Other non cash movements                     |       | (2,060        | )              | (8,088        | )          | 3,663          |       |
| Currency adjustment                          |       | (37,323       | )              | 112,435       |       | 27,265         |       |
| Movement in net debt                         |       | (76,551       | )              | (1,426,294    | )          | 176,006        |       |
| Net debt at beginning of year                |       | (3,126,360    | )              | (1,700,066    | )          | (1,876,072     | )          |
| **Net debt  at end of year**                 | ** ** | **€**    | **(3,202,911** | **)**         | **€** | **(3,126,360** | **)**      | **€** | **(1,700,066** | **)** |
|                                              |            |               |                |               |            |                |            |  |  |  |

 

F-144

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**32 Analysis of Net Debt**

| ** **                               | ** ** | **December  2005** | ** **     | **Cash Flow** | ** ** | **Acquisitions  and  disposals** | ** ** | **Non Cash** | ** ** | **Currency**  | ** ** | **December  2006** | ** ** |
|------------------------------------------|------------|--------------------|----------------|--------------------|------------|----------------------------------|------------|-------------------|------------|---------------|------------|--------------------|------------|
| ** **                               | ** ** | **€000**      | ** **     | **€000**      | ** ** | **€000**                    | ** ** | **€000**     | ** ** | **€000** | ** ** | **€000**      | ** ** |
| Cash                                     |       | 99,542             |           | 47,628             |       |                             | —     |              |       |          | —     |               |       | (557 | ) | 146,613 |   |
| Short term deposits and liquid resources |       | 148,185            |           | 83,780             |       |                             | —     |              |       |          | —     |               |       | (8,457 | ) | 223,508 |   |
| Restricted cash                          |       | 755,575            |           | (755,575           | )          |                             | —     |              |       |          | —     |               |       | — |   | — |   |
| Cash and investments                     |       | 1,003,302          |           | (624,167           | )          |                             | —     |              |       |          | —     |               |       | (9,014 | ) | 370,121 |   |
| Bank overdrafts and demand  loans        |       | (20,023            | )              | (18,828            | )          |                             | —     |              |       |          | —     |               |       | (42 | ) | (38,893 | ) |
| Loans repayable within one year          |       | (52,532            | )              | (107,129           | )          |                             | —     |              |       |          | (2,060     | )                  |       | 1,078 |   | (160,643 | ) |
| Kappa bonds outstanding                  |       | (755,575           | )              | 755,575            |       |                             | —     |              |       |          | —     |               |       | — |   | — |   |
| Short term borrowing                     |       | (828,130           | )              | 629,618            |       |                             | —     |              |       |          | (2,060     | )                  |       | 1,036 |   | (199,536 | ) |
| Long and medium term borrowing           |       | (3,277,983         | )              | (48,087            | )          |                             | —     |              |       |          | —     |               |       | (29,270 | ) | (3,355,340 | ) |
| Net borrowing                            |       | (3,102,811         | )              | (42,636            | )          |                             | —     |              |       |          | (2,060     | )                  |       | (37,248 | ) | (3,184,755 | ) |
| Finance leases                           |       | (23,549            | )              | 7,647              |       |                             | 808        |              |       |          | (2,987     | )                  |       | (75 | ) | (18,156 | ) |
| **Net debt**                             | ** ** | **€**         | **(3,126,360** | **)**              | **€** | **(34,989**                      | **)**      | ** **        | **€** | **808**       |       | ** **         | ** ** | **€** | **(5,047** | **)** | ** ** | **€** | **(37,323** | **)** | **€** | **(3,202,911** | **)** |
|                                          |            |                    |                |                    |            |                                  |            |                   |            |               |            |                    |            |  |  |  |  |  |  |  |  |  |  |

 

| ** **                               | ** ** | **December  2004** | ** **     | **Cash Flow** | ** ** | **Acquisitions  and  disposals** | ** ** | **Non Cash** | ** **     | **Currency**  | ** ** | **December  2005** | ** ** |
|------------------------------------------|------------|--------------------|----------------|--------------------|------------|----------------------------------|------------|-------------------|----------------|---------------|------------|--------------------|------------|
| ** **                               | ** ** | **€000**      | ** **     | **€000**      | ** ** | **€000**                    | ** ** | **€000**     | ** **     | **€000** | ** ** | **€000**      | ** ** |
| Cash                                     |       | 140,149            |           | (44,246            | )          | —                           |       | —            |           | 3,639         |       | 99,542             |       |
| Short term deposits and liquid resources |       | 107,809            |           | 34,211             |       | —                           |       | —            |           | 6,165         |       | 148,185            |       |
| Restricted cash                          |       | —             |           | 755,575            |       | —                           |       | —            |           | —        |       | 755,575            |       |
| Cash and investments                     |       | 247,958            |           | 745,540            |       | —                           |       | —            |           | 9,804         |       | 1,003,302          |       |
| Bank overdrafts and demand  loans        |       | (28,673            | )              | 17,201             |       | —                           |       | —            |           | (8,551        | )          | (20,023            | )          |
| Loans repayable within one year          |       | (53,877            | )              | (14,511            | )          | —                           |       | (8,911            | )              | 24,767        |       | (52,532            | )          |
| Kappa bonds outstanding                  |       | —             |           | (755,575           | )          | —                           |       | —            |           | —        |       | (755,575           | )          |
| Short term borrowing                     |       | (82,550            | )              | (752,885           | )          | —                           |       | (8,911            | )              | 16,216        |       | (828,130           | )          |
| Long and medium term borrowing           |       | (1,848,074         | )              | 288,944            |       | (1,805,992                       | )          | 823               |           | 86,316        |       | (3,277,983         | )          |
| Net borrowing                            |       | (1,682,666         | )              | 281,599            |       | (1,805,992                       | )          | (8,088            | )              | 112,336       |       | (3,102,811         | )          |
| Finance leases                           |       | (17,400            | )              | 4,812              |       | (7,007                           | )          | (4,053            | )              | 99            |       | (23,549            | )          |
| **Net debt**                             | ** ** | **€**         | **(1,700,066** | **)**              | **€** | **286,411**                      | ** ** | **€**        | **(1,812,999** | **)**         | **€** | **(12,141**        | **)**      | **€** | **112,435** | ** ** | **€** | **(3,126,360** | **)** |
|                                          |            |                    |                |                    |            |                                  |            |                   |                |               |            |                    |            |  |  |  |  |  |  |

 

F-145

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**32Analysis of Net Debt—(continued)**

| ** **                               | ** ** | **December  2003** | ** **     | **Cash Flow** | ** ** | **Acquisitions  and  disposals** | ** ** | **Non Cash** | ** ** | **Currency**  | ** ** | **December  2004** | ** ** |
|------------------------------------------|------------|--------------------|----------------|--------------------|------------|----------------------------------|------------|-------------------|------------|---------------|------------|--------------------|------------|
| ** **                               | ** ** | **€000**      | ** **     | **€000**      | ** ** | **€000**                    | ** ** | **€000**     | ** ** | **€000** | ** ** | **€000**      | ** ** |
| Cash                                     |       | 86,137             |           | 55,623             |       |                             | —     |              |       |          | —     |               |       | (1,611 | ) | 140,149 |   |
| Short term deposits and liquid resources |       | 92,930             |           | 16,914             |       |                             | —     |              |       |          | (35        | )                  |       | (2,000 | ) | 107,809 |   |
| Cash and investments                     |       | 179,067            |           | 72,537             |       |                             | —     |              |       |          | (35        | )                  |       | (3,611 | ) | 247,958 |   |
| Bank overdrafts and demand  loans        |       | (22,373            | )              | (5,338             | )          |                             | —     |              |       |          | —     |               |       | (962 | ) | (28,673 | ) |
| Loans repayable within one year          |       | (88,138            | )              | 54,280             |       |                             | —     |              |       |          | 3,698      |               |       | (23,717 | ) | (53,877 | ) |
| Short term borrowing                     |       | (110,511           | )              | 48,942             |       |                             | —     |              |       |          | 3,698      |               |       | (24,679 | ) | (82,550 | ) |
| Long and medium term borrowing           |       | (1,916,348         | )              | 12,986             |       |                             | —     |              |       |          | —     |               |       | 55,288 |   | (1,848,074 | ) |
| Net borrowing                            |       | (1,847,792         | )              | 134,465            |       |                             | —     |              |       |          | 3,663      |               |       | 26,998 |   | (1,682,666 | ) |
| Finance leases                           |       | (28,280            | )              | 13,576             |       |                             | —     |              |       |          | (2,963     | )                  |       | 267 |   | (17,400 | ) |
| **Net debt**                             | ** ** | **€**         | **(1,876,072** | **)**              | **€** | **148,041**                      | ** ** | ** **        | **—** |          | ** ** | ** **         | **€** | **700** |   | ** ** | **€** | **27,265** | ** ** | **€** | **(1,700,066** | **)** |
|                                          |            |                    |                |                    |            |                                  |            |                   |            |               |            |                    |            |  |  |  |  |  |  |  |  |  |

 

Cashcomprises cash in hand and overnight deposits. The movement in liquid resourcesrepresents movement in all monetary assets (excluding cash, short term depositsand overnight borrowing) which are convertible into cash at, or close to, theircarrying value in the balance sheet. These specifically comprise governmentgilts, commercial paper and deposits, with maturities of less than one yearwhen acquired. They are categorized as held-to-maturity because the Group hasboth the intent and the ability to hold these investments until maturity.

