As filed with the Securities and Exchange Commission on March 15, 2007



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F

|o  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934                                
|-- | --------------------------------------------------------------------------------------------------------------------------------
|OR
|ý  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
|OR
|o  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                        
|OR
|o  | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                     

Commission file number 1-14932

UPM-Kymmene Corporation(Exact name of Registrant as specified in its charter)

The Republic of Finland(Jurisdiction of incorporation or organization)

Eteläesplanadi 2
FI-00130 Helsinki
Finland(Address of principal executive offices)

Securities
registered pursuant to Section 12(b) of the Act:

|                                                                                                       |  |                                                                         
|------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------
|Title of each class:
Ordinary shares, with no nominal value, represented by American Depositary Shares |  | Name of each exchange on which registered:
New York Stock Exchange, Inc.

Securities
registered pursuant to Section 12(g) of the Act:

None

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

None

Number of ordinary shares outstanding on December 31, 2006:

523,259,430

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

Yes ý    No o

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

Yes o    No ý

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

Yes ý    No o

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

Large accelerated filer ý        Accelerated filer
o        Non-accelerated filer o

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

Item 17 o    Item 18 ý

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

Yes o    No ý



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TABLE OF CONTENTS

|                                |          |    |                                                                         | Page
|------------------------------- | -------- | -- | ----------------------------------------------------------------------- | ----
|INTRODUCTION                    |          | iv
|FINANCIAL AND OTHER INFORMATION |          | iv
|U.S. DOLLAR PRESENTATION        |          | v 
|FORWARD-LOOKING STATEMENTS      |          | v 
|GLOSSARY                        |          | vi
|PART I                          |          | 1 
|                                | Item 1.  |    | Identity of Directors, Senior Management and Advisors                   |     
|                                | Item 2.  |    | Offer Statistics and Expected Timetable                                 |     
|                                | Item 3.  |    | Key Information                                                         |     
|                                |          |    | Selected Financial Data                                                 |     
|                                |          |    | Dividends                                                               |     
|                                |          |    | Exchange Rates                                                          |     
|                                |          |    | Risk Factors                                                            |     
|                                | Item 4.  |    | Information on the Company                                              |     
|                                |          |    | Organization                                                            |     
|                                |          |    | Development of the Company                                              |     
|                                |          |    | Strategy                                                                |     
|                                |          |    | Business Overview                                                       |     
|                                |          |    | Paper Divisions                                                         |     
|                                |          |    | Converting Division                                                     |     
|                                |          |    | Wood Products Division                                                  |     
|                                |          |    | Other Operations                                                        |     
|                                |          |    | Associated Companies and Joint Ventures                                 |     
|                                |          |    | Fiber Supply                                                            |     
|                                |          |    | Energy                                                                  |     
|                                |          |    | Wood Procurement                                                        |     
|                                |          |    | Marketing                                                               |     
|                                |          |    | Seasonality of UPM's Business                                           |     
|                                |          |    | Dependence on Patents and Industrial, Commercial or Financial Contracts |     
|                                |          |    | Environmental and Regulatory Matters                                    |     
|                                |          |    | Organizational Structure                                                |     
|                                |          |    | Property, Plants and Equipment                                          |     
|                                | Item 4A. |    | Unresolved Staff Comments                                               |     
|                                | Item 5.  |    | Operating and Financial Review and Prospects                            |     
|                                |          |    | General                                                                 |     
|                                |          |    | Overview                                                                |     
|                                |          |    | Trends in Our Business                                                  |     
|                                |          |    | Application of Critical Accounting Policies                             |     
|                                |          |    | Sensitivity Analysis                                                    |     
|                                |          |    |                                                                         |     

i

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| |          |  | Cost Structure                                                |  | 45 
| | -------- |  | ------------------------------------------------------------- |  | ---
| |          |  | Recent Developments                                           |  | 45 
| |          |  | Currency Fluctuations                                         |  | 47 
| |          |  | Finnish Corporate Tax Rate                                    |  | 47 
| |          |  | Changes in International Financial Reporting Standards (IFRS) |  | 47 
| |          |  | New U.S. GAAP Pronouncements                                  |  | 49 
| |          |  | Results of Operations                                         |  | 50 
| |          |  | Liquidity and Capital Resources                               |  | 61 
| |          |  | Off-Balance Sheet Arrangements                                |  | 63 
| |          |  | Contractual Obligations and Other Commitments                 |  | 63 
| |          |  | Research and Development                                      |  | 63 
| |          |  | Capital Expenditures                                          |  | 65 
| |          |  | Inflation                                                     |  | 66 
| | Item 6.  |  | Directors, Senior Management and Employees                    |  | 66 
| |          |  | Board of Directors                                            |  | 67 
| |          |  | Executive Team                                                |  | 70 
| |          |  | Compensation of Directors and Officers                        |  | 74 
| |          |  | Board Practices                                               |  | 76 
| |          |  | Home Country Practices                                        |  | 78 
| |          |  | Employees                                                     |  | 79 
| |          |  | Share Ownership                                               |  | 81 
| | Item 7.  |  | Major Shareholders and Related Party Transactions             |  | 82 
| |          |  | Major Shareholders                                            |  | 82 
| |          |  | Related Party Transactions                                    |  | 83 
| | Item 8.  |  | Financial Information                                         |  | 84 
| |          |  | Consolidated Financial Statements                             |  | 84 
| |          |  | Other Financial Information                                   |  | 84 
| |          |  | Significant Changes                                           |  | 86 
| | Item 9.  |  | The Offer and Listing                                         |  | 87 
| |          |  | Nature of Trading Markets                                     |  | 87 
| |          |  | Trading and Settlement on the Helsinki Stock Exchange         |  | 88 
| |          |  | Regulation of the Finnish Securities Market                   |  | 89 
| |          |  | The Finnish Book-Entry Securities System                      |  | 90 
| | Item 10. |  | Additional Information                                        |  | 91 
| |          |  | Memorandum and Articles of Association                        |  | 91 
| |          |  | Material Contracts                                            |  | 94 
| |          |  | Exchange Controls                                             |  | 94 
| |          |  | Taxation                                                      |  | 94 
| |          |  | Documents on Display                                          |  | 100
| | Item 11. |  | Quantitative and Qualitative Disclosures about Market Risk    |  | 101
| |          |  |                                                               | 

ii

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|         |           |     | Market-sensitive Instruments and Financial Risk Management                   |  | 101
|-------- | --------- | --- | ---------------------------------------------------------------------------- |  | ---
|         | Item 12.  |     | Description of Securities Other than Equity Securities                       |  | 102
|PART II  |           | 103
|         | Item 13.  |     | Defaults, Dividend Arrearages and Delinquencies                              |  | 103
|         | Item 14.  |     | Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 103
|         | Item 15.  |     | Controls and Procedures                                                      |  | 103
|         | Item 16.  |     | [Reserved]                                                                   |  | 103
|         | Item 16A. |     | Audit Committee Financial Expert                                             |  | 103
|         | Item 16B. |     | Code of Ethics                                                               |  | 104
|         | Item 16C. |     | Principal Accountant Fees and Services                                       |  | 104
|         | Item 16D. |     | Exemptions from the Listing Standards for Audit Committee                    |  | 105
|         | Item 16E. |     | Purchases of Equity Securities by the Issuer and Affiliated Purchases        |  | 105
|PART III |           | 106
|         | Item 17.  |     | Financial Statements                                                         |  | 106
|         | Item 18.  |     | Financial Statements                                                         |  | 106
|         | Item 19.  |     | Exhibits                                                                     |  | 106

iii

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INTRODUCTION

In this annual report, "UPM," the "Company," the "Group," "we," "us" and "our" refer to UPM-Kymmene Corporation or UPM-Kymmene Corporation
and its consolidated subsidiaries, as the context may require. We are incorporated as a stock corporation organized under the laws of the Republic of Finland.

FINANCIAL AND OTHER INFORMATION

We produce our financial statements in accordance with International Financial Reporting Standards, as adopted by the European Union ("IFRS"), which vary in
certain respects from U.S. generally accepted accounting principles ("U.S. GAAP"). Reconciliation of certain amounts to U.S. GAAP is set forth in Note 40 of the notes to the consolidated
financial statements included elsewhere in this annual report.

Our
IFRS accounts, audited in accordance with Finnish Standards on Auditing for statutory purposes, were approved by our Board of Directors on February 1, 2007 and will be
presented for approval by our shareholders in the annual general meeting of the shareholders scheduled to be held on March 27, 2007.

Except
as otherwise indicated, information regarding sale for each of our divisions, as presented herein, include inter-divisional sales.

Certain
financial terms and indicators used throughout this annual report on Form 20-F are calculated by the Company as follows:



References
in this annual report to "European Union countries" are to the following 25 member states of the European Union (the "EU"): Austria, Belgium, Cyprus, Czech Republic, Denmark,
Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the United Kingdom,
and, as from January 1, 2007, also to Bulgaria and Romania. However, for any financial or statistical information for periods prior to May 1, 2004 references to "European Union
countries" are to the following 15 EU member states that comprised the European Union prior to such date: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, Spain, Sweden and the United Kingdom. References in this annual report to "North America" are to Canada and the United States.

We
have derived certain information contained in this annual report concerning European demand and prices for printing papers from reports prepared by Confederation of European Paper
Industries Print ("CEPIPRINT") and Confederation of European Paper Industries Fine ("CEPIFINE"). Beginning from 2004, the data reported by these organizations for the European market has included the
25 European Union countries as from May 1, 2004, together with an additional group of 26 European countries, which comprise mainly Eastern European countries and autonomous states. Prior to
2004, the data reported by CEPIPRINT and CEPIFINE for the European market focused solely on a group of Western European countries, which was more limited in scope than the current reporting market.
Neither organization has made available information for the revised definition of the European market for periods prior to 2004. Accordingly, the European demand and pricing information for the year
2004 and onwards provided in this annual report refers to the revised definition of the European market and for periods prior to 2004 to the previous definition of Western Europe.

All
references herein to tons are to metric tons, which are equal to 1,000 kilograms.

iv

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U.S. DOLLAR PRESENTATION

We have published our consolidated financial statements in euro for periods beginning on or after January 1, 1999. References to "Euro," "euro" or
"€" are to the common currency of the European Union's Economic and Monetary Union or EMU.

Solely
for the reader's convenience, this annual report presents translations of certain euro amounts into U.S. dollars ("U.S. dollars," "U.S.$" or "$") at the noon buying rate in New
York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") of €1.00 = U.S.$1.3197
(U.S.$1.00 = €0.7577) in effect on December 29, 2006, the last trading day in that year. On March 9, 2007, the rate was €1.00 = U.S.$1.3118
(U.S.$1.00 = €0.7623). You should not consider these translations as representations that the euro amounts actually represent such U.S. dollar amounts or could be converted into
U.S. dollars at the rate indicated or at any other rate. For historical information concerning the euro to dollar exchange rate from January 1, 2002 to a recent date see "Item 3. Key
InformationExchange Rates."

FORWARD-LOOKING STATEMENTS

Certain statements in this annual report, including but not limited to certain statements set forth under the captions "Item 3. Key Information," "Item 4.
Information on the Company," "Item 5. Operating and Financial Review and Prospects," "Item 8. Financial Information" and "Item 11. Quantitative and Qualitative Disclosures about Market Risk," are
based upon the beliefs of management as well as assumptions made by and information currently available to management and such statements may constitute "forward-looking statements" within the meaning
of the U.S. Private Securities Litigation Reform Act of 1995. Potential investors should note that many factors, some of which are discussed elsewhere in this annual report, could affect our future
operations and future financial results and could cause future operations and future financial results to differ materially from those expressed in such forward-looking statements. Such factors
include, among others: (i) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein, continued success of product development,
acceptance of new products or services by our targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes
in the degree of protection created by our patents and other intellectual property rights, the availability of capital on acceptable terms, (ii) industry conditions, such as strength of product
demand, intensity of competition, prevailing and future global market prices for our products and the pricing pressures thereto, financial condition of our customers and competitors, the potential
introduction of competing products and technologies by the competitors and (iii) general economic conditions, such as rates of economic growth in our principal geographic markets or
fluctuations in exchange and interest rates and various other factors, including those described in "Item 3. Key InformationRisk Factors" and elsewhere in this annual report and in other
filings that we make with the U.S. Securities and Exchange Commission (the "Commission"). Should one or more of these factors materialize, or should any assumptions of our management underlying such
forward-looking statements prove to be incorrect, our actual financial condition or results of
operations and prospects could differ materially from those described herein as anticipated, believed, estimated or expected. We do not intend or assume any obligation to update our forward-looking
statements. Any forward-looking statement speaks only as of the date on which it is made.

v

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GLOSSARY

The following explanations are not intended as technical definitions, but to assist the general reader to understand certain terms as used in this annual report.

|Coated fine paper |     | Also known as coated woodfree paper. Coated fine paper is used for demanding printing applications. The amount of coating and gloss of the paper is determined by the end-use. Top quality coated fine papers are called art
printing papers and due to excellent printability are used for art books, brochures, annual reports and other similar purposes. Other papers, with a lighter coating, are used for brochures, books, magazines, catalogues and other similar
purposes.
|----------------- | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Coated paper      |     | Paper which has been coated on one or both sides with a mix of clay or carbonates and latex to create a high-quality printing surface.                                                                                                                                                                                                                                                                                                                                             
|                  | LWC |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                  | MWC |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                  | MFC |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Deinking          |     | The process of obtaining recycled fiber, which can be used for papermaking by removing the ink and other non-fibrous components from recovered paper, by washing or flotation combined with chemical treatment.                                                                                                                                                                                                                                                                    
|Face papers       |     | Paper on which the label is printed in pressure-sensitive labelstock.                                                                                                                                                                                                                                                                                                                                                                                                              
|Fiber             |     | The basic structural unit of paper. Fibers used in papermaking originate mainly from the stem of softwood and hardwood trees.                                                                                                                                                                                                                                                                                                                                                      
|Fine paper        |     | Also known as free sheet or woodfree paper. Fine paper generally contains chemical pulp, with no more than 10% of mechanical pulp, and its filler content varies between five and 25%. Fine paper is generally highly regarded for its strength,
brightness and good archiving characteristics. Fine paper may be coated or uncoated. Fine papers are used as office papers, such as photocopying and laser printing, as well as for publications such as annual reports.          
|                  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

vi

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|Gravure printing               |  | A process of printing that uses a thin, quick-drying ink applied from a cylindrical surface having an etched (recessed) design. Rotogravure printing is the opposite of letterpress printing, since the design areas are recessed into the plate instead
of being in relief.                                                                  
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Kraft paper                    |  | High-strength packaging paper made of softwood pulp, which has the longest fibers. Kraft paper is used primarily in carrier bags, pouches and wrappings.                                                                                                                                                                                      
|Label paper                    |  | Face and base papers suitable for pressure-sensitive labels. Face papers have distinct printing properties and base papers have siliconizing and tear-off properties.                                                                                                                                                                         
|Magazine paper                 |  | Paper used in magazines, catalogues, brochures, direct mail advertising and similar printed material.                                                                                                                                                                                                                                         
|MFS                            |  | Also known as improved newsprint. Uncoated, machine-calendered speciality paper, containing mechanical pulp and recycled fiber as raw material. MFS is suitable for newspaper inserts, newspapers, magazines, books and directories.                                                                                                          
|MG paper                       |  | Machine-glazed paper. Paper made smooth and glossy on one side by drying on a heated, polished metal cylinder, which forms part of the drying section of the machine.                                                                                                                                                                         
|Newsprint                      |  | Uncoated paper manufactured mainly from mechanical pulp or recycled paper and used for newspapers and directories. Newsprint has low basis weight and is mainly used for printing newspapers, but it is also used for printing magazines and advertising
publications, which do not require high-quality printing and good color reproduction.
|Non-impact printing            |  | A method of printing involving electrophotographic and ink jet printing. In this method, the printing element does not make contact with the paper.                                                                                                                                                                                           
|PM                             |  | PM, or paper machine, is a term used when referring to individual paper manufacturing units within a paper mill.                                                                                                                                                                                                                              
|Pressure-sensitive label stock |  | Face and base materials laminated together for manufacturers of price and product labels, as well as labels used in automatic data processing. Pressure-sensitive label stock is also known as self-adhesive label stock.                                                                                                                     
|Printing paper                 |  | Papers used in the graphic industry and for photocopying. Printing papers may be coated or uncoated magazine paper, newsprint and fine paper.                                                                                                                                                                                                 
|Publication papers             |  | Papers used in publications such as newspapers, catalogues, magazines and advertising materials.                                                                                                                                                                                                                                              
|                               |  |                                                                                                                                                                                                                                                                                                                                               

vii

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|Pulp                               |                 | Generic name for wood or plant based fiber masses used as raw material in papermaking.                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------- | --------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                   | Chemical pulp   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                   | Mechanical pulp |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                   | Softwood pulp   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|RFID                               |                 | RFID, or radio-frequency identification, is a technology that incorporates the use of radio waves to uniquely identify an object. A typical RFID system consists of a tag, a reader and a host system.                                                                                                                                                                                                                                                                                   
|Recovered paper                    |                 | Paper and board recovered for secondary use.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Recycled fiber                     |                 | Fiber extracted from recovered paper.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Release paper                      |                 | In pressure-sensitive labelstock, the back page of a label that is removed and discarded.                                                                                                                                                                                                                                                                                                                                                                                                
|SC                                 |                 | Supercalendered paper. Supercalendered paper is manufactured from mechanical and chemical pulp with mineral pigments as filler. This paper is used for printing magazines, especially multi-color magazines with large circulations. Traditional SC paper
is made for gravure printing, but other SC paper grades have also been developed to suit offset printing. SC-A paper grade is the standard SC paper grade. SC-B paper grade contains more recycled fiber than SC-A paper grade.
|Siliconized paper                  |                 | Papers siliconized from one side to form the tear-off part of speciality tapes for hygiene products, labels and industrial applications.                                                                                                                                                                                                                                                                                                                                                 
|Uncoated fine paper                |                 | Also known as uncoated woodfree paper, this paper is principally used for printing and writing. It includes A4 paper used for photocopying and business form paper used as continuous stationery for computer printouts. Uncoated fine paper, when
pigmented or surface sized, is used for conversion into envelopes and labels. Machine glazed woodfree paper is used for wrapping and for paper bags.                                                                                  
|Woodfree, free sheet or fine paper |                 | See "Fine paper" above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

viii

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PART I

Item 1.    Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2.    Offer Statistics and Expected Timetable

Not applicable.

Item 3.    Key Information

Selected Financial Data

The following table presents selected consolidated financial data as of and for each of the five years ended December 31, 2006, under IFRS and under U.S.
GAAP. The selected consolidated financial data presented below are derived from our audited consolidated financial statements for these periods and should be read in conjunction with these financial
statements and the related notes thereto. Our audited consolidated financial statements as of December 31, 2006 and 2005 and for each of the three years ended December 31, 2006 and the
related notes are included elsewhere in this annual report.

We
have published our consolidated financial statements in euro for periods beginning on or after January 1, 1999. Solely for your convenience, we have included in the following
table U.S. dollar amounts for the year ended December 31, 2006 which we have obtained by converting amounts in euro at the rate of €1.00 = U.S.$1.3197 (U.S.$1.00 =
€0.7577), the Noon Buying Rate for the euro in effect on December 29, 2006, the last trading day in that year. On March 9, 2007, the Noon Buying Rate for the euro was
€1.00 = U.S.$1.3118 (U.S.$1.00 = €0.7623).

Our
consolidated financial statements are prepared in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. Reconciliation of the amounts to U.S. GAAP is
set forth in Note 40 of the notes to the consolidated financial statements included elsewhere in this annual report and should be read in conjunction with such financial statements, including
the notes thereto.

|                                      |  | As of and for the year ended December 31,(1) | 
|------------------------------------- |  | -------------------------------------------- | 
|
|
|
|INCOME STATEMENT DATA                 |  |                                              | 
|Amounts in accordance with IFRS       |  |                                              | 
|Sales                                 |  | 13,226                                       | 
|Operating profit                      |  | 707                                          | 
|Profit before tax                     |  | 484                                          | 
|Net income                            |  | 446                                          | 
|Amounts in accordance with U.S. GAAP  |  |                                              | 
|Net income from continuing operations |  | 560                                          | 
|Net income                            |  | 560                                          | 
|                                      |  |                                              | 

1

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|BALANCE SHEET DATA                                    |  |         |   |         |   |         |   |         |   |         |   |         |  
|----------------------------------------------------- |  | ------- | - | ------- | - | ------- | - | ------- | - | ------- | - | ------- | -
|Amounts in accordance with IFRS                       |  |         |   |         |   |         |   |         |   |         |   |         |  
|Total assets                                          |  | 19,095  |   | 14,469  |   | 15,541  |   | 15,877  |   | 16,591  |   | 17,624  |  
|Current liabilities                                   |  | 3,180   |   | 2,410   |   | 2,348   |   | 2,249   |   | 2,240   |   | 2,283   |  
|Non-current liabilities                               |  | 6,295   |   | 4,770   |   | 5,845   |   | 5,966   |   | 7,322   |   | 8,104   |  
|Minority interest                                     |  | 24      |   | 18      |   | 21      |   | 26      |   | 32      |   | 33      |  
|Share capital                                         |  | 1,175   |   | 890     |   | 890     |   | 891     |   | 890     |   | 442     |  
|Equity attributable to equity holders of the parent   |  | 9,596   |   | 7,271   |   | 7,327   |   | 7,636   |   | 6,997   |   | 7,204   |  
|Amounts in accordance with U.S. GAAP                  |  |         |   |         |   |         |   |         |   |         |   |         |  
|Total assets                                          |  | 19,295  |   | 14,621  |   | 15,770  |   | 15,959  |   | 16,853  |   | 17,594  |  
|Current liabilities                                   |  | 3,180   |   | 2,410   |   | 2,348   |   | 2,247   |   | 2,391   |   | 2,209   |  
|Non-current liabilities                               |  | 6,653   |   | 5,041   |   | 6,160   |   | 6,210   |   | 7,192   |   | 8,024   |  
|Minority interest                                     |  | 24      |   | 18      |   | 21      |   | 26      |   | 32      |   | 33      |  
|Share capital                                         |  | 1,175   |   | 890     |   | 890     |   | 891     |   | 890     |   | 442     |  
|Shareholders' equity                                  |  | 9,438   |   | 7,152   |   | 7,241   |   | 7,476   |   | 7,238   |   | 7,328   |  
|OTHER DATA                                            |  |         |   |         |   |         |   |         |   |         |   |         |  
|Amounts in accordance with IFRS                       |  |         |   |         |   |         |   |         |   |         |   |         |  
|Net cash provided by operating activities             |  | 1,603   |   | 1,215   |   | 853     |   | 997     |   | 1,258   |   | 1,418   |  
|Net cash used in investing activities                 |  | (414    | ) | (314    | ) | (158    | ) | (446    | ) | (373    | ) | (441    | )
|Net cash used in financing activities                 |  | (1,255  | ) | (951    | ) | (588    | ) | (710    | ) | (964    | ) | (1,032  | )
|Capital expenditures                                  |  | 922     |   | 699     |   | 749     |   | 686     |   | 720     |   | 620     |  
|Earnings per share                                    |  | 0.86    |   | 0.65    |   | 0.41    |   | 1.85    |   | 0.60    |   | 0.96    |  
|Diluted earnings per share                            |  | 0.86    |   | 0.65    |   | 0.41    |   | 1.84    |   | 0.60    |   | 0.96    |  
|Dividends per share(2)                                |  | 0.98    |   | 0.75    |   | 0.75    |   | 0.75    |   | 0.75    |   | 0.75    |  
|Amounts in accordance with U.S. GAAP                  |  |         |   |         |   |         |   |         |   |         |   |         |  
|Basic earnings per share                              |  | 1.07    |   | 0.81    |   | 0.33    |   | 1.10    |   | 0.90    |   | 1.21    |  
|Basic earnings from continuing operations per share   |  | 1.07    |   | 0.81    |   | 0.29    |   | 0.86    |   | 0.76    |   | 1.15    |  
|Diluted earnings per share                            |  | 1.07    |   | 0.81    |   | 0.33    |   | 1.09    |   | 0.90    |   | 1.20    |  
|Diluted earnings from continuing operations per share |  | 1.07    |   | 0.81    |   | 0.29    |   | 0.85    |   | 0.76    |   | 1.14    |  
|Weighted average number of shares                     |  |         |   |         |   |         |   |         |   |         |   |         |  
|Basic number of shares (1,000's)                      |  | 523,220 |   | 523,220 |   | 522,029 |   | 523,641 |   | 523,130 |   | 518,935 |  
|Diluted number of shares (1,000's)                    |  | 526,041 |   | 526,041 |   | 523,652 |   | 526,247 |   | 524,254 |   | 525,782 |  

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Dividends

Our current dividend policy is to declare and pay dividends based upon, and in relation to, profits, with a dividend averaging over one-third of the
profits for the financial year as our target dividend pay-out ratio. The aim is to provide shareholders with a steady, growing annual dividend. The timing and amount

2

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of
future dividend payments, if any, will depend on our future earnings, financial condition (including our capital requirements), future earnings prospects and other factors deemed relevant by our
Board of Directors.

The
following table sets forth the dividends per share paid in respect of the five most recent financial years and their corresponding U.S. dollar values:

|     |  | €    |  | U.S.$(1)
|---- |  | ---- |  | --------
|2002 |  | 0.75 |  | 0.82    
|2003 |  | 0.75 |  | 0.90    
|2004 |  | 0.75 |  | 0.97    
|2005 |  | 0.75 |  | 0.90    
|2006 |  | 0.75 |  | 0.98    

---

Under the Finnish Companies Act and general corporate practice, dividends on the shares of a Finnish company are generally only paid annually
after shareholder approval of both the company's results and the amount of the dividend proposed by its board of directors. In accordance with the Finnish Companies Act, payment of dividends may also
be based on audited financial statements for a period subsequent to the previous financial year, provided these financial statements and the payment of such dividends have been approved by the general
meeting of shareholders. Accordingly, our payment of each annual or any other dividend in respect of our shares will require the approval of the holders of a majority of votes carried by the shares
represented at the general meeting of shareholders. Under Finnish law, the amount of any dividend is limited to the Company's distributable funds, on a non-consolidated basis, available
according to the Company's latest audited financial statements approved by the general meeting of shareholders. Any distribution of funds is prohibited if it is known or it should be known at the time
of making such decision that the company is insolvent or such distribution would cause the company to become insolvent. As of December 31, 2006, the Company's distributable funds were
€3,325 million (U.S.$4,388 million).

Dividends
paid to holders of the shares (in the form of shares and American depositary shares, or ADSs), who are non-residents of Finland, will generally be subject to
Finnish withholding tax at a rate of 28%. Such shareholders may, however, be subject to a lower withholding tax rate where there is a double taxation treaty with Finland that contains appropriate
provisions. The current convention between the Government of the United States of America and the Government of the Republic of Finland for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income and on Capital limits the Finnish withholding tax on dividends to 15%. See "Item 10. Additional InformationTaxationFinnish
Taxation."

Exchange Rates

The first table below sets forth, for the periods and dates indicated, the average, high, low and period-end Noon Buying Rates for the euro expressed
in euro per U.S. dollar. The second table below sets forth, for the dates indicated, the average, high, low and period-end Noon Buying Rates for the U.S. dollar expressed in U.S. dollars
per euro. The average rates set forth in both tables below are the average of the Noon Buying Rates on the last business day of each month during the relevant period. We make no representation that
euro could have been converted into U.S. dollars at the rates indicated or at any other rate for such periods or at such dates.

The
following table sets forth information concerning the Noon Buying Rates expressed in euro per U.S. dollar for the periods and dates indicated.

3

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Euro per U.S. Dollar

|                       |  | Average |  | High   |  | Low    |  | Period-End
|---------------------- |  | ------- |  | ------ |  | ------ |  | ----------
|Year                   |  |         |  |        |  |        |  |           
|2002                   |  | 1.0532  |  | 1.1636 |  | 0.9537 |  | 0.9537    
|2003                   |  | 0.8763  |  | 0.9652 |  | 0.7938 |  | 0.7938    
|2004                   |  | 0.8014  |  | 0.8474 |  | 0.7339 |  | 0.7387    
|2005                   |  | 0.8065  |  | 0.8571 |  | 0.7421 |  | 0.8445    
|2006                   |  | 0.7898  |  | 0.8432 |  | 0.7504 |  | 0.7577    
|2007 (through March 9) |  | 0.7625  |  | 0.7750 |  | 0.7549 |  | 0.7623    

|                        |  | High   |  | Low   
|----------------------- |  | ------ |  | ------
|2006                    |  |        |  |       
|September               |  | 0.7906 |  | 0.7792
|October                 |  | 0.7999 |  | 0.7829
|November                |  | 0.7871 |  | 0.7541
|December                |  | 0.7649 |  | 0.7504
|2007                    |  |        |  |       
|January                 |  | 0.7750 |  | 0.7527
|February                |  | 0.7732 |  | 0.7549
|March (through March 9) |  | 0.7637 |  | 0.7623

The
following table sets forth information concerning the Noon Buying Rates expressed in U.S. dollars per euro for the periods and dates indicated.

U.S. Dollars per Euro

|                       |  | Average |  | High   |  | Low    |  | Period-End
|---------------------- |  | ------- |  | ------ |  | ------ |  | ----------
|Year                   |  |         |  |        |  |        |  |           
|2002                   |  | 0.9495  |  | 1.0485 |  | 0.8594 |  | 1.0485    
|2003                   |  | 1.1411  |  | 1.2597 |  | 1.0361 |  | 1.2597    
|2004                   |  | 1.2478  |  | 1.3625 |  | 1.1801 |  | 1.3538    
|2005                   |  | 1.2400  |  | 1.3476 |  | 1.1667 |  | 1.1842    
|2006                   |  | 1.2661  |  | 1.3327 |  | 1.1860 |  | 1.3197    
|2007 (through March 9) |  | 1.3115  |  | 1.3246 |  | 1.2904 |  | 1.3118    

|                        |  | High   |  | Low   
|----------------------- |  | ------ |  | ------
|2006                    |  |        |  |       
|September               |  | 1.2833 |  | 1.2648
|October                 |  | 1.2773 |  | 1.2502
|November                |  | 1.3261 |  | 1.2705
|December                |  | 1.3327 |  | 1.3073
|2007                    |  |        |  |       
|January                 |  | 1.3286 |  | 1.2904
|February                |  | 1.3246 |  | 1.2933
|March (through March 9) |  | 1.3118 |  | 1.3094

Our
shares trade on the Helsinki Stock Exchange and our ADSs trade on the New York Stock Exchange. Fluctuations in the exchange rate between the euro and the U.S. dollar
will affect the U.S. dollar equivalent of the euro quotation of the shares on the Helsinki Stock Exchange and, as a result, are likely to affect the market price of the ADSs on the New York Stock
Exchange. We declare any cash dividends in euro and exchange rate fluctuations will affect the U.S. dollar amounts received on conversion of cash dividends on the shares represented by ADSs.

4

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For a discussion of the effects of exchange rate movements on our operations and our risk management policies, see "Item 5. Operating and Financial Review and
ProspectsCurrency Fluctuations" and "Item 11. Quantitative and Qualitative Disclosures about Market RiskForeign Currency Exposure."

Risk Factors

Set forth below is a description of certain factors that may affect our results of operations or financial condition or investments in our shares or ADSs from
time to time. The risks have been classified as (i) strategic risks, (ii) operational risks, (iii) financial risks and (iv) hazard risks.

(i)    Strategic risks

We face significant competition from multinational and local competitors, who may offer our customers competing products with more attractive prices.

The paper and forest products markets in which we operate are highly competitive. We have, from time to time, experienced price pressures from competitors in our
main business areas and geographic markets and we have experienced particularly large fluctuations in operating margins due to this competitive environment. We principally compete with a number of
large multinational paper and forest products companies as well as with numerous regional or more specialized competitors. There can be no assurance that we will have sufficient financial resources to
respond to these competitive pressures and to continue to make investments in our manufacturing facilities or in product development at the same level as in previous years. A failure to do so could
have a material adverse impact on our competitive position.

Shifts in consumer preferences, including the trend toward a greater use of computers and electronic media, can materially affect the demand for our
products and our financial results.

Over the last several decades, consumer expectations with respect to paper used for such items as books, catalogues, magazines, newspapers, advertising and direct
mail literature, packaging and label materials and other similar uses have become both more demanding and more diverse as advances in technology have allowed paper manufacturers to produce a greater
variety and higher quality of paper at a lower cost. The trend towards a greater use of computers and electronic media may have an effect on consumption patterns for paper in the future. In addition,
as consumers have become more environmentally conscious, consumer preferences have also shifted towards paper products, which contain a proportion of recycled fiber. Our ability to continue to meet
the shifting demands of consumers in the paper market depends upon a variety of factors, including our ability to foresee and/or identify changes in consumer preferences, the technical capabilities of
our manufacturing facilities, the speed of, and the costs associated with, the shifting of production at such facilities and the success of our various research and development programs. There can be
no assurance that we will be able to successfully adapt to future changes in consumer demands or that such changes will not have a material adverse impact on our business, financial condition or
results of operations.

Our competitiveness may be negatively affected to the extent we are unable to enter into successful mergers and acquisitions or to integrate and manage
acquired operations.

The paper and forest products industry has in the past experienced and may continue to experience further consolidation, driven, in part, by a desire to achieve
economies of scale and synergies. We may seek growth through acquisitions or mergers to stay competitive or to enter into new areas of operation. Such acquisitions may not be available to us, or may
not be available at the times or on terms acceptable to us. In addition, the mergers and acquisitions which we might enter into or make could involve certain risks, including those concerning our
ability to successfully integrate and manage acquired operations and personnel, as well as to successfully achieve the economies of scale or synergies sought. The integration of

5

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acquired
businesses may also lead to a possible deterioration of our financial condition, a loss of key employees of the acquired companies or a diversion of management attention away from other
ongoing business concerns. If valuation premises in the case of a merger or acquisition prove to be incorrect, for example, in the case of demand and product pricing, we may be required to record
material impairment charges in future periods.

We cannot be certain that our existing product and geographical diversification will ensure adequate returns in the future.

We seek to generate profits through managing a balanced product portfolio and maintaining a diversified geographical presence. Although we believe that our
current product portfolio and geographic diversification is rather appropriately balanced, changes in consumer behavior may affect demand for our main products in our major markets and there can be no
assurance that our current product portfolio and geographical diversification will be best-suited for successful business operations and ensure adequate returns in the future.

Although our customer base is numerous and diverse, the loss of one or a group of major customers could have an adverse impact on our business.

We sell a significant portion of our products to several major customers, including certain significant printing houses and merchant distributors, which resell
our products. Although we are not dependent on any specific customer or group of customers, the loss of one or more of our major customers, if not replaced on similar terms, could have a material
adverse effect on our business, financial condition or results of operations. Our ten largest customers accounted for approximately 15% of our sales in 2006 and our largest customer accounted for
approximately 3%. In addition, each of our divisions and business units have major customers that, although not necessarily material to our Group as a whole, are important to the operations of such
divisions and business units.

We are subject to significant environmental regulations.

We are subject to various environmental laws and regulations in the jurisdictions in which we operate, governing, among other things, wood procurement, use of
recycled material and different forms of production discharges and emissions. We have made substantial investments in environmental management covering areas such as wood procurement, use of recycled
material, emissions into air, water discharges and use of energy. We are currently not involved in any major legal proceedings concerning environmental matters that could reasonably be expected to
have a material adverse impact on our business, financial condition or results of operations, nor is management aware of any claims or potential liability concerning environmental matters that could
reasonably be expected to have a material adverse impact on our business, financial condition or results of operations. However, the risk of substantial environmental costs and liabilities is inherent
in industrial operations, including the paper and forest products industry, and there can be no assurance that significant costs and liabilities will not be incurred in the future or that the adoption
of increasingly strict environmental laws, regulations and enforcement policies could not result in substantially increased costs and liabilities in the future.

Our operations in emerging market countries where we operate could be adversely affected by unexpected political, economic or legal developments.

We have manufacturing operations in certain emerging market countries, including, among other such countries, China and Russia. The political, economic and legal
systems in these countries may be less predictable than in countries with more established and sustained institutional structures. Political or economic upheaval and changes in laws may have a
material adverse effect on our operations in these countries and, in turn, the amount of income from, and the value of, the investments we have made in relation to our operations in such countries.
Our investment or procurement activities in these countries

6

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may
also be subject to other risks and uncertainties, such as unfavorable taxation treatment, exchange controls, inflation, currency fluctuations and nationalization. Emerging markets represented
approximately 16% of our sales of €10.0 billion in 2006.

(ii)   Operational risks

Our financial performance is influenced by the cyclicality of the markets and pricing fluctuations for paper and forest products.

The markets for paper and forest products are cyclical, being characterized by periods of imbalance between supply and demand. The general economic conditions of
the major economic regions are the primary determinants of the demand for paper and forest products, as demand and consumption generally correlate with overall economic activity. Prices of paper and
forest products can fluctuate significantly when supply and demand become imbalanced. These demand-supply imbalances may also be caused by inventory build-up and reduction and not
necessarily by changes in end-consumption. During periods of weaker economic growth, the capacity build-up can cause oversupply in the market and lower prices. Similarly,
strong economic growth in main market areas can lead to paper shortages and result in significant price increases. In particular, the price of pulp, which is a raw material used by some of our
divisions and is also produced by us, has fluctuated significantly, while our principal product groups have experienced somewhat lesser price fluctuations. In addition, many of our products are sold
in markets with established regional or world market prices, which fluctuate as a result of supply and demand imbalances. There can be no assurance that current price levels for our products will be
maintained, that any additional price increases will be achieved or that the industry will not add new capacity, thereby potentially causing an imbalance between supply and demand.

We rely on third-party suppliers for significant amounts of our raw materials. Disruptions in our supply chain and fluctuations in the prices of these
materials could materially affect our business.

In 2006, we relied on third-party suppliers for more than 85% of our wood requirements and approximately 30% of our electric power needs. Other production inputs,
such as chemicals, fillers and recovered paper are solely purchased from third-party suppliers. In the event of a significant interruption or limitation in the supply of these production inputs from
our current suppliers, we would seek to obtain them from other sources. However, there can be no assurance that we would be able to do so without an adverse impact on our manufacturing operations,
such as an interruption or downscaling of production or change in the product mix, or increased costs. This could, in turn, have a material adverse effect on our business, financial condition or
results of operations.

Our ability to implement our strategies depends on our ability to recruit and retain skilled employees.

To meet the challenges of sustained growth and improving the efficiency of our operations, we must continue to recruit and retain skilled employees. We are
continuously evaluating our recruiting, compensation and career development policies and taking measures to attract and retain skilled personnel. However, there can be no assurance that we will not
encounter shortages of sufficient numbers of appropriately skilled personnel in the future. Such shortages could have a negative effect on our business operations.

We cannot be certain that our internal control measures will ensure that we implement and maintain adequate controls over our financial reporting
processes.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent and detect fraud. If we cannot provide reliable
financial reports or prevent fraud, our financial results could be negatively affected. Inadequate internal controls could also cause investors to lose

7

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confidence
in our reported financial information, which could have a negative effect on the market price of our shares and other securities.

We and certain of our subsidiaries are the subjects of investigation by antitrust authorities in various parts of the world, and named as defendants in
civil litigation in the United States concerning allegedly anti-competitive conduct.