F-146

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**33 Acquisitions anddisposals**

**Summary of the effects of the acquisition of Kappa**

Theacquisition of Kappa was completed on December 1, 2005. The fair valueexercise relating to the acquisition is preliminary and is reflected in theschedule below although the fair value exercise on fixed and intangible assetshas been substantially completed. The fair value exercise on pensions has alsobeen substantially completed, and no significant adjustment is expected inrelation to these amounts.

| ** **                                     | ** ** | **Book value**     | ** ** | **Policy  Alignment**   | ** ** | **Revaluations  Booked in  2005** | ** ** | **Fair Value  at Year End   2005** | ** ** | **Revaluations  Booked in  2006** | ** ** | **Fair Value  at Year End  2006** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|----------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **€ million** | ** ** | **€ million** | ** ** | **€ million**                | ** ** | **€ million**                                | ** ** | **€ million**                | ** ** | **€ million**                          | ** ** |
| Cash                                           |       |                    | 49         |                    |       |                                   | —     |                                                   |       |                                   | —     |                                             |       |   | 49 |   |   |   | — |   |   |   | 49 |   |   |
| Accounts  receivable and prepayments           |       |                    | 575        |                    |       |                                   | (2         | )                                                      |       |                                   | (1         | )                                                |       |   | 572 |   |   |   | (55 | ) |   |   | 517 |   |   |
| Inventories                                    |       |                    | 258        |                    |       |                                   | 18         |                                                   |       |                                   | —     |                                             |       |   | 276 |   |   |   | (11 | ) |   |   | 265 |   |   |
| Financial assets                               |       |                    | 3          |                    |       |                                   | —     |                                                   |       |                                   | —     |                                             |       |   | 3 |   |   |   | — |   |   |   | 3 |   |   |
| Property, plant  and equipment                 |       |                    | 1,574      |                    |       |                                   | (17        | )                                                      |       |                                   | 23         |                                             |       |   | 1,580 |   |   |   | 30 |   |   |   | 1,610 |   |   |
| Intangible assets                              |       |                    | —     |                    |       |                                   | —     |                                                   |       |                                   | 35         |                                             |       |   | 35 |   |   |   | — |   |   |   | 35 |   |   |
| Accounts payable and accruals                  |       |                    | (581       | )                       |       |                                   | (6         | )                                                      |       |                                   | (8         | )                                                |       |   | (595 | ) |   |   | (4 | ) |   |   | (599 | ) |   |
| Long term debt and other long term liabilities |       |                    | (1,806     | )                       |       |                                   | —     |                                                   |       |                                   | (4         | )                                                |       |   | (1,810 | ) |   |   | — |   |   |   | (1,810 | ) |   |
| Provisions for  liabilities and charges        |       |                    | (385       | )                       |       |                                   | 73         |                                                   |       |                                   | —     |                                             |       |   | (312 | ) |   |   | 116 |   |   |   | (196 | ) |   |
| Minority interest                              |       |                    | (2         | )                       |       |                                   | —     |                                                   |       |                                   | —     |                                             |       |   | (2 | ) |   |   | — |   |   |   | (2 | ) |   |
| Net  (liabilities)/assets acquired             |       |                    | €     | (315                    | )          |                                   |       | €                                                 | 66         |                                   |       |                                             | €     | 45 |   |   |   | (204 | ) |   |   | 76 |   |   |   | (128 | ) |   |
| Shareholder loans acquired                     |       |                    |       |                    |       |                                   |       |                                                   |       |                                   |       |                                             |       |   | (739 | ) |   |   | — |   |   |   | (739 | ) |   |
|                                           |       |                    |       |                    |       |                                   |       |                                                   |       |                                   |       |                                             |       |   | (943 | ) |   |   | 76 |   |   |   | (867 | ) |   |
| Goodwill                                       |       |                    |       |                    |       |                                   |       |                                                   |       |                                   |       |                                             |       |   | 1,186 |   |   |   | (72 | ) |   |   | 1,114 |   |   |
| **Total  consideration**                       |       |                    |       |                    |       |                                   |       |                                                   |       |                                   |       |                                             | ** ** | ** ** | **243** |   | ** ** | ** ** | **4** |   | ** ** | ** ** | **247** |   |   |
| Deferred  consideration                        |       |                    |       |                    |       |                                   |       |                                                   |       |                                   |       |                                             |       |   | (33 | ) |   |   | — |   |   |   | (33 | ) |   |
| Acquisition costs                              |       |                    |       |                    |       |                                   |       |                                                   |       |                                   |       |                                             | ** ** | ** ** | — |   |   |   | (4 | ) |   |   | (4 | ) |   |
| **Cash  payments**                             |       |                    |       |                    |       |                                   |       |                                                   |       |                                   |       |                                             | ** ** | ** ** | **€** | **210** |   | ** ** | ** ** | **—** |   | ** ** | ** ** | **€** | **210** |   |   |
|                                                |            |                         |            |                         |            |                                        |            |                                                        |            |                                        |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theconsolidated financial statements of cash flows for 2005 includes the followingsignificant cash flows in relation to Kappa.

| ** **                               | ** ** | **€ millions** | ** ** |
|------------------------------------------|------------|--------------------------|------------|
| Net cash flow  from operating activities |       |                     | 71         |   |   |
| Interest paid                            |       |                     | (20        | ) |   |
| Purchase of tangible  fixed assets       |       |                     | (25        | ) |   |

 

F-147

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**33Acquisitions and disposals—(continued)**

The summarized statementsof operations and statements of total recognized gains and losses for Kappafrom the beginning of its financial year on January 1, 2005 to November 30,2005 are set out below. These figures are reported in accordance withaccounting standards generally accepted in The Netherlands and are unaudited.

**Summarized statements of operations**

| ** **                   | ** ** | **Jan. 1, 2005  through  Nov. 30, 2005** | ** ** |
|------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                   | ** ** | **€ millions**                                     | ** ** |
| Net sales                    |       |                                                         | 2,585      |   |   |
| Operating income             |       |                                                         | 154        |   |   |
| Exceptional items            |       |                                                         | (11        | ) |   |
| Profit before interest       |       |                                                         | 143        |   |   |
| Net interest                 |       |                                                         | (208       | ) |   |
| Loss before taxes            |       |                                                         | (65        | ) |   |
| Tax                          |       |                                                         | (11        | ) |   |
| **Net loss  for the period** | ** ** | ** **                                                   | **€** | **(76** | **)** | ** ** |
|                              |            |                                                              |            |  |  |  |

 

**Statements of total recognizedgains and losses**

| ** **                                                 | ** ** | **Jan. 1, 2005  through  Nov. 30, 2005** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **€ millions**                                     | ** ** |
| Net loss for the period                                    |       |                                                         | (76        | ) |   |
| Translation adjustment on foreign currency net investments |       |                                                         | (8         | ) |   |
| **Total  recognized gains and losses**                     | ** ** | ** **                                                   | **€** | **(84** | **)** | ** ** |
|                                                            |            |                                                              |            |  |  |  |

 

Thenet loss for Kappa for the year ended December 31, 2004 was €79 million.

**34  Parent Undertakings and Controlling Parties**

At December 31, 2006, the immediate controllingparty and the parent undertaking of the smallest group of which the company isa member, and for which group financial statements are prepared, is SK Funding.The ultimate controlling party and the parent undertaking of the largest groupof which the company is a member, and for which group financial statements areprepared, is SKGL. SK Funding and SKGL are companies incorporated in Ireland.

On January 31, 2007 Smurfit Kappa Group plc (“SKGplc”) completed an exchange offer for the existing shares of SKGL whereby theshareholders of SKGL exchanged their shares for an identical number of sharesof the same classes in the capital of SKG plc (the exchange offer). As aconsequence of the Exchange Offer, with effect from January 31, 2007, SKGplc became the holding company of the Group in place of SKGL.

F-148

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**34 Parent Undertakings andControlling Parties—(continued)**

We are subject to the reporting requirements of theSecurities Exchange Act of 1934, as amended, and file reports, including AnnualReports on Form 20-F, and other information with the SEC. You mayread and copy any document we file with the SEC at its public reference roomsat 100 F Street, N.W. Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330for more information on the public reference rooms and their copy charges. Inaddition, the SEC maintains an Internet site at *http://www.sec.gov*that contains reports and other information regarding issuers that fileelectronically with the SEC. These filings are also available to the publicfrom commercial document retrieval services.

SK Acquisition’s annualreport on Form 20-F, current reports on Form 6-K, and allamendments to those reports are made available free of charge through ourwebsite (*www.smurfitkappa.com*) as soon aspracticable after such material is electronically filed with or furnished tothe Securities and Exchange Commission.

**35 Companies (Amendment)Act, 1963 to 2005**

The financial statementsin this report do not comprise ‘full group accounts’ within the meaning ofRegulation 40(1) of the European Communities (Companies: Group Accounts)Regulations, 1992 of Ireland in so far as such group accounts would have tocomply with the disclosure and other requirements of those Regulations. The auditors have made reports withoutqualification and without reference to an emphasis of matter under Section 193of the Companies Act, 1990, in respect of the consolidated financial statementsfor the years ended December 31, 2005 and 2004. Full accounts forSKGL for the year ended December 31, 2005 and 2004 have also been filedwith the Registrar of Companies. Full accounts for SKGL for the year ended December 31,2006, upon which an unqualified opinion has been issued will be filed with theRegistrar in due course.

**36 Comparative Figures**

Certain figures for theprior years have been adjusted to conform with 2006 classifications anddisclosure requirements.