In 2003, UPM directed its outside counsel to conduct an internal investigation of UPM's and its subsidiaries' compliance with competition laws in the United
States and other jurisdictions where the companies conduct business. Following this internal investigation, UPM decided to approach competition law authorities in the European Union, the United States
and Canada, and, subsequently, in certain other countries, to disclose any conduct that did not comport with applicable competition laws, and to strengthen its competition law compliance programs. UPM
has created an EU Competition Law Compliance Manual and has initiated a comprehensive competition law training program for all its employees.

The
competition authorities have continued their investigations into alleged antitrust activities with respect to various products of UPM. The U.S. Department of Justice, the relevant
authorities of the European Union and the authorities in several of its member states, Canada and certain other countries, have informed UPM that it has received conditional full immunity with respect
to certain conduct disclosed to the authorities.

During
2006, the investigations of the U.S. labelstock industry and European fine paper, newsprint, magazine paper, label paper and self-adhesive labelstock markets were
closed by the U.S. Department of Justice and the European Commission competition authority. In addition, in December 2006, the Finnish Competition Authority decided not to propose a fine to us
in connection with its investigation of raw wood procurement in Finland.

UPM
and its subsidiary, UPM Raflatac Inc., along with certain labelstock manufacturers, have been named as defendants in a number of class-action lawsuits filed in U.S. District
Courts by the Company's customers and in state courts by customers of the Company's customers. These lawsuits allege that the defendants violated federal and/or state antitrust laws by conspiring with
one another to fix the prices of and allocate the markets for labelstock products. The complaints seek treble or punitive damages for alleged overcharges resulting from the purported conspiracy.

UPM
and its subsidiary, UPM-Kymmene, Inc., have also been named as a defendant in class-action lawsuits making similar allegations against manufacturers of magazine
papers. These complaints, like the labelstock complaints, seek treble or punitive damages for alleged overcharges resulting from the purported conspiracy.

In
an unrelated development, on May 3, 2004, UPM received a Statement of Objection from the European Commission concerning alleged anti-competitive activities in the
market for plastic industrial sacks. UPM manufactured plastic industrial sacks until December 2000, when the business was sold. In November 2005, the European Commission imposed on UPM a
fine of
€56.55 million concerning antitrust activities in the market for plastic industrial sacks. UPM has paid the fine but has appealed the decision.

In
the aggregate, these matters may implicate or result in substantial adverse publicity, penalties and damages. It is possible that any ultimate liability could be material to UPM's
financial position, results of operations and cash flow. At this time, however, and in light of our cooperation with the authorities, and due to the considerable uncertainties associated with these
matters, it is not possible for us to estimate any potential liability. We will continue to consider the need to establish loss provisions in light of future developments.

8

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(iii) Financial risks

Our exposure to fluctuations in exchange rates and interest rates can have a significant effect on our financial results.

As a consequence of the global nature of our business, we are exposed to risks associated with changes in exchange rates, which may have an adverse effect on our
business, financial condition or results of operations. Currency risk exposure primarily affects our export operations to the extent our sales are denominated in currencies other than those in which
manufacturing costs are incurred (e.g., non-euro denominated sales by our operations based in the EU member states participating in the EMU or U.S. dollar-denominated sales by our Canadian
operations). In general, the introduction of the euro has reduced our exposure to such currency risk. Nevertheless, a significant portion of our sales are denominated in currencies (consisting
primarily of the U.S. dollar and the British pound sterling) other than the euro.

In
addition, our reported earnings may be affected by fluctuations between the euro and the non-euro currencies in which our various foreign subsidiaries report their results
of operations when such results of operations are translated back into euro. To manage exposure to such exchange rate fluctuations, we closely monitor our exposure to currency risks and seek to hedge
such risks using certain financial instruments, including forward foreign exchange agreements and currency swaps. There can be no assurance, however, that currency exchange rate fluctuations between
the euro and other currencies, such as the U.S. dollar or the British pound sterling, will not have a material adverse effect on our business, financial condition or results of operations in the
future. Further, changes in interest rates may have a considerable impact on the values of our assets (biological assets
for example), which are valued on a discounted cash flow model. See "Item 5. Sensitivity Analysis" and "Item 11. Quantitative and Qualitative Disclosures about Market Risk."

Adverse economic conditions in the markets we serve may increase the likelihood of payment defaults by our customers and adversely affect our financial
condition or results of operations.

We face the risk of nonpayment or nonperformance by our customers in connection with the sale of our products. In particular continued weakness in the general
economic environment may result in increased defaults by customers and increased losses. We have various programs in place to monitor and mitigate customer credit risk and we have insurance policies
covering most of our trade receivables.

(iv)  Hazard risks

Although we maintain extensive insurance coverage for our operations, various events, such as natural catastrophes or sabotage, could adversely affect
our financial condition or results of operations.

We operate a significant number of manufacturing facilities all over the world, most of which we own. We are also the largest private owner of forestland in
Finland. We currently have in place a program consisting of a number of different insurance policies that cover property damage and losses due to the interruption of any of our businesses, subject to
applicable terms and conditions of our insurance policies. Management believes that this coverage is adequate to cover risks resulting from possible damage to our property or the interruption of any
of our business operations. However, there can be no assurance that our insurance program would be sufficient to cover potential catastrophes, such as war, terrorism or natural disasters.

Item 4.    Information on the Company

Organization

UPM-Kymmene Corporation is a stock corporation organized under the laws of the Republic of Finland. Our registered office is located at
Eteläesplanadi 2, FIN-00101 Helsinki, Finland, telephone

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+358-204-15111.
Our agent for U.S. federal securities law purposes is: UPM-Kymmene, Inc., attn: President, located at 999 Oakmont Plaza Drive, Suite 200,
Westmont, Illinois, 60559, telephone +1-630-850-4997.

Development of the Company

On April 30, 1996, UPM-Kymmene Corporation was incorporated in the Republic of Finland as a result of the merger of two companies, Kymmene
Corporation ("Kymmene") and Repola Ltd ("Repola"), which were also incorporated in Finland. Prior to the merger, United Paper Mills Ltd ("United Paper Mills") had been a paper and forest
products subsidiary of Repola.

Kymmene's
origins date back to 1872. Kymmene made its first international acquisition in 1932. In the 1960s and 1970s, Kymmene expanded its operations into Germany through the
construction of a new fine paper mill, Nordland Papier GmbH, and into France through the acquisition of a French paper producer Papeteries Boucher S.A.. In 1986, Kymmene merged with Oy Kaukas Ab of
Finland and from that time was able to use the pulp producing capacity of Oy Kaukas Ab to enhance Kymmene's vertical integration in the forest products industry. In 1987, Kymmene built a new
light-weight coated paper mill in Irvine, Scotland, establishing Caledonian Paper plc ("Caledonian"). In 1988, Kymmene acquired Oy Wilh. Schauman Ab, a major producer of pulp, panels, packaging
materials and sawn goods in Finland. In 1990, Kymmene enhanced its position in the European paper market with the acquisition of the French newsprint producer Chapelle Darblay S.A. ("Chapelle
Darblay").

The
predecessor companies of Repola were founded in the late nineteenth century. In 1920, the ownership of three paper mills was consolidated to form United Paper Mills. During the
decades that followed, United Paper Mills expanded its operations, reaching new markets throughout Europe. In the 1980s, United Paper Mills acquired the Stracel S.A. ("Stracel") pulp mill in
Strasbourg, France, built a greenfield paper mill in Shotton, Wales, and constructed a newsprint plant at Stracel's mill site. In 1989 Kajaani Oy's paper mill in Finland was consolidated into the
group. In 1990, United Paper Mills merged with the forest products and engineering group Rauma-Repola Oy to form the international forest products and engineering group Repola. All engineering
operations of the merged companies were combined to form Rauma Corporation and their forest industry operations were combined within United Paper Mills. Both Rauma Corporation and United Paper Mills
were then established as wholly-
owned subsidiaries of Repola. In May 1997, Rauma Corporation became an affiliated company following a share sale and dividend payment in the form of Rauma Corporation's shares, as part of our
strategy to focus on forest industry operations. In 1999, Rauma Corporation merged with Valmet Corporation, a Finnish engineering company, to form Metso Corporation ("Metso"), giving us a shareholding
of approximately 15% in the new company. In March 2005, we sold our remaining shareholding of 14.6% in Metso for net proceeds of €282 million thereby completing our exit
from the engineering business.

As
part of our strategy to expand in areas where we are, or have the capacity to be, an industry leader, we acquired, in October 1997, Blandin Paper Company ("Blandin") in the
United States and, in October, 2000, Repap Enterprises, Inc. ("Repap") in Canada, which made us one of the three largest suppliers of magazine paper in North America. Subsequent to the
acquisition, Repap's main operating subsidiary, Repap New Brunswick Inc., changed its name to UPM-Kymmene Miramichi Inc. ("Miramichi"). In March 1998, we acquired a
49% interest in a paper mill project at Changshu near Shanghai in China. In August 2000, we acquired the remaining 51% of the Changshu mill, providing us with a significant presence in fine
paper manufacturing in China, a presence which was further strengthened by the commissioning of a new fine paper machine at this mill in mid-2005. In November 2001, we completed the
largest acquisition of our company history, when we purchased four of the six paper mills of the German G. Haindl'sche Papierfabriken KGaA ("Haindl") for a total enterprise value of
€2,690 million. This acquisition added 1.9 million tons of competitive annual publication paper capacity and strengthened our position as the leading magazine paper
producer in the world and as one of the leading producers of newsprint in Europe. Since the formation of the Company, the aim has been to further focus on chosen

10

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core
paper converting and wood products businesses. Hence, selected divestments have also taken place, including the divestments of the Simpele paperboard mill in Finland and Joutseno pulp mill in
Finland in 1997.

We
have pursued a strategy of expanding and focusing our core business operations in the Converting Division through various investments and divestments. The division's investments have
primarily focused on expanding the pressure-sensitive labelstock business and increasing production of radio-frequency identification ("RFID") smart labels. Our subsidiary UPM Raflatac Inc. has
grown by opening a pressure-sensitive labelstock factory in North Carolina in the fall of 2001 and by expanding this factory in 2005. Furthermore, Raflatac started up a new factory in China at the
beginning of 2007 and is constructing a state-of-the-art factory in Dixon, Illinois, scheduled for a first quarter 2008 start-up. Loparex Group
("Loparex"), our siliconizing unit formerly called Lohjan Paperi, was divested in August 2005 for €230 million and our Walki Films business, which produced packaging and
industrial wrappings, was divested already in 2002. In addition, in February 2007, we entered into an agreement for the divestment of Walki Wisa. See "Item 5. Operating and Financial Review and
ProspectsRecent DevelopmentsRecent Acquisitions and Divestments" and "Item 8. Financial InformationOther Financial InformationLegal Proceedings."

Also,
in the Wood Products Division, we have taken steps to strengthen our position through acquisitions, investments and restructuring. Our recent investments in this division have been
focused in Russia, primarily to establish low-cost plywood and sawn timber operations and to improve our wood fiber raw material sourcing to Finland. In 2004, to better align the structure
of the Wood Products Division, we also divested the wood-based building supplies businesses of Brooks Group ("Brooks") and Anco Træ. This realignment process was completed in
2006, when we divested our remaining wood-based building supplies business, which included Puukeskus Oy and its subsidiaries ("Puukeskus"). See "Item 5. Operating and Financial Review and
ProspectsRecent DevelopmentsRecent Acquisitions and Divestments."

In
March 2006, we announced an extensive restructuring program intended to reduce our workforce by approximately 3,600 employees during 2006-2008 as a result of a
closure of 795,000 tons of paper production capacity, of which 120,000 tons would be converted from magazine to speciality papers. See "Item 5. Operating and Financial Review and
ProspectsRecent DevelopmentsRestructuring Activities."

Strategy

UPM's business focus is on printing papers, selected speciality papers, converted products and wood products. Our goals are to be one of the leading paper
companies in the world and to achieve profitable growth in a socially and ecologically sustainable way.

Our
financial objective is to be more profitable than our main competitors. We also seek to maintain a strong financial position intended to secure our long-term development
and to make effective use of capital markets. Our dividend policy is to distribute on average more than one-third of our profits for the financial year. Many factors, including the
development of our operations, industry conditions and general economic conditions, could affect our future operations, future financial results and future dividend payments, and there can be no
assurance that we will achieve or maintain compliance with the financial objectives stated above.

We
aim to be one of the market leaders in our chosen business areas. As part of the implementation of our strategy, we review acquisition opportunities arising, in particular, in product
areas and markets where we are, or have the capacity to become, a leading manufacturer. In recent years, we have undertaken a number of acquisitions in Europe, North America and Asia and we may,
should suitable opportunities arise, engage in additional acquisitions in the future. In connection with such acquisitions, we may use either cash, shares or convertible bonds or a combination of
cash, shares and convertible bonds as

11

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consideration
for the assets or entity being acquired. In addition to reviewing acquisition opportunities, we are continuously looking into possibilities for investing in organic growth and invest
actively in maintaining and improving our current production assets to be among the most competitive companies in the industry. In our traditional markets, especially in Europe, our investments are
focused on securing the competitive position of our facilities. Potential areas for organic growth are Asia, South America and Russia, either because of their vast market potential or as a competitive
production platform.

Our
strategy is built on the following key strengths:

Global activities.We have production plants in 15 countries, with principal facilities located in
Finland, Germany, France, the United Kingdom, Austria, the United States, Canada and China.

Long-term customer relations.We enjoy close and lasting relations with both local and
multinational customers. We seek to enhance these relationships through continuous improvement of our operations and long-term commitment to our customers. To ensure customer satisfaction,
we aim to offer a competitive and comprehensive product portfolio, customer-oriented product development and a high standard of service.

Skilled personnel.We believe that one of our key competitive advantages over our competitors is our
skilled and motivated employees. Professional expertise is promoted through job rotation and continuous in-service training.

Effective production facilities.Our production facilities rank with the world's best in terms of
production capacity and competitiveness. A high level of technical expertise forms the basis for cost leadership and quality output.

Comprehensive logistics network.We operate a global and highly efficient logistics network. We make
a high proportion of shipments by sea, which as a low-cost transportation method ensures
competitive deliveries. We also utilize modern information technology-based logistics chain management systems.

Clear business focus and market shares.We have focused our activities by investing in our core
business areas and by divesting non-core assets and activities. In all of our main product areas, we are among the leading manufacturers in our most important markets. To maintain and
achieve leading market positions, we expect to grow both organically and through acquisitions.

High level of vertical integration.Our activities are based on close integration of raw materials,
energy and production. We enjoy a high degree of self-sufficiency in chemical pulp and electric power. Wood raw material supplies are partly secured by our own forests. In our production
of pulp, paper and wood products, we make proper and efficient use of our wood raw material. Our Converting Division is based, to a significant extent, on raw material supplied by our own paper mills
as well as on in-house specialized know-how.

Business Overview

We are one of the world's leading papermakers with an annual paper production capacity of approximately 12.2 million tons. Our core businesses are the
production, sales and marketing of magazine papers, newsprint and fine and speciality papers. Paper operations are supplemented by converted and wood products. The main markets for our products are
the European Union countries and North America, which accounted for some 66% and 12% of our sales in 2006, respectively. In 2006, our total sales were €10.0 billion
(U.S.$13.2 billion) and, at December 31, 2006, our total assets amounted to €14.5 billion (U.S.$19.1 billion).

12

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Magazines and newspapers, sales catalogues, direct mailings, copying, computer printouts, other business communication areas and converting are the primary uses for our paper products.
We are the world's leading manufacturer of magazine papers and one of the largest manufacturers of newsprint in Europe, as well as one of the largest producers of fine papers in Europe and Asia. In
selected speciality papers, we hold leading positions either globally or in Europe. We are also among the leading manufacturers either globally or in Europe in our converting businesses, including in
the area of pressure-sensitive labelstock. We are the largest producer of plywood in Europe and the fourth largest producer of sawn timber. Today, we have production facilities in 15 countries, with
principal facilities located in Finland, Germany, the United Kingdom, France, Austria, the United States, Canada and China.

Our
operations are organized into the following three core business areas:



In
addition to our core business areas, activities outside our three core business areas are reported under Other Operations, which consists of our forestry departments and energy
department in Finland, our 47% interest in the chemical pulp company Oy Metsä-Botnia Ab ("Metsä-Botnia"), our 42,19% interest in the energy company Pohjolan Voima Oy
("Pohjolan Voima"), our Corporate Ventures business unit, our real estate units in Finland, our logistics services and the central administrative functions for our Group.

The
following tables set forth the percentages of our sales of €10.0 billion, €9.3 billion and €9.8 billion in 2006,
2005 and 2004, respectively, by division and by geographic market:

|                           |  | Year ended December 31, |  
|-------------------------- |  | ----------------------- | -
|
|
|Division                   |  |                         |  
|Magazine papers            |  | 32                      | %
|Newsprint                  |  | 14                      |  
|Fine and speciality papers |  | 24                      |  
|Converting                 |  | 12                      |  
|Wood products              |  | 13                      |  
|Other operations(2)        |  | 5                       |  
|                           |  |                         |  
|Total                      |  | 100                     | %
|                           |  |                         |  

---

13

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|                               |                                | Year ended December 31, |   
|------------------------------ | ------------------------------ | ----------------------- | --
|
|
|Market area                    |                                |                         |   
|European Union countries:      |                                |                         |   
|                               | Germany                        |                         | 16
|                               | United Kingdom                 |                         | 12
|                               | Finland                        |                         | 9 
|                               | France                         |                         | 7 
|                               | Other European Union countries |                         | 22
|                               |                                |                         |   
|Total European Union countries |                                | 66                      |   
|Other European countries       |                                | 7                       |   
|North America                  |                                | 13                      |   
|Asia                           |                                | 10                      |   
|Other countries(1)             |                                | 4                       |   
|                               |                                |                         |   
|Total                          |                                | 100                     | % 
|                               |                                |                         |   

---

Paper Divisions

We manufacture a comprehensive range of paper grades to be used by our publisher, printer, retailer, paper converter and other end-use customers. Both
our products and customer service are constantly being developed. Our papers are produced from a renewable fiber raw material base,
including various wood species and recycled fiber, which represents more than a quarter of our fiber raw material requirement. We have paper mills in Finland, Germany, the United Kingdom, France,
Austria, the United States, Canada and China. Our papermaking capacity is approximately 12.2 million tons per year.

Our
Magazine Papers Division produces coated and uncoated magazine papers to be used in magazines, newspaper supplements, printed advertising material and sales catalogues. Close to
two-thirds of this magazine paper was supplied to buyers in Europe in 2006. The next most important market is the United States. With an annual capacity of approximately 5.2 million
tons, we are the world's largest manufacturer of magazine paper. Our market share was approximately one-fifth of the global market for magazine paper in 2006.

Our
Newsprint Division manufactures standard and speciality newsprint for publishers and printers, as well as for other uses such as telephone directories and mail order catalogues. The
paper production capacity of the Newsprint Division is approximately 2.8 million tons. Approximately 90% of the newsprint is sold on the markets of Europe, where we had a market share of
somewhat less than one-fifth in 2006.

Our
Fine and Speciality Papers Division supplies fine paper products mainly to paper merchants, office supplies wholesalers, printers, publishers and converters. Uses for fine paper
include copying and non-impact printing, direct mail advertising, special interest magazines and high-quality printed products. The range includes both coated and uncoated fine
papers. The main markets for our fine papers are in Europe and in Asia, particularly the growing Chinese market. We are a leading supplier of fine papers in Europe with a market share of more than
one-tenth. In wood fibre based fine paper, we are among the market leaders in Asia. Our speciality papers comprise face and release papers for pressure-sensitive labels, white and brown
sack and kraft papers. We are the world's largest producer of label papers and one of Europe's biggest suppliers of packaging papers. Our fine paper production capacity is approximately
3.3 million tons and speciality paper capacity approximately 0.8 million tons.

14

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The
following table sets forth the paper divisions' 2006 sales by division and by geographic market:

|                  |  | Magazine
Papers |  | Percent |   | Newsprint |  | Percent |   | Fine and
Speciality
Papers |  | Percent |  
|----------------- |  | --------------- |  | ------- | - | --------- |  | ------- | - | -------------------------- |  | ------- | -
|
|Europe            |  | 2,187           |  | 65      | % | 1,290     |  | 90      | % | 1,696                      |  | 66      | %
|North America     |  | 770             |  | 23      |   | 50        |  | 3       |   | 141                        |  | 6       |  
|Rest of the world |  | 397             |  | 12      |   | 96        |  | 7       |   | 723                        |  | 28      |  
|                  |  |                 |  |         |   |           |  |         |   |                            |  |         |  
|Total             |  | 3,354           |  | 100     | % | 1,436     |  | 100     | % | 2,560                      |  | 100     | %
|                  |  |                 |  |         |   |           |  |         |   |                            |  |         |  

The following table sets forth the annual capacity and industry market position of the main products produced by our paper divisions as of
December 31, 2006:

|                       |  | Capacity |  | European
position |  | Global
position |    
|---------------------- |  | -------- |  | ----------------- |  | --------------- | ---
|
|Magazine papers        |  | 5,240    |  | 1                 |  | 1               |    
|Newsprint              |  | 2,830    |  | 2                 |  | 5               |    
|Fine paper             |  | 3,310    |  | 3                 |  | 5               |    
|                       |  |          |  |                   |  |                 |    
|Printing papers, total |  | 11,380   |  |                  |  |                |    
|Label papers           |  | 290      |  | 1                 |  | 1               |    
|Packaging papers       |  | 510      |  | 3                 |  |                |    
|                       |  |          |  |                   |  |                 |    
|Papers, total          |  | 12,180   |  | 2                 |  | 3               | (1)
|                       |  |          |  |                   |  |                 |    

---

Source: UPM, Jaakko Pöyry. Capacities following the conversion of
Jämsänkoski PM 4 from magazine to label papers in the first quarter of 2007 and closure of Tervasaari PM 7 in the second quarter of 2007. For
a discussion of possible changes to the annual capacity of our paper divisions, see "Item 4. Information on the CompanyDevelopment of the Company."

Magazine Papers Division

The Magazine Papers Division accounted for approximately 32% of our 2006 sales, making it our largest business division.

As
of December 31, 2006, we were the world's largest producer of magazine paper, with an annual capacity of approximately 5.2 million tons, representing approximately 20%
of the global magazine paper capacity.

The
largest market for our Magazine Papers Division is Europe, where our market share of demand was slightly over 25% in 2006. Our main market outside of Europe is the United States,
where our market share of demand was approximately 15% in 2006. Production of the division's papers is almost exclusively based on firm orders we receive. In this way, we avoid the need to maintain
large inventories.

15

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The
following table sets forth certain financial and statistical data regarding the Magazine Papers Division for the three most recent years:

|                                     |  | Year ended December 31, |  
|------------------------------------ |  | ----------------------- | -
|
|
|Magazine papers                      |  |                         |  
|Sales                                |  | 3,354                   |  
|Operating profit/loss(1)             |  | (56                     | )
|Capital employed (average)           |  | 4,010                   |  
|ROCE (%)                             |  | (1.4                    | )
|Capital expenditure and acquisitions |  | 155                     |  
|Personnel at December 31             |  | 6,869                   |  
|Deliveries (tons in 000's)           |  | 4,761                   |  

---

The Magazine Papers Division includes our magazine paper machines and the Kaukas pulp mill.

Typically,
magazine papers have high mechanical pulp content. However, certain of our mills in Central Europe also produce magazine paper, mainly supercalendered ("SC") paper grade B,
but also grades SC-A and LWC, with recycled fiber content. Altogether, our magazine paper division used approximately 0.6 million tons of waste paper in 2006. Magazine papers are
generally used in magazines, newspaper supplements, catalogues and direct mailings. This division has a comprehensive product range, offering a wide variety of papers for specific printing purposes.
We manufacture both coated and uncoated papers. Coated magazine papers, such as light-weight coated ("LWC"), medium-weight coated ("MWC") and machine-finished coated ("MFC") paper, are mainly used in
the manufacture of high-quality, multi-coated printed products including magazines, catalogues, brochures, direct mail advertising and other advertising materials. Uncoated papers, such as
SC paper, are mainly used for magazines, weekend newspaper supplements, catalogues and flyers. Magazine paper is sold mainly to multinational and national printers, publishers and media and mail order
companies. Sales contracts with customers of our Magazine Paper Division generally have three-month, six-month or 12-month terms, with majority of the contracts in Europe
having a term of six months or more, but in other markets the terms of the Magazine Paper Division's contracts are generally shorter.

The
Magazine Papers Division produces magazine paper on 20 machines at 12 mills in Finland, Germany, the United Kingdom, Austria, France, the United States and Canada. In Finland, the
division's products are manufactured at five paper mills located in Jämsänkoski, Kaipola, Kajaani, Lappeenranta and Rauma. The division's seven other magazine
paper-producing mills are: Augsburg and Schongau in Germany; Caledonian in Irvine, Scotland; Steyrermühl in Austria; Stracel in Strasbourg, France; Blandin in Grand Rapids, Minnesota,
and Miramichi in New Brunswick, Canada. We currently have 12 paper machines producing LWC paper, MWC paper and MFC paper with total annual capacity of approximately 3.4 million tons and eight
paper machines producing SC paper with total annual capacity of approximately 1.9 million tons. For a discussion of changes to the annual capacity of our paper divisions, see "Item 5. Operating
and Financial Review and ProspectsRecent DevelopmentsRestructuring Activities."

16

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In
June 2006, the Voikkaa mill in Finland, including two coated magazine paper machines and production capacity of 410,000 tons, was permanently shut down. These paper machines
had poor competitiveness and weak profitability, while contributing to the overcapacity in the market, and hence came to the end of their useful lives. The paper machine 4 at
Jämsänkoski ceased the production of LWC at the beginning of 2007, as it was converted to the production of label papers.

Also
in 2006, we completed the rebuilds of Kaipola paper machine 6 and Schongau paper machine 9. Such modernizations take place periodically to ensure the competitiveness and the quality
of production.

Like
all sectors of the paper industry, the market for magazine papers is highly competitive. Although quality considerations are a factor, the market is affected mostly by price. We
compete with various companies in Europe in the manufacture of magazine papers, including Stora Enso Oyj ("Stora Enso"), Myllykoski Oyj ("Myllykoski"), Norske Skogindustrier ASA ("Norske Skog"),
M-real Oyj ("M-real"), Cartiere Burgo spa ("Cartiere Burgo") and Svenska Cellulosa Aktiebolaget (publ.) ("SCA"). In North America, our principal competitors are Stora Enso,
Verso Paper Holdings, Bowater Inc., Abitibi-Consolidated Inc. and Kruger Inc.

Newsprint Division

The Newsprint Division accounted for approximately 14% of our 2006 sales. The division has approximately 2.8 million tons of annual newsprint production
capacity, and our market share was somewhat over 15% in Europe in 2006. As of December 31, 2006, we were the second largest manufacturer of newsprint in Europe and the fifth largest in the
world. The mills of this division also produce paper for certain other products, including improved newsprint grades, the so-called machine finished specialities ("MFS"), for use in
telephone and other directories and mail order catalogs. MFS grades account for approximately one-fourth of the divisions' total output.

The
following table sets forth certain financial and statistical data regarding the Newsprint Division for the three most recent years:

|                                     |  | Year ended December 31, | 
|------------------------------------ |  | ----------------------- | 
|
|
|Newsprint                            |  |                         | 
|Sales                                |  | 1,436                   | 
|Operating profit/loss(1)             |  | 148                     | 
|Capital employed (average)           |  | 1,921                   | 
|ROCE (%)                             |  | 7.7                     | 
|Capital expenditure and acquisitions |  | 145                     | 
|Personnel (at December 31)           |  | 3,204                   | 
|Deliveries (tons in 000's)           |  | 2,677                   | 

---

The Newsprint Division includes our newsprint machines.

Production
of our newsprint is based almost exclusively on firm orders received. In this way, we avoid the necessity of maintaining large inventories. Newsprint is primarily sold to a
number of large publishers in Europe. Typically, these publishers have had a long-term relationship with us lasting a number of years or, in some cases, decades. We negotiate supply
contracts with most of such publishers annually, but sales

17

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outside
Europe, accounting for approximately 10% of the total in 2006, are mostly based on short-term contracts.

Our
Newsprint Division produces newsprint on 12 machines with a total annual capacity of approximately 2.8 million tons at seven mills in Finland, Germany, the United Kingdom,
France and Austria. In Finland, this division's products are manufactured at two paper mills located in Kaipola and Kajaani. The division's five other mills are located in Schongau and Schwedt,
Germany; Shotton, Wales; Grand-Couronne, France; and Steyrermühl, Austria.

The
Kaipola, Schongau, Schwedt, Shotton, Grand Couronne and Steyrermühl mills each have their own deinking plants, which together processed approximately
2.3 million tons of waste paper in 2006. The recycled fiber content in our newsprint production was approximately 70% in 2006. Investments to further increase recycled usage are carried out on
a regular basis. We also invest in increasing energy self-sufficiency and use of biofuels in newsprint production through investments in power boilers, most recently at Shotton and
Grand-Couronne. Furthermore, rebuilds of paper machinery to improve efficiency and quality took place at Schongau and Kaipola during 2006.

Like
all sectors of the paper industry, the market for newsprint is highly competitive and is affected mostly by price, although quality considerations are also a factor. In Europe, we
compete with such manufacturers as Stora Enso, Norske Skog, Holmen AB, Myllykoski and SCA. In addition, the aggregate annual exports of newsprint by Canadian producers to Europe amounted to
approximately 4% of the European standard newsprint market in 2006 and such producers compete with us. The share of Russian producers exporting newsprint to Western Europe also accounted for
approximately 4% of the European market in 2006. Export volumes from these two regions have been rather steady in recent years, as capacity closures have taken place in Canada and Russian newsprint
has been in good demand domestically and in other markets.

Fine and Speciality Papers Division

The Fine and Speciality Papers Division accounted for approximately 24% of our 2006 sales. Besides coated fine paper and uncoated fine paper, including envelope
papers, the division includes speciality papers, which are comprised of label and packaging papers. As of December 31, 2006, our fine paper business, with a production capacity of approximately
3.3 million tons per year, had the third-leading market position in Europe and the fifth in the world. Of the total fine paper capacity, 1.7 million tons per year has been allocated to
uncoated papers and 1.6 million tons to coated papers. Our European market share of demand in coated and uncoated fine paper has in recent years been quite stable ranging between 11% and 13%.
In China, our capacity of 850,000 tons per year gives us a number two position in that wood-pulp based fine paper market. For a discussion of changes to the annual capacity of our paper
divisions, see "Item 5. Operating and Financial Review and ProspectsRecent DevelopmentsRestructuring Activities."

18

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The
following table sets forth certain financial and statistical data regarding the Fine and Speciality Papers Division for the three most recent years:

|                                     |  | Year ended December 31,
|------------------------------------ |  | -----------------------
|
|
|Fine and Speciality Papers           |  |                        
|Sales                                |  | 2,560                  
|Operating profit(1)                  |  | 108                    
|Capital employed (average)           |  | 2,760                  
|ROCE (%)                             |  | 3.9                    
|Capital expenditure and acquisitions |  | 189                    
|Personnel (at December 31)           |  | 6,283                  
|Deliveries (tons in 000's)           |  | 3,550                  

---

The Fine and Speciality Papers Division includes our fine and speciality paper machines as well as the Kuusankoski, Pietarsaari and Tervasaari
pulp mills.

The
most important raw material used in the production of both coated and uncoated fine paper is chemical pulp, with its content representing up to approximately 70% of fiber furnish. We
supply most of the pulp internally from our own or associated pulp mills. all located in Finland. Fine papers are used for copying, non-impact printing, facsimile, direct mail advertising,
brochures and special interest magazines.

Our
fine paper operations produce a range of products on ten paper machines and related coaters. The products are produced by four of our mills: Nordland Papier AG ("Nordland") in
Dörpen, Germany; Kymi in Kuusankoski, Finland; UPM-Kymmene (Changshu) Paper Industry Co., Ltd. in Changshu, China, and UPM-Kymmene France S.A.S., in
Docelles, France. In mid 2005, we commissioned a new paper machine at Changshu with a capacity of 450,000 tons per year, which has since then been increased further by 10,000 tons. The mill's capacity
for coated fine paper was raised at the same time with the aim of coated grades representing a quarter of the production in the short-term. Total cost for the investment was approximately
€390 million. In 2006, we rebuilt paper machine 3 at Nordland and paper machine 1 at Docelles with a combined cost of €108 million. These rebuilds were
carried out in order to increase production, improve efficiency and increase the quality of output. The capacities and locations of the division's mills allow deliveries to be made at short notice in
the local markets based on specific orders.

The
principal customers for the division's fine paper products are paper merchants, office supplies wholesalers, printers and paper converters. Because the division's fine paper products
are primarily sold to merchants and wholesalers, the division's sales and operating profit depend primarily on underlying market balance and pricing, but also on the tendency of merchants to maintain,
increase or reduce inventories of fine paper products that are dependent upon the relevant industry cycle. Therefore, most of the sales are based on short-term contracts. As in the
magazine papers and newsprint divisions, fine papers are produced in response to firm orders received. As a result, there is generally no need to maintain inventories beyond what is needed to satisfy
the delivery timetables of our customers.

The
market for fine paper in Europe is highly competitive. Our major competitors in Europe include M-real, Stora Enso, Sappi Limited, Portucel Soporcel Group, International
Paper and Cartiere Burgo and Mondi. In China, our competitors include Asia Pulp and Paper, Shandong Chenming Paper Holdings Ltd. and Stora Enso, and, in other Asian markets where we export fine
papers, we compete with various local producers.

19

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As
of December 31, 2006, production capacity for the division's speciality papers at six paper machines totaled approximately 800,000 tons per year.

We
are the largest supplier of label papers to the pressure-sensitive labelstock business in the world with a market share of approximately 20% in 2006. The label papers unit produces
face and release papers utilizing four paper machines in Finland with a total capacity of approximately 510,000 tons per year, following the completion of the rebuild of
Jämsänkoski paper machine 4 in early 2007. The packaging papers unit produces white and brown kraft papers with a total production capacity of approximately 290,000 tons
per year predominantly for the European market, where our overall market share was slightly less than 20% in 2006. Kraft papers are produced in Finland on two machines. The kraft paper capacity
excludes the sack paper machine 6 at our Tervasaari mill, with a total production capacity of approximately 115,000 tons per year, that will be permanently closed down as part of the profit
improvement program in the first half of 2007.

Converting Division

The Converting Division accounted for approximately 12% of our 2006 sales. Our Converting Division manufactures pressure-sensitive labelstock and RFID smart
labels and industrial wrappings. We were the second largest producer of pressure-sensitive labelstock in the world and in Europe as of December 31, 2006 and one of the leading players in the
developing RFID tag market. In industrial wrappings, we were the largest producer in Europe. In February 2007, we entered into an agreement for the divestment of Walki Wisa. See "Item 5.
Operating and Financial Review and ProspectsRecent DevelopmentsRecent Acquisitions and Divestments."

The
following table sets forth the industry position of the Converting Division as of December 31, 2006:

|                                             |  | European
position |  | Global
position
|-------------------------------------------- |  | ----------------- |  | ---------------
|Pressure-sensitive labelstock (UPM Raflatac) |  | 2                 |  | 2              
|Industrial wrappings (Walki Wisa)            |  | 1                 |  |               

The following table sets forth certain financial and statistical data regarding the Converting Division for the three most recent years:

|                                     |  | Year ended December 31,
|------------------------------------ |  | -----------------------
|
|
|Converting                           |  |                        
|Sales                                |  | 1,274                  
|Operating profit(1)                  |  | 64                     
|Capital employed (average)           |  | 489                    
|ROCE (%)                             |  | 13.1                   
|Capital expenditure and acquisitions |  | 73                     
|Personnel (at December 31)           |  | 3,560                  

---

20

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The following table sets forth the Converting Division's sales by unit for the three most recent years:

|              |  | Year ended December 31, | 
|------------- |  | ----------------------- | 
|
|
|UPM Raflatac  |  | 987                     | 
|Walki Wisa(1) |  | 287                     | 
|Sold units(2) |  |                        | 
|Internal      |  |                        | 
|              |  |                         | 
|Total         |  | 1,274                   | 
|              |  |                         | 

---

UPM Raflatac, a business unit of our Converting Division, is the second largest producer of pressure-sensitive labelstock in the world with a
market share of nearly 20% in 2006, and has production facilities in four European countries as well as in the United States, Australia, Malaysia, China and South Africa. UPM Raflatac sells its
products to label converters, which produce labels used for production, decoration and identification purposes. UPM Raflatac has had average sales growth of approximately 10% per annum over the last
ten years. Growth is being pursued by investing in new production capacity, with a new coating line having started up in the United States in 2005, a new manufacturing facility being commissioned in
China in early 2007 and a new production facility in the United States being decided for an early 2008 start-up.

UPM
Raflatac has continued to develop RFID products and production processes and the commercialization of these products is under process in a competitive environment. We manufacture
RFID tags at our Jyväskylä mill in Finland, and, in September 2005, we started RFID tag production in Fletcher, North Carolina. We believe that RFID's growth
prospects are favorable in a market which is still in its infancy, although 2006 sales were very modest and operations were loss-making.

Walki
Wisa, a business unit of our Converting Division, produces coated and laminated packaging materials and industrial wrappings in Finland, Germany, the United Kingdom, Sweden and
China. Walki Wisa's products are mainly used in the wrapping of paper, wood and steel products. Our Paper Divisions, for example, are customers of Walki Wisa. Recent activities in Europe in this
rather mature business have been focused on streamlining of operations, in order to mitigate the higher raw material costs and pressure on product pricing. In early 2006, Walki Wisa's converting
factory in China adjacent to the Changshu paper mill began operations. Strong growth in paper and paperboard production in China provides a good platform for increased demand for wrappings. In
February 2007, we entered into an agreement for the divestment of Walki Wisa. See "Item 5. Operating and Financial Review and ProspectsRecent DevelopmentsRecent
Acquisitions and Divestments."

21

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The following table sets forth the Converting Division's 2006 sales by geographic market:

|                         |  | € in millions |  | Percent of
division sales |  
|------------------------ |  | ------------- |  | ------------------------- | -
|Finland                  |  | 62            |  | 5                         | %
|Other European countries |  | 831           |  | 65                        |  
|North America            |  | 256           |  | 20                        |  
|Rest of the world        |  | 125           |  | 10                        |  
|                         |  |               |  |                           |  
|Total                    |  | 1,274         |  | 100                       | %
|                         |  |               |  |                           |  

Our main markets for converted products are the European countries, which together accounted for approximately 70% of our total sales in 2006,
while North America accounted for approximately 20%. Although other markets accounted for only 10% of sales in 2006, significant future growth potential exists in emerging markets especially for UPM
Raflatac. Generally, all converting businesses compete with a number of international and local competitors. The competitive structure, however, is not necessarily as dispersed as in the paper
businesses. In the labelstock business, Avery Dennison is our principal competitor whereas, in industrial wrappings, Mondi Packaging is one of our main competitors. In the area of RFID, we compete
with a limited number of companies, including Avery Dennison.

Wood Products Division

As of December 31, 2006, we were the largest plywood producer in Europe in terms of production capacity and one of the world's leading producers of
high-quality plywoods. We were also Europe's fourth largest supplier of sawn timber. Between 2004 and 2006, we divested our building supplies trading businesses based in Ireland, Denmark
and Finland.

The
following table sets forth the annual capacity and industry position of our Wood Products Division's manufacturing business units as of December 31, 2006:

|              |  | Capacity |  | European
Position
|------------- |  | -------- |  | -----------------
|
|Plywood       |  | 1,100    |  | 1                
|Sawmilling(1) |  | 2,500    |  | 4                

---

22

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The following table sets forth certain financial and statistical data regarding the Wood Products Division for the three most recent years:

|                           |             | Year ended December 31,
|-------------------------- | ----------- | -----------------------
|
|
|Wood Products              |             |                        
|Sales                      |             | 1,321                  
|Operating profit(1)        |             | 144                    
|Capital employed (average) |             | 616                    
|ROCE (%)                   |             | 23.4                   
|Capital expenditure        |             | 39                     
|Personnel (at December 31) |             | 5,577                  
|Production (in 1,000 m3)   |             |                        
|                           | Plywood     |                        
|                           | Sawn timber |                        

---

The Wood Products Division accounted for approximately 13% of our 2006 sales.

The
Wood Products Division is divided into two units: plywood and sawmilling. This division provides an important link in our integrated paper production processes through the use of the
by-products of our sawn timber and plywood production, including waste wood and waste produced in the process of sawing, in the production of pulp and in generating energy at our mills.

The
following table sets forth the Wood Products Division's sales by unit for the three most recent years:

|                         |  | Year ended December 31, |  
|------------------------ |  | ----------------------- | -
|
|
|Plywood                  |  | 578                     |  
|Sawmilling               |  | 529                     |  
|Divested units           |  | 300                     |  
|Internal sales and other |  | (86                     | )
|                         |  |                         |  
|Total                    |  | 1,321                   |  
|                         |  |                         |  

Plywood.The plywood unit, which is responsible for our Wood Products Division's plywood operations in
Finland, France, Estonia and Russia, was Europe's largest plywood manufacturer as of December 31, 2006. The production capacity of plywood unit is approximately 1.1 million cubic meters
per year and it represented slightly less than 20% of European demand in 2006. Our plywood production comprises higher-value-added products, such as special plywoods and veneers, as well as commodity
plywood grades, all using the WISA brand. The main buyers of plywood products are the construction and transport industries, which use plywood in the construction of trailers and truck floors. Vehicle
manufacturers use plywood because it is one of the strongest conventional lightweight materials available, making it possible to increase cargo capacity and reduce fuel consumption. Other uses for
plywood include parquet flooring, scaffolding, concrete forming and shipbuilding, where plywood is used to build, among

23

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other
things, the interiors of liquid natural gas transport tanks due to its ability to withstand extremely low temperatures without contracting. In March 2006, we sold our unprofitable Loulay
plywood mill in France, employing approximately 190 people and generating sales of €28 million in 2005. During the year, we also completed investments at the Chudovo mill in
Russia and the Heinola mill in Finland aimed at increasing our manufacturing capacity. In addition, efficiency and product quality investments were carried out at Savonlinna and
Jyväskylä plywood mills in Finland.

Our
principal competitors in plywood production include Finnforest Corporation ("Finnforest"), various midsize Eastern European producers, such as Latvijas Finieris, and a number of
smaller producers in certain localized markets. With respect to the production of construction grade plywood, our principal competitors include North American and Russian producers, such as Sveza,
which export a substantial portion of their plywood production to Europe.

Sawmilling.As of December 31, 2006, we were Europe's fourth largest producer of sawn timber measured by production
capacity. Our sawmilling unit operates seven sawmills in Finland with a production capacity of approximately 1.8 million cubic meters per year, one mill in Austria with a production capacity of
approximately 350,000 cubic meters per year and one mill in Pestovo, Russia, with a production capacity of 270,000 cubic meters per year. Each cubic meter of sawn timber requires 2.0 to 2.5 cubic
meters of raw wood. The unit also produces joinery products from sawn timber at six locations in Finland, two in France and one in Russia. These joinery factories manufacture products and
semi-finished products for the building industry and interior decorating, as well as wooden components for industrial use. Sawn timber and joinery products also carry the WISA brand. Since
2001, we have transformed most of our sawmills to specialize in a single species of timber to raise production efficiency and improve quality.

In
2004 and 2005, our sawmilling operations were restructured, including a closure of our Aureskoski sawmill in Finland and reduction of production at our Alholma and Kajaani sawmills in
Finland by approximately one-third. To increase competitiveness and production of value-added products, we modernized the Korkeakoski and Kaukas sawmills in Finland as well as improved
operations at Aureskoski and Heinola converting facilities. The improved competitiveness together with better market conditions has clearly contributed to the performance of sawmilling operations.

Our
principal competitors in the sawn timber and joinery sector are suppliers based in the Nordic countries, including Stora Enso, Finnforest, SCA Timber ("SCA Timber"), Iggesund Timber
("Iggesund Timber") and Södra Timber. In addition, the unit faces competition from local producers, particularly in Germany and Austria, as well as from Russian, Ukrainian and other
Eastern European producers, which recently have added new and competitive capacity aimed at serving the European market.

In
2006, 88% of the Wood Products Division's production was sold in the European Union countries, with sales in Finland representing approximately 35% of the division's total sales. The
other main markets were in the United Kingdom, Germany and France.

The
following table sets forth the Wood Products Division's 2006 sales by geographic market:

|                               |  | € in
millions |  | Percent of
business area
sales |  
|------------------------------ |  | ------------- |  | ------------------------------ | -
|Finland                        |  | 457           |  | 35                             | %
|Other European Union countries |  | 660           |  | 50                             |  
|Other European countries       |  | 46            |  | 3                              |  
|North America                  |  | 12            |  | 1                              |  
|Rest of the world              |  | 146           |  | 11                             |  
|                               |  |               |  |                                |  
|Total                          |  | 1,321         |  | 100                            | %
|                               |  |               |  |                                |  

24

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Other Operations

The major business units in our Other Operations are the forestry departments and energy department in Finland and our associated companies, the most important of
which are Metsä-Botnia and Pohjolan Voima. The main purpose of these operations is to secure steady supplies of wood, energy and chemical pulp at competitive prices. Approximately 75%
of the sales of these operations are to other units within the Group.

Other
business units in Other Operations include:



Other
Operations is also responsible for staff functions and shareholdings.

The
following table sets forth certain financial data regarding Other Operations for the three most recent years:

|                                                             |                             | Year ended December 31, |    
|------------------------------------------------------------ | --------------------------- | ----------------------- | ---
|
|
|Other Operations                                             |                             |                         |    
|Sales(1)                                                     |                             | 571                     |    
|Operating profit(2)                                          |                             | 128                     |    
|                                                             | Forestry department         |                         | (19
|                                                             | Energy department (Finland) |                         | 94 
|                                                             | Other                       |                         | 53 
|Personnel (at December 31)                                   |                             | 3,211                   |    
|Associated companies and joint ventures in Other Operations: |                             |                         |    
|Share of results, after tax(3)                               |                             |                         |    
|                                                             | Metsä-Botnia                |                         | 69 
|                                                             | Pohjolan Voima              |                         | (14
|                                                             | Other                       |                         | 6  

---

Our energy and forestry departments are described in "Energy" and "Wood Procurement" below.

25

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Associated Companies and Joint Ventures

Metsä-Botnia

We own 47% of Metsä-Botnia, one of Europe's biggest pulp producers with a capacity of 2.7 million tons per year. The other owners of
Metsä-Botnia are M-real (30%) and Metsäliitto Cooperative ("Metsäliitto") (23%). Metsä-Botnia produces softwood and hardwood
pulps at five mills in Finland and its sales 2006 were €1,311 million. Metsä-Botnia had 1,895 employees as of December 31, 2006. Most of the pulp produced
by Metsä-Botnia is supplied to its shareholders. Through our annual quota of 1.15 million tons per year, Metsä-Botnia has the ability to provide approximately
one-third of our annual chemical pulp requirement. In 2006, we bought 403,000 tons of pulp from Metsä-Botnia. In late 2006, UPM made an offer to buy from M-real
up to 15% of the shares of Metsä-Botnia for €500 million. M-real rejected the offer on January 31, 2007.

During
March 2005, Metsä-Botnia decided to invest U.S.$1.1 billion (€0.8 billion) in a pulp mill in Uruguay with an annual capacity of
approximately one million tons. Production at this mill is expected to begin in the third quarter of 2007. We are participating in this pulp mill project with a direct cash investment of
U.S.$99 million (€75 million). Botnia S.A. manages this pulp mill and its purpose is to provide its investors with low-cost pulp. In March 2006, in
connection with the Uruguayan pulp mill project, we sold our shares in the Uruguayan forestry company Compañia Forestal Oriental S.A. to Metsä-Botnia for
€36 million. We plan to use the low-cost pulp from the Uruguayan pulp mill in our paper operations, especially in our fine paper operations in China. UPM's ownership
percentage in Metsä-Botnia and 12.4% investment in Botnia S.A. is protected through an agreement among UPM, M-real and Metsäliitto that they will not sell any
of their shares in Metsä-Botnia to third parties without first offering
such shares to the other shareholders. The governments of Uruguay and Argentina are engaged in a dispute over the environmental effects of this pulp mill but this dispute is not expected to affect the
progress of this pulp mill. The dispute has been debated at the Hague International Court and at the World Bank, both of which have found no environmental rationale to abandon the support of the
project. The project has proceeded on schedule, but we cannot exclude the possibility of further distractive actions by the Argentinean opposition prior to the planned start-up or
thereafter.

Pohjolan Voima

We have a 42.19% interest in Pohjolan Voima, which generates and procures approximately 20 terawatt hours ("TWh") of electricity and heat annually for its
shareholders, which are mostly Finnish industrial and power companies. The company supplies approximately 35% of our electricity requirement, mostly as hydropower and nuclear power. Nuclear power is
generated by Teollisuuden Voima Oy, which is 57.72% owned by Pohjolan Voima. In 2006, Pohjolan Voima had sales of €775 million and it employed, at year-end, 1,008
people.

In
2003, Teollisuuden Voima decided to build a new nuclear power plant with a capacity of 1,630 megawatts ("MW") in Olkiluoto, Eurajoki, Finland. We have reserved for our use
approximately 470 MW, or 29%, of the power capacity of the new plant via Pohjolan Voima. With our €40 million equity investment in the project made at the end of 2004, we intend
to further secure competitively priced electricity for our mills in Finland. The new Olkiluoto power plant was originally scheduled to be in operation in mid-2009 but, due to the several
delays in key construction phases, the start-up of the plant is now estimated to take place during 2010.

Fiber Supply

Our activities are based on close integration of raw materials, energy and production. The principal resources used in our production are chemical pulp, wood and
energy.

26

---



Pulp
is the major ingredient required in the manufacture of paper. There are three principal types of pulp: chemical pulp, mechanical pulp and recycled fiber pulp. Chemical pulp is
produced by cooking wood chips in solutions of caustic chemicals to separate the cellulose fibers used for pulping. Mechanical pulp is produced by grinding logs or wood chips. Furthermore, recycled
fiber, which is
produced by deinking recovered paper, is used as a source for recycled fiber pulp. Our mechanical and recycled fiber pulp production is fully integrated with our paper production and they together
cover approximately 60% of our total pulp requirement.

We
produce approximately 95% of the chemical pulp supplies necessary for our papermaking operations internally or through our associated company, Metsä-Botnia. The total
production capacity of our five chemical pulp mills is 2.3 million tons per year. As of December 31, 2006, the Kaukas mill had an annual capacity of 740,000 tons, the Wisaforest mill had
an annual capacity of 800,000 tons, the Kymi mill in Finland had an annual capacity of 540,000 tons and the Tervasaari mill in Finland had an annual capacity of 240,000 tons. Our current chemical pulp
entitlement from our 47% interest in Metsä-Botnia totals 1.15 million tons per year.

We
sell most of our chemical pulp, which is considered a commodity, internally at market price. In order to balance chemical pulp production and the specific pulp requirements of our
paper mills, we sell some of the chemical pulp we produce and purchase some other qualities of pulp from other suppliers in the open market. Our consumption of recycled fiber pulp amounted to
2.3 million tons in 2006, making us the largest user of recycled fiber for printing and writing paper manufacturing in Europe. The waste paper collected and used for the recycled fiber pulp was
3.0 million tons in 2006.

The
following table sets forth our annual pulp production volumes for the three most recent years:

|                          |  | Year ended December 31,
|------------------------- |  | -----------------------
|
|
|Production(1)             |  |                        
|Own production            |  | 2,095                  
|From associated companies |  | 403                    
|                          |  |                        
|Chemical pulp             |  | 2,498                  
|Mechanical pulp           |  | 2,897                  
|Recycled fiber pulp       |  | 2,343                  
|                          |  |                        
|Total                     |  | 7,738                  
|                          |  |                        

---

The following table sets forth our annual pulp consumption volumes for the three most recent years:

|                    |  | Year ended December 31,
|------------------- |  | -----------------------
|
|
|Consumption         |  |                        
|Chemical pulp       |  | 3,429                  
|Mechanical pulp     |  | 2,934                  
|Recycled fiber pulp |  | 2,344                  
|                    |  |                        
|Total               |  | 8,707                  
|                    |  |                        

27

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Energy

Energy is a significant component of paper industry costs, most notably in the production of mechanical pulp for magazine papers and newsprint. Integrated,
low-cost energy is thus an important contributor to cost competitiveness when producing these grades of paper. Our energy policy is to secure supplies of electricity based on multiple
sources that are reliable and cost-effective. Energy supplied by power plants which we own or lease or which we have obtained through share ownership in power companies cover the
electricity requirements of our Finnish mills. Outside Finland, most of the electricity used by our mills is purchased locally. Including our share ownership in power companies, we are approximately
70% self-sufficient in electric power.

Our
electricity procurement in 2006 amounted to 20.0 TWh, of which 18.4 TWh was used internally and 1.6 TWh was sold. Total electricity consumption by our mills was 11.2 TWh in Finland
and 7.2 TWh outside of Finland.

The
annual generating capacity available to us through in-house and leased capacity and through associated companies totaled approximately 2,540 MW as of December 31,
2006. Our most important associated companies in terms of energy are Pohjolan Voima, in which we have a 42.19% shareholding, and Kemijoki Oy, of whose hydropower shares we own 19.0%, representing
4.13% of Kemijoki's total share capital.

As
part of our environmental strategy, we have reduced our consumption of fossil fuels by substituting them primarily with biofuels. In 2006, biofuels accounted for 57% of our total fuel
supply. The high share of biofuels of the total supply is a result of an extensive recent and on-going investment program including the construction of several power plants utilizing
biomass fuels. In late 2006, new power plants were started up at Shotton, Wales, and Rauma, Finland. The investment at Rauma was carried out by our associated company, Pohjolan Voima. The new power
plant utilizing biofuels at our Chapelle Darblay mill in France was completed during the first quarter of 2007. In
addition, a decision was made in late 2006 to construct a new power plant, utilizing biofuels, at our Caledonian mill in Scotland, scheduled for start-up during the first quarter of 2009,
with a net investment cost of €72 million. In 2006, we procured logging residues that generated energy of approximately 1.68 TWh at our own, as well as at our associated
companies' power plants.

As
a step for further development of our energy operations, we decided to become a significant producer of second generation biodiesel. We are currently developing the business concept
and respective technical solutions, with the aim of investing in the first commercial-scale production plant within the next few years. We have several suitable plant locations in Finland, France,
Germany and the United Kingdom for such venture.

Wood Procurement

We own 920,000 hectares of forestland in Finland, of which 770,000 hectares are in commercial use. Currently, the annual growth of these forests is estimated to
be approximately four million cubic meters and the planned level of sustainable felling is 2.1 million cubic meters per year, representing approximately 10% of our consumption in Finland. In
addition, we manage approximately 280,000 hectares of forestland for private forest owners in Finland. After several years of fellings that were below our sustainable level, we felled nearly four
million cubic meters of wood on our land in Finland in 2006 representing approximately 17% of our Finnish wood consumption. We also own approximately 3,000 hectares and manage (through our Tilhill
Forestry subsidiary) 154,000 hectares of forestland in the United Kingdom and own 79,000 hectares of forestland in the United States. In Canada, we own 17,000 hectares of forestland and also
administer 953,000 hectares of Province-owned forestland under long-term licenses.

28

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The
following table sets forth our wood consumption by country for the three most recent years:

|               |  | Year ended December 31,
|-------------- |  | -----------------------
|
|
|Finland        |  | 21,700                 
|Austria        |  | 1,010                  
|Germany        |  | 650                    
|France         |  | 490                    
|Russia         |  | 640                    
|United Kingdom |  | 250                    
|Estonia        |  | 40                     
|Canada         |  | 830                    
|United States  |  | 490                    
|               |  |                        
|Total          |  | 26,100                 
|               |  |                        

Our total wood consumption was 26.1 million cubic meters in 2006, increasing from the abnormally low level in 2005 which was caused by the
seven-week labor dispute in Finnish pulp and paper industry during the summer of 2005. Wood consumption by our production plants in Finland totaled 21.7 million cubic meters. Of the
total Finnish wood consumption, 4.2 million cubic meters was imported from Russia. In addition to providing wood for our own mills, our forestry department in Finland supplied
4.4 million cubic meters of wood to associated companies and other mills outside of our Group.

Wood
for consumption by our mills outside Finland is purchased primarily from private local suppliers pursuant to long-term contracts and totaled 4.4 million cubic
meters in 2006.

The
amount of wood cut from our forests can fluctuate from year to year depending on the supply of wood raw material from other sources. We are active in the management of our
forestlands. Areas that have been harvested for wood are regenerated with pine, spruce or birch. Four to five saplings are generally planted for each tree cut. Issues of particular interest to our
customers are forest certification and the legality and origins of wood, particularly those of imported wood. All of our own forests are certified and we closely monitor the origins of all the wood we
use while developing our chain of custody schemes.

Marketing

We sell most of our products primarily through our own global sales network. We sell paper products mainly to European and North American customers, but we also
have an established customer base in South America, Asia, Africa and Australia. We believe that maintaining our own sales organization in major markets improves our ability to respond to customers'
needs. The Converting Division has its own worldwide marketing and sales network. With respect to our Wood Products Division, we have sales and distribution companies in 14 countries as well as agents
covering our most important markets around the world.

29

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The
following table sets forth our sales by market area for the three most recent years:

|                               |  | Year ended December 31,
|------------------------------ |  | -----------------------
|
|
|Germany                        |  | 1,587                  
|United Kingdom                 |  | 1,223                  
|Finland                        |  | 920                    
|France                         |  | 661                    
|Other European Union countries |  | 2,247                  
|Other European countries       |  | 661                    
|United States                  |  | 1,124                  
|Canada                         |  | 126                    
|Rest of the world              |  | 1,473                  
|                               |  |                        
|Total                          |  | 10,022                 
|                               |  |                        

Seasonality of UPM's Business

The demand for our products does not depend on the seasons in any material way, nor does our manufacturing or marketing substantially fluctuate due to the
seasons. There is a tendency, however, for the paper deliveries during the second half of the year to be somewhat higher than during the first half, mostly explained by the Christmas catalogue season.

Dependence on Patents and Industrial, Commercial or Financial Contracts

Our business operations are primarily based on our long manufacturing experience in various wood based manufacturing operations and related know-how
and our proprietary process information. Our experience in all aspects of the forest industry, from timber to high-technology products, has consistently provided us with the ability to
modernize our operations and integrate leading technology, manufacturing processes and control systems according to market requirements.

Our
patent strategy is to protect the results of our research and development work, such as manufacturing processes and end-products, to the fullest extent allowed under
relevant intellectual property law. In pursuing this strategy, we seek to protect our right to utilize the results of our own research and development work worldwide and to prevent unfair competition
from other companies.

For
intellectual property arising from projects we have engaged in with other parties, it is our policy to pursue full intellectual property rights, to secure ourselves the unrestricted
right to use that intellectual property and to protect the fair and beneficial terms of any co-operative research and development agreement.

In
some cases, we have also entered into licensing agreements, as a licensor or a licensee. As a licensee, we generally engage in strategic licensing agreements to reduce our own
research and development costs and to focus our research and development efforts on our own core technologies. As a licensor, we generally enter into strategic arrangements on a
case-by-case basis.

In
2006, we filed 31 patent applications as first filings and, in addition to these, five Patent Cooperation Treaty applications. As of December 31, 2006, our intellectual
property rights were protected in various countries throughout the world, primarily in the United States and Europe, by a total of approximately 630 patents and patent applications.

30

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Environmental and Regulatory Matters

Our operations are subject to comprehensive environmental laws and regulations. Violations of these laws or regulations could result in fines, injunctions
(including orders to cease the violating operations and to improve the condition of the environment in the affected area or to pay for such improvements) or other penalties. In addition, environmental
permits are required for certain of our operations. These permits may be subject to revocation, renewal and modification by the issuing authorities at their discretion and in compliance with
applicable laws. Our management believes that we are, in all material respects, in compliance with the environmental laws and regulations applicable to us and that our discharges and emissions are
within or well below levels established by regulation or permits. We invest substantial capital resources on environmental compliance and monitoring of the environment. Our operating expenses
(including depreciation) attributable to environmental protection amounted to €108 million and our capital expenditures on environmental protection amounted to
€33 million in 2006, as compared to operating expenses (including depreciation) attributable to environmental protection of €114 million and
€112 million in 2005 and 2004, respectively, and capital expenditures on environmental protection of €38 million and €55 million in
2005 and 2004, respectively.

Our
environmental management is based upon internally defined goals, measuring the realization of these goals as well as developing and implementing best practices in the whole value
chain. We measure and assess continuously both the direct and indirect environmental loads and impacts of our operations and strive to manage these systematically in accordance with the principle of
continuous improvement. The environmental loads and impacts related to product life cycle result from sourcing of raw materials, production, distribution of products and product recovery and disposal.
We also assess our suppliers systematically and regularly also from the perspective of environmental and social responsibility.

We
are committed to the principles of sustainable development as set out in the charter of the International Chamber of Commerce. In 1996, an environmental policy, which includes a
principle of continual improvement of our environmental record, was approved for our operations. In 2002, this environmental policy was reviewed with minor amendments. Our management has set the goal
that all of our major production plants should have ISO 14001 or other comparable standard compliant environmental management systems in use. At present, all of our paper and pulp mills, our plywood
mills and sawmills in Finland, our sawmill in Russia, our hydroelectric power plants in Finland and our
forestry departments in Finland, France, the United Kingdom, Germany, Austria, the United States and Canada have ISO 14001 certified environmental management systems in place. In addition, five of our
Converting Division's plants also have certified systems. All of our pulp and paper mills in Finland and most of those elsewhere in Europe have also received approval for their systems under the
European Union's Eco-Management and Audit Scheme ("EMAS"). For Finland, Germany and North America, the paper mills have published respective joint EMAS or other externally verified
environmental statements.

We
have adopted a policy of not purchasing wood from protected forestlands or from any other areas designated by local forest or environmental authorities as being of special ecological
importance. All suppliers of wood are required to provide proof of the origins of their wood. Therefore, we have continued our work to gain chain of custody ("CoC") certification for our wood raw
material supply. In 2006, approximately 65% of the wood we used was from certified forests, as compared to approximately 64% and 67% in 2005 and 2004, respectively. In 2005, a generic chain of custody
model, covering the main forest certification schemes, was implemented at those forest departments and mills using wood from more than one forest certification scheme. Since June 2006, all of
our pulp and paper mills have had a third party audited chain of custody in place. To ensure sustainable commercial use of forests, we provide extensive environmental training to our forestry
department's entire field personnel.

We
have continued to improve the efficiency of our production processes and our use of energy for those processes. In 2006, paper production increased by 9%, as compared to a decrease of
6% in 2005 and by an increase of 6% in 2004. The average effluent amount of paper mills per produced paper ton

31

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decreased
approximately 9% in 2006, as compared to a decrease of 3% in 2005 and a decrease of 6% in 2004, and the corresponding chemical oxygen demand (COD) of discharges decreased by approximately 4%
in 2006, as compared to a decrease of 13% in 2005 and a decrease of 2% in 2004. The total fossil carbon dioxide emissions of mill power plants increased by 5% in 2006, as compared to a decrease of 5%
in 2005 after having remained largely unchanged in 2004. The total solid waste deliveries, primarily ash from mill power plants, to landfills increased by approximately 25% in 2006, as compared to an
increase of 8% in 2005 and a decrease of 26% in 2004, due to our increased use of biofuels. In 2006, biofuels accounted for approximately 57% of all fuels used in heat and electricity generation at
our mills. We have continued to invest in biofuel-fired power plants.

EU-wide
trading of carbon dioxide emissions allowances started on January 1, 2005. Required carbon dioxide emission permits covering all our installations subject to
the scheme have been granted to us. In 2006 and 2005, we used fewer allowances than were granted to us.

We
have made consistent efforts to increase the proportion of recycled fiber in the raw material base. We are the largest user of recovered paper for printing papers in Europe and the
second largest in the world, with an annual consumption of 3.0 million tons in 2006, as compared to 2.9 million tons in 2005
and 2.8 million tons 2004. In 2006, 27% of our total fiber usage for paper production was gained from recovered paper.

In
2006, we announced that we will use the following third-party certified environmental labels: European Eco-Label ("EU Flower"), PEFC and FSC. The EU Flower label proves
that the paper fulfils certain environmental criteria, for example, that production has a lower environmental impact, including selection of raw materials, use of chemicals, use of fiber and energy,
emissions from operations and waste management. The PEFC and FSC labels prove that wood raw material originates from certified and well-managed forests and the wood is legally logged and
does not come from protected areas.

We
are included in the Dow Jones sustainability index DJSI STOXX for 2006/2007, an index that has been adopted by Dow Jones for companies that are industry leaders in economical,
ecological and social sustainability. Companies being components of the Dow Jones sustainability indexes are assessed through an extensive third-party screening to be industry leaders in economical,
ecological and social sustainability. During 2003-2006, our share has been a component of both DJSI World and DJSI STOXX and, in 2006 and 2005, we were selected to the DJSI World Forest
Products & Paper industry index as sector leader. We also publish a separate, unaudited Environmental and Corporate Social Responsibility Report.

Organizational Structure

UPM-Kymmene Corporation, our Finnish parent company, holds the majority of our operating assets in Finland, while our assets outside Finland are held
through regional or divisional subsidiaries.

The
following table sets forth the significant subsidiaries owned, directly or indirectly, by UPM-Kymmene Corporation, their country of incorporation, the percentage of
shares of that subsidiary that we own and the percentage of voting power we have in that subsidiary:

|Name of Company                             |  | Country of
Incorporation |  | Percentage
Owned |   | Percentage
Voting Power |  
|------------------------------------------- |  | ------------------------ |  | ---------------- | - | ----------------------- | -
|UPM-Kymmene Beteiligungs GmbH               |  | Germany                  |  | 100              | % | 100                     | %
|UPM-Kymmene Vervaltung GmbH                 |  | Germany                  |  | 100              |   | 100                     |  
|UPM-Kymmene Administrations GmbH & Co. KgaA |  | Germany                  |  | 100              |   | 100                     |  
|UPM-Kymmene Papier GmbH & Co. KG            |  | Germany                  |  | 100              |   | 100                     |  
|Nordland Papier GmbH                        |  | Germany                  |  | 100              |   | 100                     |  
|UPM-Kymmene Canada Holdings Inc.            |  | Canada                   |  | 100              |   | 100                     |  
|UPM-Kymmene Miramichi Inc.                  |  | Canada                   |  | 100              |   | 100                     |  
|UPM-Kymmene Investment Inc.                 |  | United States            |  | 100              |   | 100                     |  

32

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Property, Plants and Equipment

Our executive offices are located at Eteläesplanadi 2, Helsinki, Finland, in a building which we lease. We generally own all our manufacturing
facilities. In addition to manufacturing facilities, we own a number of other facilities, including warehouses, distribution centers and shipping terminals.

Our
manufacturing facilities include the following:

Paper Divisions

|Location of Facility |  | Unit             |  | Capacity |     | Principal Activity                            
|-------------------- |  | ---------------- |  | -------- | --- | ----------------------------------------------
|
|Austria              |  |                  |  |          |     |                                               
|Steyrermühl          |  | Steyrermühl      |  | 190,000  |     | SC magazine paper                             
|                     |  |                  |  | 300,000  |     | newsprint                                     
|Canada               |  |                  |  |          |     |                                               
|Miramichi, NB        |  | Miramichi        |  | 450,000  |     | LWC magazine paper                            
|                     |  |                  |  | 150,000  |     | timber, m3 in Other Operations                
|China                |  |                  |  |          |     |                                               
|Changshu             |  | Changshu         |  | 600,000  |     | uncoated fine paper                           
|                     |  |                  |  | 250,000  |     | coated fine paper                             
|Finland              |  |                  |  |          |     |                                               
|Jämsänkoski          |  | Jämsänkoski      |  | 620,000  |     | SC magazine paper                             
|                     |  |                  |  | 260,000  |     | label papers (following conversion)           
|Kaipola              |  | Kaipola          |  | 310,000  |     | LWC magazine paper                            
|                     |  |                  |  | 390,000  |     | newsprint                                     
|Kajaani              |  | Kajaani          |  | 170,000  |     | SC magazine paper                             
|                     |  |                  |  | 470,000  |     | newsprint                                     
|Kuusankoski          |  | Kymi             |  | 420,000  | (1) | coated fine paper                             
|                     |  |                  |  | 380,000  |     | uncoated fine paper                           
|                     |  |                  |  | 540,000  |     | chemical pulp                                 
|Lappeenranta         |  | Kaukas           |  | 580,000  |     | LWC magazine paper                            
|                     |  |                  |  | 740,000  |     | chemical pulp                                 
|Pietarsaari          |  | Wisapaper        |  | 190,000  |     | kraft paper                                   
|                     |  | Wisapulp         |  | 800,000  |     | chemical pulp                                 
|Rauma                |  | Rauma            |  | 720,000  |     | LWC magazine paper                            
|                     |  |                  |  | 540,000  |     | SC magazine paper                             
|Valkeakoski          |  | Tervasaari       |  | 350,000  | (1) | kraft, envelope, release and base label papers
|                     |  |                  |  | 240,000  |     | chemical pulp                                 
|France               |  |                  |  |          |     |                                               
|Docelles             |  | Docelles         |  | 150,000  |     | uncoated fine paper                           
|Grand-Couronne       |  | Chapelle Darblay |  | 350,000  |     | newsprint                                     
|Strasbourg           |  | Stracel          |  | 280,000  |     | LWC magazine paper                            
|Germany              |  |                  |  |          |     |                                               
|Augsburg             |  | Augsburg         |  | 380,000  |     | LWC magazine paper                            
|                     |  |                  |  | 120,000  |     | SC magazine paper                             
|Dörpen               |  | Nordland         |  | 925,000  |     | coated fine paper                             
|                     |  |                  |  | 585,000  |     | uncoated fine paper                           
|Schongau             |  | Schongau         |  | 250,000  |     | newsprint                                     
|                     |  |                  |  | 500,000  |     | newsprint                                     
|                     |  |                  |  |          |     |                                               

33

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|Schwedt          |  | Schwedt    |  | 300,000 |  | newsprint         
|---------------- |  | ---------- |  | ------- |  | ------------------
|United Kingdom   |  |            |  |         |  |                   
|Irvine           |  | Caledonian |  | 280,000 |  | LWC magazine paper
|Shotton          |  | Shotton    |  | 520,000 |  | newsprint         
|United States    |  |            |  |         |  |                   
|Grand Rapids, MN |  | Blandin    |  | 350,000 |  | LWC magazine paper

Converting Division

|Location of Facility |  | Unit                |  | Capacity |  | Principal Activity 
|-------------------- |  | ------------------- |  | -------- |  | -------------------
|
|Australia            |  |                     |  |          |  |                    
|Braeside(2)          |  | UPM Raflatac        |  | n/a      |  | label materials    
|China                |  |                     |  |          |  |                    
|Changshu             |  | Walki Wisa Raflatac |  | n/a      |  | packaging materials
|Finland              |  |                     |  |          |  |                    
|Jyväskylä            |  | Rafsec              |  | n/a      |  | label materials    
|Pietarsaari          |  | Walki Wisa          |  | n/a      |  | packaging materials
|Tampere              |  | UPM Raflatac        |  | n/a      |  | label materials    
|Valkeakoski          |  | Walki Wisa          |  | n/a      |  | packaging materials
|France               |  |                     |  |          |  |                    
|Pompey (Nancy)       |  | UPM Raflatac        |  | n/a      |  | label materials    
|Germany              |  |                     |  |          |  |                    
|Jülich               |  | Walki Wisa          |  | n/a      |  | packaging materials
|Steinfurt            |  | Walki Wisa          |  | n/a      |  | packaging materials
|Malaysia             |  |                     |  |          |  |                    
|Johor                |  | UPM Raflatac        |  | n/a      |  | label materials    
|South Africa         |  |                     |  |          |  |                    
|Pinetown(2)          |  | UPM Raflatac        |  | n/a      |  | label materials    
|Spain                |  |                     |  |          |  |                    
|Polinyá (Barcelona)  |  | UPM Raflatac        |  | n/a      |  | label materials    
|Sweden               |  |                     |  |          |  |                    
|Örnsköldsvik         |  | Walki Wisa          |  | n/a      |  | packaging materials
|United Kingdom       |  |                     |  |          |  |                    
|Garstang(2)          |  | Walki Wisa          |  | n/a      |  | packaging materials
|Scarborough          |  | UPM Raflatac        |  | n/a      |  | label materials    
|United States        |  |                     |  |          |  |                    
|Fletcher, NC         |  | UPM Raflatac        |  | n/a      |  | label materials    
|Fletcher, NC(2)      |  | Rafsec              |  | n/a      |  | label materials    

34

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Wood Products Division

|Location of Facility |  | Unit               |  | Capacity   |  | Principal Activity
|-------------------- |  | ------------------ |  | ---------- |  | ------------------
|
|Estonia              |  |                    |  |            |  |                   
|Otepää               |  | Plywood            |  | 25,000     |  | plywood           
|Finland              |  |                    |  |            |  |                   
|Heinola              |  | Plywood            |  | 50,000     |  | plywood           
|Joensuu              |  | Plywood            |  | 55,000     |  | plywood           
|Lahti                |  | Plywood            |  | n/a        |  | plywood processing
|Lappeenranta         |  | Plywood            |  | 80,000     |  | plywood           
|Pellos               |  | Plywood            |  | 480,000    |  | plywood           
|Savonlinna           |  | Plywood            |  | 80,000     |  | plywood           
|Jyväskylä            |  | Plywood            |  | 100,000    |  | plywood           
|Vuohijärvi           |  | Plywood            |  | 80,000     |  | veneer            
|Keuruu and Lohja     |  | Plywood            |  | 18,000     |  | plywood and veneer
|                     |  | Plywood            |  | (combined) |  |                   
|Russia               |  |                    |  |            |  |                   
|Chudovo              |  | Plywood            |  | 100,000    |  | plywood           
|                     |  |                    |  | 7,500      |  | veneer            
|Austria              |  |                    |  |            |  |                   
|Steyrermühl          |  | Sawmilling         |  | 350,000    |  | timber            
|Finland              |  |                    |  |            |  |                   
|Heinola              |  | Sawmilling         |  | 120,000    |  | timber            
|                     |  |                    |  | 10,000     |  | components        
|Kajaani              |  | Sawmilling         |  | 150,000    |  | timber            
|Korkeakoski          |  | Sawmilling         |  | 330,000    |  | timber            
|Lappeenranta         |  | Sawmilling         |  | 500,000    |  | timber            
|                     |  |                    |  | 60,000     |  | timber components 
|Leivonmäki           |  | Sawmilling         |  | 75,000     |  | timber            
|Luumäki(2)           |  | Planing            |  | 20,000     |  | components        
|Aureskoski           |  | Planing            |  | 90,000     |  | components        
|Pietarsaari          |  | Sawmilling+Planing |  | 200,000    |  | components        
|                     |  |                    |  | 45,000     |  | components        
|Pori                 |  | Sawmilling         |  | 380,000    |  | timber            
|Russia               |  |                    |  |            |  |                   
|Pestovo              |  | Sawmilling         |  | 270,000    |  | timber            

---

In addition to the manufacturing facilities listed above, we own nine hydro power plants with an aggregate capacity of 197 MW.

Item 4A.    Unresolved Staff Comments

None.

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Item 5.    Operating and Financial Review and Prospects

General

The information in this item concerning our financial condition and results of operations refers to the consolidated financial statements included elsewhere in
this annual report, which are prepared in accordance with IFRS. IFRS differs in certain significant respects from U.S. GAAP. A reconciliation of the amounts of net profit and shareholders'
equity reported under IFRS to the amounts determined under U.S. GAAP is set out in Note 40 to the consolidated financial statements included elsewhere in this annual report. For a
discussion of the principal differences between IFRS and U.S. GAAP, see "Principal Differences Between IFRS and U.S. GAAP" in Note 40 of the notes to the consolidated
financial statements included elsewhere in this annual report.

Overview

We have a relatively broad product portfolio, but our focus is on papermaking. The sale of magazine papers, newsprint and fine and speciality papers amounted to
approximately 70% of our total sales in 2006, compared with 68% in 2005 and 67% in 2004. We supply a broad range of paper products to our customers worldwide, including publishers, printers,
retailers, converters and merchants. We derive additional revenue from the sale of converted products and wood products which both accounted for between 13% and 15% of our sales in the years 2006,
2005 and 2004. Converted products include pressure-sensitive labelstock, RFID labels and industrial wrappings. Converted products utilize our own proprietary technology and the division is a customer
of our speciality paper businesses, which supply a significant portion of paper used in converting. Wood products, which consists of plywood and sawn timber, also supply wood raw material to pulp and
paper production. We are well-integrated in key resources, with a high degree of self-sufficiency in pulp and energy, while our forest holdings serve as a strategic buffer in
the Finnish wood market. We are still primarily a European company, as sales to Europe represented 73% of total sales during the year 2006, compared with 73% in 2005 and 74% in 2004. North America
represented 13% of sales in 2006, compared with 14% in 2005 and 15% in 2004, and sales to the rest of the world represented the remaining 13% of sales in 2006, compared with 11% in 2005 and 11% in
2004. The geographic allocation of sales has remained similar over the past three years, but the importance of Asia and China in particular has been growing. See "Item 4. Business
OverviewMarket Area."

The
main driving forces in the paper and forest products industry are general economic performance, print media advertising, paper demand trends, the industry's capacity
build-up through technological advancement ("capacity creep") and new investment, capacity closures, capacity utilization, commodity pricing, cost competitiveness and construction
activity. The sales prices and
capacity utilization rates for our main products are strongly affected by general business conditions in the markets in which we operate. Individual suppliers, due to a relatively large number of
competitors, have very little influence on these factors and the resulting product sales cycles. As a result, the companies in the paper and forest products industry compete primarily on cost
effectiveness to offset downturns in the sales cycles. Efficiency of operations, manufacturing costs and the prevailing exchange rates between producer and consumer countries affect profitability in
our industry. We believe that, in order to be successful in the industry, a company should be positioned at the lower end of a cost curve in its core product areas, have a suitable,
high-quality product mix and be located in the proximity to key global and local customers. Although we have been among the most profitable larger companies in the paper and forest
products industry in recent years, our profitability position may fluctuate depending on differences in business conditions for different products as well as on changes in exchange rates.