**37 Differences BetweenAccounting Principles Generally Accepted in Ireland and in the United States**

The Group’s consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in Ireland (“Irish GAAP”), which differ in certain respectsfrom accounting principles generally accepted in the United States (“US GAAP”).The significant differences as they apply to the Group and the necessaryadjustments are summarized below.

**Goodwill**

Irish GAAP, FRS 10—“Goodwill and Intangible Assets,”requires goodwill to be capitalized as an intangible fixed asset and amortizedin the Consolidated Statements of Operations over its estimated useful life.For US GAAP, the Group applies SFAS No. 142 “Goodwill and Other IntangibleAssets”. Under SFAS No. 142, goodwill is no longer amortized, but istested for impairment on an annual basis and whenever indicators of impairmentarise. 

F-149

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37 Differences Between AccountingPrinciples Generally Accepted in Ireland and in the United States—(continued)**

The goodwill impairment test, which is based on fairvalue, is to be performed on a reporting unit level using a two-step impairmenttest. A reporting unit is an operating segment as defined by SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information”, or onelevel lower. In the first step, the fair value of a reporting unit, calculatedon an undiscounted cash flow basis, is compared with its carrying amount,including goodwill. If the fair value of the reporting unit exceeds itscarrying amount, goodwill is not deemed to be impaired and step two of theimpairment test is not required. If the fair value of the reporting unit islower than its carrying amount, step two needs to be performed to measure theamount of impairment. The second step of the goodwill impairment test, used tomeasure the amount of impairment loss, compares the implied fair value ofreporting unit goodwill with the carrying amount of that goodwill. If thecarrying amount of reporting unit goodwill exceeds the implied fair value ofthat goodwill, an impairment loss shall be recognized in an amount equal tothat excess. The loss recognized cannot exceed the carrying amount of goodwill.

The fair value of each reporting unit was determinedbased upon SKG’s segment reporting. According to these calculations, the fairvalue of the reporting units exceeded the carrying value of their net assets.Therefore, the additional analysis was not required and there was no impairmentof goodwill upon adoption of SFAS No. 142. The Group performed an annualimpairment test in the last quarter of 2004, 2005 and 2006. No indicators ofimpairment were identified.

Under Irish GAAP, theGroup accounts for goodwill arising on the acquisition of a foreign entity as aeuro functional asset. Under US GAAP, SFAS No. 52 requires goodwill andany fair value adjustments arising out of the purchase of a foreign entity tobe treated as currency assets and liabilities of the foreign operation andtranslated at the closing rates with differences taken to the currencytranslation adjustment recorded in other comprehensive income as a component ofshareholders’ equity.

**Intangible Assets**

Under US GAAP, €176million representing the allocated value in purchase accounting for customerrelationships has been accounted for as intangible assets under US GAAP. IrishGAAP does not require the separate recognition of such assets and thus hasincluded the €176million amount in goodwill under Irish GAAP. Such goodwill is amortized underIrish GAAP on a straight-line basis over 40 years. The separately identifiedintangible assets have been amortized on a straight-line basis over 5 - 8 yearsunder US GAAP. Additional amortization expense under US GAAP for intangibleassets is expected to be approximately €31 million for each of thenext 5 years.

**Deferred taxation**

Irish GAAP, FRS 19—“DeferredTax” requires full provision to be made for deferred tax arising from timingdifferences between the recognition of gains and losses in the financialstatements and their recognition in tax computations. In adopting FRS 19, wehave chosen not to discount deferred tax assets and liabilities. This standardeliminated a number of the differences between accounting for deferred taxunder Irish and US GAAP. However, under SFAS No. 109—“Accounting forIncome Taxes”, deferred taxation would also be provided under US GAAP on thedifference between the accounting and taxation bases of assets and liabilitiesof subsidiaries acquired. Deferred income taxes on the taxable US GAAPadjustments are included within the reconciliations.

F-150

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37 Differences Between AccountingPrinciples Generally Accepted in Ireland and in the United States—(continued)**

**Retirement benefits**

Under Irish GAAP, FRS 17—“Retirement Benefits”requires that scheme assets are valued at fair value and scheme liabilities aremeasured using the Projected Unit Credit method. Net scheme assets andliabilities, reduced by deferred tax amounts, are required to be shown on theface of the Consolidated Balance Sheets as a pension asset or liability asappropriate. SK Acquisitions has also adopted Urgent Issues Task Force abstract35—“Death-in-service and incapacity benefits” (“UITF 35”). Effective December 31,2006, SK Acquisitions adopted the provisions of SFAS No. 158, “Employer’sAccounting for Defined Benefit Pension and Other Postretirement Plans, anamendment to FASB Statements No. 87, 88, 106 and 132(R)”. SFAS No. 158requires that the funded status of the company’s pension and non-pensionpostretirement benefit plans be recognized as an asset or liability in the ConsolidatedBalance Sheets.

In addition, the recognition of any changes in thatfunded status in the year in which changes occur and the recognition of thepreviously unrecognized gains/(losses), prior service costs/(credits) andtransition assets now form part of the component of the Accumulated Other ComprehensiveIncome which does not affect retained earnings.

As a result of thischange, under US GAAP, the main differences with Irish GAAP arise in relationto the amortization of accumulated gains and losses in the Consolidated Statementsof Operations and the treatment of death-in-service and incapacity benefits. Inaddition, under US GAAP, net scheme assets and liabilities are required to beshown gross of deferred tax amounts.

**Functional currency**

Under Irish GAAP the Group accounts for the activitiesof its subsidiaries in Mexico, Colombia, Venezuela and Argentina, whichhistorically have high rates of inflation, using the US dollar as thefunctional currency.

Under US GAAP for each of the periods presented,Mexico, Colombia, Argentina and Venezuela would not be regarded ashyper-inflationary and the Mexican Peso, the Colombian Peso, the ArgentineanPeso and the Venezuelan Bolivar respectively would have been used as thefunctional currency.

Net income for 2006 hasbeen increased by €4 million due todepreciation.

**Stock-basedemployee compensation expense**

Effective January 1, 2006, under Irish GAAP,share-based payments are measured at fair value. Refer to Note 27 for furtherinformation.

Under US GAAP,prior to January 1, 2006, we accounted for stock-based compensation basedon the intrinsic-value-based method prescribed by Accounting Principles BoardOpinion 25, “Accounting for Stock Issued to Employees” (“APB 25”) and relatedinterpretations. Under this method, compensation expense is accrued and bookedto income over the vesting period. The vesting period commences when it becomesprobable that the underlying targets attaching to the options will be achievedand the number of shares will be known and ends with the date when the grantingof the shares is not contingent upon the performance of additional services orother conditions. Compensation expense would be booked on a period by periodbasis to reflect the difference between the price an employee must pay toacquire the 

F-151

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37 Differences Between AccountingPrinciples Generally Accepted in Ireland and in the United States—(continued)**

shares underlying theoption and the market price of the shares, at the end of each accounting perioduntil the final vesting date.

Effective January 1,2006, we adopted the fair value recognition provisions of SFAS 123 (revised2004), “Share-Based Payment” (“SFAS 123R”) using the prospective transitionmethod. Accordingly, equity-classified awards are measured at grant date fairvalue and are not subsequently remeasured. We do not have anyliability-classified awards.

**Debt instrumentsissue costs**

Under Irish GAAP debtissue costs are deducted from the proceeds of the relevant debt instruments.Under US GAAP such costs would be shown as deferred charges in the ConsolidatedBalance Sheets. In both cases the amount of such costs are expensed at aconstant rate of interest on the outstanding balance of the debt.

**Accounting forassociates**

Irish GAAP requiresseparate disclosure of operating earnings, net interest, exceptional items andthe taxation charge arising in associates. Under US GAAP earnings ofassociates, net of taxation would be shown as a single line item in arriving atnet income.

**Financialinstruments**

Under Irish GAAP allhedging instruments are matched with their underlying hedged item. Eachinstrument’s gain or loss is brought into the Consolidated Statements ofOperations and its fair value into the Consolidated Balance Sheets at the sametime as is the matched underlying asset, liability, income or cost.

Under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” all derivative instrumentsare recognized on the Consolidated Balance Sheets at their fair values. Changesin fair value are either recognized periodically in income or in shareholders’equity as a component of comprehensive income depending on whether thederivative qualifies for hedge accounting in accordance with the requirementsof SFAS No. 133, and if so, whether it qualifies as a fair value hedge orcash flow hedge. Changes in fair value of derivatives accounted for as fairvalue hedges are recorded in income along with the corresponding portions ofthe changes in the fair value of the hedged items, to the extent they are effectiveas hedges. Changes in fair value of derivatives accounted for as cash flowhedges, to the extent they are effective as hedges, are recorded in othercomprehensive income net of deferred taxes. Changes in fair values ofderivatives not qualifying as hedges are reported in net income.

Under Irish GAAP thefunctional currency of the Group’s operations in Latin America is the US$. TheGroup’s investment in these operations is financed by US$ borrowing. Thecarrying amounts of these operations are translated at the end of eachaccounting period at the closing rates of exchange. The resulting exchangedifferences are taken directly to reserves. Exchange gains or losses on therelated US$ borrowing are then offset as a reserve movement against theexchange differences.

Under US GAAP the functional currency of our LatinAmerican operations is the local currency of each of the countries in which weoperate. While net investment hedge accounting is permitted, the use of 

F-152

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37 Differences Between AccountingPrinciples Generally Accepted in Ireland and in the United States—(continued)**

a different functional currency for our Latin Americanoperations results in our US$ debt not directly matching the local currency netassets. The Group does not meet the US GAAP criteria for net investment hedgeaccounting using a tandem currency debt instrument and as a result thetranslation gains and losses on the debt instrument are recorded in thestatement of operations rather than in other comprehensive income.

**Currency swaps**

Under Irish GAAP, the fairvalue of currency swaps relating to outstanding debt is an adjustment to thecarrying value of debt. Under US GAAP, it would be separately recorded as partof other assets or liabilities.

**Impairmentwritedowns**

Under Irish GAAP, impairmentwritedowns are included in accumulated depreciation. Under US GAAP they wouldbe deducted from the cost of the assets identified as being impaired.

**Insurance receipts**

Under Irish GAAP insurance receipts related to theinterruption of business are deferred and released to income against therelated costs.

Under US GAAP, FIN 30, SOP96-1 and EITF 01-13 require insurance receipts to be recognized onreceipt.

**Restructuring and integrationcosts**

The rules forrecognizing restructuring and integration costs in the statement of operationsare generally consistent between Irish and US GAAP. However, under Irish GAAP,on the acquisition of a business, costs in connection with restructuring wouldnot be recorded in purchase accounting but would be expensed as incurred postacquisition. Under US GAAP, a purchase accounting liability would be recordedfor qualifying costs and goodwill increased if certain requirements aresatisfied as prescribed by EITF 95-3.

**Rollover investment by SKG management**

Under US GAAP, because ofthe application of the EITF issue 88-16, “Basis in Leveraged BuyoutTransactions”, only partial purchase accounting applied to the acquisition ofJSG in 2002. The approximate 8% rollover investment by senior managementshareholders would be valued at their predecessor basis in JSG as opposed tothe inherent new basis in successor. The primary effect of that adjustment wasto reduce goodwill and shareholders’ equity. Under Irish GAAP, no suchadjustment is required.

**Composition of SKAcquisitions Group—consolidation of companies sold to affiliates**

SK Acquisitions has an amount advanced to affiliatesarising from assets sold to affiliates in 2002. Under Irish GAAP, theaffiliates are not consolidated. Under US GAAP, the affiliates areconsolidated, 

F-153

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37 Differences Between AccountingPrinciples Generally Accepted in Ireland and in the United States—(continued)**

resultingin an increase to net income under US GAAP of approximately €23million and a decrease to shareholders’ equity under US GAAP of approximately €155million.

**Consolidation ofassets held for sale**

The European Commission approval of the Kappaacquisition in December 2005 required the divestment by the Group ofcertain Kappa assets acquired and certain assets already owned and consolidatedby SK Acquisitions.

Under Irish GAAP, consolidated assets held fordisposal continue to be consolidated until the date of sale whereas, assets fordisposition acquired in a business combination are included as available forsale and are recognized in current assets at the lower of cost or netrealizable value. The results of assets for disposition acquired in a businesscombination are not consolidated.

Under US GAAP both the Kappa assets and the SKAcquisitions assets would be consolidated but treated as held for sale underSFAS No. 144 “Accounting for the Impairment or Disposal of Long-LivedAssets”. The assets and liabilities would be included at fair value less coststo sell and would be shown as current assets and liabilities. Any fair valueadjustment on the Kappa assets acquired would be treated as part of thepurchase price allocation with subsequent fair value adjustments taken to the ConsolidatedStatements of Operations. The results from operations for assets held for salein 2005 are included in the Consolidated Statements of Operations whereas theyare excluded under Irish GAAP.

All of the assetsconcerned were sold in October. Assets held for sale at December 31, 2006amounted to €5,000,000. Assets held for sale at December 2005includes assets of €92,901,000and liabilities of €38,497,000which are included in the European Specialties segment.

**Inventory valuation—fairvalue**

Under Irish GAAP the fair value of inventory in anacquisition would be based either on the current cost to the acquired entity ofreproducing the inventory or on the historical cost of the inventory (includingthe interest cost of holding the inventory) where it is difficult to findreplacement cost as replacement would be impossible.

Under US GAAP, inventoryacquired in a transaction accounted for under the purchase method is asfollows: (a) finished goods are valued at estimated selling prices lessthe sum of the costs of disposal and a normal profit; (b) work in processinventories are valued at estimated selling prices less the sum of the costs ofcompletion, costs of disposal, and a normal profit; and (c) raw materialinventories are valued at current replacement cost. The differences invaluation of inventory acquired in the Kappa transaction under Irish GAAP andUS GAAP resulted in an adjustment to goodwill in the reconciliations.

**Long-term receivables**

Under Irish GAAP, certainlong-term receivables are included in current assets. Under US GAAP, they areincluded in long-term assets.

F-154

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37 Differences Between AccountingPrinciples Generally Accepted in Ireland and in the United States—(continued)**

**Currency Translation Adjustment**

Adjustmentsarising on translation of the results of non-euro entities’ operations ataverage rates and on restatement of the opening net assets at closing ratesinto the consolidated financial statements are dealt with in the Consolidated Statementsof Total Recognized Gains and Losses under Irish GAAP and in the statement of OtherComprehensive Income under US GAAP. The currency translation adjustmentincluded in other comprehensive income includes the translation impact of theadjustments to net loss under US GAAP for each year. Furthermore, the currencytranslation adjustment for each Irish GAAP to US GAAP reconciling item has beenincluded in their respective line items in the shareholders’ reconciliationitself.

**Scope of Consolidation—push-down of PIK notes**

On December 1, 2005SKGL, SK Acquisitions and the shareholders of Kappa Holding B.V. (“Kappa”)concluded an agreement resulting in the merger of the operations of both groupsof companies. The merger was completed through the issue of shares by SKGL andthe payment of consideration comprising cash of approximately €238million and an €89million subordinated promissory note, primarily to Kappa’s former shareholders.These 9% shareholder PIK notes mature on December 31, 2016.

In January 2005, SKHoldings completed an offering of €325 million in aggregateprincipal amount of 11.5% senior PIK notes due 2015. Through a series oftransactions substantially all of the net proceeds were paid to shareholders bymeans of a capital reduction under Irish law.

Under Irish GAAP,transactions of both SKGL and SK Holdings are not consolidated in the Group’sconsolidated financial statements.

Under US GAAP in certaincircumstances, parent company third party debt and associated costs would bepushed-down to the reporting entity.

Effectively, the Group isdeemed to absorb a majority of the risk of certain of the debt transactions ofSK Holdings and SKGL. As such, these aforementioned debt transactions have beenpushed down into the consolidated financial statements as of December 31,2006. The SK Holdings transaction is reflected as an increase of outstandingdebt with the resulting proceeds treated as a distribution to shareholders. TheSKGL transaction is reflected as an increase of outstanding debt with an equalreduction in equity. The accrued interest associated with these notes isrecorded in the statement of operations.

F-155

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37 Differences BetweenAccounting Principles Generally Accepted in Ireland and in the United States—(continued)**

The fair value of the11.5% senior PIK notes due 2015 and of the 9% subordinated promissory notes asat December 31, 2006 was €403.1 million and €97.7million respectively.

**Gain on Munksjö disposal**

The Company disposed ofits Munksjö pulp, specialty paper and tissue operations during the year ended December 31,2005. As the carrying value of these entities differed under Irish GAAP and USGAAP, the reconciliation of income includes an adjustment to the gain ondisposal accordingly.

**Other**

Other comprises minoradjustments including a reversal of part of an impairment charge due to adifference in the underlying asset value between Irish GAAP and US GAAP.

The following is a summaryof the significant adjustments to net loss and shareholders’ equity which wouldbe required if US GAAP were to be applied instead of Irish GAAP:

| ** **                                                                                   | ** ** | **2006**      | ** **   | **Restated  2005** | ** ** | **Restated  2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------|--------------|--------------------|------------|--------------------|------------|
| ** **                                                                                   | ** ** | **€000** | ** **   | **€000**      | ** ** | **€000**      | ** ** |
| **Income**                                                                                   | ** ** | ** **    | ** **   | ** **         | ** ** | ** **         | ** ** |
| Net loss reported in the  consolidated statement of operations                               |       | (271,926      | )            | (176,541           | )          | (41,042            | )          |
| Adjustments:                                                                                 |       |          |         |               |       |               |       |
| Goodwill amortization                                                                        |       | 62,033        |         | 28,914             |       | 37,925             |       |
| Other intangible amortization                                                                |       | (31,131       | )            | (2,038             | )          | —             |       |
| Functional currency—property,  plant and equipment                                      |       | 4,029         |         | —             |       | —             |       |
| Retirement benefits                                                                          |       | (5,623        | )            | (8,118             | )          | (3,061             | )          |
| Deferred taxation                                                                            |       | 17,156        |         | 4,936              |       | 9,309              |       |
| Stock-based compensation  expense                                                            |       | —        |         | (12,625            | )          | 6,854              |       |
| Inventory valuation—fair value                                                          |       | —        |         | (5,451             | )          | —             |       |
| Management rollover investment                                                               |       | 590           |         | 614                |       | 616                |       |
| Financial instruments—fair  value                                                       |       | 12,580        |         | 11,414             |       | (33,275            | )          |
| Translation gains/(losses) arising on net investment  hedging                                |       | 48,182        |         | (66,808            | )          | 44,056             |       |
| Consolidation of companies  sold to affiliates                                               |       | 23,086        |         | (34,053            | )          | (8,195             | )          |
| Adjustment to gain on Munksjö  disposal                                                 |       | —        |         | 2,597              |       | —             |       |
| Consolidation of assets held  for sale                                                       |       | —        |         | 163                |       | —             |       |
| Insurance receipts                                                                           |       | (540          | )            | (398               | )          | —             |       |
| PIK interest                                                                                 |       | (51,461       | )            | (36,959            | )          | —             |       |
| Provisions                                                                                   |       | 8,770         |         | —             |       | —             |       |
| Other                                                                                        |       | 2,281         |         | —             |       | —             |       |
| ** **                                                                                   |       | 89,952        |         | (117,812           | )          | 54,229             |       |
| **Net (loss)/income as  adjusted to accord with US GAAP**                                    | ** ** | **€**    | **(181,974** | **)**              | **€** | **(294,353**       | **)**      | **€** | **13,187** | ** ** |
| Arising from:                                                                                |       |          |         |               |       |               |       |
| Continuing operations                                                                        |       | (181,974      | )            | (265,928           | )          | (20,701            | )          |
| Acquired activities                                                                          |       | —        |         | (26,181            | )          | —             |       |
| Discontinued activities                                                                      |       | —        |         | (2,244             | )          | 33,888             |       |
| **Net (loss)/income  available to ordinary shareholders as adjusted to accord with US GAAP** | ** ** | **€**    | **(181,974** | **)**              | **€** | **(294,353**       | **)**      | **€** | **13,187** | ** ** |