In
order to maintain and improve our competitive position, our management has been focused on achieving greater efficiency and cost-control. Continuous cost savings measures
that we have undertaken in recent years have reduced our unit manufacturing costs and supported our relative profitability in the current cycle. During 2003, we introduced a group-wide
cost savings program aimed at achieving annual

36

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savings
of €200 million by the beginning of 2005. We achieved the target ahead of time in the second quarter of 2004. In addition, the synergy benefits from our acquisition of
Haindl in late 2001 positively affected our financial performance. The synergy benefits of €70 million were reached by the end of the third quarter in 2004 and exceeded
thereafter. Our wood products operations have undergone a major restructuring in 2004 and 2005 intended to improve the cost structure of both sawmilling and plywood manufacturing. Closures of
unprofitable papermaking units have also taken place. In 2003, two magazine paper machines at Blandin, with a combined annual production capacity of 157,000 tons, were closed. In 2004, the
100,000 tons per year speciality newsprint machine 17 at Voikkaa was closed down. At the end of 2005, two small MG kraft paper machines at Kuusankoski, with a combined annual production
capacity of 20,000 tons per year, were permanently shut down.

Furthermore,
in March 2006, we announced a profit improvement program aimed at a profit improvement of €200 million on an annual basis by the end of 2008.
The program includes closures of 675,000 tons of annual paper production capacity, 560,000 tons of which was closed in 2006, streamlining and reorganization of both business and
functional operations and a total reduction of workforce by approximately 3,600 people. For a discussion of possible changes to the annual capacity of our paper divisions, see
"Item 4. Information on the CompanyDevelopment of the Company."

Trends in Our Business

General

In the early 1990s, numerous capacity expansions in the industry led to an oversupply of many forest products which, exacerbated by the recession in Western
Europe and North America, led to reduced capacity utilization rates and intensified competition. Consequently, this period was characterized by lower paper and pulp prices. In 1994 and 1995,
improvements in capacity utilization and price increases in certain paper grades created a favorable economic environment for industry participants. As a result of their improved financial position,
paper producers then initiated a number of new capital investment projects. The overall capacity increase, however, was lower than during the previous industry cycle, as paper producers emphasized
capacity gains through industry consolidation and greater financial strength. More controlled capital expenditure and consolidation have been characteristic of the industry in most recent years,
although excessive investments have been made in some paper grades. Between 2001 and 2003, demand for most paper products was very weak, with declines in demand for certain paper grades resulting in
oversupply and low prices. During 2004, paper demand began to strengthen and industry operating rates rose to a level where price increases were once again possible, mainly in North America and other
non-European markets. During 2005, most paper prices noticeably increased in North America and other non-European markets, but in Europe fierce competition limited price
increases particularly in magazine and fine papers. Despite rather vigorous economic growth in the United States, printing paper demand declined overall. In 2006, paper prices continued to increase in
North America, but, with the exception of newsprint, prices remained practically unchanged in Europe although printing paper demand grew by more than 2%. In North America, printing paper demand
declined again. In Asia, paper markets continued to grow strongly, but local capacity increases were substantial and the amount of net imports to the region declined, especially in the case of fine
paper. Asian paper prices increased somewhat during the year.

Although
global consumption by end-users of most paper grades has in general increased relatively steadily by an average of approximately 2 to 3% annually in recent years,
significant fluctuations in levels of stocks maintained by paper producers and customers have periodically increased variations in demand. For example, from time to time, cyclicality has resulted from
the practice of customers leveraging inventory capacity by increasing stocks at lower prices and then reducing stocks as prices increase.

Due
to more subdued demand growth in mature North American and Western European markets, adverse price developments, cost pressures and resulting lower levels of profitability, industry
participants

37

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have
been more cautious about making significant investments in new production capacity over the past several years. European and North American paper producers have mainly invested in their
production assets through rebuilding and acquisitions, particularly in North America, rather than through investing in new paper machines. New capacity has, however, been introduced in Asia and, to a
lesser degree, in Europe in the area of newsprint, coated magazine and fine paper. Most recently, to control supply and avoid inventory build-up, several companies have announced
significant restructuring programs including closure of capacity either permanently or temporarily. Capacity closures have taken place primarily in North America in the areas of newsprint and uncoated
fine paper and in Europe in the areas of magazine and fine paper. For a discussion of our restructuring program and investment plans, see "Item 5. Recent
DevelopmentsRestructuring Activities" below.

For
certain paper grades, European industry participants also face a potential threat from producers in Asia and South America, as well as North America and Eastern Europe. Approximately
one-tenth of the newsprint consumed in Europe comes from North America and Russia. Throughout the early 1990s, Asian producers increased their investments in new capacity and their share
of world paper production rose. However, as a result of economic uncertainty in the area, these investments slowed down considerably from 1997 through the early 2000s as decreasing demand growth in
the area resulted in over-capacity and local producers faced financial difficulties. Recently, the activity has picked up, with the growth of the Chinese paper market bringing
opportunities for paper companies. Significant investments in paper capacity have recently been and are currently being made in China, including our new 450,000 tons per year fine paper
machine, which started up in the summer of 2005 at Changshu.

Market Conditions for Paper Products

The main driving forces behind the demand for paper are economic growth, advertising in printed media and circulation of magazines, newspapers and other
paper-based material used by consumers. Changes in readers' habits and consumers' information sourcing, with the electronic media gaining popularity, play an increasingly important role as demand
drivers for paper.

The
following tables set forth global demand for printing papers in 2006:

|                  |  | Magazine Papers |  | Newsprint |  | Fine Papers
|----------------- |  | --------------- |  | --------- |  | -----------
|
|Europe            |  | 11.5            |  | 13.7      |  | 19.9       
|North America     |  | 8.4             |  | 13.3      |  | 18.2       
|Rest of the world |  | 4.2             |  | 18.3      |  | 39.6       
|                  |  |                 |  |           |  |            
|Total             |  | 24.1            |  | 45.3      |  | 77.7       
|                  |  |                 |  |           |  |            

|                  |  | Magazine Papers |  | Newsprint |  | Fine Papers
|----------------- |  | --------------- |  | --------- |  | -----------
|
|Europe            |  | 15.6            |  | 18.7      |  | 27.2       
|North America     |  | 25.4            |  | 40.2      |  | 54.9       
|Rest of the world |  | 0.8             |  | 3.4       |  | 7.3        
|                  |  |                 |  |           |  |            
|World average     |  | 3.7             |  | 7.0       |  | 11.9       
|                  |  |                 |  |           |  |            

---

Sources:
CEPIPRINT, CEPIFINE and Pulp and Paper Products Council ("PPPC").

38

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The following tables set forth changes in demand for printing papers in our principal markets, Europe and North America in the last five years:

Changes in Demand for Printing Papers

|Paper Grade         |  | 2006 |   | 2005 |   | 2004 |   | 2003 |   | 2002 |  
|------------------- |  | ---- | - | ---- | - | ---- | - | ---- | - | ---- | -
|
|Europe              |  |      |   |      |   |      |   |      |   |      |  
|Newsprint           |  | 3    |   | 1    |   | 7    |   | 0    |   | (5   | )
|SC magazine         |  | 7    |   | (1   | ) | 3    |   | 2    |   | (1   | )
|Coated magazine     |  | 0    |   | 0    |   | 6    |   | 6    |   | 2    |  
|Coated fine paper   |  | 2    |   | 3    |   | 8    |   | 3    |   | 2    |  
|Uncoated fine paper |  | 1    |   | 1    |   | 6    |   | 0    |   | 0    |  
|North America       |  |      |   |      |   |      |   |      |   |      |  
|Newsprint           |  | (6   | ) | (6   | ) | (2   | ) | (1   | ) | (2   | )
|SC magazine         |  | (3   | ) | 4    |   | (2   | ) | 6    |   | 6    |  
|Coated magazine     |  | 1    |   | (3   | ) | 8    |   | 6    |   | 5    |  
|Coated fine paper   |  | 4    |   | (2   | ) | 11   |   | (4   | ) | 5    |  
|Uncoated fine paper |  | (1   | ) | (4   | ) | 2    |   | (2   | ) | (2   | )

---

Sources: CEPIPRINT, CEPIFINE and PPPC.

Paper
demand fluctuations have been rather significant in recent years. Weaker economic growth in 2001, the subdued advertising market and the utilization of previously built up
inventories resulted in a decreased demand for paper, especially in the United States but also in Europe. In 2002, improvements were seen in the North American market as the economic growth improved,
but the European paper demand continued to be weak. In 2003, magazine paper demand picked up, but the demand for newsprint and fine paper was still weak on both continents. In 2004, as a result of
strong economic growth, advertising, direct mail, pagination and classified advertisements increased. Accordingly, paper demand overall grew above historical average in both Europe and North America,
by approximately 6% in Europe and by approximately 2% in North America. In 2005, European paper demand advanced by approximately 1%, but, in North America, led by large declines in newsprint and
uncoated fine paper consumption, paper demand declined by approximately 3%. During 2006, paper demand grew by more than 2% in Europe, with all main grades posting positive growth, but the decline in
North America continued, at a pace of more than 1%, with newsprint again leading the decline. Speciality paper demand (not included in the table) is generally more stable than that of commodity paper
grades. Label paper demand has continued to grow over the past five years and the average annual growth over the longer term has been approximately 5%. Demand for packaging paper typically grows more
slowly following the trends in industrial production in selected process industries.

39

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The
following tables set forth changes in prices for printing papers in our principal markets, Europe and North America, in the last five years:

Changes in Prices for Printing Papers(1)

|Paper Grade         |  | 2006 |   | 2005 |   | 2004 |   | 2003 |   | 2002 |  
|------------------- |  | ---- | - | ---- | - | ---- | - | ---- | - | ---- | -
|
|Europe              |  |      |   |      |   |      |   |      |   |      |  
|Newsprint           |  | 5    |   | 4    |   | (2   | ) | (13  | ) | (13  | )
|SC magazine         |  | 0    |   | 1    |   | (3   | ) | (7   | ) | (5   | )
|Coated magazine     |  | (1   | ) | 1    |   | (3   | ) | (10  | ) | (10  | )
|Coated fine paper   |  | (1   | ) | 0    |   | (4   | ) | (11  | ) | (7   | )
|Uncoated fine paper |  | (2   | ) | (3   | ) | (6   | ) | (10  | ) | (5   | )
|North America       |  |      |   |      |   |      |   |      |   |      |  
|Newsprint           |  | 9    |   | 10   |   | 10   |   | 10   |   | (21  | )
|SC magazine         |  | 2    |   | 8    |   | 4    |   | 3    |   | (14  | )
|Coated magazine     |  | (1   | ) | 17   |   | 5    |   | 1    |   | (15  | )
|Coated fine paper   |  | 4    |   | 12   |   | 4    |   | 3    |   | (12  | )
|Uncoated fine paper |  | 12   |   | 8    |   | 5    |   | (5   | ) | (5   | )

---

Sources: Pulp and Paper International (PPI) and Resource Information Systems, Inc. (RISI), benchmark prices.

Paper prices generally fluctuate more than demand. At the beginning of 2001, due to good demand, prices for magazine papers and newsprint
increased to near record levels in Europe. Fine and speciality paper prices, along with pulp prices, were however under pressure during the year in both Europe and North America. During 2002, prices
of all main paper grades declined rapidly, as overcapacity became persistent. The market situation began to improve in North America late in the year, however, during 2003 prices began to gradually
increase from their historically low 2002 levels, with the exception of uncoated fine paper. In Europe, average prices of newsprint, magazine papers and fine papers continued to decline sharply in
2003. During 2004, average prices of all main grades continued to erode even more in Europe. In 2004, European paper prices were at historically low levels, with prices approximately 15 to 25% lower
than in 2000 depending on grade. In North America, the industry operating rates were higher and prices continued to rise during 2004. In 2005, European prices were
largely similar to those of the previous year, with newsprint gaining ground and uncoated fine paper prices declining somewhat. In North America, further price increases were carried out and prices
rose to levels well above their historical average. During 2006, prices for newsprint advanced in Europe, but prices for magazine and fine paper remained largely unchanged, as structural overcapacity
continued to affect the market. Label paper prices were stable, in selected packaging paper grades some price increases took place.

Market Conditions for Pulp

Pulp, which is a main ingredient in the manufacture of fine paper and an important element in the production of magazine papers and selected other paper grades,
has a more volatile price history than paper. The table below sets forth the price development of the benchmark pulp grade, Northern Bleached Softwood Pulp ("NBSKP"), for the last five years.

40

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Market Pulp (NBSKP) Prices, USD/ton

|Year |  | Average |  | High |  | Low
|---- |  | ------- |  | ---- |  | ---
|2002 |  | 463     |  | 490  |  | 435
|2003 |  | 526     |  | 560  |  | 440
|2004 |  | 617     |  | 660  |  | 560
|2005 |  | 610     |  | 650  |  | 585
|2006 |  | 675     |  | 730  |  | 600

---

High/Low Based on Monthly Average Prices

Global
market pulp demand follows the paper business cycle. During 2001 and 2002, pulp markets were depressed due to weak paper demand, but with improving operating rates they improved
somewhat in 2003. During 2004, prices rose due to a strong demand for pulp and a decrease in producer inventories. Led by the strong demand growth in Asia, particularly China, global pulp markets
continued to be in balance during 2005 and the average price of softwood pulp did not change much from the previous year. Hardwood pulp prices, however, increased more. In 2006, global pulp markets
were characterized by good demand, closures of capacity in North America and controlled inventory levels. As a result, successful price increases were implemented throughout the year and average
prices of softwood pulp rose to USD 730/ton in December 2006.

The
direct impact of the fluctuation in market pulp prices on our overall profitability has been minimal since we use almost all our pulp production internally as raw material for our
paper production and have a share of associated company Metsä-Botnia's pulp production available for our paper manufacturing. Overall, we are approximately 95%
self-sufficient in chemical pulp.

Market Conditions for Converted Products

The pressure-sensitive label stock market experienced rather weak demand in 2002 with some improvement in the latter half of the year, when signs of improved
market conditions emerged. The industrial wrapping market also suffered from weak economic growth and subdued production levels by customer industries. During 2003, the North American market for
pressure-sensitive labelstock
improved, but the European demand was weak. Also, the Asian market developed positively. Weak demand in the paper and food industries led to weak markets for industrial wrappings in 2003. During 2004,
the markets for converted products strengthened particularly in North America, but also in Europe. Asian demand also improved and selected price increases for pressure-sensitive label stock were
carried out in main markets during 2004. The industrial wrappings market in Europe improved during 2004 as paper and other process industry operating rates rose and demand for paper-based wrappings
increased. In 2005, solid market growth for pressure-sensitive labels was evident in all main markets. The demand growth for industrial wrappings was relatively stable, but competition was intense. In
2006, pressure-sensitive label stock markets grew by approximately 8% in Europe and also the U.S. market experienced growth of 3 to 4%. In Asia, the market experienced growth in excess of 10%. Some
price increases were carried out in North America during the year. Industrial wrappings market demand grew marginally in Western Europe, but raw material price increases were not being transferred
into product prices due to continued fierce competition.

Market Conditions for Wood Products

Prices for plywood were relatively stable in 2001 as a result of good demand. During 2002, plywood prices declined somewhat due to fierce competition. Prices
declined more noticeably in 2003 due to difficult market conditions and U.S. dollar based exporters becoming more active in the European market. The demand for plywood improved again in 2004 and the
market became more favorable during the second half of the year. In 2005, plywood markets strengthened further and selected price increases took

41

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place.
During 2006, helped by the high activity level in the construction, renovation and transport equipment industries, demand for plywood was strong. As a result, European prices increased during
the year.

Sawn
timber markets were oversupplied in 2001 and prices weakened. In 2002, sawn timber prices remained low, but as a result of low inventories and relatively good demand, prices began
to rise once again towards the end of the year. During 2003, the market weakened especially in the second half of the year due to oversupply and average sawn timber prices in 2003 were little changed
as compared to the year before. During 2004, sawn timber markets continued to be oversupplied as production from Scandinavia and Eastern Europe entered the market. As a result, prices remained
depressed throughout 2004. In 2005, the underlying demand for sawn timber was healthy in Europe but the market continued to be oversupplied. Signs of improving sawn timber markets did however emerge
late in the year in Europe. In 2006, sawn timber demand in Europe continued at a brisk pace inasmuch as economic growth picked up. Due to restrictions in log supply and resulting production cutbacks,
markets became tighter and prices rose markedly.

Application of Critical Accounting Policies

The following discussion is based upon our consolidated financial statements, which have been prepared in accordance with IFRS, with a reconciliation to U.S.
GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to tangible and intangible assets, bad debts, inventories,
provisions and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.

We
believe that the following critical accounting policies incorporate our more significant judgments and estimates used in the preparation of our consolidated financial statements. All
of our accounting policies are summarized in our consolidated financial statements, which are included elsewhere in this annual report. Where there is a difference in accounting policy between U.S.
GAAP (as reported in Note 40 of the notes to the consolidated financial statements) and IFRS that is material and contains significant critical estimates, we have included a separate discussion
below.



42

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43

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Sensitivity Analysis

The main factor affecting our financial results is the sales prices of our paper products. We estimate that a hypothetical 10% increase in paper prices would have
had a positive effect of €340 million, €140 million and €250 million on the operating profits of our magazine papers division,
newsprint division and fine and speciality paper division, respectively, for the year ended December 31, 2006. A similar 10% change in the volume delivered, on the other hand, would only have
had less than half the effect on operating profits as compared to the same percentage change in paper prices. A 10% increase in the price of plywood and sawn timber would have had a positive effect of
€60 million and €50 million, respectively.

44

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Long-term
changes in exchange rates also have a marked impact on our financial results. We estimate that a hypothetical 10% change in the value of the U.S. dollar against the
euro would result in a change of approximately €50 million in pre-tax profits in the short term and approximately €100 million in the long
term under our current hedging policy and based on year-end 2006 net currency flows, which assumes that 50% of net currency exposure has been hedged for 12 months ahead in
accordance with our hedging policy.

Cost Structure

Our main costs and expenses are personnel expenses and the cost of our fiber raw materials. Delivery cost to customers worldwide is also a major cost factor. In
2006, costs and expenses totaled €8.5 billion, as compared to €8.1 billion and €8.5 billion in 2005 and 2004, respectively.

The
following is a breakdown of our cost structure (excluding depreciation) in 2006, 2005 and 2004:

|                      |  | As a percentage of total costs |  
|--------------------- |  | ------------------------------ | -
|
|Personnel expenses    |  | 19                             | %
|Logs and pulpwood     |  | 14                             |  
|Delivery              |  | 12                             |  
|Chemicals and fillers |  | 14                             |  
|Energy                |  | 11                             |  
|Recovered paper       |  | 3                              |  
|Other raw materials   |  | 12                             |  
|Other(1)              |  | 15                             |  
|                      |  |                                |  
|Total                 |  | 100                            | %
|                      |  |                                |  

---

Of the world commodity prices, changes in crude oil have limited direct impact on us. We estimate that a hypothetical $5 per barrel increase in
crude oil prices would decrease our operating profits by less than €10 million over a 12-month period. Indirect effects on our transportation costs and
oil-based raw materials are greater.

Recent Developments

Recent Acquisitions and Divestments

On February 26, 2007, we entered into an agreement for the disposition of Walki Wisa, a business unit in our Converting Division, to a private equity
investor. We estimate the disposition, which is expected to be completed during the second quarter of 2007, to result in a capital gain of EUR 25 million, subject to certain closing
adjustments. The transaction is subject to approval by competition authorities. Walki Wisa has production facilities in Finland, Sweden, Germany, the United Kingdom and China. Walki Wisa's sales
amounted to EUR 287 million in 2006 and it employed approximately 950 persons, 600 of them in Finland, as of December 31, 2006.

In
June 2006, we disposed our group head office building and related real estate for a gain of €41 million.

In
August 2006, we sold our building materials merchant Puukeskus with a capital gain of €93 million. At the beginning of 2006, Puukeskus employed 608
people.

In
November 2005, we acquired the Russian wood procurement company ZAO Tikhvinsky Komplexny Lespromkhoz. The financial impact of the transaction was not significant.

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In
August 2005, we sold Loparex, our siliconized release material business, for a total consideration of €230 million with a gain on sale of
€26 million. In 2004, the operations of Loparex had annual sales of €337 million and employed 1,360 people.

In
March 2005, we sold our remaining 19.9 million shares of Metso for a total amount of €282 million with a capital gain of
€89 million.

In
November 2004, we announced our withdrawal from a planned wood procurement and possible pulp mill project in Zhanjiang, Guandong province in China.

In
August 2004, we sold the Irish building supplies chain Brooks for €213 million with a capital gain of €110 million. In 2003,
Brooks had annual sales of €195 million and 430 employees.

In
April 2004, we sold the Danish building materials retail chain Anco Træ. The financial impact of the transaction was not significant. In 2003, the operations in
question had annual sales of €70 million and employed 190 people. The financial impact of the transaction was not significant.

Restructuring Activities

In March 2006, we announced an extensive restructuring program, which is currently being implemented. In connection with this program, we (i) closed
down our magazine paper mill, with a production capacity of 410,000 tons per year, in Voikkaa, Finland, in June 2006; (ii) closed down the coated fine paper machine 7, with a production
capacity of 150,000 tons per year, at our Kymi mill in Kuusankoski, Finland, also in June; (iii) plan to close down the sack paper machine 6, with a production capacity of 115,000 tons per
year, and the semi-alkaline pulp line at our Tervasaari mill in Finland, during the first half of 2007, and (iv) convert the production of coated magazine paper on the paper machine
4, with a production capacity of 120,000 tons, at our Jämsänkoski mill in Finland, to label papers in the first quarter of 2007. Through these closures and conversion, we
expect to reduce our coated magazine paper capacity in Europe by 17% and our coated fine paper capacity in Europe by 12% and will cease our production of brown sack paper. The negotiations with our
employees in connection with this program were carried out during 2006. The resulting impact is expected to be a total workforce reduction of approximately 3,600 employees during
2006-2008. Fixed asset write-offs related to the program amounted to €135 million in 2006, and a provision primarily for personnel reductions of
€61 million was made in 2006. The cash effects of this program materialize primarily in 2006 and 2007. We do not anticipate a loss in revenues due to the program, except for
approximately €50 million per year following the second quarter of 2007 as a result of the cessation of brown sack paper production. In addition, in connection with this
program, we are investing approximately
€325 million to improve the production efficiency of our Kymi pulp mill. The investment is expected to be completed during the summer of 2008.

In
October 2005, we concluded negotiations relating to the closure of two paper machines at our Kymi mill and closed down the machines. The paper machines had an aggregate annual
capacity of 20,000 tons. The financial impact of the close-down on our results was insignificant.

In
December 2004, we closed the 240,000 tons per year kraft pulp mill at Miramichi in Canada. As a result, we booked a charge of €110 million in 2004 due to
the Miramichi closing and associated restructuring charges.

In
October 2004, we restructured the Wood Products Division's businesses in Finland. As a result, our annual sawmilling production decreased by approximately 400,000 cubic meters
and birch plywood production by approximately 70,000 cubic meters. Personnel reductions associated with these restructuring efforts were approximately 650 employees. We closed our Aureskoski sawmill
and our Viiala plywood mill in Finland at the end of 2004 and our Kuopio plywood mill in Finland during the latter half of 2005. We also reduced the sawmilling production at our Alholma and Kajaani
mills by approximately one third in 2005. We also adjusted our staff functions accordingly. We booked charges of €34 million relating to these restructurings.

46

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In
May 2004, we closed down a book paper machine with a capacity of 100,000 tons per year, together with the adjacent stone ground-wood plant, at our Voikkaa paper
mill. As a result, we booked a charge of €9 million in 2003.

Labor Disputes

Following a ban on overtime work declared by the Finnish Paper Workers' Union and several illegal strikes, we together with other members of the Finnish Forest
Industries Federation ("FFIF") began, on May 18, 2005, a lock-out at all Finnish pulp and paper mills which also affected our converting factories. The lock-out ended on
July 1, 2005, when FFIF and the Finnish Paper Workers' Union signed a new collective agreement which will expire on May 31, 2008. The new collective agreement for salaried employees in
the paper industry signed on July 17, 2005, will also expire May 31, 2008. In those industries which had joined the comprehensive agreement, a nationwide wage increase went into effect
in June 2005 for salaried employees and in July 2005 for blue-collar employees.

An
eight-month strike at our Miramichi mill ended in August 2005 when the local Communications, Energy and Paper Workers' Union approved a new five-year collective
agreement.

Currency Fluctuations

The euro was introduced as our accounting currency on January 1, 1999. After its introduction, the euro has increasingly been used as the pricing currency,
although sales also often take place in the customer's own currency and the breakdown of sales by country may also be partly indicative of the breakdown by currency. Additionally,
long-fiber chemical pulp is generally priced in U.S. dollars. In general, the introduction of the euro has reduced our exposure to exchange rate fluctuations. In 2006, total foreign
exchange gains resulting from currency fluctuations and included in the profit and loss account net of our hedging activities were €13 million, compared to gains of
€19 million in 2005 and losses of €61 million in 2004. See "Item 11. Quantitative and Qualitative Disclosures about Market Risks."

For
additional discussion regarding the currency risk exposure of the Company, see "Item 11. Quantitative and Qualitative Disclosures about Market RiskForeign Currency
Exposure." During 2006, the U.S. dollar decreased in value against the euro by approximately 11.6% compared to the year-end rate for the previous year, and the value of the British pound
sterling increased in 2006 by 2.0% from December 31, 2005.

Finnish Corporate Tax Rate

Effective January 1, 2005, the Finnish corporate tax rate was reduced to 26% from 29%. This reduction has had a favorable impact on our net profit because,
in the past, more than one-half of our profit before tax has been generated from our Finnish operations.

Changes in International Financial Reporting Standards (IFRS)

Standards, Interpretations and Amendments to Published Standards that Are Effective

In 2006, we adopted all of the standards, interpretations and amendments to published standards issued by the International Accounting Standards Board (the
"IASB") that are relevant to our operations and effective for accounting periods beginning on January 1, 2006. The adoption has resulted in changes to our accounting policies or the amounts
reported for the current or prior years in the following areas:

Amendment
to IAS 19,Employee BenefitsActuarial Gains and Losses, Group Plans and Disclosures, is effective for annual
periods beginning on or after January 1, 2006. Inasmuch as we decided to retain our former accounting policy regarding the recognition of actuarial gains and losses, adoption of this amendment
has only impacted the format and extent of disclosures presented in our financial statements (Note 29).

47

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IFRIC
8,Scope of IFRS 2, is effective for annual periods beginning on or after May 1, 2006. IFRS 2 applies to share based payment
transactions in which the entity receives or acquires goods or services. IFRIC 8 includes into the scope of IFRS 2 the transactions where the entity, when granting its own shares, cannot identify the
goods or services received. We early adopted IFRIC 8 as of the beginning of 2006 resulting in a charge in other costs and expenses of €3 million in 2006.

Amendment
to IAS 39,Financial Instruments: Recognition and MeasurementThe Fair Value Option, is effective for annual periods
beginning on or after January 1, 2006. The amendment changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to designate
financial instruments as part of this category. This amendment does not have any impact on the classification and designation of our financial instruments classified as at fair value through profit or
loss for the year ended December 31, 2006 or prior years.

Amendment
to IAS 21,The Effects of Changes in Foreign Exchange RatesNet Investment in a Foreign Operation, is effective for
annual periods beginning on or after January 1, 2006. The amendment has broadened and clarified the definition of a net investment. This amendment does not have any impact on our financial
statements for the year ended December 31, 2006 or prior years.

Amendments
to IAS 39,Financial Instruments: Recognition and Measurementand IFRS 4Insurance
ContractsFinancial Guarantee Contracts, are effective for annual periods beginning on or after January 1, 2006. The amendments require issued financial
guarantees, other than those previously asserted by the entity to be insurance contracts, to be initially recognized at their fair value and subsequently measured at the higher of the unamortized
balance of the related fees received and
deferred, and the expenditure required to settle the commitment at the balance sheet date. These amendments do not have any impact on our financial statements for the year ended December 31,
2006 or prior years.

IFRIC
4,Determining whether an Arrangement contains a Lease, is effective for annual periods beginning on or after January 1,
2006. We have reviewed our contracts to determine whether they are required to be accounted as leases in accordance with IAS 17,Leases. This
interpretation does not have any impact on our financial statements for the year ended December 31, 2006 or prior years.

Standards, Interpretations and Amendments to Published Standards that Are Not Yet Effective

Certain standards, interpretations and amendments to existing standards have been published that are mandatory for accounting periods beginning on or after
January 1, 2007 but which we have not early adopted:

IFRS
7,Financial Instruments: Disclosures, and a complementary amendment to IAS 1,Presentation of Financial
StatementsCapital Disclosures, are effective for annual periods beginning on or after January 1, 2007. IFRS 7 introduces new disclosures to improve the
information about financial instruments. The amendment to IAS 1 introduces disclosures about how an entity manages its capital. We will apply IFRS 7 and the amendment to IAS 1 from annual periods
beginning on or after January 1, 2007. Adoption of IFRS 7 and the amendment to IAS 1 will expand disclosures presented in the financial statements.

IFRS
8,Operating Segments, is effective for annual periods beginning on or after January 1, 2009. IFRS 8 replaces IAS 14 Segment Reportingand requires
the amount reported for each segment item to be the measure reported to the chief operating decision maker for the
purposes of allocating resources to that segment and assessing its performance. We are currently evaluating the effects of implementing this standard.

IFRIC
7,Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies, is effective for annual
periods beginning on or after March 1, 2006. The interpretation provides guidance on how to apply the requirements of IAS 29 in a reporting period in which an entity identifies the existence of
hyperinflation in the economy of its functional currency, when that economy was not hyperinflationary in the prior period. We do not expect the interpretation to be relevant for us.

48

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IFRIC
9,Reassessment of Embedded Derivatives, is effective for annual periods beginning on or after June 1, 2006. The
interpretation concluded that an entity generally should not reassess its conclusion as to whether an embedded derivative needs to be separated from the hybrid contract after it is initially
recognized. We do not believe that this interpretation should have a significant impact on the reassessment of embedded derivatives inasmuch as we already assess whether embedded derivatives should be
separated using principles consistent with IFRIC 9.

IFRIC
10,Interim Financial Reporting and Impairment, is effective for annual periods beginning on or after November 1, 2006. The
interpretation concludes that an impairment loss recognized in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost
should not be reversed in subsequent interim financial statements or in annual financial statements. We do not believe that this interpretation should have an impact on our financial statements.

IFRIC
11,IFRS 2Group and Treasury Share Transactions, is effective for annual periods beginning on or after March 1,
2007. The Interpretation addresses how to apply IFRS 2Share-based Paymentto share-based payment arrangements involving an entity's own equity
instruments or equity instruments of another entity in the same group (e.g., equity instruments of its parent). We do not believe that this interpretation should have an impact on our financial
statements.

IFRIC
12,Service Concession Arrangements, is effective for annual periods beginning on or after January 1, 2008. This
interpretation addresses the accounting by private sector operators involved in the provision of public sector infrastructure assets and services. We do not expect the interpretation to be relevant
for us.

New U.S. GAAP Pronouncements

In February 2006, the U.S. Financial Accounting Standards Board (the "FASB") issued Statement No. 155,Accounting for
Certain Hybrid Financial Instrumentsan Amendment of FASB Statement No. 133 and 140, which provides entities with relief from having to separately determine
the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract in accordance with SFAS No. 133. This statement allows an entity to make an
irrevocable election to measure such hybrid financial instruments at fair value in its entirety, with changes in fair value recognized in earnings. SFAS 155 is effective for all financial
instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. We do not believe that the adoption of FAS 155 will have a material
impact on our consolidated financial statements.

In
June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxesan Interpretation of FASB
Statement No. 109. This FASB Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
and transition provisions, and significantly expands income tax disclosure requirements. It applies to all tax positions accounted for in accordance with SFAS No. 109 and is effective for
fiscal years beginning after December 15, 2006. We are currently estimating the impact of implementing FIN 48.

In
September 2006, the FASB issued Statement No. 157,Fair Value Measurements. This Statement does not add any new fair
value measurements but improves existing guidance for measuring assets and liabilities using fair value including defining fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value. This Statement emphasizes that fair value is a market based measurement and sets forth a fair value hierarchy with the highest priority being quoted prices in active
markets. This Statement is effective for fiscal years beginning after November 15, 2007. We are currently estimating the impact of implementing FAS 157.

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In February 2007, the FASB issued statement No. 159,The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an
Amendment of FASB Statement No. 115, which permits entities to measure many financial instruments and certain other items at fair value. This Statement's objective is to
improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to
apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of a reporting entity's first fiscal year beginning after November 15, 2007. We do not believe
that the adoption of FAS 159 will have a material impact on our consolidated financial statements.

Results of Operations

The following tables set forth the sales and operating profits of our divisions in accordance with IFRS and the production and delivery volumes of paper and wood
products for the three most recent years:

|                       |                            | Year ended December 31, |      
|---------------------- | -------------------------- | ----------------------- | -----
|
|
|Sales by Division      |                            |                         |      
|Paper Divisions        |                            |                         |      
|                       | Magazine papers            |                         | 3,354
|                       | Newsprint                  |                         | 1,436
|                       | Fine and speciality papers |                         | 2,560
|Converting division    |                            | 1,274                   |      
|Wood products division |                            | 1,321                   |      
|Other operations       |                            | 571                     |      
|Interdivisional sales  |                            | (494                    | )    
|                       |                            |                         |      
|Total                  |                            | 10,022                  |      
|                       |                            |                         |      

|                             |                            | Year ended December 31, |    
|---------------------------- | -------------------------- | ----------------------- | ---
|
|
|Operating Profit by Division |                            |                         |    
|Paper Divisions              |                            |                         |    
|                             | Magazine papers            |                         | (56
|                             | Newsprint                  |                         | 148
|                             | Fine and speciality papers |                         | 108
|Converting division          |                            | 64                      |    
|Wood products division       |                            | 144                     |    
|Other operations             |                            | 128                     |    
|                             |                            |                         |    
|Total                        |                            | 536                     |    
|                             |                            |                         |    

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|                           |  | Year ended December 31,
|-------------------------- |  | -----------------------
|
|
|Production                 |  |                        
|Papers total               |  | 11,151                 
|Chemical pulp              |  | 2,095                  
|Plywood, 1000 m3           |  | 955                    
|Sawn timber, 1000 m3       |  | 2,357                  
|Deliveries                 |  |                        
|Magazine papers            |  | 4,761                  
|Newsprint                  |  | 2,677                  
|Fine and speciality papers |  | 3,550                  
|Converting papers          |  |                       
|                           |  |                        
|Total                      |  | 10,988                 
|                           |  |                        

The Year ended December 31, 2006 Compared to the Year ended December 31, 2005

Sales

General.Our sales were €10,022 million for the year ended December 31, 2006, as compared to
€9,348 million for the year ended December 31, 2005. Our total paper
deliveries for the year ended December 31, 2006 amounted to 10,988,000 tons, an increase of 8% compared with 10,172,000 tons for the year ended December 31, 2005. Deliveries increased
due to a more than 2% increase in paper demand in Europe and continued robust demand in Asia as well as the absence of negative effects on paper deliveries comparable to the impact in 2005 of
the seven-week labor dispute in Finland and the eight-month strike at the Miramichi mill. Sales were also positively affected by the higher newsprint prices in Europe and higher magazine
paper prices in North America and other non-European markets. The strong volume growth, as well as the slightly higher prices in the United States of our pressure-sensitive labels
business, also increased sales as did the higher deliveries and sales prices of wood products. The average euro vs. U.S. dollar exchange rate was 1.2661 in 2006 compared to 1.2400 in 2005,
thereby having a limited negative effect on our U.S. dollar-denominated export sales from Europe. Losses of €10 million on foreign currency hedges reduced sales in 2006,
compared with gains of €2 million for the year 2005.

Magazine Papers.Sales in our Magazine Papers Division were €3,354 million for the year ended
December 31, 2006, an increase of 8.4% from sales of €3,094 million for the year ended December 31, 2005. Sales were mainly boosted by higher volume of deliveries,
which were 4,761,000 tons in 2006, up by 6.1% from 4,486,000 tons in 2005. During the year ended December 31, 2005, deliveries were negatively affected by the Finnish labor dispute and the
strike in Miramichi. In 2006, deliveries were supported by the higher magazine paper demand in Europe. Demand for coated magazine paper was practically unchanged in Europe, but the demand for uncoated
magazine paper increased by 7% in 2006 as compared with 2005. In North America, magazine paper demand declined somewhat. The growth in the circulation of general interest magazines was subdued and
advertising pages showed only very modest growth. Publishers continued to launch special-interest magazines to attract especially younger consumers in a competition for their media interest as
offering and services by the electronic media continued to win market share.

Average
magazine paper prices in Europe and North America in 2006 as compared to 2005 were practically unchanged. In the United States, the average dollar-based magazine paper prices
were also largely on the same level in 2006, as the magazine paper prices there increased early in the year but started to decline towards the end of the year.

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Newsprint.Sales in our Newsprint Division were €1,436 million for the year ended December 31,
2006, an increase of 9.8% from sales of €1,308 million for the year ended December 31, 2005. Deliveries of newsprint increased 3.3% to 2,677,000 tons for the year ended
December 31, 2006 from 2,592,000 tons for the year ended December 31, 2005. The deliveries for 2005 were negatively impacted by the effects of the Finnish labor dispute. Besides the
effect of the Finnish labor dispute, sales in our Newsprint Division were positively affected by the 2% growth in European newsprint demand in 2006, driven by the popularity of free newspapers and
good growth in the Eastern European markets. Many newspaper publishers invested heavily in electronic content offering and newspaper advertising pages in many European markets suffered. Demand growth
for speciality newsprint grades in Europe was flat for the year 2006 as compared with 2005.

On
average, European market prices for newsprint were up by 5% for the year ended December 31, 2006 as compared to the year ended December 31, 2005. In other markets,
including the United States and Asia, newsprint prices on average were nearly 10% higher in 2006. In the United States, prices however began to decline towards the end of the year.

Fine and Speciality Papers.Sales in our Fine and Speciality Papers Division were €2,560 million for
the year ended December 31, 2006, an increase of 14.6% from sales of €2,234 million for the year ended December 31, 2005. Deliveries of fine and speciality papers
increased by 16.1% to 3,550,000 tons for the year ended December 31, 2006 from 3,060,000 tons for the year ended December 31, 2005. In 2005, the Finnish labor dispute negatively affected
deliveries of our Kymi fine paper mill and speciality papers. In 2006, sales were positively affected by the 2% increase in European fine paper demand, which was approximately the same for both
uncoated and coated grades. In addition, the strong Asian, especially Chinese, fine paper demand growth, increased sales as the new capacity introduced at our Changshu mill in mid-2005 was
utilized close to the maximum level in 2006. In North America, fine paper consumption growth was slightly negative, as uncoated fine paper demand declined by 1% and coated fine paper demand increased
by 4%. Supported by the growth in pressure-sensitive labels, demand for label papers grew throughout the year and sales increased by more than 10%. Demand growth for packaging papers was more modest
but sales growth was strong following the effects of the Finnish labor dispute in 2005.

In
2006, sales of fine and speciality papers were negatively affected by slightly lower prices. In Europe, prices of uncoated fine papers on average declined by 2%. Average prices of
coated fine papers, in turn, declined by only 1%. In China, average prices were somewhat higher in 2006 than in 2005 as price increases were carried out especially in the second half of the year 2006
to mitigate the effects of higher pulp prices. The average prices for label papers in 2006 were largely similar to those in 2005. The average prices for packaging papers increased marginally.

Converting.Sales in our Converting Division were €1,274 million for the year ended
December 31, 2006, a decrease of 5.4% from sales of €1,347 million for the year ended December 31, 2005. The divestment of Loparex with annual sales of
€337 million during August, 2005, negatively affected sales. Higher deliveries of especially pressure-sensitive labels increased sales in 2006. In addition, sales in 2005 were
negatively affected by the Finnish labor dispute.