 

F-156

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

**Shareholders’ Equity**

| ** **                                                              | ** ** | **2006**      | ** **  | **Restated  2005** | ** ** |
|-------------------------------------------------------------------------|------------|---------------|-------------|--------------------|------------|
| ** **                                                              | ** ** | **€000** | ** **  | **€000**      | ** ** |
| Shareholders’ equity as reported in the consolidated balance sheet |       | 1,241,070     |        | 1,418,909          |       |
| Adjustments:                                                            |       |          |        |               |       |
| Goodwill—Gross                                                     |       | 180,546       |        | 112,436            |       |
| —Aggregate amortization                                            |       | 163,639       |        | 101,606            |       |
| Other intangible amortization                                           |       | (33,169       | )           | (2,038             | )          |
| Functional currency—property, plant and equipment                  |       | 6,144         |        | 53,319             |       |
| Functional currency—investments                                    |       | 1,858         |        | 310                |       |
| Retirement benefits                                                     |       | (10,664       | )           | (30,597            | )          |
| Deferred taxation                                                       |       | (205,739      | )           | (137,896           | )          |
| Financial instruments—fair value                                   |       | 6,332         |        | (30,059            | )          |
| Minority share of US GAAP adjustments                                   |       | (1,771        | )           | (6,376             | )          |
| Consolidation of companies sold to affiliates                           |       | (154,859      | )           | (176,859           | )          |
| Rollover investment by SKG management                                   |       | (74,370       | )           | (74,961            | )          |
| Insurance receipts                                                      |       | —        |        | 540                |       |
| Provisions                                                              |       | —        |        | (8,770             | )          |
| Push down of PIK notes                                                  |       | (494,043      | )           | (442,582           | )          |
| Other                                                                   |       | 2,281         |        | —             |       |
|                                                                    |       | (613,815      | )           | (641,927           | )          |
| **Shareholders’ equity as adjusted  to accord with US GAAP**       | ** ** | **€**    | **627,255** | ** **         | **€** | **776,982** | ** ** |
|                                                                         |            |               |             |                    |            |  |  |

 

**Cash Flows**

The Consolidated Statements of Cash Flows preparedunder Irish GAAP presents substantially the same information as that requiredunder US GAAP by SFAS No. 95—“Statement of Cash Flows”. This standard differs,however, with regard to the classification of items within the statements andas regards the definition of cash and cash equivalents. Under US GAAP, cashwould not include bank overdrafts. The movements on such bank overdrafts arerequired to be included in financing activities under SFAS No. 95. UnderUS GAAP, only short term investments with a maturity of three months or less atthe date of acquisition are included in cash equivalents. Under Irish GAAP,movements in short term investments are classified as management of liquidresources. Under Irish GAAP, cash flows are presented separately for operatingactivities, dividends received from associates, returns on investments andservicing of finance, taxation, capital expenditure and financial investment,acquisitions and disposals, equity dividends paid, management of liquidresources and financing. US GAAP, however, requires only three categories ofcash flow activity to be reported: operating, investing and financing.

Cash flows from taxation and returns on investmentsand servicing of finance shown under Irish GAAP would be included as operatingactivities under US GAAP. Cash flows from capital expenditure, financialinvestment and acquisitions and disposals would be included as investingactivities under US 

F-157

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

GAAP. The payment ofdividends would be included as a financing activity under US GAAP. Under USGAAP, capitalized interest is treated as part of the cost of the asset to whichit relates and is thus included as part of investing cash flows; under IrishGAAP all interest is treated as part of returns on investments and servicing offinance.

The categories of cashflow activity under US GAAP are summarized as follows:

| ** **                                       | ** ** | **2006**      | ** **  | **2005**      | ** ** | **2004**      | ** ** |
|--------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| ** **                                       | ** ** | **€000** | ** **  | **€000** | ** ** | **€000** | ** ** |
| Cash inflow from operating activities            |       | 280,346       |        | 182,698       |       | 318,827       |       |
| Cash inflow/(outflow) on investing activities    |       | 445,698       |        | (530,701      | )          | (174,770      | )          |
| Cash (outflow)/inflow from financing activities  |       | (594,635      | )           | 355,052       |       | (85,896       | )          |
| Increase in cash and cash equivalents            |       | 131,409       |        | 7,049         |       | 58,161        |       |
| Currency adjustment on cash and cash equivalents |       | (9,014        | )           | 9,804         |       | (3,611        | )          |
| Cash and cash equivalents at beginning of year   |       | 247,726       |        | 230,873       |       | 176,323       |       |
| **Cash and  cash equivalents at end of year**    | ** ** | **€**    | **370,121** | ** **    | **€** | **247,726**   | ** ** | **€** | **230,873** | ** ** |
|                                                  |            |               |             |               |            |               |            |  |  |  |

 

**Deferred taxation—additionalinformation required by SFAS No. 109**

Theanalysis of the US GAAP deferred taxation liability required by SFAS No. 109is as follows:

| ** **                                          | ** ** | **2006**      | ** **  | **2005**      | ** ** |
|-----------------------------------------------------|------------|---------------|-------------|---------------|------------|
| ** **                                          | ** ** | **€000** | ** **  | **€000** | ** ** |
| **Deferred  taxation liabilities:**                 |       |          |        |          |       |
| Excess of book value over tax value of fixed assets |       | 444,824       |        | 386,203       |       |
| Other timing differences                            |       | 91,163        |        | 81,974        |       |
|                                                |       | 535,987       |        | 468,177       |       |
| **Deferred  taxation assets:**                      |       |          |        |          |       |
| Net operating loss carry forwards                   |       | (356,925      | )           | (293,035      | )          |
| Valuation allowances                                |       | 173,113       |        | 167,005       |       |
| Retirement benefits                                 |       | (77,283       | )           | (58,264       | )(1)       |
| Other timing differences                            |       | (34,111       | )           | (2,573        | )          |
|                                                |       | (295,206      | )           | (186,867      | )          |
|                                                | ** ** | **€**    | **240,781** | ** **    | **€** | **281,310** | ** ** |
| **Split as  follows:**                              |       |          |        |          |       |
| Current                                             |       | 21,258        |        | (14,418       | )          |
| Non current                                         |       | 219,523       |        | 295,728       |       |
|                                                | ** ** | **€**    | **240,781** | ** **    | **€** | **281,310** | ** ** |

----

(1)          Retirement benefitsincludes €75,862,000(2005: €52,776,000)in relation to deferred tax which has been recorded within ‘Pension liabilities’under Irish GAAP (Note 24).

Valuation allowances areset up for losses carried forward in those jurisdictions in which it is morelikely than not that the losses carried forward will not be utilized to offsetfuture taxable income or in which there is no deferred tax liability againstwhich the related asset can be offset prior to expiry.

F-158

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

**Share optionschemes—additional information required by SFAS No. 123**

Prior to January 1,2006, we accounted for stock-based compensation based on theintrinsic-value-based method prescribed by Accounting Principles Board Opinion25, “Accounting for Stock Issued to Employees” (“APB 25”), and relatedinterpretations. Under this method, compensation expense was recorded only ifon the date of grant the current market price of the underlying stock exceededthe exercise price or the exercise price was not fixed at the grant date. SFAS123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and SFAS 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123” (“SFAS 148”) established accounting and disclosure requirementsusing a fair-value-based method of accounting for stock-based employeecompensation plans. As permitted by SFAS 123 and SFAS 148, we elected tocontinue to apply the intrinsic-value-based method of accounting describedabove and adopted only the disclosure requirements of SFAS 123 until SFAS 123Rwas adopted on January 1, 2006. The following table illustrates the effecton net income and on earnings per share if the fair-value-based method had beenapplied to all outstanding and unvested awards in periods prior to January 1,2006.

| ** **                                                                                                       | ** ** | **Restated  2005** | ** **   | **Restated  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------|--------------|--------------------|------------|
| ** **                                                                                                       | ** ** | **€000**      | ** **   | **€000**      | ** ** |
| Net loss attributable to common shareholders under US GAAP                                                       |       |               |         |               |       |
| As reported (restated)                                                                                           |       | (294,353           | )            | 13,187             |       |
| Add: Stock based employee compensation expense included in reported   net loss                                   |       | 17,696             |         | 259                |       |
| Deduct: Total stock based employee compensation expense determined  under fair value based method for all awards |       | (1,316             | )            | (1,073             | )          |
| **Pro forma  (restated)**                                                                                        | ** ** | **€**         | **(277,973** | **)**              | **€** | **12,373** | ** ** |
|                                                                                                                  |            |                    |              |                    |            |  |  |

 

**Pension costs andtermination indemnities—information required by SFAS No. 87, SFAS No. 88,SFAS No. 106 and SFAS No. 132 amended by SFAS No. 158**

Thecomponents of the defined benefit net pension expense for the Group’s definedbenefit plans, termination indemnities and post retirement healthcare definedbenefit plans, under US GAAP, for the years ended December 31, 2006, 2005and 2004 are estimated to be as follows:

| ** **                                                  | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                  | ** ** | **€000** | ** ** | **€000** | ** ** | **€000** | ** ** |
| Service cost                                                |       | 52,285        |       | 37,450        |       | 38,470        |       |
| Interest cost                                               |       | 89,857        |       | 57,731        |       | 56,282        |       |
| Expected return on plan assets                              |       | (80,614       | )          | (44,259       | )          | (40,627       | )          |
| Amortization of unrecognized transition obligation or asset |       | —        |       | 112           |       | —        |       |
| Recognized gains and losses                                 |       | 936           |       | 5,453         |       | 61            |       |
| Recognized prior service cost                               |       | 1,172         |       | (451          | )          | 57            |       |
| Gain due to settlement or curtailment                       |       | (366          | )          | (2,564        | )          | (636          | )          |
|                                                        | ** ** | **€**    | **63,270** | ** **    | **€** | **53,472**    | ** ** | **€** | **53,607** | ** ** |
|                                                             |            |               |            |               |            |               |            |  |  |  |

 

F-159

----

**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

The estimated fund statusof the Group’s defined benefit plans, termination indemnities and postretirement healthcare defined benefit plans under US GAAP was as follows:

| ** **                                                                           | ** ** | **2006**      | ** **   | **2005**      | ** **   |
|--------------------------------------------------------------------------------------|------------|---------------|--------------|---------------|--------------|
| ** **                                                                           | ** ** | **€000** | ** **   | **€000** | ** **   |
| **Change in benefit obligation**                                                     | ** ** | ** **    | ** **   | ** **    | ** **   |
| Benefit obligation at beginning of year                                              |       | 2,043,374     |         | 1,123,272     |         |
| Service cost                                                                         |       | 52,285        |         | 37,450        |         |
| Interest cost                                                                        |       | 89,857        |         | 57,731        |         |
| Contributions by plan participants                                                   |       | 9,542         |         | 7,180         |         |
| Actuarial gains and losses                                                           |       | (60,309       | )            | 89,686        |         |
| Benefits paid                                                                        |       | (95,091       | )            | (58,201       | )            |
| Curtailments and settlements                                                         |       | (7,690        | )            | (8,997        | )            |
| Plan amendments                                                                      |       | 1,957         |         | (61           | )            |
| Acquisitions                                                                         |       | —        |         | 799,806       |         |
| Disposals                                                                            |       | (13,446       | )            | (29,741       | )            |
| Adjustment to fair value                                                             |       | (27,458       | )            | —        |         |
| Currency adjustments                                                                 |       | 6,514         |         | 25,249        |         |
| Benefit obligation at end of year                                                    |       | 1,999,535     |         | 2,043,374     |         |
| **Change in plan assets**                                                            | ** ** | ** **    | ** **   | ** **    | ** **   |
| Fair value of plan assets at beginning of year                                       |       | 1,319,191     |         | 655,105       |         |
| Actual return on assets                                                              |       | 105,252       |         | 121,834       |         |
| Contributions by employer                                                            |       | 87,885        |         | 51,077        |         |
| Contributions by plan participants                                                   |       | 9,542         |         | 7,180         |         |
| Benefits paid                                                                        |       | (95,091       | )            | (58,201       | )            |
| Curtailments and settlements                                                         |       | (3,501        | )            | (3,048        | )            |
| Acquisitions                                                                         |       | —        |         | 536,793       |         |
| Disposals                                                                            |       | (9,500        | )            | (7,705        | )            |
| Adjustment to fair value                                                             |       | (2,511        | )            | —        |         |
| Currency adjustment                                                                  |       | 7,979         |         | 16,156        |         |
| Fair value of plan assets at end of year                                             |       | 1,419,246     |         | 1,319,191     |         |
| **Funded status of the plans**                                                       | ** ** | **€**    | **(580,289** | **)**         | **€**   | **(724,183** | **)** |
| Amounts available to be applied as an increase/(reduction) of future  pension costs: |       |          |         |          |         |
| Unrecognized actuarial gains or losses                                               |       | N/A           | *            | (7,003        | )            |
| Unrecognized prior service cost                                                      |       | N/A           | *            | (1,535        | )            |
| Minimum pension liability                                                            |       | N/A           | *            | (6,020        | )            |
| **(Accrued)  pension costs**                                                         |       | N/A           | *            | **€**    | **(738,741** | **)** |
|                                                                                      |            |               |              |               |              |  |  |

 

*                    N/A—Notapplicable. In accordance with the provisions of SFAS No. 158, under USGAAP the funded status would be recognized in the Consolidated Balance Sheetsand any unrecognized gains/(losses), prior service costs/(credits) andtransition assets/(obligations) would be recognized in 

F-160

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

the Consolidated Statementof Shareholders’ Equity at December 31, 2006. In addition, the minimumpension liability would be eliminated upon the adoption of SFAS No. 158.

Thefollowing table presents a reconciliation of the (accrued) benefit cost for theGroup’s defined benefit plans, termination indemnities and post retirementhealthcare defined benefit plans under US GAAP:

| ** **                                                                                          | ** ** | **2006**      | ** **   |
|-----------------------------------------------------------------------------------------------------|------------|---------------|--------------|
| ** **                                                                                          | ** ** | **€000** | ** **   |
| (Accrued) pension cost at beginning of year                                                         |       | (738,741      | )            |
| Net periodic cost                                                                                   |       | (63,270       | )            |
| Employer contributions                                                                              |       | 87,885        |         |
| Disposals                                                                                           |       | 2,962         |         |
| Adjustment to fair value                                                                            |       | 24,947        |         |
| Amount recognized in accumulated other comprehensive income upon the  adoption of SFAS No. 158 |       | 99,038        |         |
| Minimum pension liability charge for the year                                                       |       | 1,066         |         |
| Minimum pension liability eliminated upon the adoption of SFAS  No. 158                        |       | 4,954         |         |
| Currency adjustment                                                                                 |       | 870           |         |
| Funded  status of the plans at end of year                                                          | ** ** | **€**    | **(580,289** | **)** |
|                                                                                                     |            |               |              |  |

 

Thefollowing table presents the amounts that would be recognized in theConsolidated Balance Sheets for the Group’s defined benefit plans, terminationindemnities and post retirement healthcare defined benefit plans at December 31,2006 under US GAAP:

| ** **              | ** ** | **2006**      | ** **   |
|-------------------------|------------|---------------|--------------|
| ** **              | ** ** | **€000** | ** **   |
| Non current assets      |       | 17,778        |         |
| Current liabilities     |       | (36,811       | )            |
| Non current liabilities |       | (561,256      | )            |
|                    | ** ** | **€**    | **(580,289** | **)** |
|                         |            |               |              |  |

 

Thefollowing table presents the pre-tax net actuarial (gain) and prior service(credit) that would be recognized in the accumulated other comprehensive incomeamounts not affecting retained earnings for the Group’s defined benefit plans,termination indemnities and post retirement healthcare defined benefit plansunder US GAAP at December 31, 2006:

| ** **             | ** ** | **2006**      | ** **  |
|------------------------|------------|---------------|-------------|
| ** **             | ** ** | **€000** | ** **  |
| Net actuarial (gain)   |       | (98,471       | )           |
| Prior service (credit) |       | (567          | )           |
|                   | ** ** | **€**    | **(99,038** | **)** |
|                        |            |               |             |  |

 

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37 Differences BetweenAccounting Principles Generally Accepted in Ireland and in the United States—(continued)**

Thefollowing table presents the change in the accumulated other comprehensiveincome amounts that would be recognized under SFAS 158:

| ** **                                                  | ** ** | **2006**      | ** **  |
|-------------------------------------------------------------|------------|---------------|-------------|
| ** **                                                  | ** ** | **€000** | ** **  |
| Accumulated other comprehensive income at beginning of year |       | —        |        |
| (Decrease) due to adoption of SFAS No. 158             |       | (99,038       | )           |
|                                                        | ** ** | **€**    | **(99,038** | **)** |
|                                                             |            |               |             |  |

 

Thefollowing table presents the estimated actuarial net (gain) and estimated priorservice (credits) of the Group’s benefit plans that will be amortized fromaccumulated gains and (losses) not affecting retained earnings into netperiodic cost/(income) under US GAAP and recorded in the ConsolidatedStatements of Operations in 2007:

| ** **             | ** ** | **2007**      | ** ** |
|------------------------|------------|---------------|------------|
| ** **             | ** ** | **€000** | ** ** |
| Net actuarial (gain)   |       | (2,566        | )          |
| Prior service (credit) |       | (152          | )          |
|                   | ** ** | **€**    | **(2,718** | **)** |
|                        |            |               |            |  |

 

The Group’s postretirement healthcare defined benefitschemes are in the US. The estimated fund status of these schemes at December 31,2006 was €1,994,000 (2005: €2,412,000).

Plan assets less than projected benefit obligationsinclude overfunded plans at December 31, 2006, €17,778,000(2005: €3,200,000)and underfunded plans at December 31, 2006 of €598,067,000 (2005: €727,383,000).