Sales
by UPM Raflatac increased 14.9% to €987 million for the year ended December 31, 2006 from €859 million for the year ended
December 31, 2005. The demand for pressure-sensitive labels grew by approximately 8% in Europe and the growth in North American market was estimated at 3-4%. Strong growth continued
in Asia and South America, although from a markedly lower base. UPM Raflatac gained market share in the two most important markets for its products, especially in North America. Small increases in
prices were carried out in the United States but otherwise overall average prices were largely the same in 2006 as compared with 2005. RFID business grew in volume terms by more than 70%, but sales
were still modest, as unit prices of RFID tags continued to decline and the business was yet to experience major commercialization.

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Sales
by Walki Wisa increased 6.7% to €287 million for the year ended December 31, 2006 from €269 million for the year ended
December 31, 2005. Sales increased as demand for industrial wrappings in Europe was quite healthy and capacity utilization was high. Also, the effects of the Finnish labor dispute negatively
affected sales in 2005. In February 2007, we entered into an agreement for the divestment of Walki Wisa. See "Item 5. Operating and Financial Review and ProspectsRecent
DevelopmentsRecent Acquisitions and Divestments."

Wood Products.Sales in our Wood Products Division were €1,321 million for the year ended
December 31, 2006, an increase of 2.4% from sales of €1,290 million for the year ended December 31, 2005. Sales increased due to higher volumes of plywood
deliveries and markedly higher volumes of sawn timber deliveries. In addition, average sales prices were higher in 2006 than during 2005. On the other hand, sales were negatively affected by the sale
of Loulay plywood mill in April, 2006 and by the sale of Finnish building supplies retail chain Puukeskus in August, 2006. The combined negative impact of these two divestments on 2006 sales was
approximately €110 million.

Our
plywood operations had sales of €578 million for the year ended December 31, 2006, an increase of 5.9% from the sales of
€546 million for the year ended December 31, 2005. Plywood production increased 4.3% to 955,000 cubic meters for the year ended December 31, 2006, as compared to
plywood production of 916,000 cubic meters for the year ended December 31, 2005. Birch plywood and veneer demand was strong during 2006, as the activities of the construction, interior and
transport equipment industries were at a high level in Europe. Spruce plywood market also held up relatively well. Average prices for plywood and veneer were 15% higher, depending on
grade, in 2006 compared to 2005.

Our
sawmilling operations generated sales of €529 million in 2006, an increase of 17.0% from sales of €452 million for the year ended
December 31, 2005. Production of sawn timber increased by 9.8% to 2,214,000 cubic meters in 2006 compared with 2,017,000 cubic meters in 2005. Sawn timber demand in Europe was supported by
healthy level of construction activity. In addition, the shortages in log supply restricted production thereby improving market balance.
Average prices of sawn timber and processed goods were 516% higher in 2006 than in 2005, depending on the grade, resulting in positive contribution to sales.

Our
building supplies trade operations had sales of €300 million for the year ended December 2006, a decrease of 24% from sales of
€394 million for the year ended December 31, 2005. The sales both in 2006 and in 2005 were those of Puukeskus, which was divested in August, 2006.

Other Operations.Sales to third parties by Other Operations amounted to €571 million for the year
ended December 31, 2006, an increase of 10.4% from sales of €517 million for the year ended December 31, 2005. Third party sales of our forest operations rose due
to higher fellings from our own forests and somewhat higher wood prices in Finland. In addition, outside sales of our energy operations increased, partially caused by the 66% higher market price for
electricity on the Nordic Electricity Exchange.

Operating Profit (loss)

General.Our operating profit for the year ended December 31, 2006 totaled €536 million, an
increase of 68.6% from operating profit of €318 million for the year ended December 31, 2005. The operating profit in 2006 included a capital gain of
€93 million resulting from the sale of Puukeskus and a capital gain of €41 million from the sale of our head office real estate in Helsinki, Finland. In
2005, we reported a capital gain of €26 million from the sale of Loparex.

In
2006, operating profit included a €61 million provision for personnel expenses, an impairment charge of €115 million on the production
facilities at Miramichi magazine paper mill, a €135 million impairment charge mostly attributable to the closure of Voikkaa paper mill, other restructuring charges of
€7 million, charges of €10 million from the sale of Loulay S.A. plywood mill and a donation of €5 million to

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a
Cultural Foundation in Finland. In 2005, operating profit included a €151 million impairment charge related to the magazine paper mill at Miramichi, a
€8 million write-off at Nordland fine paper mill in connection with the rebuild of a paper machine, a €25 million impairment charge related to
Finnish sawmilling operations, a €7 million expense relating mainly to restructuring of the sales network in our Wood Products Division and a €57 million
charge related to the fine imposed by the EU competition authorities concerning anti-competitive activities of Rosenlew Oy's plastic industrial sack business, which was sold in 2000.

Magazine Papers.We incurred an operating loss for our Magazine Papers Division of €56 million for the
year ended December 31, 2006, compared with an operating loss of €76 million for the year ended December 31, 2005. The 2006 operating loss included an impairment
charge of €115 million on the production facilities at Miramichi magazine paper mill, whereas the 2005 operating loss includes an impairment charge of
€151 million related to the Miramichi mill. In addition, the 2006 results included an impairment charge of €116 million related to the closure of Voikkaa
mill and personnel charges of €28 million related to the profit improvement program. Also in 2005, a €17 million provision was booked for pension costs at
the Miramichi mill and a one-off depreciation charge of €5 million was made at our Augsburg mill. Excluding the above items, the higher deliveries and slightly
higher average prices reduced the operating loss by approximately €133 million. In addition, our efficiency improved, as we closed down the high-cost Voikkaa mill
and transferred its production to other units, which were then able to operate at higher utilization rates. Although the surge in energy costs and prices for certain raw materials was not as steep in
2006 as during 2005, higher raw material and energy prices in 2006 negatively affected our operating profits by approximately €56 million as compared to 2005. Inasmuch as the
average exchange rate between the U.S. dollar and the euro was approximately the same for the year 2006 as for the year 2005, profitability was little affected by changes in exchange rates.

Newsprint.We had an operating profit for our Newsprint Division of €148 million for the year ended
December 31, 2006, compared with an operating profit of €77 million for the year ended December 31, 2005. A charge of €5 million was
included in the 2006 operating profit, relating to the profit improvement program. In 2005, operating profit included a one-time depreciation charge of €5 million
for our old assets at the Augsburg mill. Higher prices and volumes contributed approximately €105 million to the increase in operating profit in 2005. We continued to improve
our efficiencies, by finding solutions to limit our raw materials expenditure while optimizing our production runs at paper mills. The price of recovered paper, the primary raw material for the
production of newsprint, started to increase towards the end of the year 2006, but on average, as purchased by us, was only 0.5% higher in 2006
than during 2005, therefore, having no material impact on the operating profit. Energy costs continued to rise in 2006, although at a lower rate than in 2005, resulting in additional costs of
€35 million for 2006 as compared to 2005.

Fine and Speciality Papers.Operating profit for our Fine and Speciality Papers Division was
€108 million for the year ended December 31, 2006, an increase of 27.1% from operating profit of €85 million for the year ended December 31,
2005. In 2006, operating profit included €38 million in personnel and impairment charges related to the profit improvement program. The result in 2005 included a
€8 million write-off related to the paper machine rebuild at Nordland. Profitability for the year 2006 improved by €115 million, as compared
to the year 2005, as a result of improved sales due to higher volume of deliveries partially offset by the impact of slightly lower prices. The profit contribution from China, as a result of the
second machine at Changshu mill operating for the full year for the first time in 2006, was material. Production efficiency improved resulting in further profit improvement. On the other hand, higher
costs for chemicals, fillers and other variable items had a negative impact of €78 million on the operating profit. Speciality paper operations had somewhat lower profits in
2006 compared with 2005, caused mainly by the effects of the rebuild of the label paper machine 8 at the Tervasaari mill in the first quarter of 2006. Label paper market continued to grow and prices
were stable. The profitability of packaging paper operations improved, as selected price increases were carried out in the sector and deliveries increased.

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Converting.Operating profit for our Converting Division was €64 million for the year ended
December 31, 2006, a decrease of 8.6% from operating profit of €70 million for the year ended December 31, 2005. In 2005, operating profit included a gain of
€26 million from the sale of Loparex. Operationally, the year 2006 was strong for our pressure-sensitive labels business. Operating profit margin improved, driven by more
efficient use of capacity, enabled by 16% higher volumes and slightly higher sales prices in the U.S. market. Industrial wrapping business had improved profitability, driven by the effects of internal
rationalization and efficiency improvements. On the other hand, higher raw material prices affected profitability negatively. In the RFID business, unit prices decreased while volumes increased by
more than 70%. The RFID business continued to operate at a loss.

Wood Products.Operating profit for our Wood Products Division was €144 million for the year ended
December 31, 2006, compared with operating profit of €6 million for the year ended December 31, 2005. In 2006, operating profit included a loss of
€10 million on the sale of Loulay plywood mill and a capital gain of €93 million on the sale of Puukeskus. In 2005, operating profit included
€32 million of charges related to the impairment and restructuring. The profitability of our plywood and sawmilling businesses benefited from higher average prices and volumes.
On the other hand, operating profit was negatively affected by somewhat higher wood costs in Finland. Plywood business maintained its operating profit margins and sawmilling operations improved from
an operating loss to clear operating profit. Our Finnish wood-based building supplies trade
business, Puukeskus, recorded a good level of profitability before it was divested in the third quarter of 2006.

Other Operations.Operating profit from Other Operations was €128 million for the year ended
December 31, 2006, compared to operating profit of €156 million for the year ended December 31, 2005. In 2006, operating profit included a
€41 million capital gain from the sale of our group head office real estate and a €5 million charge related to the donation to Cultural Foundation in
Finland. Also, the 2006 operating profit was charged with a €126 million fair value change of biological assets and wood harvested. In 2005, a
€57 million charge related to the fine imposed by the EU competition authorities was reflected in operating profit.

Our
forestry operations contributed operating loss of €19 million in 2006, compared to operating profit of €64 million in 2005. Wood harvest
volumes from own forests grew markedly and stumpage prices rose, contributing to operating profit. Operating profit was reduced by the €126 million fair value change of
biological assets and wood harvested. The value of wood harvested from our forests was €107 million in 2006 compared with €34 million in 2005. The change
in the fair value of biological assets (living trees) was a negative €19 million in 2006 compared with a positive €68 million in 2005.

Our
energy operations contributed operating profit of €94 million in 2006, compared to operating profit of €135 million in 2005. This
decrease was due to lower utilization of low-cost hydropower caused by the lower level of water reservoirs in Finland.

Our
share of the results after tax of associated companies contributed €61 million for the year ended December 31, 2006, compared with
€41 million for the year ended December 31, 2005. The share of result after tax of Metsä-Botnia was €69 million in 2006 compared
with €36 million in 2005. Metsä-Botnia's sales volumes increased and the pulp prices rose. Average bleached long-fiber pulp prices in Europe were
USD 675 per ton in 2006 compared with USD 610 per ton in 2005. Meanwhile, hardwood pulp prices increased on average to USD 638 per ton from USD 470 per ton. Our other main associated
company, Pohjolan Voima, has a mission to provide energy to its shareholders at cost and hence its operating profit tends to be close to zero. For the year ended December 31, 2006, our share of
Pohjolan Voima's results was a negative €14 million.

Financial Items

Our interest and other finance expenses net for the year ended December 31, 2006, were a negative €185 million compared to a
negative €147 million a year earlier. Our net interest-bearing debt declined but

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interest
rates increased during the year. Our net capital gains on available-for-sale investments for the year ended December 31, 2006 were a negative
€2 million compared with a positive €90 million in 2005 due to the sale of Metso shares. Exchange rate and fair value gains and losses were a gain of
€18 million for the year ended December 31, 2006 and a loss of €4 million for the year ended December 31, 2005. Our net interest-bearing
liabilities decreased by €788 million during 2006 to €4,048 million as of December 31, 2006 from €4,836 million as of
December 31, 2005. The decrease was due mainly to asset sales and higher net cash provided by operating activities.

Profit (loss)

We had a profit before tax of €367 million for the year ended December 31, 2006, an increase of 43% from profit before tax of
€257 million for the year ended December 31, 2005. We had tax charges of €29 million for the year ended December 31, 2006, compared to tax
charge of €46 million for the year ended December 31, 2005. The 2006 taxes included a €20 million income due to an increase in deferred tax assets
related to the change in the Group's structure, expense of €22 million due to the decrease in the income tax rates in Canada and income of €28 million
from a tax receivable arising from the change in German tax legislation. The 2005 taxes include a positive change of €58 million in deferred tax assets arising from the losses
made by our Miramichi mill.

Profit
for the period amounted to €338 million for the year ended December 31, 2006, compared to €211 million for the year ended
December 31, 2005.

The Year ended December 31, 2005 Compared to the Year ended December 31, 2004

Sales

General.Our sales were €9,348 million for the year ended December 31, 2005, as compared to
€9,820 million for the year ended December 31, 2004. Our total paper deliveries for the year ended December 31, 2005 amounted to 10,172,000 tons, down by 6%
compared with 10,792,000 tons for the year ended December 31, 2004. One of the main reasons for this decrease in paper deliveries is the seven-week labor dispute in Finland and the
eight-month strike at the Miramichi mill. Although the decrease in deliveries and the divestments of selected businesses, including Brooks and Anco Træ wood based building supplies
businesses in 2004, with combined annual sales of €265 million, and Loparex in the autumn of 2005, with annual sales of €337 million, negatively affected
sales, higher paper prices particularly in the United States as well as the growth of our pressure-sensitive labelstock business increased sales. The effects of currency exchange rate movements on
sales were minimal, as the average euro vs. U.S. dollar exchange rate changed only slightly in 2005 versus 2004. Gains of €2 million on foreign currency hedges are included in
our sales, compared with gains of €26 million for the year ended December 31, 2004.

Magazine Papers.Sales in our Magazine Papers Division were €3,094 million for the year ended
December 31, 2005, a decrease of 6.5% from sales of €3,308 million for the year ended December 31, 2004. Deliveries of magazine papers were 4,486,000 tons in 2005,
down by 9.2% from 4,940,000 tons in 2004. The Finnish labor dispute during the second quarter and the strike in Miramichi resulted in decreased deliveries. After the labor disputes ended, production
levels returned to normal relatively quickly. Demand for coated magazine paper was similar in Europe, but declined by 3% in the United States in 2005 as compared to 2004. Demand for uncoated magazine
paper in turn decreased 1% in Europe and increased 3% in the United States as buyers substituted more expensive coated paper with uncoated grades. Overall, the circulation of general interest
magazines and magazine advertising pages showed weaker trends, but conditions in the special-interest magazine market were more favorable and growth in direct mail advertising continued.

Sales
of magazine paper were positively affected by the approximately 1% higher average magazine paper prices in Europe in 2005 as compared to 2004. In the U.S., the dollar-based
magazine paper prices in North America increased by approximately 14% in 2005.

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Newsprint.Sales in our Newsprint Division were €1,308 million for the year ended December 31,
2005, at the same level as sales of €1,304 million for the year ended December 31, 2004. Deliveries of newsprint declined 4.7% to 2,592,000 tons for the year ended
December 31, 2005 from 2,719,000 tons for the year ended December 31, 2004 primarily due to the effects of the seven-week Finnish labor dispute. Standard newsprint demand in
Europe, our main market, increased 1%, driven by the growth in newspaper advertising and classified advertisements particularly in Germany and new European Union countries. Demand for speciality
newsprint grades in Europe changed only slightly for the year ended December 31, 2005.

On
average, newsprint market prices were up by 4% for the year ended December 31, 2005 as compared to the year ended December 31, 2004. In other markets, including the
United States and Asia, newsprint prices continued to rise throughout the year, averaging more than 10% in 2005.

Fine and Speciality Papers.Sales in our Fine and Speciality Papers Division were €2,234 million for
the year ended December 31, 2005, a decrease of 2.3% from sales of €2,286 million for the year ended December 31, 2004. Deliveries of fine and speciality papers
decreased only slightly, by 0.5% to 3,060,000 tons for the year ended December 31, 2005 from 3,074,000 tons for the year ended December 31, 2004. The Finnish labor dispute negatively
affected deliveries of our Kymi fine paper mill and speciality papers. The commencement of commercial production of the second paper machine in China in mid-year positively contributed to
deliveries. Demand for fine paper in Europe, during the year ended December 31, 2005, continued to increase from the year ended December 31, 2004. Demand for uncoated fine paper grew by
approximately 1% and demand for coated fine paper by approximately 3%. Strong demand for fine paper continued in China, supported by China's more than 9% economic growth. In North America, fine paper
consumption declined. For label papers, demand grew throughout the year while the demand for packaging papers was more stable.

Sales
of fine and speciality papers were to a certain degree negatively affected by lower prices. In Europe, our primary market for fine and speciality papers, average prices of uncoated
fine papers declined 2% and average prices of coated fine papers remained flat in 2005. In China, new capacity brought on to the market increased competition and prices were slightly under pressure
during the second half of the year, but average fine paper prices changed only slightly. The average prices for label papers in 2005 were somewhat higher than in 2004, while prices for packaging
papers were relatively stable.

Converting.Sales in our Converting Division were €1,347 million for the year ended
December 31, 2005, a decrease of 4.7% from sales of €1,414 million for the year ended December 31, 2004. The decrease was caused by the divestment of Loparex
during August 2005 and the lower sales by Walki Wisa due to the effects of the labor dispute in Finland. The higher demand and, particularly, deliveries of pressure-sensitive labels produced by
our UPM Raflatac subsidiary, increased sales.

Sales
by UPM Raflatac increased 10% to €859 million for the year ended December 31, 2005 from €784 million for the year ended
December 31, 2004. The demand for pressure-sensitive labels grew in all our key markets, but the strongest growth for UPM Raflatac took place in North America, where new capacity was started up
during the year. Also, sales in Asia-Pacific increased more than 10%. The increase in sales was a result of increased
deliveries, as there was little change in overall average prices for our products. Rafsec almost doubled its delivery volumes during 2005, but sales in this stage are still modest as business is at
its infancy stage.

Sales
by Walki Wisa decreased 10% to €269 million for the year ended December 31, 2005 from €299 million for the year ended
December 31, 2004. Demand for industrial wrappings in Europe was relatively stable, but Walki Wisa suffered from the loss of market share due mainly to the effects of the labor dispute in
Finland. Competition in this business area is fierce and it was difficult to pass on the selected raw material price increases to customers.

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Wood Products.Sales in our Wood Products Division were €1,290 million for the year ended
December 31, 2005, a decrease of 13.5% from sales of €1,492 million for the year ended December 31, 2004. This decrease was mainly due to the sale of our building
supplies trade businesses of Anco Træ and Brooks during 2004, when these two businesses had combined sales of €160 million. Lower sawn timber deliveries also
contributed to decreased sales.

Our
plywood operations had sales of €546 million for the year ended December 31, 2005, a decrease of 4.7% from the sales of
€573 million for the year ended December 31, 2004. Plywood production decreased 5% to 916,000 cubic meters for the year ended December 31, 2005, as compared to
plywood deliveries of 969,000 cubic meters for the year ended December 31, 2004. Demand for birch plywood was robust in 2005 and the spruce plywood market was satisfactory. Spruce plywood price
increases carried out during the year also contributed to the increase in sales.

Our
sawmilling operations generated sales of €452 million in 2005, a decrease of 9.2% from sales of €498 million for the year ended
December 31, 2004. Due to the restructuring of our sawn timber operations in Finland including closure of production capacity, production of sawn timber decreased to 2,147,000 cubic meters in
2005 compared with 2,409,000 cubic meters in 2004. Sawn timber demand in Europe was stable, but prices continued to be under pressure during the year due to the oversupply.

Our
building supplies trade operations had sales of €394 million for the year ended December 2005, a decrease of 24% from sales of
€519 million for the year ended December 31, 2004. This decrease was due primarily to the sale of our Brooks and Anco Træ operations. The Finnish building
supplies trading business Puukeskus increased its sales by approximately 10% for the year ended December 31, 2005, as compared to the year ended December 31, 2004.

Other Operations.Sales to third parties by Other Operations amounted to €517 million for the year
ended December 31, 2005, a decrease of 3.9% from sales of €538 million for the year ended December 31, 2004.

Operating Profit (loss)

General.Our operating profit for the year ended December 31, 2005 totaled €318 million, a
decrease of 53.6% from operating profit of €685 million for the year ended December 31, 2004. In 2005, we reported a capital gain of €26 million
from the sale of Loparex but in comparison, the 2004 operating profit included a gain of €110 million resulting from the sale of our Brooks building supplies trade business and
income of €249 million resulting from the change in Finland's employment pension scheme. Other changes in pension accounting resulted in income of
€23 million in 2004. In addition, operating profit in 2004 included €100 million in goodwill depreciation, while in 2005 goodwill was no longer
depreciated.

In
2005, operating profit included a €151 million impairment charge related to the magazine paper mill at Miramichi, a €8 million
write-off at Nordland fine paper mill in connection with the rebuild of a paper machine, a €25 million impairment charge related to Finnish sawmilling operations, a
€7 million expense relating mainly to restructuring of the sales network in our Wood Products Division and a €57 million charge related to the fine
imposed by the European Union competition authorities concerning anti-competitive activities of Rosenlew Oy's plastic industrial sack business, which was sold in 2000. In 2004, costs
included in the operating profit were the €110 million associated with the closure of Miramichi pulp mill, €34 million for restructuring our Finnish wood
products operations, €19 million made in relation to long-term wood supply agreements in the United Kingdom and €11 million for group
restructuring.

It
was estimated that the negative effect on pre-tax profit of the seven-week long labor dispute in Finland was approximately
€195 million, primarily affecting operating profit. The overall impact of the labor dispute is difficult to assess and should only be considered a reasonable estimate of its
negative impact. However, the higher newsprint and magazine paper prices and improved cost effectiveness positively contributed to our operating profit.

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Magazine Papers.We incurred an operating loss for our Magazine Papers Division of €76 million for the
year ended December 31, 2005, compared with an operating loss of €67 million for the year ended December 31, 2004. The 2005 operating loss includes an impairment
charges of €151 million related to the Miramichi mill. The
operating loss for 2004 includes restructuring and impairment charges of €110 million in Miramichi and amortization of goodwill of €58 million. Higher
magazine paper prices, particularly in North America and other non-European markets representing slightly more than one third of our sales, contributed approximately
€177 million to operating income. Our operations became more efficient, which offset largely the negative effects of increased prices for certain oil-based raw
materials, such as latex, as well as higher energy prices in Europe and North America. Higher raw material and energy prices negatively affected our operating profits by approximately
€73 million in 2005 versus 2004. The labor dispute in Finland had the most negative impact on our magazine paper division, as 3,440,000 tons per year, representing 27% of the
group annual production capacity, is produced in Finland. The negative impact of the labor dispute on the magazine paper division was approximately €106 million.

Newsprint.We had an operating profit for our Newsprint Division of €77 million for the year ended
December 31, 2005, compared with an operating loss of €7 million for the year ended December 31, 2004. The operating loss for 2004 includes amortization of
goodwill of €28 million. The operating profit improved primarily as a result of higher prices for newsprint, which contributed approximately €73 million
to operating income. With respect to our strategy of lowering fixed and variable unit costs, we made further progress by more efficient use of raw materials and optimization. The price of recovered
paper, the primary raw material for the production of newsprint, was stable compared to 2004, but energy costs at our continental European mills, which are not integrated to our own or affiliated
energy network, increased and resulted in additional costs. Moreover, the labor dispute in Finland had approximately a €22 million negative impact on operating profit.

Fine and Speciality Papers.Operating profit for our Fine and Speciality Papers Division was
€85 million for the year ended December 31, 2005, a decrease of 50.3% from operating profit of €171 million for the year ended December 31,
2004. The result in 2005 includes a €8 million write-off related to the paper machine rebuild at Nordland. The decline was due primarily to the decline in fine paper
prices in Europe and the Finnish labor dispute, with an estimated effect of €67 million for the Fine and Speciality paper division. Market conditions in particular for uncoated
fine paper were challenging, but also coated fine paper production suffered partially due to higher raw material and energy costs, with a negative impact of €55 million.
Operating profit also was lower due to higher depreciation, derived from the expansion in China, where profitability suffered from start-up costs and intense competition especially in the
second half of the year. The effects of the Finnish labor dispute were felt also in speciality paper operations, particularly in packaging paper operations, while the performance of label papers
remained good.

Converting.Operating profit for our Converting Division was €70 million for the year ended
December 31, 2005, a decrease of 1% from operating profit of €71 million for the year ended December 31, 2004. Operating profit includes the gain of
€26 million from the sale of Loparex and excludes its profit contribution during the last four months of the year after the completion of its sale. Delivery growth of
approximately 9% and stable prices for our pressure-sensitive labels, particularly to the U.S. market, in addition to the effects from internal restructuring measures taken at Walki Wisa, supported
profitability. Costs of growing the Rafsec business and price increases for certain raw materials, on the other hand, weakened operating profit.

Wood Products.Operating profit for our Wood Products Division was €6 million for the year ended
December 31, 2005, compared with operating profit of €111 million for the year ended December 31, 2004. The 2005 operating profit includes
€32 million of charges related to the impairment and restructuring. The 2004 operating profit was affected by a charge of €34 million relating to
restructuring in Finland and a gain of €110 million related to the sale of Brooks. The profitability of our plywood operations, supported by

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good
demand, higher prices and more efficient production, improved markedly. Due to the restructuring measures taken, our sawmilling operations improved their financial performance, although still
reporting an operating loss. Oversupply in the European market, caused partially by new capacity built in Eastern Europe and Germany, depressed prices and high wood costs in Finland continued to be
the driving forces in the sawn timber business. For our Finnish wood-based building supplies trade business, the good level of profitability continued in 2005.

Other Operations.Operating profit from Other Operations was €156 million for the year ended
December 31, 2005, compared to operating profit of €392 million for the year ended December 31, 2004. A €57 million charge related to the
fine imposed by the EU competition authorities is included in operating profit for 2005. Operating profit for 2004 includes income of €249 million arising from the change in
Finland's employee pension scheme and charges of €19 million made in relation to long-term wood supply agreements in the United Kingdom and
€11 million for group restructuring.

Our
forestry operations contributed operating profit of €64 million in 2005, compared to €66 million in 2004. This decline was due primarily
to a decrease in wood procurement volumes, while average prices for wood were stable. The value of wood harvested from our forests was €34 million compared with
€42 million the year before. The change in the fair value of biological assets (living trees) was €68 million compared with
€57 million the year before.

Our
energy operations contributed operating profit of €135 million in 2005, compared to €118 million in 2004. This increase was due
primarily to effective utilization of own energy resources and higher sales prices.

Our
share of the results after tax of associated companies, primarily Metsä-Botnia, contributed €41 million for the year ended December 31,
2005, compared with €58 million for the year ended December 31, 2004. Metsä-Botnia's profits suffered from the standstill during the labor dispute in
Finland. Average softwood pulp prices were down slightly but hardwood pulp prices were up slightly for the year ended December 31, 2005 as compared with the year ended December 31, 2004.

Financial Items

Our interest and other finance expenses net for the year ended December 31, 2005, were €147 million compared to
€178 million a year earlier due to lower interest rates during the year ended December 31, 2005. Our net capital gains on available-for-sale
investments for the year ended December 31, 2005 were €90 million due to the sale of Metso shares compared with €1 million a year earlier. Exchange
rate and fair value gains and losses were a loss of €4 million for the year ended December 31, 2005 and a gain of €48 million for the year ended
December 31, 2004. Our net interest-bearing liabilities increased by €219 million during 2005 to €4,836 million at the end of 2005 from
€4,617 million at the end of 2004. The increase was due mainly to share repurchases, lower net cash provided by operating activities and higher capital expenditure.

Profit (loss)

We had a profit before tax of €257 million for the year ended December 31, 2005, a decrease of 54% from profit before tax of
€556 million for the year ended December 31, 2004. We had tax charges of €46 million for the year ended December 31, 2005, compared to tax
income of €414 million for the year ended December 31, 2004. The 2005 taxes include a positive change of €58 million in deferred tax assets arising
from the losses made by Miramichi. In 2004, we booked a tax income of €284 million related to the valuation of net assets for Haindl, which we acquired in late 2001, and tax
benefits of €235 million resulting from the changes in Finnish tax law. In 2004, we also recognized tax income of €50 million related to recognition of
tax benefits of tax losses in Canada in our IFRS financial statements based on events occurring after the date our statutory IFRS financial statements were issued, upon which we implemented a tax plan
strategy to utilize the deferred tax assets.

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Profit
for the period amounted to €211 million for the year ended December 31, 2005, compared to €970 million for the year ended
December 31, 2004.

Liquidity and Capital Resources

Overview

Our primary source of liquidity comes from our generation of operating cash flow. As of December 31, 2006, we had €199 million in
cash and cash equivalents. As of December 31, 2006, we also had unused credit facilities amounting to €2.7 billion. We believe that our existing cash, cash equivalents
and operating cash flow will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.

Our
liquidity resources are subject to change as market and general economic conditions evolve. Increases in liquidity could result from an increase in cash flow from operations or, for
example, a divestment of non-core assets. Decreases in liquidity could result from a weaker than expected cash flow from operations caused by lower demand or weaker prices for our
products. In addition, any potential acquisitions in which all or a portion of the consideration would be payable in cash, could have a significant effect on our liquidity resources.

We
seek to minimize risks relating to the refinancing of our outstanding debt by ensuring that our loan portfolio has a balanced maturity profile and that our loans have sufficiently
long maturities. As of December 31, 2006, the average maturity of our outstanding debt was 7.1 years, compared to 7.5 years as of December 31, 2005.

The
following table sets out a summary of our main cash flows for the most recent three years:

|                                           |  | Year ended December 31, |  
|------------------------------------------ |  | ----------------------- | -
|
|
|Net cash flow from operating activities    |  | 1,215                   |  
|Net cash flow used in investing activities |  | (314                    | )
|Net cash flow used in financing activities |  | (951                    | )

Cash from Operating Activities

Our net cash flow from operating activities was €1,215 million for the year ended December 31, 2006 as compared to
€853 million for the year ended December 31, 2005. The increase was mainly due to the decrease of €21 million in working capital for the year ended
December 31, 2006, compared to an increase of €234 million for the year ended December 31, 2005. For the year ended December 31, 2004, our net cash flow
from operating activities was €997 million. Changes in cash flows from operating activities are primarily subject to the amounts of paper delivered and the prices at which the
paper is sold. Due to improvements in our operating results, our operating cash flow has strengthened. Our operating profit for the year 2006 included net capital gains on disposal of fixed assets of
€157 million and our operating profit for the years 2005 and 2004 included net capital gains on disposal of fixed assets of €48 million and
€138 million, respectively. These capital gains are not included in our cash flow from operating activities for these periods. We believe that cash available through operations
is adequate to fund our current scope of operations and our projected capital expenditures.

Cash Used in Investment Activities

Our cash flows in company acquisitions, purchases of shares and investments in intangible and tangible assets were €703 million,
€723 million and €672 million for the years ended December 31, 2006, 2005 and 2004, respectively. We believe that the competitiveness of our paper
machines is satisfactory, and therefore, during the last three years we have been able to maintain our capital expenditures at a level

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below
depreciation. After sales of businesses, shares and other assets, and change of other long-term investments amounting to €389 million,
€565 million and €206 million, our net cash used in investing activities were €314 million, €158 million and
€466 million for the years 2006, 2005 and 2004, respectively. In 2006, the most important of our capital expenditure were the rebuilds of our Kymi pulp mill and paper machine 3
at our Nordland mill and the new power plant at our Chapelle Darblay mill. In 2005, the most important of our capital expenditure projects was the completion of our second paper mill in Changshu. In
addition, we invested in the rebuild of paper machine 3 at the Nordland mill, in capacity increase of paper machine 8 at our Tervasaari mill and in biofuel power plants at our Chapelle, Shotton and
Rauma mills. In 2004, the biggest capital expenditure projects completed were the rebuild of our Wisaforest pulp mill in Finland, the rebuild of paper machine 2 at the Rauma mill in Finland and the
new sawmill in Pestovo in Russia.

Cash Used in Financing Activities

Net cash used in financing activities was €951 million for the year ended December 31, 2006, as compared to
€588 million and €710 million for the years ended December 31, 2005 and 2004, respectively. Repayment of short-term debt amounted to
€398 million in 2006 as compared to incurrence of additional short-term debt of €262 million in 2005 and repayment of short-term
debt of €102 million in 2004. Dividend payments of €392 million, €388 million and €393 million for the
financial years of 2005, 2004 and 2003, respectively, are included in cash flow used in financing activities for the years ended December 31, 2006, 2005 and 2004, respectively. Under the
decisions made by our annual shareholders' meetings, we repurchased 8.9 million of our shares for €151 million in 2005. We did not repurchase any of our shares in 2006 or
2004.

As
of December 31, 2006, with €3,353 million of long-term interest-bearing debt, mainly consisting of bonds, loans from financial institutions
and pension loans and €992 million of short-term interest-bearing debt totaling €4,345 million and offset by a total of
€297 million in the form of
interest-bearing receivables and cash and cash equivalents, we had a total of €4,048 million of net interest-bearing liabilities, which represented a decrease of
€788 million from €4,836 million as of December 31, 2005. In 2005, our net interest-bearing liabilities increased by
€219 million from €4,617 million as of December 31, 2004. During the last three years, our net interest-bearing liabilities have not changed
significantly because we have not made any major company acquisitions or disposed of any significant business lines. Consequently, our gearing ratio, (i.e., net interest-bearing liabilities divided by
equity) has been relatively unchanged being 56%, 66% and 61% as of December 31, 2006, 2005 and 2004, respectively.

To
diversify our funding sources and to secure a balanced maturity structure and sufficiently long maturities we have launched a number of issues in the capital markets. Our average loan
maturity was 7.1 years, 7.5 and 7.6 years as of December 31, 2006, 2005 and 2004, respectively.

In
2006, we incurred new loans of €415 million to cover our funding needs primarily for loan repayments.

We
have two major committed revolving credit facilities, which are part of our liquidity resources. One is for a principal amount of €1.5 billion, with a maturity
in 2010. The other is for a principal amount of €1.2 billion, with a maturity in 2008. As of December 31, 2006, both of these facilities were unused.

Since
1998, we have repurchased an aggregate of, after adjustment for the 2003 bonus issue, approximately 79.2 million of our own shares. Such an amount of shares would equal
approximately 15.1% of our present share capital. Of the total number of shares repurchased, 76.8 million have been cancelled, 2.3 million shares have been used to finance acquisitions
and 0.2 million have been donated to a new cultural foundation. As of December 31, 2006, we held none of our own repurchased shares.

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Our
current Standard & Poor's credit rating is BBB (stable). In October 2005, Moody's lowered our credit rating from Baa1 to Baa2 (stable). Any future downgrades may
increase the cost of capital on any new debt we may incur.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Contractual Obligations and Other Commitments

Our principal contractual obligations relate to outstanding debt, leasing commitments and other commercial commitments. The following table sets forth our
obligations and commitments to make future payments under contracts and contingent commitments as of December 31, 2006:

|                                             |  |       |  | Anticipated Payments by Period |  |      
|-------------------------------------------- |  | ----- |  | ------------------------------ |  | -----
|
|
|Contractual Obligations                      |  |       |  |                                |  |      
|Long-term debt including interest            |  | 5,514 |  | 732                            |  | 1,084
|Operating lease commitments                  |  | 117   |  | 23                             |  | 42   
|Capital lease obligations including interest |  | 151   |  | 12                             |  | 29   
|Pension obligations                          |  | 642   |  | 61                             |  | 118  
|Purchase commitments                         |  | 1,845 |  | 920                            |  | 628  
|                                             |  |       |  |                                |  |      
|Total                                        |  | 8,269 |  | 1,748                          |  | 1,901
|                                             |  |       |  |                                |  |      

The figures included in purchase commitments do not include our obligations to pay certain fixed and variable costs of Pohjolan Voima and Kemijoki
Oy in connection with their supply of power to us. These rights and obligations arise as a result of our shareholdings in each of the companies and are enforceable for so long as we continue to own
such shares. The fixed costs are determined on an annual basis pursuant to the terms of the respective shareholders' agreement for each of these companies, while the variable costs will depend on the
amount of power procured and consumed by us during the year. For a further discussion of Pohjolan Voima and Kemijoki Oy, see "Item 4. Information on the CompanyOther
OperationsPohjolan Voima" and "Item 7. Major Shareholders and Related Party TransactionsRelated Party TransactionsEnergy."

Research and Development

General

Our research work helps the Company and its customers to succeed by providing better quality products more cost-effectively.

Our
research and development work is divided between our own product and process development and work conducted with universities, research institutes and suppliers of materials. In
2006, the Company spent approximately €44 million on research and development projects, which corresponded to 0.4% of sales compared with €50 million, or
0.5% of sales, in 2005 and €47 million, or 0.5% of sales, in 2004. Important development work is also carried out in conjunction with production line modernizations.

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Collaboration with Universities and Research Institutes

We own 39% of Oy Keskuslaboratorio-Centrallaboratorium Ab (the Finnish Pulp and Paper Research Institute or "FPPRI"), which is collectively owned by various pulp
and paper companies in Finland. We, the other owners of the Finnish Pulp and Paper Research Institute and certain other companies and research institutes have signed a letter of intent to establish
Metsäklusteri Oy to coordinate European and national research. Other research institutes with which we cooperate include Papiertechnische Stiftung in Germany, Centre Technique du Papier
in France, Ytkemiska Institutet in Sweden and Technical Research Centre of Finland. We have also been involved in many national pulp and paper technology programs initiated by the National Technology
Agency of Finland.

We
also work closely together with universities through joint research programs and every year sponsor numerous graduate and postgraduate research projects connected with the Company's
products and manufacturing technologies.

Product and Process Development

In 2005, we reformed our research and development model in order to better correspond to our customers' needs. The new concept increased the number of
customer-oriented research and development projects in 2006.

Our
paper divisions focus their research and development work on fibers and fiber raw materials, new and cost-efficient process and raw material options as well as customer
support and technical services. Our fiber research is aimed at finding the best process options for chemical and mechanical pulping and fiber recycling and at making optimum use of fibers in
production processes. The goal is to determine the suitability of different wood species and collected waste paper grades as raw material for production of high-quality printing papers.
Our expertise is also used in process development projects and in the commissioning of new production lines.

In
our paper and coating research, we are further seeking to develop the quality competitiveness of our papers and to further enhance their performance. Raw material optimization and
further development of production processes are increasing the cost-effectiveness of paper making. In printing, the paper must exhibit both good printability and good runnability. Research
topics include the interactions between ink and paper and the role of the printing paper surface and structure. Our printing team works in close co-operation with customers and takes part
in the development and marketing of our Paper Services research and development packages.

Our
production support team helps the mills to achieve their quality and efficiency targets. The main thrust of the work is on improving paper machine runnability and process stability.
Projects to modernize our existing machines and raise machine speeds are other important aspects of the team's work.

We
are committed to the principles of sustainable development, which requires that we fully understand and take into account the environmental impacts of our products, processes and raw
materials. Our research staff and mills are working together to find ways to reduce environmental impacts, for example, by reclaiming waste flows and by reducing solid waste.