Thefollowing assumptions were used to determine the defined benefit expense forthe Group.

| ** **                                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average assumed discount rate                              |       |     | 4.6        | %        |       |     | 4.9        | % |   |   | 5.5 | % |   |
| Weighted average rates of compensation increase                     |       |     | 3.0        | %        |       |     | 3.1        | % |   |   | 3.3 | % |   |
| Weighted  average expected long term rates of return on plan assets |       |     | 6.1        | %        |       |     | 6.1        | % |   |   | 6.7 | % |   |

 

The calculation of the projected benefit obligation atDecember 31, 2006 assumed a discount rate of approximately 5.0% (2005:4.6%) and a compensation increase of 3.2% (2005: 3.0%).

The assets of the plans are invested primarily inequities, fixed interest securities, insurance contracts and real estate.

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

The weighted-average assetallocations at December 31, 2006 and 2005 by asset category of the definedbenefit pension schemes is shown below:

| ** **        | ** ** | **Plan assets** | ** ** |
|-------------------|------------|----------------------|------------|
| ** **        | ** ** | ** **           | ** ** | **Percentage of Plan** | ** ** |
| ** **        | ** ** | **Target**           | ** ** | **Assets at December 31,** | ** ** |
| ** **        | ** ** | **Allocation**       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Equity securities |       |                 | 15-80%     |   |   |   | 48 | % |   |   | 50 | % |   |
| Debt securities   |       |                 | 20-85%     |   |   |   | 39 | % |   |   | 38 | % |   |
| Real Estate       |       |                 | 0-10%      |   |   |   | 7 | % |   |   | 6 | % |   |
| Other             |       |                 | 0-10%      |   |   |   | 6 | % |   |   | 6 | % |   |
| Total             |       |                 |       |   |   |   | 100 | % |   |   | 100 | % |   |

 

The Group maintains target allocation percentagesamong various asset classes based on an investment policy established for thepension plans which is designed to achieve long term rate of return objectives,while mitigating against downside risk and considering expected cash flows. Ourinvestment policy is reviewed from time to time to ensure consistency with ourlong term objective of funding 100% of the projected benefit obligation.

The expected long term rate of return on plan assetsreflects the average return rates expected on the funds invested or to beinvested to provide for the benefits included in the projected benefitobligation. In estimating those rates, appropriate consideration is given tothe current returns being earned by the plan assets in the fund and the ratesof return expected to be available for reinvestment.

The Group’s expected return on assets of the definedbenefit schemes is based on recommendations from the plan actuaries, havingconsidered anticipated future long term performance of individual assetclasses. Consideration is also given to the appropriate asset allocationstrategy, given the anticipated requirements of the plan to determine theaverage rate of return expected on the funds invested to provide for thepension plan benefits. While appropriate consideration is given to recent fundperformance and historical returns, the assumption is primarily a long-term,prospective rate. Based on our most recent study, the expected long term returnassumption effective January 1, 2007 will be 6.3%.

The expected employee and employer contributions tothe funded defined benefit plans are anticipated to be €11,616,000and €48,330,000respectively for the year ended December 31, 2007. The expected employercontributions to the unfunded defined benefit plans is expected to be €36,281,000for the year ended December 31, 2007. The accumulated benefit obligationof all schemes at December 31, 2006 is €1,754,838,000 (2005: €1,819,813,000).

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

Expected future benefitpayments for each of the next five fiscal years and in the aggregate for thefive fiscal years thereafter are shown below:

| **Year**     | ** ** | ** **    | ** ** | **Benefit Payments** | ** ** |
|--------------|------------|---------------|------------|---------------------------|------------|
| ** **   | ** ** | **€000** | ** ** |
| 2007         |       |          | 90,331     |                      |       |
| 2008         |       |          | 95,292     |                      |       |
| 2009         |       |          | 100,080    |                      |       |
| 2010         |       |          | 103,751    |                      |       |
| 2011         |       |          | 110,758    |                      |       |
| 2012  - 2016 |       |          | 571,308    |                      |       |

 

**BusinessCombinations—Additional Information Required**

Pro-forma sales and netincome/(loss) for Group under US GAAP for the year ended December 31, 2005 were€7,022million (unaudited) and (€141.6) million (unaudited), respectively(2004: €7,649 million(unaudited) and net income of €63.8 million (unaudited),respectively). Pro forma net income for 2005 includes early debt extinguishmentcosts of €104.7million (unaudited) which are not expected to reoccur.

**US GAAP RestatementItems**

**The following is an extract fromNote 35 to the consolidated financial statements included in our reportForm 20-F/A, which was filed on November 24, 2006. Theserestatement items were adjusted in that Form 20-F/A filing.**

**SFAS No. 52 requires goodwilland any fair value adjustments arising out of the purchase of a foreign  entity to be treated as currency assets andliabilities of the foreign operation and translated at the closing  rates with differences taken to the currencytranslation adjustment recorded in other comprehensive income as a component ofshareholders’ equity. Accordingly, in performing this goodwill allocation tosubsidiaries and applicable currency translation, the Group has restatedfinancial statement amounts presented in accordance with US GAAP to reflect thecurrency movement associated with goodwill in the years 2003 and 2004. Thisresulted in a cumulative increase in currency translation adjustment of**€93,533,000 as ofDecember 31, 2004 leading to a reduction in both goodwill andshareholders’ equity reported under US GAAP for an identical amount.Consequently, the currency translation adjustment in other comprehensive  loss for the years ended December 31,2004 and 2003 increased by €8,409,000 and €85,124,000, respectively, thereby increasing othercomprehensive loss by identical amounts in both years. This restatement did notimpact the consolidated statement of operations or cash flows for the years endedDecember 31, 2004 and 2003 as presented in accordance with US GAAP.

**US GAAP requires parent companythird party debt and associated issue costs to be pushed down to the reportingentity under certain circumstances. Accordingly, on analysis of parent companythird party debt, the Group considers it appropriate to adopt pushdownaccounting in respect of the issuance of PIK notes by SKGL with regard to theKappa acquisition. This resulted in a cumulative increase in third party debtof**€89,620,000 as of December 31, 2005 leading to a reduction inincome of €667,000 anda reduction in shareholders’ equity reported under US GAAP of €89,620,000. The Grouphas also pushed down debt issue costs of €8,330,000 related to the €325,000,000 PIK notesissued by JSG Holdings which leads to an 

F-164

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**37Differences Between Accounting Principles Generally Accepted in Ireland and inthe United States—(continued)**

**increasein net loss of**€751,000 for the year ended December 31, 2005and an increase in deferred debt issue costs and an increase in shareholders’equity reported under US GAAP of €7,579,000. These restatements did not impact theconsolidated statement of operations, balance sheet or cash flows for the yearsended December 31, 2004 and 2003 as presented in accordance with US GAAP.

**Under US GAAP the functionalcurrency of the Group’s Latin American operations is the local currency of eachof the countries in which it operates. The Group did not meet the criteria fornet investment hedge accounting using a tandem currency debt instrument underUS GAAP and as a result the Group has restated the statements of operations andother comprehensive income reclassifying the translation gains and losses onthe debt instrument. For 2003 and 2004 net income under US GAAP increased by**€116,054,000 and €44,056,000 with acorresponding decrease in other comprehensive income. For 2005 net income underUS GAAP decreased by €66,808,000 with a corresponding increase in othercomprehensive income. These restatements do not impact the shareholders’ equityor cash flows reported under US GAAP for any of the years presented.

**TheGroup has restated shareholders’ equity presented in accordance with US GAAP tocorrect certain clerical errors in relation to the fair value adjustmentsarising on the acquisition of Kappa. These restatements decreased shareholders’equity reported under US GAAP by**€2,544,000 at December 31, 2005. They did notimpact the consolidated statement of operations or cash flows for the yearsended December 31, 2005, 2004 and 2003 as presented in accordance with USGAAP.

**38 New AccountingStandards**

**US GAAP**

In February 2006, the Financial AccountingStandards Board (‘FASB’) issued SFAS No. 155, ‘*Accounting for Certain Hybrid Financial Instruments—an amendment ofFASB Statements No. 133 and 140*,’ (‘SFAS 155’). SFAS 155 amendsSFAS No. 133, ‘*Accounting forDerivative Instruments and Hedging Activities*,’ and SFAS No. 140,‘*Accounting for Transfers and Servicing ofFinancial Assets and Extinguishment of Liabilities*.’ SFAS 155resolves issues addressed in Statement 133 Implementation Issue No. D1, ‘*Application of Statement 133 to Beneficial Interestsin Securitized Financial Assets*.’ Among other provisions, the new rule (a) permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation, (b) clarifieswhich interest-only strips and principal-only strips are not subject to therequirements of Statement 133, (c) establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation, (d) clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivates, and (e) amends Statement 140 to eliminate the prohibition on aqualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. SFAS 155 is effective for fiscal years beginning after September 15,2006 and is required to be adopted by the Group in the first quarter of fiscalyear 2007, beginning January 1, 2007. We are currently evaluating theeffect that the adoption of SFAS 155 will have on our consolidated results ofoperations, financial position and cash flows, but we do not expect it to havea material impact.

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**38 NewAccounting Standards—(continued)**

In March 2006, the FASB issued SFAS No. 156,‘*Accounting for Servicing of Financial Assets—anamendment of FASB Statement No. 140*,’ (‘SFAS 156’). SFAS 156 amendsSFAS No. 140, ‘*Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities*,’with respect to the accounting for separately recognized servicing assets andservicing liabilities. SFAS 156 is effective for fiscal years beginning after September 15,2006 and is required to be adopted by the Group in the first quarter of fiscalyear 2007, beginning January 1, 2007. The Group is currently evaluatingthe effect that the adoption of SFAS 156 will have on our consolidated resultsof operations, financial position and cash flows, but we do not expect it tohave a material impact.

In July 2006, the FASB issued FinalInterpretation No. 48, ‘*Accounting forUncertainty in Income Taxes*’(‘FIN 48’). FIN 48 is aninterpretation of FASB Statement No. 109, *‘Accounting for Income Taxes*’. FIN 48 clarifies the accountingfor income taxes by prescribing the minimum recognition threshold a taxposition is required to meet before being recognized in the financialstatements. It also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition. The provisions of FIN 48 are effective from January 1,2007. Differences between the amounts recognized in the Consolidated Balance Sheetsprior to the adoption of FIN 48 and the amounts reported after adoption will beaccounted for as a cumulative-effect adjustment recorded to the beginningbalance of retained earnings. We are currently evaluating the impact of adoptingFIN 48 on our financial statements.

In September 2006, the FASB issued SFAS No. 157,*‘FairValue Measurements’* (‘SFAS157’). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements. SFAS 157 does not require any additional fair valuemeasurements; however it eliminates inconsistencies in the guidance provided inprevious accounting pronouncements. We expect to adopt SFAS 157 effective January 1,2008, as required. We are currently evaluating the impact of adopting SFAS 157,but do not expect its adoption to have a material impact on our consolidatedfinancial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 158,‘*Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans—An Amendment of FASB No. 87, 88, 106 and 132(R)*’(SFAS 158). SFAS 158 requires that the funded status of defined benefitpostretirement plans (other than multiemployer plans) be recognized on theGroup Consolidated Balance Sheet, and that changes in the funded status bereflected in comprehensive income in the year in which the changes occur;effective fiscal years ending after June 15, 2007. The standard alsorequires companies to measure the funded status of these plans as of the dateof its fiscal year-end, effective for years ending after December 15,2008. For both of these changes early adoption is encouraged. We adopted SFAS158 with effect from January 1, 2006 in our US GAAP financial statements.The adoption of SFAS, changing from the corridor approach to the recognition ofthe full liability resulted in a reduction in the liability of €104million—see Note 37.

In September 2006,the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (‘SAB’)No. 108, “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements”, to eliminatethe diversity of practice surrounding how public companies quantify financialstatement misstatements. Traditionally, there have been two widely-recognizedmethods for quantifying the effects of financial statement misstatements: the ‘roll-over’method and the ‘iron curtain’ method. The roll-over method focuses primarily onthe impact of a misstatement on the income statement, including the reversingeffect of prior year misstatements, but its use can lead to the 

F-166

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**38 NewAccounting Standards—(continued)**

accumulation of misstatements in the balance sheet.The iron-curtain method, on the other hand, focuses primarily on the effect ofcorrecting the period-end balance sheet with less emphasis on the reversingeffects of prior year errors on the income statement. In SAB No. 108, theSEC Staff established an approach that requires quantification of financialstatement misstatements based on the effects of the misstatements on eachfinancial statement and the related financial statement disclosures. This modelis commonly referred to as a ‘dual approach’ because it requires quantificationof errors under both the iron curtain and the roll-over methods. The Groupadopted SAB No. 108 in the fourth quarter of 2006. This adoption did nothave a material impact on the Group’s consolidated results of operations, financialposition or cash flows.

**InternationalFinancial Reporting Standards**

In 2002 the European Unionissued regulations requiring all companies with securities admitted to tradingon a regulated market in any European Economic Area (EEA) State to preparetheir financial statements in accordance with accounting standards issued bythe International Accounting Standards Board (IASB). For Irish public limited companies with equity securitiespublicly traded, the regulations apply for accounting periods starting on orafter January 1, 2005. For Irish public limited companies whose debtsecurities only are publicly traded the regulations may be applied foraccounting periods starting on or after January 1, 2007. Our equity anddebt securities are not traded on a regulated market of an EEA Member State,however we will prepare financial statements in accordance with standardsissued by the IASB with effect from January 1, 2007.

**39 Post Balance SheetEvents**

**Facture Fire**

A fire occurred in anelectrical station in early January 2007 and shut down one of the largermachines in the Group’s Facture operations. The machine re-opened in mid April. The situation was insured, and the Directors believe that the overallimpact on the Group’s results will not be significant.

**Initial PublicOffering**

On March 14, 2007, SKG completed an initial publicoffering, with the placing to institutional investors of 78,787,879 newordinary shares in SKG plc (the “Ordinary Shares”), a company formed in January2007 as the ultimate holding company for the Group. This offering, togetherwith the issue of an additional 11,818,181 Ordinary Shares, generated grossproceeds of €1,495 million, which were used by us to repaycertain debt obligations and to prepay the shareholder PIK note issued inconnection with the Merger. Trading in the shares (“Admission”) on the IrishStock Exchange and on the London Stock Exchange commenced on March 20, 2007.The additional shares were issued on Admission by Deutsche Bank acting asstabilizing manager under an over-allocation option representing shares up to amaximum of 15% of the total number of shares comprised in the initial publicoffering.

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**40 OrganizationalStructure**

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

 

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**Smurfit Kappa Acquisitions and Subsidiary Companies Notes to the Consolidated Financial Statements—(continued)**

**40Organizational Structure—(continued)**
| Subsidiaries                                                                           | ** ** | ** **                                                                                                                                                               | ** ** | **Principal   Activities** | ** ** | **Country of   Incorporation** | ** ** | **Holding %** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|--------------------|
| **Smurfit International France S.A.**                                                  |       | Holding company  for French                                                                                                                                              | ** ** | **France**                 |       | 100                            |
| 2 rue Goethe,  75116 Paris, France                                                     |       | operations whose activities are the manufacture of  paperboard and packaging products                                                                                    | ** ** | ** **                 |       |                           |
| **Smurfit Investments UK Limited**                                                     |       | Holding company  for UK                                                                                                                                                  | ** ** | **United**                 |       | 100                            |
| Darlington Road, West Auckland,  Bishop Auckland, Co. Durham  DL14 9PE, United Kingdom |       | operations whose  principal activities are the manufacture of paperboard and packaging products                                                                          | ** ** | **Kingdom**                |       |                           |
| **Smurfit Kappa Ireland Limited**                                                      |       | Manufacture of  paperboard and                                                                                                                                           | ** ** | **Ireland**                |       | 100                            |
| Beech Hill, Clonskeagh,  Dublin 4, Ireland                                             |       | packaging products and  printing                                                                                                                                         | ** ** | ** **                 |       |                           |
| **Smurfit Nervion, S.A.**                                                              |       | Manufacture of  sack paper and                                                                                                                                           | ** ** | **Spain**                  |       | 99                             |
| B Arriandi s/n, 48215 lurreta,  Vizcaya, Spain                                         |       | holding company for  Spanish, Portuguese and sack converting operations whose principal activities  are the manufacture of paperboard, packaging and paper sack products | ** ** | ** **                 |       |                           |
| **Smurfit SISA, S.p.A**                                                                |       | Manufacture of  paperboard and                                                                                                                                           | ** ** | **Italy**                  |       | 90                             |
| Strada Serravalle 30,  15067 Novi Ligure (AL), Italy                                   |       | packaging products                                                                                                                                                       | ** ** | ** **                 |       |                           |

 

F-169

----

**Smurfit Kappa Funding plcand Subsidiary Companies**

**Valuation and Qualifying Accounts**

**Schedule II-I**

**Description**

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2004** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 54,840              |       |            |       | €           | 4,048      |                |       |   | € | (385 | ) |   |   | € | (5,593 | ) |   |   | € | 52,910 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2005** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 52,910              |       |            |       | €           | (7,146     | )                   |       |   | € | 959 |   |   |   | € | (892 | ) |   |   | € | 45,831 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2006** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 45,831              |       |            |       | €           | 1,726      |                |       |   | € | (316 | ) |   |   | € | (4,973 | ) |   |   | € | 42,268 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

S-1

----

**Smurfit Kappa****Acquistions and Subsidiary Companies**

**Valuation and Qualifying Accounts**

**Schedule II-II**

**Description**

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2004** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 54,840              |       |            |       | €           | 4,048      |                |       |   | € | (385 | ) |   |   | € | (5,593 | ) |   |   | € | 52,910 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2005** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 52,910              |       |            |       | €           | (7,146     | )                   |       |   | € | 959 |   |   |   | € | (892 | ) |   |   | € | 45,831 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                             | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **charged to** | ** ** | ** **      | ** ** | **Acquisitions** | ** ** | **Balance at** | ** ** |
| ** **                             | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **Exchange**    | ** ** | **and**          | ** ** | **end of**     | ** ** |
| ** **                             | ** ** | **year**              | ** ** | **expenses**        | ** ** | **differences** | ** ** | **Deductions**   | ** ** | **year**            | ** ** |
| ** **                             | ** ** | **€000**         | ** ** | **€000**       | ** ** | **€000**   | ** ** | **€000**    | ** ** | **€000**       | ** ** |
| **Year ended December 31,  2006** |       |                  |       |                |       |            |       |             |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Provision for bad and  doubtful debts  |       |                  | €     | 45,831              |       |            |       | €           | 1,726      |                |       |   | € | (316 | ) |   |   | € | (4,973 | ) |   |   | € | 42,268 |   |   |
|                                        |            |                       |            |                     |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

S-2

----