Our
Converting Division's key areas for research and development are coating technologies and applications for RFID labels. At our UPM Raflatac operations, priority has been given to
improving the quality of our filmic self-adhesive labelstocks and to producing thinner self-adhesive labelstocks for the beverage and other industries. Our RFID labels business
is actively involved in international standardization work, which is fundamental to the further development and large-scale commercialization of RFID technology. The research and development has
focused particularly on the development of Gen2 compatible products. The Gen2 standard was approved by the International Standards Organization in 2006 and this has increased the introduction of
applications based on RFID technology and improved the

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growth
prospects of the industry. We have also made commercially available our own RFID tags, which are now used by several major retail companies.

Our
Walki Wisa's development work has focused on biodegradable and compostable consumer package material. We have also developed and launched several new glue-laminated
paperboard applications. Research being conducted by our Wood Products Division is directed mainly at overlaying and gluing techniques, the properties of different wood species, production support and
the environment. For our customer segments, we have our own product development teams, which work to harness the potential offered by different technologies to serve the needs of the market. An
example of this development work is a new generation of products for parquet flooring manufacturers in which expertise in sawmilling and veneer products has been combined with gluing technology.

Our
Corporate Ventures unit seeks to generate new business for the Company by monitoring and developing products and processes based largely on new technologies.

Our
research centers employed approximately 290 individuals at the end of 2006. Centralization of our global research and development activities was completed with the opening of the new
Lappeenranta research center in June 2005. The Lappeenranta research center focuses on fibers and fiber raw materials, papers, coating and printing, as well as production support and the
environment. Our recycled fiber research is centered in Augsburg, Germany, and support for our North American operations is placed in Grand Rapids, Minnesota. We are scheduled to open a new research
center in China in April 2007.

Capital Expenditures

In 2007, we expect our capital expenditures, excluding potential acquisitions and share purchases, not to exceed the level of 2006. We have a number of investment
projects in progress during 2007, including the rebuild of the recovery plant at our Kymi pulp mill, conversion of the coated magazine paper machine 4 to produce label papers at our
Jämsänkoski mill, investment in the improvement of production efficiency and product quality at our plywood mills in Savonlinna and
Jyväskylä, investment in bleached pulp production at our Tervasaari mill, construction of a new mill to manufacture self-adhesive label stock in Dixon,
Illinois, in the United States, and construction of a new power plant at the Caledonian mill. In addition, our associated company Metsä-Botnia is constructing a pulp mill in Uruguay.

In
2006, we made a decision to rebuild the recovery plant at our Kymi pulp mill. The total investment cost is estimated at €325 million and the project is
scheduled for completion in the summer of 2008. At our Jämsänkoski mill, €45 million will be invested to convert the coated magazine paper machine
4 to produce label papers. The conversion is scheduled for completion in the second quarter of 2007. At our Jämsänkoski mill, we also intend to invest
€38 million in the quality of uncoated magazine paper. The investment is scheduled for completion in the second quarter of 2008.

At
our plywood mills in Savonlinna and Jyväskylä, €8 million will be invested to improve production efficiency and product quality.
These investments are scheduled for completion by the end of the first quarter of 2007.

We
are making a €25 million investment in bleached pulp production at our Tervasaari mill, where a new bleaching line is scheduled to start up in autumn 2007.

We
are building a new self-adhesive labelstock factory in Dixon, Illinois, in the United States. The value of our investment is approximately USD 109 million
(€83 million), and the new factory is scheduled for completion in the first quarter of 2008.

We
are building a new power plant using biofuels at our Caledonian mill, with an estimated investment cost, net, of approximately €72 million and
start-up scheduled for the third quarter of 2009.

The
modernization of the release paper machine 8 at our Tervasaari mill was completed at the end of February 2006. Our Walki Wisa's converting factory in China started its
operations in March 2006. In

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September 2006,
the rebuilds of two paper machines were completed at our Nordland and Docelles paper mills. These investments substantially improved product quality and efficiency of the
production lines. Completed in September, the modernization investment for the film lamination line at our Tampere labelstock factory doubled the filmic self-adhesive labelstock capacity
of the factory and further strengthened UPM Raflatac's position in the growing filmic labelstock market. At our Shotton paper mill, the new sludge boiler entered production use at the end of the year.
The investment further improved the mill's energy self-sufficiency and increased the use of biofuels. Our UPM Raflatac's new production plant in China started commercial production, ahead
of the original schedule, in December.

The
biofuel-fired power plant investment for our Chapelle Darblay mill is proceeding according to plan, with completion scheduled for the first quarter of 2007.

In
Uruguay, our associated company, Metsä-Botnia is constructing a pulp mill with an annual capacity of approximately 1 million tonnes. The construction project
began in 2005 and is scheduled for completion in the third quarter of 2007. Our cash investment in shares of the Metsä-Botnia's pulp company in Uruguay will be approximately
U.S.$99 million (€75 million). In March 2006, in connection with the Uruguayan pulp mill project, we sold our shares in the Uruguayan forestry company
Compañia Forestal Oriental S.A. to Metsä-Botnia for €36 million.

During
the year ended December 31, 2006, our gross capital expenditure, including acquisitions and share purchases, amounted to €699 million (7.0% of
sales), a decrease of €50 million from our capital expenditure of €749 million (8.0% of sales) during the year ended December 31, 2005. During the
year ended December 31, 2004, our gross capital expenditure amounted to €686 million (7.0% of sales). Capital expenditures comprised primarily investments in plants and
machinery. Acquisitions and purchases of shares accounted for €68 million in 2006, as compared to €44 million in 2005 and
€41 million in 2004. Maintenance and replacement investments in existing production machinery totaled €370 million in 2006 as compared to
€346 million in 2005 and €253 million in 2004. In addition to this, €261 million was spent in 2006 on changes in production and on
new production units and production lines, as compared to €359 million in 2005 and €392 million in 2004.

Sales
of shares and other non-current assets totaled €357 million in 2006, €573 million in 2005 and
€311 million in 2004. In 2006, the most notable transactions were the disposal of the Finnish building supplies merchant Puukeskus and our head office real estate. In 2005, the
proceeds comprised primarily our disposal of Loparex and our shares in Metso. In 2004, the proceeds included proceeds realized on the sale of Brooks.

Inflation

Inflation in Finland as measured by the consumer price index was 1.6% for the year 2006, 0.9% for the year 2005 and 0.2% for the year 2004. Inflation in Finland
did not have a significant impact on our operating results. However, a portion of our operations, sales and production is performed in countries with rates of inflation higher or lower than that of
Finland. Changes in rates of exchange may or may not reflect differences in rates of inflation. It is therefore not possible to quantify the individual or combined effects of these factors on reported
income.

Item 6.    Directors, Senior Management and Employees

Pursuant to the provisions of the Finnish Companies Act and our articles of association, the control and management of the Company is divided between the
shareholders (through actions taken at general meetings of shareholders), the Board of Directors and the President and Chief Executive Officer. In addition, we have an Executive Team, which assists
our President and Chief Executive Officer in the daily management of the Company.

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Our Board of Directors is responsible for the management of the Company and for the proper organization of our activities. The Board of Directors establishes the principles of our
strategy, organization, accounting and financial control and appoints our President and Chief Executive Officer, who acts in accordance with the orders and instructions of our Board of Directors. The
President and Chief Executive Officer, assisted by our Executive Team, is responsible for the day-to-day management of our affairs. The President and Chief Executive Officer is
also responsible for ensuring that our bookkeeping conforms with the law and that our financial administration and management is reliably organized. Measures that are not within the ordinary course of
our business may be taken by the President and Chief Executive Officer only if approved by the Board of Directors, unless the time required to obtain the approval of the Board of Directors would cause
us to suffer a substantial disadvantage. In the latter case, the Board of Directors must be informed as soon as practicable of the measures which have been taken. The business address for each of the
members of our Board of Directors and Executive Team is Eteläesplanadi 2, P.O. Box 380, 00101 Helsinki.

Board of Directors

Pursuant to our articles of association, our Board of Directors consists of at least five and no more than 12 members at any time. The Board of Directors
currently consists of ten members, each of whom has been elected by our shareholders in an annual general meeting of shareholders held on March 22, 2006 for a period ending with the following
annual general meeting of shareholders scheduled to be held on March 27, 2007. Members of our Board of Directors may be appointed, or removed, only by a resolution of shareholders in a general
meeting of shareholders. Pursuant to our articles of association, the mandatory age for retirement of members of our Board of Directors is 70.

Following
the annual general meeting of our shareholders held on March 22, 2006, the members of our Board of Directors are as follows:

|Vesa Vainio |  | Chairman
Member since 1996, Vice Chairman in 1997, Chairman since 2001
Independent member of the Board
Born 1942
LL.M.
Chairman 19981999 and 20002002 and Vice Chairman 19992000 of the Board of Directors of Nordea AB (publ). Chairman of the Executive Board and CEO of Merita Bank Ltd and CEO of Merita Ltd 19921997. President of Kymmene
Corporation 19911992. Various other executive positions in Finnish industry 19721991.
Member of the Board of Directors of Nokia Corporation.
Owns 14,073 of our shares.
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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|Jorma Ollila     |  | Vice Chairman
Member since 1997, Vice Chairman since 2004
Chairman of the Nominating and Corporate Governance Committee
Independent member of the Board
Born 1950
M.Sc. (Eng.), M.Sc. (Pol.Sci.), M.Sc. (Econ.), Ph.D. (Pol.Sc.) h.c. and D.Sc. (Tech.) h.c.
Chairman of the Boards of Directors of Nokia Corporation and Royal Dutch Shell Plc.
Various managerial positions at Nokia Corporation 19861996, including Chairman and CEO, Chairman of the Group Executive Board of Nokia Corporation, 19992006 and President and CEO, Chairman of the Group Executive Board of Nokia Corporation,
 19921999. Various managerial positions at Citibank within corporate banking 19781985.
Member of the Board of Directors of Ford Motor Company and Vice Chairman of the Board of Directors of Otava Books and Magazines Group Ltd. Chairman of the Boards of Directors and the Supervisory Boards of EVA, the Finnish Business and Policy Forum,
and ETLA, the Research Institute of the Finnish Economy. Chairman of the European Round Table of Industrialists.
Owns 34,193 of our shares.
|---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Berndt Brunow    |  | Vice Chairman
Member since 2002, Vice Chairman since 2005
Chairman of the Human Resources Committee
Independent member of the Board
Born 1950
B.Sc. (Econ.)
President & CEO of Oy Karl Fazer Ab since 2002.
Various managerial positions at Finnpap, UPM-Kymmene Corporation and Sanitec Corporation 19892002.
Chairman of the Finnish Food and Drink Industries' Federation.
Member of the Boards of Directors of Lemminkäinen Oyj, Oy Nautor Ab and Cloetta Fazer AB (publ.).
Owns 264,613 of our shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Martti Ahtisaari |  | Member since 2000
Independent member of the Board
Born 1937
Teacher Training College, University of Oulu. Granted honorary doctorates by several universities.
President of the Republic of Finland 19942000.
Chairman of the Board of Crisis Management Initiative. Positions at several international organizations and foundations. Appointed the Special Envoy of the UN Secretary-General for the future status process for Kosovo in November 2005.
Held several posts at the Ministry for Foreign Affairs of Finland and the United Nations, including Finland's Ambassador to Tanzania, UN Commissioner for Namibia, Under-Secretary General for Administration and Management (UN) and Secretary of State
at the Ministry for Foreign Affairs.
Member of the Board of Directors of Elcoteq Network Oyj.
Owns 7,790 of our shares.                                                                                                                                                                                                                                                     
|                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|Michael C. Bottenheim |  | Member since 2001
Chairman of the Audit Committee
Independent member of the Board
Born 1947
LL.M., MBA
In 1972, joined Pierson, Heldring & Pierson, which he left in 1976 to join Citicorp's European Investment Bank in London. From 1985 until 2000, served as a Director at Lazard Brothers & Co. Limited. From 2003 until 2005, member of the
Advisory Board of Montrose Associates, London.
Non-executive director of Montrose Associates, London, since 2006.
Owns 8,401 of our shares.                                                                                                  
|--------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Karl Grotenfelt       |  | Member since 2004
Member of the Nominating and Corporate Governance Committee
Independent member of the Board
Born 1944
LL.M.
Chairman of the Board of Directors of Famigro Oy.
From 1970 until 1986, served A. Ahlstrom Corporation as lawyer, General Counsel, Administrative Director and member of the Executive Board with responsibility for the Paper Industry.
Member of the Boards of Directors of Fiskars Corporation and Ahlström Capital Oy.
Owns 10,767 of our shares.                                                                                                            
|Georg Holzhey         |  | Member since 2003
Member of the Human Resources Committee and the Nominating and Corporate Governance Committee
Non-independent member of the Board
Born 1939
Dr. oec. publ.
Executive Vice President and co-owner of G. Haindl'sche Papierfabriken KgaA 19702001. Executive Vice President of UPM-Kymmene Corporation in 2002.
Owns 433,546 of our shares.                                                                                                                                                                                                                                   
|Wendy E. Lane         |  | Member since 2005
Member of the Audit Committee
Independent member of the Board
Born 1951
Master's degree from Harvard Graduate School of Business Administration.
Chairman of the American investment firm Lane Holdings, Inc. since 1992. From 1977 until 1980, investment banker at Goldman, Sachs & Co. and, from 1981 until 1992, investment banker at Donaldson, Lufkin & Jenrette Securities Corp.
Member the Boards of Directors of Laboratory Corporation of America and Willis Group Holdings Limited.
Trustee of the U.S. Ski & Snowboard Team Foundation.
Owns 2,078 of our shares.
|                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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|Ursula Ranin         |  | Member since 2006
Member of the Audit Committee
Independent member of the Board
Born 1953
LL.M., B.Sc. (Econ.)
Employed by Nokia Corporation within the legal function from 1984 until the end of 2005, holding the position of Vice President and General Counsel 19942005 and acting as the secretary of the Board of Directors 19962005.
Member of the Board of Directors of Finnair Plc.
Owns 1,140 of our shares.                                                                                
|-------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Françoise Sampermans |  | Member since 2004
Member of the Human Resources Committee
Independent member of the Board
Born 1947
B.A., Psych.
Publishing Consultant (TJ Presse, GoYellow, DATEM, AXE-MEDIA).
From 1984 until 2000, held executive positions at various publishers (L'Express, le Point, Marianne, Le Nouvel Economiste), the printer Quebecor Europe and Alcatel-Alstom Group. From 2000 until 2003, in charge of the business unit Magazine and
Multimedia Distribution in France at NMPP.
Owns 4,767 of our shares.

Proposal of the Nominating and Corporate Governance Committee for the New Composition of Our Board of Directors

On
February 12, 2007, the Nominating and Corporate Governance Committee of our Board of Directors adopted its proposal to the annual general meeting of our shareholders scheduled
to be held on March 27, 2007 regarding the election of the members to our Board of Directors. The Nominating
and Corporate Governance Committee proposes to the annual general meeting of shareholders that the number of the members of the Board of Directors be increased from ten to 11, and that the
following current members of the Board of Directors be re-elected for a term ending at the end of the next annual general meeting of our shareholders: Vesa Vainio, Jorma Ollila, Berndt
Brunow, Michael C. Bottenheim, Karl Grotenfelt, Georg Holzhey, Wendy Lane, Ursula Ranin and Françoise Sampermans. In addition, the Nominating and Corporate Governance Committee
proposes that Veli-Matti Reinikkala and Jussi Pesonen be elected as new members of the Board of Directors for such term. Martti Ahtisaari, a member of our Board of Directors since 2000,
will not stand for re-election to the Board of Directors.

Veli-Matti
Reinikkala, born in 1957, has acted as the Head of ABB Ltd's Process Automation division since January 2006. Mr. Reinikkala is a member of the
ABB Ltd's Group Executive Committee, the Chairman of the Board of ABB Oyj in Finland and the Chairman of the Board of ABB Turbo Systems AG in Switzerland. Mr. Reinikkala holds an
Executive Master of Business Administration (EMBA) degree.

Jussi
Pesonen, born in 1960, is our President and Chief Executive Officer. See "Executive Team" below.

Executive Team

Our Executive Team assists our President and Chief Executive Officer in the management of the Company. It prepares matters, such as strategies, budgets and
policies as well as significant investments, acquisitions and divestments, for the decision making by our Board of Directors. The Executive Team also handles matters relating to reporting, external
and internal communication, human resources development, employee compensation and management of investors relations. The members of the

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Executive
Team include our President and Chief Executive Officer, the presidents of our business divisions and the executive vice presidents responsible for our corporate functions. The business
divisions have their own management groups, the purpose of which is to assist the presidents of their respective divisions. In addition, there are also local management groups in which our employees
are represented.

Currently,
the members of our Executive Team are as follows:

|Jussi Pesonen  |  | President and Chief Executive Officer of UPM-Kymmene Corporation, from January 29, 2004
Born 1960
M.Sc.(Eng.).
Joined UPM in 1987 and occupied several posts including Production Manager at Jämsänkoski mill, Production Unit Director at Kajaani, Kaukas and Shotton mills and Vice President of Newsprint Product Group. COO of the paper divisions
20012003. In January 2004, prior to becoming President and CEO, he served the Company as Senior Executive Vice President and deputy to the President and CEO.
Owns 20,014 of our shares and holds 50,000 Class D options, 70,000 Class E options, 50,000 Class F options and 100,000 Class G options.               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Pirkko Harrela |  | Executive Vice President, Corporate Communications, from January 2004
Born 1960
M.A.
Several posts in Finnpap 19851996. Several management posts in Communications for Printing Papers Division 19962002. Vice President, Corporate Communications, 2003.
Owns 5,770 of our shares and holds 13,200 Class D options, 37,000 Class E options, 21,500 Class F options and 30,000 Class G options.                                                                                                                                                                                                                                                                           
|Pauli Hänninen |  | Executive Vice President, Technology, from January 2007
Born 1948
M.Sc.(Eng.), Tech. Licentiate
In A. Ahlstrom in various production and line management positions 19741989, the last position as Vice President and General Manager of Kauttua paper mill 19861989. Director of Kaipola LWC mill 19891993. Vice President and General
Manager of Kajaani paper mill 19932000. Vice President, Product Group Uncoated Papers 20002001. Senior Vice President, Fine Paper Operations 20012003. Executive Vice President, Business Development, 20042006.
Owns 1,460 of our shares and holds 13,000 Class D options, 21,500 Class F options and 30,000 Class G options.
|Matti Lievonen |  | President, Fine and Speciality Papers Division, from January 2004
Born 1958
B.Sc.(Eng.), MBA
Several posts in United Paper Mills Ltd since 1986, including Project Manager, Technical Manager and Director for TD production unit at Kaipola mill 19941996. Director of Chapelle Darblay S.A. production unit in France 19972001. Executive
Vice President, Business and Technology Optimization 20022003.
Owns 1,000 of our shares and holds 18,000 Class D options, 37,000 Class E options, 21,500 Class F options and 50,000 Class G options.                                                                                                                         
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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|Matti J. Lindahl   |  | President, Wood Products Division, from March 2007
Born 1946
B.Sc. (Econ.)
Joined Finnboard in 1972 and held several management posts in sales and marketing. Managing Director of Finnboard (UK) Ltd. 19821990. President of Finnboard 19901992 and of Wisaforest Oy Ab 19921993. CEO of Nordland Papier AG
19942002. President, Fine Paper Division, 19972001. Executive Vice President, Haindl integration, 2002. President, Converting Division, 20022004. President, Speciality Coatings Business, 20052007.
Holds 33,000 Class D options, 37,000 Class E options and 21,500 Class F options.                     
|------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Heikki Malinen     |  | Executive Vice President, Strategy, since January 2006
Born 1962
M.Sc. (Econ.), MBA (Harvard)
Several posts in Finnpap 19881994, including Director, Marketing & Sales. In 1995, Director of Business Development of United Paper Mills Ltd. Engagement Manager with McKinsey & Company 19971999. Managing Partner with Jaakko
Pöyry Consulting 20002001. President of Sales with UPM-Kymmene, Inc. 20022004. President, UPM-Kymmene North America 20042005.
Holds 13,200 Class D options, 22,000 Class E options, 21,500 Class F options and 50,000 Class G options.                                                    
|Jyrki Ovaska       |  | President, Magazine Papers Division, from January 2004
Born 1958
M.Sc.(Eng.)
Held several posts with United Paper Mills Ltd, Jämsänkoski mill, in production, customer service and business management 19841995. Vice President, Business Development, Printing Papers 19961998. Vice President, LWC Product
Group 19982000. Senior Vice President, Business Development and Support Functions, Publication Papers 20002001. President, Fine & Speciality Papers Division 20022003.
Owns 3,300 of our shares and holds 33,000 Class D options, 37,000 Class E options, 21,500 Class F options and 50,000 Class G options.
|Heikki Pikkarainen |  | President, Labelstock Business, from January 2005
Born 1963
M.Sc.(For.), MBA
Corporate Analyst with Industrialization Fund of Finland, 19881989. Various tasks in M&A projects, business development and corporate analysis with Jaakko Pöyry Consulting, 19891998. Director, Business Development and Vice
President of CHP business in Power and Heat Division, Fortum Oyj, 19982000. Since 2000 with UPM in several posts of strategic development, most recently Vice President, Strategic Development during 20032004.
Owns 8,000 of our shares and holds 21,500 Class F options and 50,000 Class G options.         
|                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|Jyrki Salo        |  | Executive Vice President and CFO, since February 2006
Born 1960
M.Sc.(Econ.)
Joined IBM Corporation in 1984, various tasks in sales and market development positions in Finland and the United Kingdom. Joined Nokia Corporation in 1990 holding several posts in senior executive positions with business and finance & control
responsibilities in Finland, Belgium, Germany, the Netherlands and the USA. Senior Vice President, Finance & Control for Nokia's Networks Business Group 20022005.
Owns 6,100 of our shares and holds 21,500 Class F options and 50,000 Class G options.                                                                                                                                                                                         
|----------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Riitta Savonlahti |  | Executive Vice President, Human Resources, from May 2004
Born 1964
M.Sc.(Econ.)
Held HR Specialist posts with ABB 19901994. Human Resources Manager with Nokia Mobile Phones, Salo Operations 19952000. Senior Vice President, Human Resources with Raisio Group 20002001. Senior Vice President, Human Resources with
Elcoteq Network Corporation 20012004.
Holds 35,000 Class E options, 21,500 Class F options and 30,000 Class G options.                                                                                                                                                                                                                                                                                                                                  
|Hans Sohlström    |  | Executive Vice President, Marketing, from March 2004
Born 1964
M.Sc.(Tech.), M.Sc.(Econ.)
Various tasks in business control and development, procurement, planning, production and maintenance at Oy Wilh. Schauman Ab, Nordland Papier GmbH and Kymmene Oy 19841989. Marketing Assistant, Finnpap, 19891990. Marketing Manager, Stracel
S.A. 19901994. Mill Director, Jämsänkoski MFC and SC mills, 19941998. Management posts in sales and marketing, Publication Papers, 19982002. Senior Vice President Sales & Marketing, Magazine Paper Division,
20022004.
Owns 3,492 of our shares and holds 21,500 Class F options and 30,000 Class G options.                                                                                                                      
|Markku Tynkkynen  |  | Executive Vice President, Business Functions and Resources, since January 2004
Born 1952
M.Sc.(Paper Eng.).
Employed by A. Ahlstrom 19801982 as Production Engineer. Joined UPM in 1982 having several management posts in production, business development, sales and business management. Paper mill director of Stracel S.A. 19901993. General Manager
and Vice President of Jämsänkoski profit unit 19941998. Vice President of SC Product Group 19982000. Senior Vice President, Publication Papers Division, with responsibility for product groups, technology and mills,
20002001. President, Magazine Paper Division 20022003.
Owns 3,600 of our shares and holds 33,000 Class D options, 37,000 Class E options, 21,500 Class F options and 50,000 Class G options.
|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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|Hartmut Wurster |  | President, Newsprint Division, from January 2002
Born 1955
D.Tech.
Several posts with Hamburger AG and Brigl & Bergmeister in Austria 19821987, including Head of Technology Department and Production Manager. Joined Haindl Papier GmbH & Co. KG in 1987. Head of Technology Department at Augsburg mill
19871989. Mill Director, Augsburg, 19891996 and member of the Executive Board responsible for the Magazine Paper Division, 19962001.
Holds 24,000 Class E options, 21,500 Class F options and 50,000 Class G options.
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Compensation of Directors and Officers

Directors

For the year ended December 31, 2006, the aggregate remuneration paid to the members of our Board of Directors as a group was
€1.0 million.

The
following table sets forth the total annual remuneration paid to the members of our Board of Directors on an individual basis.

Fees and share ownership of the members of the Board of Directors on an individual basis

|                                          |  | Fees paid in 2006 |  |       
|----------------------------------------- |  | ----------------- |  | ------
|
|
|
|Vesa Vainio, independent, Chairman        |  | 96,000            |  | 3,912 
|Jorma Ollila, independent, Vice Chairman  |  | 66,008            |  | 2,689 
|Berndt Brunow, independent, Vice Chairman |  | 66,008            |  | 2,689 
|Martti Ahtisaari, independent             |  | 51,004            |  | 2,078 
|Michael C. Bottenheim, independent        |  | 66,008            |  | 2,689 
|Karl Grotenfelt, independent              |  | 51,004            |  | 2,078 
|Georg Holzhey, not-independent(2)         |  | 51,004            |  | 2,078 
|Wendy E. Lane, independent                |  | 51,004            |  | 2,078 
|Ursula Ranin                              |  | 51,004            |  | 2,078 
|Françoise Sampermans, independent(3)      |  | 51,004            |  | 2,078 
|                                          |  |                   |  |       
|Total                                     |  | 572,503           |  | 23,325
|                                          |  |                   |  |       

---

Share ownership also includes shares held by under-age children by organizations or foundations of which the person has control.

Officers

For the years ended December 31, 2006, 2005 and 2004, the aggregate remuneration paid to the members of our Executive Team in salaries and fringe benefits
was approximately €5.5 million, €6.4 million and €4.6 million, respectively, of which approximately
€0.3 million, €1.0 million and €0.4 million, respectively, was paid in the form of bonuses. The combined compensation of our
President and Chief Executive Officer Jussi Pesonen, including salary, fringe benefits and other remuneration, in 2006, 2005

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and
2004 was €899,000, €1,012,000 and €665,000, respectively, of which €0, €240,000 and €90,000,
respectively, was in the form of bonuses. Contributions paid to Mr. Pesonen's voluntary pension plan amounted to €154,000, €84,000 and €0 in
2006, 2005 and 2004, respectively, and we recognized expenses with respect to his pension costs arising from the Finnish TEL scheme totaling €161,000 €178,000 and
€127,000 in 2006, 2005 and 2004, respectively.

Reward Schemes

According to our short-term incentive scheme, our executives can be paid a performance-related reward amounting to not more than 18 months'
salary in the case of our President and Chief Executive Officer and 12 months' salary in the case of other members of our Executive Team. The amount is based on a matrix of earnings per share
and return on capital employed, customer satisfaction, achievement of personal targets and comparison with competitors.

In
addition to salaries and bonuses the members of our Executive Team are also entitled to participate in our long-term incentive programs, including stock option plans and
equity-based reward scheme. The total expense recognized with respect to share-based payments was €0.8 million in 2006, €1.2 million in 2005 and
€2.2 million in 2004.

Those
of our key personnel who fall within the scope of our equity-based reward scheme may be rewarded with shares of UPM-Kymmene Corporation annually for the calendar years
2005, 2006 and 2007. The reward has been paid or will be paid as a combination of shares and cash. Altogether, a maximum of 1,046,400 shares may be given to key personnel on the basis of the scheme.
The amount to be paid in cash may be not more than 1.5 times the value of the shares given. The
amount of the reward is tied to the achievement of set performance targets. No rewards were given for the year 2005.

In
February 2007, our Board of Directors resolved to award our President and Chief Executive Officer Jussi Pesonen 14,500 shares and the other members of our Executive Team a
total of 56,544 shares under the schemes for 2006. In addition, in February 2007, a resolution was adopted to distribute 100,000 G2005 share options to our President and Chief Executive Officer
and a total of 470,000 G2005 share options to the other members of our Executive Team.

The
retirement age of President and Chief Executive Officer Jussi Pesonen is 60 years. Depending on the service contracts, the retirement age of the other members of our Executive
Team members is 62 or 63 years. Their target pension is 60% of the average indexed earnings from the last ten years. The costs of lowering the retirement age or supplementing statutory pension
security are generally covered by voluntary pension insurance. The expenses of our Executive Team members' defined benefit pension plans in 2006, 2005 and 2004 were
€0.9 million, €1.5 million and €0.4 million, respectively, and the expenses of their defined contribution plans were
€0.8 million, €0.9 million and €0.8 million, respectively.

Our
former President and Chief Executive Officer Juha Niemelä received termination benefits amounting to €490,000, €735,000 and
€306,000 in 2006, 2005 and 2004, respectively. The combined value of his salary and fringe benefits in 2004 was €467,000. Contributions paid to his voluntary pension
plan amounted to €1,883,000, €0 and €116,000 in 2006, 2005 and 2004, respectively, and the expenses recognized with respect to pension costs arising
from the Finnish TEL scheme totaled €89,000 in 2004.

Members
of our Executive Team have negotiated certain benefits in the event of their service contracts being terminated prior to the expiration date stated in them. If the Company gives
notice of termination to Jussi Pesonen, our President and Chief Executive Officer, a severance compensation of 24 months' fixed salary will be paid, in addition to the six months' salary for
the notice period. For other members of our Executive Team, the period for additional severance compensation is 12 months in addition to the six months' salary for the notice period.

If
there is a change of control in UPM-Kymmene Corporation as defined in the service contracts, each member of our Executive Team may terminate such service contract within
one month or, in the case of

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Jussi
Pesonen, within three months, from the date of the event that triggered the change of control, and shall receive compensation equivalent to 24 months' fixed salary.

Board Practices

The Board of Directors

Our Board of Directors is responsible for the management of the Company and for the proper organization of its activities in accordance with the applicable
legislation and our articles of association. The Board of Directors establishes our principles of strategy, organization, accounting and financial control and appoints our President and Chief
Executive Officer, who shall act in accordance with the orders and instructions of the Board of Directors. The Board of Directors' other duties include:



Our
Board of Directors is also responsible for the oversight of management of risks related to our strategy and operations, for monitoring our compliance with applicable legal and
regulatory requirements and for the oversight of the internal audit as well as internal audit processes and financial reporting. In addition, the Board of Directors' duties include the appointment and
dismissal of our President and Chief Executive Officer and approval of his/her service contract, the appointment and dismissal of the other members of our Executive Team as well as those of our other
employees, who report directly to our President and Chief Executive Officer, including approval of their salaries, pensions and other emoluments based on the proposal of our Human Resources Committee.
The Board of Directors makes an annual evaluation of its performance and working methods.

Members
of our Board of Directors are elected for a term of one year that begins at the end of the annual general meeting of shareholders at which they are elected and terminates at the
end of the next annual general meeting of shareholders. Members of our Board of Directors may be elected or removed only by a resolution of shareholders in a general meeting of shareholders and there
are no benefits provided upon termination of their service as Board members. For the year during which a specific member was elected to our Board of Directors, see the individual biographies of the
members of our Board of Directors under "Board of Directors" above.

Members
of our Board of Directors are required to report to the Board of Directors all matters that may be significant with respect to the assessment of their competence and independent
status. The Board of Directors has determined that all of the members of our Board of Directors are independent, as defined in the Finnish rules and regulations as well as the New York Stock
Exchange's listing standards, with the exception of Mr. Georg Holzhey, who held a position in the Company until the end of April 2004. A

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member
of the Board of Directors is not independent of the Company if he or she, among others, has had an employment relationship with the Company or has held a position in the Company during the last
three years prior to becoming a member of our Board of Directors.

Our
Board of Directors elects from among its members a Chairman and two Vice Chairmen for a period starting at the end of the meeting at which they are elected and ending at the
conclusion of the next following annual general meeting of our shareholders. The Board of Directors is deemed to have a quorum when more than one-half of its members are present and one of
them is either the Chairman or Vice Chairman. The Board of Directors may consult external experts when it considers necessary. Our Board of Directors met 11 times during 2006. On average, the members
of our Board of Directors attended 99% of the meetings. We are not aware of any conflicts of interest or potential conflicts of interest between any duties of the Company or the members of our Board
of Directors, on the one hand, and the private interests of the members of our Board of Directors, on the other hand.

Committees of our Board of Directors

Pursuant to our articles of association, our Board of Directors may set up special committees comprising its members. Pursuant to our Corporate Governance
guidelines, the Board of Directors shall set up three committees at its organizational meeting each year: an Audit Committee, a Human Resources Committee and a Nominating and Corporate Governance
Committee. The members of the abovementioned committees are appointed by our Board of Directors upon the recommendation of the Nominating and Corporate Governance Committee. Our Board of Directors may
also adopt charters for the committees, setting forth the purposes, goals and responsibilities of each of the abovementioned committees and any other committees the Board of Directors deems
appropriate as well as the qualifications for committee membership, procedures for the appointment and removal of committee members and the structure, operations and reporting methods of each of the
committees. The charters are available on our websitewww.upm-kymmene.com.

Audit Committee.Pursuant to its charter, the Audit Committee shall comprise at least three members. On March 22,
2006, the Board of Directors elected, from among its independent members, an Audit Committee comprising Michael C. Bottenheim as Chairman and Wendy E. Lane and Ursula Ranin as members.
The members of the Audit Committee shall meet the independence and financial literacy and other requirements of Finnish law and the rules of the Helsinki Stock Exchange as well as the rules of the New
York Stock Exchange applicable to the Company. Our Board of Directors has determined Michael C. Bottenheim and Wendy E. Lane to be "audit committee financial experts." See "Item 16A. Audit
Committee Financial Expert."

The
Audit Committee has been established by the Board of Directors primarily for the purpose of overseeing our accounting and financial reporting processes and audits of our financial
statements. The Audit Committee's duties include scrutinizing the contents of our annual financial statements and interim reports as well as our internal control systems and auditing. The Audit
Committee is also responsible for assisting the Board of Directors' oversight of (i) the quality and integrity of our financial statements and related disclosure, (ii) the performance of
our internal control and risk management, (iii) the performance of the internal audit, (iv) the external auditor's qualifications and independence, (v) the performance of the
external auditors and (vi) our compliance with legal and regulatory requirements. The Audit Committee shall also maintain procedures for the receipt, retention and treatment of complaints
received by us regarding accounting, internal controls, auditing matters or potential violations of law and for the confidential submission by our employees of concerns regarding
accounting or auditing matters or potential violations of law. At its meetings, the Audit Committee discusses matters with our internal and external auditors, President and Chief Executive Officer,
Chief Financial Officer and other executives as appropriate. The Audit Committee convened six times during the year 2006.

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Human Resources Committee.Pursuant to its charter, the Human Resources Committee shall comprise at
least three members. The
current members of the Committee are: Berndt Brunow as Chairman and Françoise Sampermans and Georg Holzhey as members. The members of the Human Resources Committee shall meet the
independence requirements of Finnish law and the rules of the Helsinki Stock Exchange as well as the rules of the New York Stock Exchange applicable to the Company. See "Home Country
Practices" below. In addition, desirable qualifications for the Committee members include experience in business management, executive compensation, employee benefits and human resources.

The
primary purposes of the Human Resources Committee are to (i) assist the Board of Directors with its responsibilities relating to the appointment, evaluation and compensation
of our President and Chief Executive Officer and members of the Executive Team and other employees who report directly to our President and Chief Executive Officer, (ii) oversee the Company's
human resources policies, compensation plans and programs and (iii) review procedures for appropriate succession planning for senior management. Final decisions on proposals made by the Human
Resources Committee concerning our Executive Team are made by our Board of Directors. The Human Resources Committee convened seven times during the year 2006.

Nominating and Corporate Governance Committee.Pursuant to its charter, the Nominating and Corporate Governance Committee
shall comprise at least three members. The current members of the Nominating and Corporate Governance Committee are Jorma Ollila as Chairman and Karl Grotenfelt and Georg Holzhey as members. The
members of the Nominating Governance Committee shall satisfy the independence requirements of Finnish law, and the rules of the Helsinki Stock Exchange and the rules of the New York Stock Exchange
applicable to the Company. See "Home Country Practices" below. Desirable qualifications for the members of the Committee include experience in corporate governance, business management,
personnel or human resources management, and organizational behaviour.

The
Nominating and Corporate Governance Committee handles matters relating to the membership of our Board of Directors and its committees and corporate governance. The primary purposes
of the Nominating and Corporate Governance Committee are to (i) identify individuals qualified to serve as directors and recommend nominees for election or re-election to the Board
of Directors and their fees and other remuneration to be approved by the shareholders consistently with the criteria approved by the Board of Directors and (ii) develop and recommend to the
Board of Directors a set of corporate governance principles applicable to the Company and review, on a regular basis, the overall corporate governance of the Company. Final decisions on proposals made
by the Nominating and Corporate Governance Committee concerning our Board of Directors are made by the shareholders at the annual general meeting of shareholders. The Nominating and Corporate
Governance Committee convened seven times during the year 2006.

Meetings
of the aforementioned committees may be attended by all members of our Board of Directors.

Home Country Practices

Under the New York Stock Exchange's listing standards, listed foreign private issuers, like UPM, must disclose any significant ways in which their corporate
governance practices differ from those followed by U.S. domestic companies under the NYSE listings standards. There are no significant differences in the corporate governance practices followed by UPM
as compared to those followed by U.S. domestic companies under the NYSE listings standards, except that:



78

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Our
corporate governance practices comply with the Corporate Governance Recommendation for Listed Companies of the Helsinki Stock Exchange, the Finnish Central Chamber of Commerce and
the Confederation of the Finnish Industries in December 2003. Our Board of Directors has adopted corporate governance guidelines for the Company, which are available at our website www.upm-kymmene.com. In addition, our Board of Directors has adopted a code of conduct applicable to our directors, officers, and employees.
See "Item 16B. Code of Ethics."

Our
Board of Directors has adopted an insider policy for our group, which sets forth the rules governing the insiders of the Company. Our permanent insiders as of January 1, 2006
included the members of our Board of Directors, our President and Chief Executive Officer, the auditor who has principal responsibility for auditing our financial statements and other members of our
senior management who regularly receive insider information and who have the authority to make decisions affecting the Company's future development and organization of its business activities. The
holdings of the shares of the Company by the primary insiders are public information and are available in the Finnish Central Securities Depository and our website www.upm-kymmene.com. The
permanent insiders are subject to a number of trading restrictions and rules, including among others, prohibitions
on trading in our securities during the four-week "closed window" periods preceding and including, the disclosure date of our annual or quarterly results. When necessary, insider registers
will be drawn up for individual projects and trading restrictions will be imposed. Persons possessing inside information are not allowed to trade in our securities.

Employees

Our human resources policy is based on clear areas of responsibility with defined targets, regular appraisal discussions, continuous training process as well as
feedback and rewards. As of December 31, 2006, we employed 28,704 individuals of whom 14,946, or 52%, were employed in Finland. Our human resources policy is implemented by local units, where
the practices can be developed using regional synergies and local strengths. We have implemented a profit-based bonus plan to provide incentives for all

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employees
and to help build a corporate culture with increased emphasis on profitability. Our employees also participate in various other incentive programs based on productivity and other factors. We
are extending our incentive schemes more widely throughout our divisions and business units. In most cases, earnings comprise of a fixed basic salary and payments under our short-term
incentive scheme that combines performance-related and profit-based elements into one incentive scheme. In 2006, payments under the latter totaled €20 million. In addition, we
conduct employee opinion surveys to study working conditions, working morale and employee satisfaction. Special importance is given to appraisal discussions between employees and their superiors and
to remuneration and recruitment processes.

A
large number of our employees belong to trade unions. In Finland, approximately 90% of our employees belong to unions, while in other countries where we have principal production
plants, the proportion of unionized workers typically varies between 10% and 50%. Local practice and legislation are observed in our labor relations matters and in negotiating collective agreements.
The paper industry and wood products industry in Finland have typically concluded collective agreements with a group of trade unions, representing blue-collar workers and white-collar
salaried employees in the paper industry, wood products industry and forestry operations. The two to three years' collective agreements currently in force will expire in October 2007 in the
wood products industry and forestry operations and in May 2008 in the paper industry. The nationwide increases in wages and salaries became effective in June 2006. See "Item 5. Operating
and Financial Review and ProspectsRecent DevelopmentsLabor Disputes" for a discussion of certain recent labor disputes.

The
following table sets forth the number of personnel by country at the end of the past three years:

|                  |  | As of December 31,
|----------------- |  | ------------------
|
|Finland           |  | 14,946            
|Germany           |  | 4,097             
|United Kingdom    |  | 1,622             
|France            |  | 1,463             
|Russia            |  | 1,361             
|Austria           |  | 679               
|Spain             |  | 269               
|Estonia           |  | 172               
|Italy             |  | 86                
|Poland            |  | 66                
|Hungary           |  | 52                
|Sweden            |  | 46                
|Belgium           |  | 42                
|The Netherlands   |  | 34                
|Denmark           |  | 23                
|Other Europe      |  | 76                
|China             |  | 1,302             
|United States     |  | 1,024             
|Canada            |  | 909               
|Malaysia          |  | 147               
|Australia         |  | 95                
|South Africa      |  | 92                
|Rest of the world |  | 101               
|                  |  |                   
|Total             |  | 28,704            
|                  |  |                   

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The following table sets forth the number of personnel by division at the end of the past three years:

|                           |  | As of December 31,
|-------------------------- |  | ------------------
|
|Magazine papers            |  | 6,869             
|Newsprint                  |  | 3,204             
|Fine and speciality papers |  | 6,283             
|Converting                 |  | 3,560             
|Wood products              |  | 5,577             
|Other operations           |  | 3,211             
|                           |  |                   
|Total                      |  | 28,704            
|                           |  |                   

Share Ownership

As of March 9, 2007, members of our Board of Directors and our Executive Team, as a group, held 834,104 ordinary shares, representing 0.16% of the issued
and outstanding share capital and 0.16% of the voting rights of the Company. Members of our Executive Team, in the aggregate, also hold stock options that, if converted, could raise our share capital
by €3,373,310 (1,984,300 ordinary shares), representing, as of March 9, 2007, 0.38% of the share capital of the Company, on a fully-diluted basis. Each member of our Board of
Directors and our Executive Team, on an individual basis, beneficially owned less than 1% of our issued and outstanding shares (including shares that are issuable upon the conversion of stock options)
as of March 9, 2007.

As
of March 19, 2002, our shareholders authorized the issuance of 7,600,000 stock options to key personnel as well as to one of our wholly-owned subsidiaries. Each stock option
entitles its holder to subscribe for two shares of the Company. Half of the stock options are marked with the symbol 2002D, while the other half are marked 2002E. Those stock options marked 2002D may
be exercised between April 1, 2004 and April 30, 2007 while those stock options marked 2002E may be exercised between April 1, 2005 and April 30, 2008.

The
share subscription price for the stock options marked 2002D is €21.95 per share and the share subscription price for the stock options marked 2002E is
€14.27 per share. The share subscription price of stock options 2002D and 2002E will, as per the dividend record date, be reduced by the amount of the dividend decided after the end of
the period for determination of the subscription price but before share subscription. As a result of the share subscriptions with the 2002 stock options, our share capital may be increased by a
maximum of €25,840,000.

On
March 31, 2005, our shareholders authorized the issuance of 9,000,000 stock options to key personnel as well as to one of our wholly-owned subsidiaries. Each stock option
entitles its holder to subscribe for one share of the Company. Of the stock options, 3,000,000 are marked with the symbol 2005F, 3,000,000 with the symbol 2005G and 3,000,000 with the symbol 2005H.
Those stock options marked 2005F may be exercised between October 1, 2006 and October 31, 2008. Those stock options marked 2005G may be exercised between October 1, 2007 and
October 31, 2009. Those stock options marked 2005H may be exercised between October 1, 2008 and October 31, 2010.

The
share subscription price for the stock option 2005F is €18.23, the trade volume weighted average quotation of the shares of the Company on the Helsinki Stock Exchange
between January 1 and February 28, 2005 with an addition of 10%. For the stock option 2005G, the share subscription price is €18.65, the trade volume weighted average
quotation of the share of the Company on the Helsinki Stock Exchange between January 1 and February 28, 2006 plus an additional 10%. For the stock option 2005H, the share subscription
price is €21.65, the trade volume weighted average quotation of the shares of the

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Company
on the Helsinki Stock Exchange between January 1 and February 28, 2007 plus an additional 10%.

The
share subscription price of the stock options shall, as per the dividend record date, be reduced by the amount of the dividend decided after the end of the period for determination
of the subscription price but before the share subscription. However, the subscription price of the share shall never be less than the book value (equivalent value) of the share.

As
a result of the share subscriptions made against the 2005 stock options our share capital may be increased by a maximum of €15,300,000.

As
of March 9, 2007, the maximum number of new shares of the Company that may be issued through the exercise of the D, E, F, G and H stock options represented approximately 2% of
our total share capital.

Item 7.    Major Shareholders and Related Party Transactions

Major Shareholders

As far as it is known to our management, we are not, directly or indirectly, controlled by another corporation, by any government or by any other entity and there
are no arrangements the operation of which may at a subsequent date result in a change in our control.

The
following table sets forth our major shareholders as of March 9, 2007, based on registered share ownership as reflected in our share register (except for the Holzhey/Bischoff
group, which includes ten prior Haindl shareholders, for which the share ownership information is as of February 12, 2007):

|                                                                        |                                                                         | As of March 9, 2007 |            
|----------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------- | -----------
|
|Holzhey/Bischoff group (including ten prior Haindl shareholders)        |                                                                         | 9,347,704           |            
|Ilmarinen Mutual Pension Insurance Company                              |                                                                         | 8,114,465           |            
|Gustaf Serlachius (representing five shareholders)                      |                                                                         | 6,309,811           |            
|Varma Mutual Pension Insurance Company                                  |                                                                         | 5,335,458           |            
|Svenska litteratursällskapet i Finland                                  |                                                                         | 3,545,870           |            
|The State Pension Fund                                                  |                                                                         | 3,150,000           |            
|Etera Mutual Pension Insurance Company                                  |                                                                         | 2,154,200           |            
|Eläke-Fennia Mutual Pension Fund                                        |                                                                         | 2,027,316           |            
|The Finnish Cultural Foundation                                         |                                                                         | 1,748,816           |            
|The Kymi 100 Year Foundation                                            |                                                                         | 1,745,482           |            
|Nominees & registered foreign owners (excluding Holzhey/Bischoff group) |                                                                         | 365,141,919         |            
|                                                                        | Nominees & registered foreign owners (including Holzhey/Bischoff group) |                     | 374,489,623
|Others                                                                  |                                                                         | 114,638,389         |            
|                                                                        |                                                                         |                     |            
|Total                                                                   |                                                                         | 523,259,430         |            
|                                                                        |                                                                         |                     |            

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To the knowledge of our management, there were two holders of 5% or more of our shares as of March 9, 2007:

|                                 |  | As of March 9, 2007 | 
|-------------------------------- |  | ------------------- | 
|
|Franklin Resources Inc.(1)       |  | 39,737,680          | 
|Capital Group Companies, Inc.(2) |  | 51,660,753          | 

---

As of March 9, 2007, 23,702,496 shares in the form of ADSs, representing 4.53% of our issued and outstanding shares, were held in the
United States by 17 record holders. In addition, as of March 9, 2007, 1,526,916 shares, representing 0.29% of our issued and outstanding shares, were held in the United States by 171 record
holders.

Related Party Transactions

There is no outstanding indebtedness to UPM-Kymmene Corporation by any director or executive officer or 10% shareholder of the Company.

From
time to time, UPM-Kymmene Corporation and its subsidiaries engage in ordinary course transactions with other companies that are related to UPM-Kymmene
Corporation. These transactions include the supply of different paper grades, pulp, wood or other products and the provision of treasury and financing transactions. Along with our subsidiaries, we
negotiate the terms of each transaction on an arm's-length basis following management guidelines. We believe that the terms of each transaction are generally no less favorable than would be available
in transactions with third parties that are not related to us.

Chemical Pulp.Most of our chemical pulp is produced and sold internally. The internal sales are priced at the market price
for the pulp. Furthermore, we hold a 47% interest in Metsä-Botnia, a joint venture with M-real and Metsäliitto. M-real is a Finnish paper producer
and Metsäliitto is a co-operative organization of Finnish forest owners. Metsäliitto is also the controlling shareholder of M-real. Chemical pulp
produced by Metsä-Botnia is sold to us and to M-real at the market price less certain transportation and other costs. In 2006, 2005 and 2004, our chemical pulp entitlement
with respect to the production of Metsä-Botnia was 1.1 million tons per year. Total purchases of chemical pulp from Metsä-Botnia amounted to
€197 million in 2006, €201 million in 2005 and €238 million in 2004. See "Item 4. Information on the CompanyAssociated
Companies and Joint VenturesMetsä-Botnia."

Energy.We obtain most of the energy for our production units in Finland through power plants which we owned or leased, as
well as through ownership in power companies, which entitle us to receive

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electricity
and heat from those companies. A significant volume of our electricity procurement comes from Pohjolan Voima, a Finnish power producer in which we hold a 42.19% equity interest, and
Kemijoki Oy, a Finnish hydropower producer in which we hold a 4.13% equity interest. Pohjolan Voima is also a majority shareholder in Teollisuuden Voima Oy, one of Finland's two nuclear power
companies. Purchases of electricity from these associated companies totaled €194 million in 2006, €166 million in 2005 and
€198 million in 2004. In accordance with the articles of association of the power companies and related shareholder agreements, the prices we pay to the power companies are
based on production costs, which are generally lower than market prices. Internal sales are based on the prevailing market price.

Research and Development.Approximately 10 to 15% of our research and development activities is conducted by FPPRI, in which
we are one of four corporate owners with a 38.65% interest. Our ownership in FPPRI provides us with fundamental research information regarding our main raw materials, major manufacturing processes and
key product attributes. In addition to joint research at FPPRI, we also utilize the institute for contract research in connection with product and process development. These services are provided on
an arm's-length basis and upon terms that we believe to be customary within the industry and generally no less favorable than would be available from unrelated third parties. See "Item 5. Operating
and Financial Review and ProspectsResearch and Development."

Recovered Paper.We purchase raw materials from certain associated companies, one of the most significant of which is
Paperinkeräys Oy, a Finnish company in which we have a 22.98% interest. Paperinkeräys Oy is engaged in the procurement, processing and transport of recovered paper.
Aggregate raw material purchases from associated companies amounted to €15 million in 2006, €17 million in 2005 and €15 million in
2004. Recovered paper is sold to us and other shareholders of Paperinkeräys Oy at a contract-based price that takes into account paper recycling expenses and the
world market prices for recovered paper. In Austria, we have a similar arrangement concerning recovered paper, which is purchased from Austria Paper Recycling G.m.b.H., a company in which we own a
33.32% equity interest. The aggregate recovered paper purchases amounted to €12 million in 2006, €14 million in 2005 and
€12 million in 2004.

Pension foundations.In Finland, we have a pension foundation (Kymin
Eläkesäätiö), which is a separate legal entity. The pensions of approximately 7% of our Finnish employees are arranged through this
foundation. The contributions paid by us to the foundation amounted to €17 million in 2006, €16 million in 2005 and €19 million in
2004. The foundation manages and invests the contributions paid to the plan. The fair value of the foundation's assets at December 31, 2006 was €206 million, of which 84%
was in the form of loans to the company and 16% invested in property.

The
pensions of approximately 68% of our employees in the United Kingdom are arranged through the UPM-Kymmene UK Pension Fund which is a separate legal entity. The
contributions paid by us to the fund amounted to €7 million in 2006, €9 million in 2005 and €4 million in 2004. The fair value of
the fund's assets at December 31, 2006 was €195 million, of which 68% was invested in equities and 32% in debt instruments and property.

We
intend to continue to engage in transactions on a similar basis with such related companies.

Item 8.    Financial Information

Consolidated Financial Statements

See "Item 18. Financial Statements."

Other Financial Information

Export Sales from Finland and Sales by Market Area

We have production plants in 15 countries, including Austria, Finland, Germany, the United Kingdom, France, the United States, Canada and China. Although 52% of
our employees were resident in Finland as of December 31, 2006, sales to Finland accounted for only 9% of our global sales in 2006. Sales to our most important markets, the European Union and
North America, contributed 78% of our total sales. Our export sales from Finland, our main base of operations, were equal to €4,006 million in 2006.

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The following table sets forth the percentages of our sales in 2006 by market area:

|                               |  | Percentage of
Group Sales |  
|------------------------------ |  | ------------------------- | -
|Market Area                    |  |                           |  
|Germany                        |  | 16                        | %
|United Kingdom                 |  | 12                        |  
|Finland                        |  | 9                         |  
|France                         |  | 7                         |  
|Other European Union countries |  | 22                        |  
|Rest of Europe                 |  | 7                         |  
|USA                            |  | 11                        |  
|Canada                         |  | 1                         |  
|Asia                           |  | 10                        |  
|Other countries(1)             |  | 5                         |  
|                               |  |                           |  
|Total                          |  | 100                       | %
|                               |  |                           |  

---

Legal Proceedings

We are a defendant or plaintiff in a number of legal proceedings incidental to our operations. These legal proceedings primarily involve claims arising out of
commercial law issues.

In
2003, we directed our outside counsel to conduct an internal investigation of UPM's and our subsidiaries' compliance with competition laws in the United States and other jurisdictions
where the companies conduct business. Following this internal investigation, we decided to approach competition law authorities in the European Union and North America, and subsequently in other
countries, to disclose any conduct that did not comport with applicable competition laws and to strengthen its competition law compliance programs. We have created a European Union Competition of our
Law Compliance Manual and have initiated a comprehensive competition law training program for all its employees.

The
competition authorities have continued investigations into alleged antitrust activities with respect to various products. The U.S. Department of Justice, the relevant authorities of
the European Union and authorities in several of its member states, Canada and certain other of our countries, have informed us that we have received conditional full immunity with respect to certain
conduct disclosed to the authorities.

During
2006, the investigations of the U.S. labelstock industry and European fine paper, newsprint, magazine paper, label paper and self-adhesive labelstock markets were
closed by the U.S. Department of Justice and the European Commission competition authority. In addition, in December 2006, the Finnish Competition Authority decided not to propose a fine to us
in its investigation of raw wood procurement in Finland.

UPM
and its subsidiary, UPM Raflatac, Inc., along with certain labelstock manufacturers, have been named as defendants in a number of class-action lawsuits filed in U.S. District
Courts by the Company's customers and in state courts by customers of the Company's customers. These lawsuits allege that the defendants violated federal and/or state antitrust laws by conspiring with
one another to fix the prices of and allocate the markets for labelstock products. The complaints seek treble or punitive damages for alleged overcharges resulting from the purported conspiracy.

UPM
and its subsidiary, UPM-Kymmene, Inc., have also been named as a defendant in class-action lawsuits making similar allegations against manufacturers of magazine
papers. These complaints, like the labelstock complaints, seek treble or punitive damages for alleged overcharges resulting from the purported conspiracy.

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In
an unrelated development, on May 3, 2004, UPM received a Statement of Objection from the European Commission concerning alleged anti-competitive activities in the
market for plastic industrial sacks. UPM manufactured plastic industrial sacks until December 2000, when the business was sold. In November 2005, the European Commission imposed a fine
of €56.55 million on us in connection antitrust activities in the market for plastic industrial sacks. UPM has paid the fine in March 2006 but has appealed the decision.

In
the aggregate, these matters may implicate or result in substantial adverse publicity, penalties and damages. It is possible that any ultimate liability could be material to our
financial position, results of operations and cash flow. At this time, however, and in light of our cooperation with the authorities, and due to the considerable uncertainties associated with these
matters, it is not possible for us to estimate any potential liability. We will continue to consider the need to establish loss provisions in light of future developments.

Other
than these proceedings, we have not been involved in any legal, administrative or arbitration proceedings which the management would expect to potentially have a material adverse
effect on our business, financial condition or results of operations, nor, so far as management is aware, are any such legal, administrative or arbitration proceedings pending or threatened.

Dividend Policy

Under the Finnish Companies Act and general corporate practice, dividends are proposed by our Board of Directors, based on our year-end audited
financial statements and subject to the amount of distributable funds for the parent company UPM-Kymmene Corporation on a non-consolidated basis, and are approved in respect of
the prior year at the annual general meeting of our shareholders. The annual general meeting is usually convened in March each year. Holders of record of UPM-Kymmene Corporation ordinary
shares on the date of the annual general meeting of shareholders at which a dividend is declared are entitled to receive the dividend, less any amounts required to be withheld on account of taxes or
governmental charges. Cash dividends payable to holders of ordinary shares will be distributed by the Company directly, except for those who hold ADSs, who will receive dividends from the depositary
for the ADSs, Citibank N.A. (the "Depositary"). In Finland, the payment will be made to the depositary bank or other institution holding the shares for the shareholder, which will credit the payment
to the shareholder's account. For
shareholders in the United States, the payment will be converted from euro into U.S. dollars unless they instruct otherwise. The U.S. dollar amounts of dividends received by holders of ordinary shares
may be affected by fluctuations in exchange rates. See "Item 3. Key InformationExchange Rates."

We
expect to continue to pay dividends, although there can be no assurance as to the particular amounts that will be paid from year to year. The payment of future dividends will depend
upon our future earnings, financial condition (including our cash needs), future earnings prospects and other factors deemed relevant by our Board of Directors. See "Item 5. Operating and Financial
Review and Prospects."

See
also "Item 3. Key InformationDividends."

Significant Changes

Other than the agreement for the disposition of Walki Wisa described in "Item 5. Operating and Financial Review and ProspectsRecent
DevelopmentsRecent Acquisitions and Divestments," no significant changes have occurred since the date of the annual financial statements included in this annual report.

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Item 9.    The Offer and Listing

Nature of Trading Markets

Our shares are registered for trading on the Helsinki Stock Exchange under the symbol "UPM1V."

The
following table sets forth, for the periods indicated, the high and low sales prices of our shares on the Helsinki Stock Exchange, as reported in euro by the Helsinki Stock Exchange,
retroactively taking into account the bonus issue in March 2003:

|                             |  | Price per UPM-Kymmene
Share
|---------------------------- |  | ---------------------------
|
|
|2002                         |  | 22.25                      
|2003                         |  | 17.10                      
|2004                         |  | 17.13                      
|2005                         |  | 18.15                      
|2006                         |  | 20.91                      
|2007 (through March 9, 2007) |  | 20.59                      

|                                      |  | High  |  | Low  
|------------------------------------- |  | ----- |  | -----
|
|2005                                  |  |       |  |      
|First Quarter                         |  | 18.15 |  | 15.77
|Second Quarter                        |  | 16.67 |  | 15.05
|Third Quarter                         |  | 17.29 |  | 15.25
|Fourth Quarter                        |  | 17.00 |  | 15.35
|2006                                  |  |       |  |      
|First Quarter                         |  | 20.91 |  | 15.84
|Second Quarter                        |  | 20.50 |  | 15.36
|Third Quarter                         |  | 19.22 |  | 16.23
|Fourth Quarter                        |  | 20.12 |  | 18.18
|2007                                  |  |       |  |      
|First Quarter (through March 9, 2007) |  | 20.59 |  | 18.48

|                                   |  | High  |  | Low  
|---------------------------------- |  | ----- |  | -----
|
|September 2006                     |  | 19.22 |  | 18.00
|October 2006                       |  | 20.12 |  | 18.18
|November 2006                      |  | 19.96 |  | 18.40
|December 2006                      |  | 19.62 |  | 18.45
|January 2007                       |  | 19.85 |  | 18.48
|February 2007                      |  | 20.59 |  | 19.12
|March 2007 (through March 9, 2007) |  | 20.05 |  | 19.10

Since June 29, 1999, our shares have been traded in the United States on the New York Stock Exchange under the symbol "UPM" in the form of
ADSs, which are evidenced by American Depositary Receipts. Each ADS represents one share.

The
depositary bank for UPM ADRs, Citibank N.A., has advised us that, as of March 9, 2007, there were 23,702,496 ADRs outstanding. The outstanding ADRs were held of record by 17
record holders. A

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significant
number of ADRs are held of record by broker nominees. The number of beneficial owners is unknown but is believed to be materially higher than the 17 record holders.

The
following table sets forth, for each of the periods indicated, the reported high and low closing price per UPM-Kymmene ADS as reported on the New York Stock Exchange
Composite Tape, retroactively taking into account the bonus issue in March 2003:

|                             |  | Price per UPM-Kymmene
ADS
|---------------------------- |  | -------------------------
|
|
|2002                         |  | 20.52                    
|2003                         |  | 20.00                    
|2004                         |  | 22.70                    
|2005                         |  | 23.82                    
|2006                         |  | 25.51                    
|2007 (through March 9, 2007) |  | 26.90                    

|                                      |  | High  |  | Low  
|------------------------------------- |  | ----- |  | -----
|
|2005                                  |  |       |  |      
|First Quarter                         |  | 23.82 |  | 20.74
|Second Quarter                        |  | 21.43 |  | 19.13
|Third Quarter                         |  | 20.87 |  | 18.71
|Fourth Quarter                        |  | 20.12 |  | 18.56
|2006                                  |  |       |  |      
|First Quarter                         |  | 25.44 |  | 19.39
|Second Quarter                        |  | 24.91 |  | 19.37
|Third Quarter                         |  | 24.30 |  | 20.49
|Fourth Quarter                        |  | 25.51 |  | 23.23
|2007                                  |  |       |  |      
|First Quarter (through March 9, 2007) |  | 26.90 |  | 24.22

|                                   |  | High  |  | Low  
|---------------------------------- |  | ----- |  | -----
|
|September 2006                     |  | 24.30 |  | 23.32
|October 2006                       |  | 25.40 |  | 23.23
|November 2006                      |  | 25.51 |  | 24.61
|December 2006                      |  | 25.48 |  | 24.85
|January 2007                       |  | 25.64 |  | 24.22
|February 2007                      |  | 26.90 |  | 25.67
|March 2007 (through March 9, 2007) |  | 26.16 |  | 25.19

Trading and Settlement on the Helsinki Stock Exchange

Trading in and clearing of securities on the Helsinki Stock Exchange takes place in euro, with the minimum tick size for trading quotations being one euro cent.
All price information is produced and published only in euro.

The
trading system of the Helsinki Stock Exchange, the SAXESS Trading System, is a decentralized and fully automated order-driven system. Trading is conducted on the basis of trading
lots, which are fixed separately for each share series.

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Continuous
trading takes place from 10:00 a.m. to 6:20 p.m. on each trading day. The closing prices are ready at the end of closing call (from 6:20 to 6:30 p.m.).
Offers may be placed in the system beginning at 8:30 a.m. during a pretrading session. Opening call takes place from 9:45 a.m. to 10:00 a.m. Contract transactions may also be
registered during pretrading session and post-trading session from 6:40 to 7:00 p.m.

Trades
are normally cleared in the Finnish Central Securities Depository's, or FCSD, automated clearing and settlement system on the third banking day after the trade date unless
otherwise agreed by the parties.

The
Helsinki Stock Exchange is a part of the OMX group. OMX also owns and maintains the exchanges in Stockholm, Copenhagen, Riga, Reykjavik, Vilnius and Tallinn. The OMX Nordic Exchange
consists of three local exchanges in Copenhagen, Helsinki and Stockholm and the companies listed on these three exchanges are presented on one list, the Nordic List.

Regulation of the Finnish Securities Market

The Finnish Financial Supervision Authority supervises the securities market in Finland. The principal statute governing the securities market is the Finnish
Securities Market Act of 1989, which contains regulations with respect to company and shareholder disclosure obligations, misuse of insider information and market manipulation, admission to listing
and trading of listed securities and public takeovers, among other things. The Finnish Financial Supervision Authority monitors compliance with these regulations.

The
Finnish Securities Market Act specifies minimum disclosure requirements for Finnish companies applying for listing on the Helsinki Stock Exchange or making a public offering of
securities in Finland. The information provided must be sufficient to enable investors to make a sound evaluation of the security being offered and the issuing company. Finnish listed companies have a
continuing obligation to publish regular financial information and to inform the market of any matters likely to have a material impact on the value of their securities.

A
shareholder is required, without undue delay, to notify a Finnish listed company and the Finnish Financial Supervision Authority when its voting participation in, or its percentage
ownership of, the issued share capital of such Finnish listed company reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 50% or 662/3%, calculated in accordance with the
Finnish Securities Market Act, or when it enters into an agreement or other arrangement that, when affected, has such effect. If a Finnish listed company receives information indicating that a voting
interest or ownership interest has reached, exceeded or fallen below these thresholds, it must disclose such information to the public and to the Helsinki Stock Exchange.

Pursuant
to the Finnish Securities Market Act, a shareholder whose holding in a Finnish listed company increases above three-tenths or one-half of the total voting rights
attached to the shares of the company, calculated in accordance with the Finnish Securities Market Act, after the commencement of a public quotation of such shares must offer to purchase the remaining
shares and other securities entitling their holders to shares of such company for fair market value. If the securities, the purchase of which caused the holding of a shareholder to increase above the
three-tenths or one-half threshold, were purchased through a public tender offer made for all shares of the company and other securities entitling its holder to shares of such company, the
obligation to make a public tender offer will not be triggered. If a Finnish listed company has one shareholder whose holding of the voting rights attached to the company's shares is above the
three-tenths or one-half threshold, another shareholder of the company will not be obliged to make a public tender offer until its holding exceeds that of the shareholder whose holding is
greater than one of the above-mentioned thresholds. If a shareholder's holding in a Finnish listed company increases above the three-tenths or one-half threshold solely due to acts by the
company or another shareholder, the shareholder whose holding has exceeded such threshold will not be obliged to make a public tender offer before purchasing or subscribing more shares of the company
or otherwise increasing its holding of voting rights attached to the shares of the company. Under the Companies Act, a shareholder

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holding
shares representing more than 90% of all the shares and the votes in a company has the right to require the minority shareholders to sell the remaining shares of such company to such
shareholder for fair market value. In addition, any minority shareholder that possesses shares that may be so purchased by a majority shareholder is entitled to require such majority shareholder to
purchase its shares. Detailed rules apply for the calculation of the above proportions of shares and votes.

The
Finnish Criminal Code also contains provisions relating to breach of disclosure requirements, misuse of privileged or inside information and market manipulation. Breach of these
provisions constitutes a criminal offense.

The Finnish Book-Entry Securities System

General

Finland has made a gradual changeover from a certificated securities system to a book-entry securities system since August 1, 1991, when the
relevant legislation came into effect. Use of the book-entry securities system is mandatory for shares listed on the Helsinki Stock Exchange. Our shares were entered into the
book-entry system on May 2, 1996.

The
Finnish book-entry securities system is centralized at the FCSD, which provides national clearing and registration services for securities. The FCSD maintains a central
book-entry securities system for both equity and debt securities.

The
FCSD maintains a register of the shareholders of listed companies and book-entry accounts for shareholders that do not wish to utilize the services of a commercial
account operator. The expenses incurred by the FCSD in connection with maintaining the central book-entry securities system are borne by the issuers participating in the Finnish
book-entry securities system and the account operators. The account operators, which consist of credit institutions, investment services companies and other institutions licensed to act as
account operators by the FCSD (each, an "Account Operator"), are entitled to make entries in the book-entry register and administer the book-entry accounts.

Registration

In order to effect entries in the Finnish book-entry securities system, a security holder or such holder's nominee must establish a
book-entry account with the FCSD or an Account Operator or register its securities through nominee registration. Finnish shareholders may not register their securities through nominee
registration. For shareholders who have not transferred their shares into book-entries, a joint book-entry account shall be opened with the FCSD, the registered holder of which
shall be the issuer. All transactions in securities registered with the Finnish book-entry securities system are executed as computerized book-entry transfers. The Account
Operator confirms book-entry transfers by sending notifications of transactions to the holder of the respective book-entry account. The account holders also receive an annual
statement of their holdings as of the end of each calendar year.

Each
book-entry account is required to contain specified information with respect to the account holder or the custodian administering the assets of a nominee account. Such
information includes the type and number of book-entry securities registered and the rights and restrictions pertaining to the account and to the book-entry securities
registered in the account. A possible nominee account is identified as such on the entry. The FCSD and the Account Operators are required to observe strict confidentiality, although certain
information (e.g., the name, nationality and address of each account holder) contained in the register of shareholders maintained by the FCSD must be made available to the public by the FCSD and the
issuer, except in the case of nominee registration.

Each
Account Operator is strictly liable for errors and omissions on the registers maintained by it and for any unauthorized disclosure of information. However, if an account holder has
suffered a loss as a result of a faulty registration or an amendment to, or deletion of, rights in respect of registered securities

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and
the Account Operator is unable to compensate for such loss, such account holder is entitled to receive compensation from the FCSD. To cover for this contingency, the FCSD maintains a statutory
registration fund. The capital of the fund must be at least 0.000048% of the average of the total market value of the book entries kept in the Finnish book-entry securities system during
the last five calendar years and it must not be less than €20 million. The compensation to be paid to one injured party shall be equal to the amount of damages suffered by such
injured party from a single Account Operator subject to a maximum amount of €25,000. Furthermore, the liability of the registration fund is limited to
€10 million per incident.

Custody of the Shares and Nominees

A non-Finnish shareholder may appoint an asset manager (or certain non-Finnish organizations approved by the FCSD) to act as a custodial
nominee account holder on its behalf. A nominee shareholder is entitled to receive dividends and to exercise all share subscription rights and other financial and administrative rights attaching to
the shares, such as the right to attend and vote at general meetings of the company. A beneficial owner wishing to attend and vote at a general meeting must seek a temporary registration and be
registered in the register of shareholders not later than ten days prior to the relevant general meeting. A custodial nominee account holder is required to disclose to the Finnish Financial
Supervision Authority and the relevant company on request the name of the beneficial owner of any shares registered in the name of such custodial nominee account holder, where the beneficial owner is
known, as well as the number of shares owned by such beneficial owner. If the name of the beneficial owner is not known, the custodial nominee account holder is required to disclose said information
on the representative acting on behalf of the beneficial owner and to submit a written declaration to the effect that the beneficial owner of the shares is not a Finnish natural person or legal
entity.

For
example, Finnish Depositories for Clearstream Banking S.A., Luxembourg, Clearstream Banking Frankfurt AG, Germany and Euroclear Bank, S.A./N.V., as operator of the Euroclear System,
have nominee accounts within the Finnish book-entry securities system and, accordingly, non-Finnish shareholders may hold their shares through their accounts with Clearstream
Banking or Euroclear.

Shareholders
wishing to hold their shares in the Finnish book-entry securities system in their name and who do not maintain a book-entry account in Finland are
required to open a book-entry account at an authorized Account Operator in Finland and a convertible euro account at a bank operating in Finland.

Item 10.    Additional Information

Memorandum and Articles of Association

Organization and Register

UPM-Kymmene Corporation is organized under the laws of the Republic of Finland. We are registered in the Trade Register maintained by the National
Board of Patents and Registration of Finland, under the business identity code 104 1090-0.

Purpose and Object

Pursuant to Section 2 of our articles of association, the sphere of operations of the Company is to engage, either directly or through its subsidiaries, in
the forest, packaging, chemical, engineering, marine technology and energy production industries as well as other business operations related to these. The Company may also own and control real
estate, shares and other securities, engage in other investment activities and act as the parent company of the group that it forms.

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Corporate Governance

Matters pertaining to corporate governance are mainly regulated under the Companies Act. For discussion relating to corporate governance, see also "Item 6.
Directors, Senior Management and Employees."

Pre-emptive Rights

Under Finnish law, existing shareholders of Finnish companies have preferential rights to subscribe, in proportion to their shareholdings, for new shares, stock
options or debt instruments convertible into shares or carrying stock options to subscribe for shares, unless the corporate resolution approving such issue provides otherwise. Under the Companies Act,
a resolution waiving pre-emptive rights must be approved by at least two-thirds of the votes cast and the shares represented at the general meeting of shareholders.

General Meeting of Shareholders

Under the Companies Act, shareholders exercise their power to decide on corporate matters at general meetings of shareholders. Our articles of association require
that a general meeting of shareholders be held annually before the end of June on a date decided by our Board of Directors to decide upon the approval of the income statement and balance sheet and
measures warranted by the profit or loss, discharges from liability, emoluments for the members of the Board of Directors and remuneration of auditors, number and the members of the Board of Directors
and auditors, as well as matters raised by
individual shareholders. Extraordinary general meetings of shareholders in respect of specific matters are held when considered necessary by our Board of Directors, or when requested in writing by an
auditor of the Company or by shareholders representing at least one-tenth of all of our issued shares.

Under
our articles of association, a shareholder must give notice to the Company of his or her intention to attend a general meeting no later than the date and time specified by the
Board of Directors in the notice of the general meeting, which may not be earlier than five days before the general meeting (the "Registration Date"). Under our articles of association, notices of
general meetings of shareholders must be given not earlier than two months prior to the Registration Date and not later than 17 days before the meeting by publishing an announcement of the
meeting in at least two Finnish daily newspapers published in the Helsinki area designated by the Board of Directors at its discretion.

Inasmuch
as the shares have been transferred to the Finnish Book-Entry Securities System, in order to have the right to attend and vote at a general meeting, a shareholder
must be registered not later than ten days prior to the relevant general meeting in the register of shareholders kept by the FCSD in accordance with the Companies Act and the Act on the
Book-Entry Securities System. See "Item 9. The Offer and ListingThe Finnish Book-Entry Securities System." Voting rights may not be exercised by a shareholder if
such shareholder's shares are registered in the name of a nominee. A beneficial owner wishing to exercise such rights should seek a temporary registration and be registered in the register of
shareholders not later than ten days prior to the relevant general meeting. There are no quorum requirements for general meetings of shareholders in the Companies Act or the articles of association.
Hence, it is possible that, depending on the attendance at any particular general meeting of shareholders, a relatively limited number of shareholders may approve resolutions put forward at such
meeting.

Voting

A shareholder may attend and vote at a general meeting of shareholders in person or through an authorized representative. Because our shares are part of the FCSD,
in order to have the right to attend and vote at a general meeting of shareholders, a shareholder must be registered on the relevant record date in the register of shareholders kept by the FCSD in
accordance with the Finnish Companies Act and the Finnish Act on the Book-Entry Securities System. The record date is ten days prior to the relevant general meeting.

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Each
of our shares is entitled to one vote at a general meeting of shareholders. While resolutions are usually passed by a majority of the votes cast, certain resolutions, such as a
resolution to amend the articles of association, a resolution to issue shares not subject to shareholders' preferential subscription rights and, in certain cases, a resolution regarding a merger or
liquidation of the Company, require a majority of at least two-thirds of the votes cast and the shares represented at the general meeting of shareholders. Any amendment to the redemption
liability (purchase obligation) provisions of the articles of association requires at least three-fourths of the votes cast and the shares represented at the relevant meeting.

Liquidation

If the Company were to be liquidated, any liquidation proceeds remaining after all of its liabilities were paid would be distributed to its shareholders in
proportion to their shareholdings.

Purchase Obligations

Our articles of association contain a clause according to which a shareholder or a group of related shareholders who or which has acquired either
331/3% or 50% of the total ordinary shares or of the total voting power of the Company, at a minimum, is obligated to purchase the shares of all other shareholders who request such
purchase. The articles of association specify that the purchase price of such shares shall be the higher of the following:



In
addition, such shareholder is also obligated to purchase any subscription rights, warrants or convertible bonds issued by the Company if so requested by the holder or holders thereof.

Pursuant
to the Finnish Securities Market Act, a shareholder whose holding in a Finnish listed company increases above three-tenths or one-half of the total voting rights
attached to the shares of the company, calculated in accordance with the Finnish Securities Market Act, after the commencement of a public quotation of such shares, must offer to purchase the
remaining shares and other securities entitling their holders to shares of such company for fair market value.

Control of Foreign Ownership

Restrictions on foreign ownership of Finnish companies were abolished as of January 1, 1993. However, under the Act on the Monitoring of Foreigners'
Corporate Acquisitions in Finland of 1992, clearance by the Finnish Ministry of Trade and Industry would be required if a foreign person or entity, other than a person or entity from another member
state of the European Economic Area or the Organization for Economic Cooperation and Development, or a Finnish entity controlled by one or more such foreign persons or entities, were to acquire a
holding of one-third or more of the voting power of the Company. The Ministry of Trade and Industry could refuse clearance where the acquisition would

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jeopardize
important national interests, in which case the matter would be referred to the government of Finland.

Amendment Proposal

On February 12, 2007, we announced the proposal of our Board of Directors to our annual general meeting of shareholders scheduled to be held on
March 27, 2007 to amend our articles of association as follows:



Material Contracts

Neither UPM-Kymmene Corporation nor any of its consolidated subsidiaries has entered into any contracts in the last two years outside of the ordinary
course of business that have had or may reasonably be expected to have a material effect on our business.

Exchange Controls

Our shares may be bought by non-residents of Finland ("non-residents") on the Helsinki Stock Exchange without any separate Finnish
exchange control consent. Non-residents may receive dividends without a separate Finnish exchange control consent, the transfer out of Finland being subject to payment by the Company of
withholding taxes.
Non-residents that have acquired our shares may receive shares pursuant to a bonus issue or through participation in a new issue without a separate Finnish exchange control consent. Shares
may be sold in Finland by non-residents and the proceeds of such sale may be transferred out of Finland in any convertible currency. There are no Finnish exchange control regulations
applying to the sale of shares of the Company by non-residents to other non-residents. Subject to the discussion above in "Control of Foreign Ownership."

Taxation

The following description is based on tax laws of Finland and the United States as in effect and available on the date of this annual report and is subject to
changes in Finnish and U.S. law, including changes that could have retroactive effect. Prospective investors should consult their professional advisors as to the tax consequences of the purchase,
ownership and disposition of shares or ADSs, including, in particular, the effect of tax laws of any other jurisdiction.

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Finnish Taxation

The following is a description of the principal Finnish income tax consequences of the purchase, ownership and disposition of shares or ADSs by a holder who is
not a resident of Finland (a "non-resident"). It does not purport to be a complete analysis of all potential Finnish tax consequences to holders of the shares and ADSs. Prospective
investors should consult their own advisers as to the consequences of the purchase, ownership and disposition of shares or ADSs in light of their particular circumstances, including the effect of any
foreign, state, or local tax laws. Statements regarding Finnish tax laws set forth below are based on the laws in force and as interpreted by the relevant taxation authorities as of the date hereof
and are subject to any changes in Finnish law, or in the interpretation thereof by the relevant taxation authorities.

A
beneficial owner of an ADS should be treated as the owner of the underlying share for purposes of the current Convention between the Government of the United States of America and the
Government of the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital and for Finnish tax purposes.
Accordingly, the Finnish tax consequences to owners of shares discussed below apply also to beneficial owners of ADSs.

Companies

Finnish companies are subject to national corporate income tax on their worldwide income. Starting from tax year 2005, the corporate income tax rate is 26%. The
corporate income tax rate was 29% in tax years 2000-2004 and 28% in tax years 1996-1999. Within this context the tax year corresponds to calendar year.

Finland
applied an imputation oravoir fiscalsystem until 2005 for profits distributed as dividends. In June 2004 the Parliament
of the Republic of Finland approved a Corporate and Capital Tax Reform according to which the imputation system was replaced with effect from January 1, 2005 with a limited double taxation
system. As part of the Tax Reform, capital gains related to certain shareholdings of Finnish resident companies are tax exempt from May 19, 2005 onwards, correspondingly capital losses and
write offs are not any more tax deductible.

Under
theavoir fiscalsystem, there was a minimum tax payable to the Finnish tax authorities by a Finnish company depending on the amount
of profit distributed as dividends. For the tax year 1999, the applicable minimum tax was 7/18 of the dividends distributed to the shareholders and for the tax year 2000, the applicable
minimum tax was 29/71. For tax years 2003, 2002 and 2001 the applicable minimum tax was also 29/71. To the extent that this minimum tax exceeded or was less than the
corporate tax charge payable to the Finnish taxation authorities calculated on taxable income, a tax surplus was established or a supplementary tax liability was imposed (as appropriate).

Under
the limited double taxation system the corporate income will first be taxed according to the corporate income tax at the rate of 26% at the company level and subsequently the
dividends received by shareholders will be taxed at the appropriate rates depending on the type of the company distributing dividends and on the other hand whether the resident shareholder is a listed
company, privately held company or a natural personthough in many cases the dividend received is at least partly exempt from income tax. There is no minimum tax payable by the companies
depending on the amount of dividends, as what was the case with the oldavoir fiscalsystem. If the listed Finnish company distributes dividends to a
shareholder, which is a natural person and resident of Finland, 70% of the dividends received by such a shareholder will be taxable as capital income, thus, the applicable tax rate will be 28%. The
rest of the dividend income received by such a shareholder will not be treated as taxable income. Finnish company paying the dividends is responsible for withholding an advance tax at the rate of 19%
of the amount of dividends.

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Non-residents of Finland are subject to Finnish withholding tax on dividends paid by a Finnish company. The withholding tax rate is 20% unless otherwise set forth in an
applicable tax treaty.

Shareholders and Holders of ADSs



The Finnishavoir fiscalsystem was applied in its entirety only to shareholders who were residents of Finland.
Under theavoir fiscalsystem, a tax credit is available to resident shareholders on the payment of dividends by a Finnish company equal to the lesser
of, the tax paid by such company for its income and 29/71 of the dividend paid, as described above. Because corporate income tax rate and the tax credit were of the same size, no taxes
were generally payable by shareholders in respect of dividends income received from a listed Finnish company. The tax credit is not generally available to non-residents. Shareholders who
are non-residents may, however, be entitled to the tax credit in whole or in part where there is a double taxation treaty with Finland that contains the appropriate provisions. Currently,
the only such tax treaty in force is with Ireland, entitling certain shareholders resident in Ireland to a tax credit equal to one-half of the credit available to residents of Finland.



Non-residents of Finland are subject to Finnish withholding tax on dividends paid by a Finnish company. In the absence of any applicable treaty, the
rate of withholding tax is 28% as from January 1, 2005 according to the new Corporate and Capital Tax Reform. The corresponding rate of withholding tax from 2000 through 2004 was 29% and in
1999 the rate was 28%. Finland has entered into double taxation treaties with many countries pursuant to which the withholding tax is reduced on dividends paid to persons entitled to the benefits
under such treaties, unless the shares from which such dividends derive are effectively connected with a permanent establishment or a fixed base in Finland, in
which case Finnish income taxes are levied on the dividends so derived. In the case of the treaty with the United States, the withholding tax rates are reduced to 15%. The Finnish company paying the
dividend is responsible for deducting any applicable Finnish withholding tax.

A
reduction of such withholding tax rate can be obtained at source upon the submission of a Source Tax Card or the required information (name, date of birth and address) to the payer
prior to the payment of dividends. If such a Source Tax Card or such information is not submitted in a timely manner, a refund of tax withheld in excess of the applicable treaty rate can be obtained
upon application to the local tax authority. Citibank N.A., as Depositary for the ADSs, has agreed to use reasonable efforts to make and maintain arrangements enabling holders to receive tax credits,
reduction in Finnish withholding tax or other benefits (pursuant to treaty or otherwise) relating to dividend payments on the ADSs at the time the dividend is paid.

No
withholding tax is levied under Finnish law on dividends paid to corporate entities that reside in the European Union and directly hold at least 25% of the capital of the distributing
Finnish company, provided that such entities are not entitled to the tax credit under the Finnishavoirfiscal system and are subject to a general
corporate income tax in their respective countries of residency, as specified in Directive 90/435/EEC. Starting from the beginning of the year 2005 the requirement concerning the ownership of shares
will be 20%. Additionally, due to the abolishment of the Finnishavoir fiscalsystem the requirement concerningavoir
fiscalwill no longer apply starting from the beginning of the year 2005.



There is no transfer tax payable in Finland on share transfers made on the Helsinki Stock Exchange. If the transfer is not made on the Helsinki Stock Exchange, a
transfer tax at the rate of 1.6% of the relevant sales price is payable by the buyer. However, if the buyer is neither a resident of Finland nor a Finnish branch of a foreign credit institution nor a
Finnish branch of a foreign brokerage firm, the seller must

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collect
the tax from the buyer. If neither the buyer nor the seller is a resident of Finland or a Finnish branch of a foreign credit institution or a Finnish branch of a foreign brokerage firm and it
is not a question of transfer of shares in a housing or real estate company, the transfer of shares will be exempt from Finnish transfer tax. No transfer tax is payable in connection with newly issued
shares.



Shareholders who are not resident in Finland and who do not engage in trade or business through a permanent establishment or fixed base in Finland which could be
regarded as the holder of the relevant shares or ADSs, will normally not be subject to Finnish taxes on capital gains realized on the transfer of shares. Transfers of shares by a
non-resident of Finland by way of gift or by reason of the death of the owner are subject to Finnish gift or inheritance tax respectively if either the transferor or the transferee was a
resident of Finland at the time of death or when the gift was given, unless Finland has waived its rights in a tax treaty to impose tax.

United States Federal Income Taxation

General

The following is a description of the principal U.S. federal income tax consequences that may be relevant with respect to the acquisition, ownership and
disposition of our shares or ADSs, which are evidenced by American Depositary Receipts. This description addresses only the U.S. federal income tax considerations of U.S. Holders (as defined below)
that are initial purchasers of our shares or ADSs and that will hold such shares or ADSs as capital assets. This description does not address tax considerations applicable to holders that may be
subject to special tax rules, such as banks, financial institutions, insurance companies, real estate investment trusts, grantor trusts, regulated investment companies, dealers or traders in
securities or currencies, tax-exempt entities, pension funds, persons that received our shares or ADSs pursuant to an exercise of employee stock options or rights or otherwise as
compensation for the performance of services, persons that will hold our shares or ADSs as a position in a "straddle" or as a part of a "hedging," "conversion" or other risk reduction transaction for
U.S. federal income tax purposes, persons that have a "functional currency" other than the U.S. dollar, persons that will own our shares or ADSs through partnerships or other pass through entities,
holders subject to the alternative minimum tax, certain former citizens or long-term residents of the United States or holders that own (or are deemed to own) 10% or more (by voting power)
of our shares. This description does not address any state, local or non-U.S. tax consequences of the acquisition, ownership and disposition of our shares or ADSs. Moreover, this
description does not address the consequences of any U.S. federal tax other than income tax, including but not limited to the U.S. federal estate and gift taxes. This description is based on
(i) the Internal Revenue Code of 1986, as amended (the "Code"), existing, proposed and temporary U.S. Treasury Regulations and judicial and administrative interpretations thereof, in each case
as in effect and available on the date hereof and (ii), in part, on the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement
will be performed in accordance with its terms. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.

For
purposes of this description, a "U.S. Holder" is a beneficial owner of our shares or ADSs that, for U.S. federal income tax purposes, is: (i) a citizen or resident of the
United States, (ii) a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any state thereof (including the District of
Columbia), (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust, if such trust validly elects to be treated as
a U.S. person for U.S. federal income tax purposes or if (A) a court within the United States is able to exercise primary supervision over its administration and (B) one or more U.S.
persons have the authority to control all of the substantial decisions of such trust. A "Non-U.S. Holder" is a beneficial owner of our

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shares
or ADSs that is neither a U.S. Holder nor a partnership (or other entity treated as a partnership for U.S. federal income tax purposes).

If
a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our shares or ADSs, the tax treatment of the partnership or a partner in such
partnership generally will depend upon the status of the partner and the activities of the partnership. A partnership or a partner in a partnership that holds our shares or ADSs should consult its own
tax advisor.

Ownership of ADSs in General

For U.S. federal income tax purposes, if you are a holder of ADSs, you generally will be treated as the owner of our shares represented by such ADSs.

The
U.S. Treasury Department has expressed concern that depositaries for ADSs, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions
that are inconsistent with the claiming of U.S. foreign tax credits by U.S. holders of such receipts or shares. Accordingly, the analysis regarding the availability of a U.S. foreign tax credit for
Finnish taxes and sourcing rules described below could be affected by future actions that may be taken by the U.S. Treasury Department.

Distributions

Subject to the discussion under "Passive Foreign Investment Company Considerations" below, the gross amount of any distribution by the Company of
cash or property (other than certain
distributions, if any, of shares or ADSs distributedpro ratato all shareholders of the Company, including holders of ADSs) with respect to shares,
before reduction for any Finnish taxes withheld therefrom, will be includible in income by a U.S. Holder as dividend income to the extent such distributions are paid out of our current or accumulated
earnings and profits as determined under U.S. federal income tax principles. Certain non-corporate U.S. Holders generally may be taxed on such dividends at the lower rates applicable to
long-term capital gains for taxable years beginning on or before December 31, 2010, (that is, gains from the sale of capital assets held for more than one year). However, a U.S.
Holder's eligibility for such preferential rate is subject to certain holding period requirements and the non-existence of certain risk reduction transactions with respect to the shares or
ADSs. Such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. Subject to the discussion under "Passive Foreign Investment
Company Considerations" below, to the extent, if any, that the amount of any distribution by our Company exceeds the Company's current and accumulated earnings and profits as determined under U.S.
federal income tax principles, it will be treated first as a tax-free return of the U.S. Holder's adjusted tax basis in the Shares or ADSs and thereafter as capital gain. We
do not maintain calculations of our earnings and profits under U.S. federal income tax principles. Therefore, U.S. Holders should expect that distributions by our Company generally will
be treated as dividends for U.S. federal income tax purposes.

Any
dividend paid in euro (or any currency other than U.S. dollars) will be included in income in a U.S. dollar amount based on the prevailing spot market exchange rate in effect on the
date of receipt by the U.S. Holder, in the case of shares, and by the depositary in the case of ADSs. Assuming the payment is not converted at that time, the U.S. Holder will have a tax basis in euro
(or any currency other than U.S. dollars) equal to that U.S. dollar amount, which will be used to measure gain or loss from subsequent changes in exchange rates. Any gain or loss realized by a U.S.
Holder that subsequently sells or otherwise disposes of euro (or, any currency other than U.S. dollars), which gain or loss is attributable to currency fluctuations after the date of receipt of the
dividend, will be ordinary gain or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution.

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Dividends
on the shares or ADSs received by a U.S. Holder will generally be treated as foreign source income for U.S. foreign tax credit purposes. Subject to limitations under U.S.
federal income tax law concerning credits or deductions for foreign taxes and certain exceptions for short-term and hedged positions, any Finnish withholding tax imposed on dividends would
be treated as a foreign income tax eligible for credit against a U.S. Holder's U.S. federal income tax liability (or at a U.S. Holder's election, may be deducted in computing taxable income if the
U.S. Holder has elected to deduct all foreign income taxes for the taxable year). The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to
specific "baskets" of income. For this purpose, for taxable years beginning before January 1, 2007, the dividends on the shares or ADSs should generally constitute "passive income," or in the
case of certain U.S. Holders, "financial services income," and, for taxable years beginning after December 31, 2006, the dividends should generally constitute "passive category income," or in
the case of certain U.S. Holders, "general category income." The rules with respect to foreign tax credits are complex, and U.S. Holders are urged to consult their own tax advisors regarding the
availability of the foreign tax credit under their particular circumstances.

Subject
to the discussion under "Backup Withholding Tax and Information Reporting Requirements" below, if you are a Non-U.S. Holder of our shares or ADSs, you
generally will not be subject to U.S. federal income or withholding tax on dividends received by you on your shares or ADSs, unless such income is effectively connected with your conduct of a trade or
business in the United States.

Sale or Exchange of Shares or ADSs

Subject to the discussion under "Passive Foreign Investment Company Considerations" below, a U.S. Holder generally will recognize gain or loss on the
sale or exchange of the shares or ADSs equal to the difference between the amount realized (including the gross amount of the proceeds before the deduction of any Finnish tax) on such sale or exchange
and the U.S. Holder's adjusted tax basis in the shares or ADSs. Subject to the discussion under "Passive Foreign Investment Company Considerations" below, such gain or loss will be
capital gain or loss. In the case of a non-corporate U.S. Holder, the maximum marginal United States federal income tax rate applicable to such gain will be lower than the maximum marginal
United States federal income tax rate applicable to ordinary income if such U.S. Holder's holding period for such shares or ADSs exceeds one year (i.e., such gain is long-term
capital gain). Gain or loss, if any, recognized by a U.S. Holder generally will be treated as United States source gain or loss, as the case may be. The deductibility of capital losses is subject to
limitations under the Code.

The
initial basis of your shares or ADSs will be the U.S. dollar value of the euro denominated purchase price determined on the date of purchase. If the shares or ADSs are treated as
traded on an "established securities market," a cash basis U.S. Holder (or, if it elects, an accrual basis U.S. Holder) will determine the U.S. dollar value of the cost of such shares or ADSs by
translating the amount paid at the spot rate of exchange on the settlement date of the purchase. The conversion of U.S. dollars to euro and the immediate use of that currency to purchase shares or
ADSs generally will not result in taxable gain or loss for a U.S. Holder.

With
respect to the sale or exchange of shares or ADSs, the amount realized generally will be the U.S. dollar value of the payment received determined on (i) the date of
receipt of payment in the case of a cash basis U.S. Holder and (ii) the date of disposition in the case of an accrual basis U.S. Holder. If the shares or ADSs are treated as traded on an
"established securities market," a cash basis taxpayer (or, if it elects, an accrual basis taxpayer) will determine the U.S. dollar value of the amount realized by translating the amount received at
the spot rate of exchange on the settlement date of the sale.

Subject
to the discussion under "Backup Withholding Tax and Information Reporting Requirements" below, if you are a Non-U.S. Holder of our shares or ADSs, you
generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of such shares or ADSs unless (i) such gain is effectively connected with
your conduct of a trade or business in the

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United
States or (ii) in the case of any gain realized by an individual Non-U.S. Holder, you are present in the United States for 183 days or more in the taxable year of such
sale or exchange and certain other conditions are met.

Passive Foreign Investment Company Considerations

A Non-U.S. corporation will be classified as a "passive foreign investment company," or a PFIC, for U.S. federal income tax purposes in any taxable
year in which, after applying certain look-through rules, either (1) at least 75% of its gross income is "passive income" or (2) at least 50% of the average value of its
gross assets is attributable to assets that produce "passive income" or is held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties,
rents and gains from commodities and securities transactions.

Based
on certain estimates of its gross income and gross assets and the nature of its business, our Company believes that it will not be classified as a PFIC for its taxable year ended
December 31, 2006. The Company's status in future years will depend on its assets and activities in those years. The Company has no reason to believe that its assets or activities will change
in a manner that would cause it to be classified as a PFIC for the taxable year ended December 31, 2007 or any future year, but there can be no assurance that the Company will not be considered
a PFIC for any taxable year. If we were a PFIC, a U.S. Holder of shares or ADSs generally would be subject to imputed interest charges and other disadvantageous tax treatment with respect to any gain
from the sale or exchange of, and certain distributions with respect to, the shares or ADSs (including the loss of the potential reduced tax rate on certain dividends described above).

If
we were a PFIC, a U.S. Holder of shares or ADSs could make a variety of elections that may alleviate certain of the tax consequences referred to above and one of these elections may
be made retroactively. However, it is expected that the conditions necessary for making certain of such elections will not apply in the case of the shares or ADSs. U.S. Holders should consult their
own tax advisers regarding the tax consequences that would arise if the company were treated as a PFIC.

Backup Withholding Tax and Information Reporting Requirements

U.S. backup withholding tax and information reporting requirements generally apply to certain payments to certain non-corporate holders of shares or
ADSs. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, our shares or ADSs made within the United States or by a U.S. payor or
U.S. middleman to a holder of our shares or ADSs, other than an exempt recipient, including a corporation, a payee that is not a U.S. person that provides an appropriate certification and certain
other persons. Backup withholding tax will apply to any payments of dividends on, and to proceeds from the sale or redemption of, our shares or ADSs within the United States or by a U.S. payor or U.S.
middleman to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from,
such backup withholding tax requirements. The backup withholding tax rate is 28% for taxable years through 2010.

Backup
withholding is not an additional tax. You generally will be entitled to credit any amounts withheld under the backup withholding rules against your U.S. federal income tax
liability or a refund of the amounts withheld provided the required information is furnished to the Internal Revenue Service in a timely manner.

Documents on Display

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and
other information with the Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at prescribed

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rates
at the Commission's Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. The public may obtain information on the operation of the Commission's Public Reference Room by calling
the Commission in the United States at 1-800-SEC-0330. The Commission also maintains a web site at http://www.sec.gov that contains reports, proxy statements and
other information regarding registrants that file electronically with the Commission.

Item 11.    Quantitative and Qualitative Disclosures about Market Risk

Market-sensitive Instruments and Financial Risk Management

General

The following discussion about our financial risk-management activities includes "forward-looking statements" that involve risk and uncertainties.
Actual results could differ materially from those projected in the forward-looking statements.

Market
risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in foreign currency exchange rates,
interest rates and equity prices. The objective of our treasury risk management strategy is to protect us against unfavorable changes in financial markets, and thus help to secure profitability. The
objectives and principles for financing activities are defined in our Treasury Policy approved by our Board of Directors. Funding and management of the financial risks are the responsibility of our
central Treasury department in Finland.

In
our treasury risk management, we use various financial instruments within specified limits to manage the primary market exposures associated with the underlying assets, liabilities
and anticipated transactions. We use these instruments to reduce risk by essentially creating offsetting market exposures. We use derivative instruments that are held only for purposes other than
trading. These contracts are entered into with financial institutions in accordance with our financial policy, thereby reducing the risk of credit loss.

The
following sensitivity analyses present the hypothetical loss in cash flows or fair values of the financial instruments and derivative financial instruments which were held by us as
of December 31, 2006 and 2005, and were subject to changes in foreign exchange rates, interest rates and equity prices. The range of sensitivities chosen for these analyses reflects our view of
changes, which are reasonably possible over a one-year period. In the normal course of business, we also face risks that are either non-financial or
non-quantifiable. These risks principally include country risk, credit risk and legal risk and are not represented in the following analyses. We also face commodity price risk in relation
to our use of wood pulp and energy in our operations. See "Item 3. Key InformationRisk Factors." We have entered into certain forward contracts at the end of 2006 to hedge our exposure to
changes in energy and recycled fiber prices. We have not had significant involvement in any other derivative commodity instruments. Accordingly, commodity price risk is also not represented in the
following analyses.

Foreign Currency Exposure

We operate internationally and thus are exposed to foreign exchange risk arising from fluctuations in exchange rates of various currencies. Our financial results
and competitiveness are also affected indirectly by the domestic currencies of our main competitors, principally the U.S. dollar, the Canadian dollar and the Swedish krona.

Foreign
currency denominated sales and purchases together with foreign currency denominated assets and liabilities give rise to foreign currency exposure. Foreign currency exposure is
managed in two parts: that relating to forecasted net foreign currency flows and that relating to foreign currency denominated balance sheet items.

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In
this regard, our policy:



Using
a hypothetical adverse change of 10% of exchange rates (a weakening of the euro), the hypothetical loss in cash flows of derivative and non-derivative financial
instruments and foreign currency denominated balance sheet positions at December 31, 2006 and 2005 was estimated to be €174 million and
€132 million, respectively. The hypothetical loss was modeled consistent with our forecasted 12-month currency flows.

Interest Rate Risk

Our treasury policy with respect to the management of interest rate risk is to maintain an average interest fixing period of six months (can vary between three
and 12 months) on our net debt portfolio. Having a short interest fixing period may increase the volatility of the average interest rate paid by us. On the assumption that yield curves will be
positive, this approach reduces interest costs in the long term as compared to an interest fixing period greater than six months, therefore making it less costly to borrow at short-term
rates. For this purpose, we enter into various derivative financial instruments, including forward contracts, options and swap agreements.

As
of December 31, 2006 and 2005, there was an estimated hypothetical negative effect of €23 million and €36 million, respectively,
on fair value of our net debt portfolio (including derivative financial instruments) as a result of interest rate exposures existing at December 31 consequent to a 100 basis point (or 1% per
year) downward parallel shift in the yield curve.

Equity Price Risk

Currently, we have a very limited amount of investments in publicly traded companies (principally traded on the Helsinki Stock Exchange).

Item 12.    Description of Securities Other than Equity Securities

Not applicable.

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PART II

Item 13.    Defaults, Dividend Arrearages and Delinquencies

None.

Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

Item 15.    Controls and Procedures

(a)   Our
management, under the supervision of and with the participation of our President and Chief Executive Officer and our Executive Vice President and Chief Financial
Officer, has evaluated the effectiveness of the Group's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934) as of December 31, 2006. Based on such evaluation, our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer have concluded that, as of
such date, the Group's disclosure controls and procedures were effective.

(b)   Management
is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.

Any
internal control system, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of the controls and
procedures, which may not prevent or detect misstatements. Also, changes in conditions and business practices in subsequent periods may subject our determination of effectiveness to the risk that
certain controls may become inadequate.

Under
the supervision and with the participation of our management, including our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, we
assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. Our management's assessment was based on the framework and criteria established in "Internal
ControlIntegrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment under these criteria, our management, including
our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, has concluded that, as of December 31, 2006, our internal control over financial
reporting is effective.

Management's
assessment of the effectiveness of internal controls over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers Oy ("PwC"), an
independent registered public accounting firm, as stated in their report which is included under "Item 18. Financial Statements" beginning on page F-2.

(c)   See
report of PwC, an independent registered public accounting firm, included under "Item 18. Financial statements" beginning on page F-2.

(d)   There
were no changes in the Group's internal controls over financial reporting that occurred during the year ended December 31, 2006 that have materially
affected, or are reasonably likely to materially affect, the Group's internal control over financial reporting.

Item 16.    [Reserved]

Item 16A.    Audit Committee Financial Expert

Our Board of Directors has determined that it has at least one "audit committee financial expert," as defined in Item 16A of Form 20-F, serving
on the Audit Committee. Michael Bottenheim and Wendy Lane

103

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are
the directors whom the Board of Directors has determined to be audit committee financial experts. Holders of ADSs should understand that this designation is a disclosure requirement of the
Commission related to Mr. Bottenheim's and Ms. Lane's experience and understanding with respect to certain accounting and auditing matters. The designation does not impose on to
Mr. Bottenheim and to Ms. Lane any duties, obligations or liability that are greater than are generally imposed on them as members of the Audit Committee and Board of Directors and their
designation as audit committee financial experts pursuant to this Commission requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or Board of
Directors.

Item 16B.    Code of Ethics

Our Board of Directors has adopted a code of conduct applicable to our directors, officers and employees. The code of conduct addresses topics such as conflicts
of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of company assets, compliance with laws, rules and regulation and encouraging the reporting of any
illegal or unethical behavior. The code of conduct contains compliance standards and procedures to facilitate the effective operations of the code of conduct and to ensure prompt and consistent action
against violations of the code. The code of conduct is available at our website atwww.upm-kymmene.comby clicking "About
Us""Corporate Responsibility."

Item 16C.    Principal Accountant Fees and Services

Audit Fees.The total fees paid to our principal accountant, PricewaterhouseCoopers, for the audit of
the annual consolidated financial for the years ended December 31, 2006, December 31, 2005 and December 31, 2004 were €4.9 million,
€3.1 million and €2.9 million, respectively.

Audit-Related Fees.The total fees related to assurance and other services that reasonably relate to
the audit or review of financial statements paid to PricewaterhouseCoopers were €1.6 million, €2.1 million and €0.8 million for the
years ended December 31, 2006, 2005 and 2004, respectively.

Tax Fees.Fees paid to PricewaterhouseCoopers, associated with tax compliance and tax consultation
were €1.3 million, €1.1 million and €1.2 million for the years ended December 31, 2006, 2005 and 2004, respectively.

All Other Fees.We did not pay any other fees to PricewaterhouseCoopers other than those described
above in 2006, 2005 and 2004.

The
Audit Committee has adopted a formal policy on auditor independence requiring the approval by the Audit Committee of all professional services rendered by the Company's independent
auditor prior to the commencement of the specified services. The Audit Committee will consider annually and, if appropriate, approve the provision of audit services by the Company's independent
auditor and consider and, if appropriate, pre-approve the provision of certain defined audit and non-audit services. The Audit Committee will also consider on a
case-by-case basis and, if appropriate, approve specific engagements that are not otherwise pre-approved.

Any
proposed engagement that does not fit within the definition of a pre-approved service may be presented to the Audit Committee for consideration at its next regular
meeting or, if earlier consideration is required, to the Audit Committee for action by written consent. The Audit Committee has also delegated to the Chair of the Audit Committee the authority to
pre-approve audit-related and non-audit services not prohibited by law to be performed by the Company's independent auditors provided that the Chair shall report any decisions
to pre-approve such audit-related or non-audit services and fees to the full Audit Committee at its next regular meeting.

All
of the services described in "Audit-Related Fees," "Tax Fees" and "All Other Fees" above were approved by the Audit Committee in accordance with our formal policy on auditor
independence.

104

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Item 16D.    Exemptions from the Listing Standards for Audit Committee

Not applicable.

Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchases

We did not purchase any of our own shares during the year ended December 31, 2006.

105

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PART III

Item 17.    Financial Statements

Not applicable.

Item 18.    Financial Statements

See pages F-1 to F-94 filed as part of this annual report.

Item 19.    Exhibits

Documents filed as exhibits to this annual report.

106

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.

Date:
March 15, 2007

| |  | UPM-KYMMENE CORPORATION
| |  | -----------------------
| |  | By:                    
| |  | Name:                  
| |  | Title:                 
| |  | By:                    
| |  | Name:                  
| |  | Title:                 

107

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UPM-KYMMENE CORPORATION    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                              |  | Page 
|--------------------------------------------------------------------------------------------- |  | -----
|UPM-Kymmene Corporation                                                                       |  |      
|Report of Independent Registered Public Accounting Firm                                       |  | F-2  
|Consolidated Income Statement for each of the years ended December 31, 2006, 2005 and 2004    |  | F-4  
|Consolidated Balance Sheet as of December 31, 2006 and 2005                                   |  | F-5  
|Consolidated Statement of Changes in Equity as of December 31, 2006, 2005 and 2004            |  | F-6  
|Consolidated Cash Flow Statement for each of the years ended December 31, 2006, 2005 and 2004 |  | F-7  
|Notes to the Consolidated Financial Statements                                                |  | F-9  
|Oy Metsä-Botnia AB                                                                            |  |      
|Report of Independent Registered Public Accounting Firm                                       |  | F-117
|Consolidated Income Statement for each of the years ended December 31, 2006, 2005 and 2004    |  | F-118
|Consolidated Cash Flow Statement for each of the years ended December 31, 2006, 2005 and 2004 |  | F-119
|Consolidated Balance Sheet as of December 31, 2006 and 2005                                   |  | F-120
|Consolidated Statement of Changes in Shareholders' Equity as of December 31, 2006 and 2005    |  | F-121
|Notes to Consolidated Financial Statements                                                    |  | F-122

F-1

---



UPM-KYMMENE CORPORATION    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the shareholders
of UPM-Kymmene Corporation

We
have completed an integrated audit of UPM-Kymmene Corporation's 2006 consolidated financial statements and of its internal control over financial reporting as of
December 31, 2006 and audits of its 2005 and 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, statements of changes in equity, and cash flow
statements present fairly, in all material respects, the financial position of UPM-Kymmene and its subsidiaries at December 31, 2006 and December 31, 2005, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with International Financial Reporting Standards as adopted by the EU
(IFRS). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

As
discussed in Note 1 to the consolidated financial statements, effective January 1, 2005, the Company changed its method of accounting for goodwill upon the adoption of
IFRS 3, Business Combinations.

IFRS
vary in certain respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is
presented in Note 40 to the consolidated financial statements.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in the accompanying "Report of Management on Internal Control Over Financial Reporting" appearing under
Item 15, that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial

F-2

---



reporting
includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Helsinki,
March 15, 2007

PricewaterhouseCoopers OyAuthorised Public Accountants

Merja
Lindh
Authorised Public Accountant

F-3

---





UPM-KYMMENE CORPORATION    CONSOLIDATED INCOME STATEMENT

|                                                                                       |                                  |      |  | As at December 31, |    
|-------------------------------------------------------------------------------------- | -------------------------------- | ---- |  | ------------------ | ---
|
|
|
|Sales                                                                                  |                                  | (4)  |  | 13,226             |    
|Other operating income                                                                 |                                  | (6)  |  | 305                |    
|Costs and expenses                                                                     |                                  | (7)  |  | (11,236            | )  
|Change in fair value of biological assets and wood harvested                           |                                  | (8)  |  | (166               | )  
|Share of results of associated companies and joint ventures                            |                                  | (9)  |  | 81                 |    
|Depreciation, amortization and impairment charges                                      |                                  | (10) |  | (1,503             | )  
|Operating profit                                                                       |                                  | (4)  |  | 707                |    
|Gains on available-for-sale investments, net                                           |                                  | (11) |  | (3                 | )  
|Exchange rate and fair value gains and losses                                          |                                  | (12) |  | 24                 |    
|Interest and other finance costs, net                                                  |                                  | (12) |  | (244               | )  
|Profit before tax                                                                      |                                  |      |  | 484                |    
|Income taxes                                                                           |                                  | (13) |  | (38                | )  
|Profit for the period                                                                  |                                  |      |  | 446                |    
|Attributable to:                                                                       |                                  |      |  |                    |    
|                                                                                       | Equity holders of parent company |      |  |                    | 449
|                                                                                       | Minority interest                |      |  |                    | (3 
|                                                                                       |                                  |      |  | 446                |    
|Earnings per share for profit attributable to the equity holders of the parent company |                                  |      |  |                    |    
|Basic earnings per share                                                               |                                  | (14) |  | 0.86               |    
|Diluted earnings per share                                                             |                                  | (14) |  | 0.86               |    

---

The notes are an integral part of these financial statements.

F-4

---



UPM-KYMMENE CORPORATION    CONSOLIDATED BALANCE SHEET

|                                                    |                                                        |      |      | As at December 31, |      
|--------------------------------------------------- | ------------------------------------------------------ | ---- | ---- | ------------------ | -----
|
|
|
|ASSETS                                              |                                                        |      |      |                    |      
|Non-current assets                                  |                                                        |      |      |                    |      
|                                                    | Goodwill                                               |      | (16) |                    | 1,998
|                                                    | Other intangible assets                                |      | (17) |                    | 608  
|                                                    | Property, plant and equipment                          |      | (18) |                    | 8,578
|                                                    | Investment property                                    |      | (19) |                    | 40   
|                                                    | Biological assets                                      |      | (20) |                    | 1,369
|                                                    | Investments in associated companies and joint ventures |      | (21) |                    | 1,553
|                                                    | Available-for-sale investments                         |      | (22) |                    | 168  
|                                                    | Non-current financial assets                           |      | (23) |                    | 98   
|                                                    | Deferred tax assets                                    |      | (28) |                    | 478  
|                                                    | Other non-current assets                               |      | (24) |                    | 95   
|                                                    |                                                        |      |      | 14,985             |      
|Current assets                                      |                                                        |      |      |                    |      
|                                                    | Inventories                                            |      | (25) |                    | 1,656
|                                                    | Trade and other receivables                            |      | (26) |                    | 2,187
|                                                    | Income tax receivables                                 |      |      |                    | 4    
|                                                    | Cash and cash equivalents                              |      |      |                    | 263  
|                                                    |                                                        |      |      | 4,110              |      
|                                                    | Assets held for sale                                   |      | (21) |                    |     
|Total assets                                        |                                                        |      |      | 19,095             |      
|EQUITY AND LIABILITIES                              |                                                        |      |      |                    |      
|Equity attributable to equity holders of the parent |                                                        |      |      |                    |      
|                                                    | Share capital                                          |      |      |                    | 1,175
|                                                    | Share premium reserve                                  |      |      |                    | 1,090
|                                                    | Treasury shares                                        |      |      |                    |     
|                                                    | Translation differences                                |      |      |                    | (117 
|                                                    | Fair value and other reserves                          |      |      |                    | 367  
|                                                    | Retained earnings                                      |      |      |                    | 7,081
|                                                    |                                                        | (27) |      | 9,596              |      
|Minority interest                                   |                                                        |      |      | 24                 |      
|Total equity                                        |                                                        |      |      | 9,620              |      
|Non-current liabilities                             |                                                        |      |      |                    |      
|                                                    | Deferred tax liabilities                               |      | (28) |                    | 1,043
|                                                    | Retirement benefit obligations                         |      | (29) |                    | 564  
|                                                    | Provisions                                             |      | (30) |                    | 247  
|                                                    | Interest-bearing liabilities                           |      | (31) |                    | 4,425
|                                                    | Other liabilities                                      |      | (32) |                    | 16   
|                                                    |                                                        |      |      | 6,295              |      
|Current liabilities                                 |                                                        |      |      |                    |      
|                                                    | Current interest-bearing liabilities                   |      | (31) |                    | 1,309
|                                                    | Trade and other payables                               |      | (33) |                    | 1,846
|                                                    | Income tax payables                                    |      |      |                    | 25   
|                                                    |                                                        |      |      | 3,180              |      
|Total liabilities                                   |                                                        |      |      | 9,475              |      
|Total equity and liabilities                        |                                                        |      |      | 19,095             |      

The notes are an integral part of these financial statements.

F-5

---





UPM-KYMMENE CORPORATION        CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

|                                                                  |                                                      | Attributable to equity holders of the parent |   |    |   |     |  
|----------------------------------------------------------------- | ---------------------------------------------------- | -------------------------------------------- | - | -- | - | --- | -
|
|
|Balance at January 1, 2004                                        |                                                      | 890                                          |   |   |   | 737 |  
|Transactions with equity holders                                  |                                                      |                                              |   |    |   |     |  
|Share options exercised                                           |                                                      | 1                                            |   | 1  |   | 8   |  
|Share-based compensation                                          |                                                      |                                             |   |   |   |    |  
|Dividend paid                                                     |                                                      |                                             |   |   |   |    |  
|Business combinations                                             |                                                      |                                             |   |   |   |    |  
|Income and expenses recognized directly in equity                 |                                                      |                                              |   |    |   |     |  
|Translation differences                                           |                                                      |                                             |   |   |   |    |  
|Other items                                                       |                                                      |                                             |   |   |   |    |  
|Cash flow hedges                                                  |                                                      |                                              |   |    |   |     |  
|                                                                  | recorded in equity, net of tax                       |                                              |  |    |  |     | 
|                                                                  | transferred to income statement, net of tax          |                                              |  |    |  |     | 
|Available-for-sale investments                                    |                                                      |                                              |   |    |   |     |  
|                                                                  | gains/losses arising from fair valuation, net of tax |                                              |  |    |  |     | 
|                                                                  | transferred to income statement, net of tax          |                                              |  |    |  |     | 
|Revision of profit on valuation of available-for-sale investments |                                                      |                                             |   |   |   |    |  
|Profit for the period                                             |                                                      |                                             |   |   |   |    |  
|                                                                  |                                                      |                                              |   |    |   |     |  
|Balance at December 31, 2004                                      |                                                      | 891                                          |   | 1  |   | 745 |  
|                                                                  |                                                      |                                              |   |    |   |     |  
|Transactions with equity holders                                  |                                                      |                                              |   |    |   |     |  
|Share options exercised                                           |                                                      | 12                                           |   | (1 | ) | 68  |  
|Acquisition of treasury shares                                    |                                                      |                                             |   |   |   |    |  
|Reissuance of treasury shares                                     |                                                      |                                             |   |   |   |    |  
|Cancellation of treasury shares                                   |                                                      | (13                                          | ) |   |   | 13  |  
|Share-based compensation                                          |                                                      |                                             |   |   |   |    |  
|Dividend paid                                                     |                                                      |                                             |   |   |   |    |  
|Business combinations                                             |                                                      |                                             |   |   |   |    |  
|Income and expenses recognized directly in equity                 |                                                      |                                              |   |    |   |     |  
|Translation differences                                           |                                                      |                                             |   |   |   |    |  
|Net investment hedge, net of tax                                  |                                                      |                                             |   |   |   |    |  
|Cash flow hedges                                                  |                                                      |                                              |   |    |   |     |  
|                                                                  | recorded in equity, net of tax                       |                                              |  |    |  |     | 
|                                                                  | transferred to income statement, net of tax          |                                              |  |    |  |     | 
|Available-for-sale investments                                    |                                                      |                                              |   |    |   |     |  
|                                                                  | gains/losses arising from fair valuation, net of tax |                                              |  |    |  |     | 
|                                                                  | transferred to income statement, net of tax          |                                              |  |    |  |     | 
|Profit for the period                                             |                                                      |                                             |   |   |   |    |  
|                                                                  |                                                      |                                              |   |    |   |     |  
|Balance at December 31, 2005                                      |                                                      | 890                                          |   |   |   | 826 |  
|                                                                  |                                                      |                                              |   |    |   |     |  
|Transactions with equity holders                                  |                                                      |                                              |   |    |   |     |  
|Reissuance of treasury shares                                     |                                                      |                                             |   |   |   |    |  
|Share-based compensation                                          |                                                      |                                             |   |   |   |    |  
|Dividend paid                                                     |                                                      |                                             |   |   |   |    |  
|Business combinations                                             |                                                      |                                             |   |   |   |    |  
|Income and expenses recognized directly in equity                 |                                                      |                                              |   |    |   |     |  
|Translation differences                                           |                                                      |                                             |   |   |   |    |  
|Other items                                                       |                                                      |                                             |   |   |   |    |  
|Net investment hedge, net of tax                                  |                                                      |                                             |   |   |   |    |  
|Cash flow hedges                                                  |                                                      |                                              |   |    |   |     |  
|                                                                  | recorded in equity, net of tax                       |                                              |  |    |  |     | 
|                                                                  | transferred to income statement, net of tax          |                                              |  |    |  |     | 
|Available-for-sale investments                                    |                                                      |                                              |   |    |   |     |  
|                                                                  | gains/losses arising from fair valuation, net of tax |                                              |  |    |  |     | 
|                                                                  | transferred to income statement, net of tax          |                                              |  |    |  |     | 
|Profit for the period                                             |                                                      |                                             |   |   |   |    |  
|                                                                  |                                                      |                                              |   |    |   |     |  
|Balance at December 31, 2006                                      |                                                      | 890                                          |   |   |   | 826 |  
|                                                                  |                                                      |                                              |   |    |   |     |  

The notes are an integral part of these financial statements.

F-6

---





UPM-KYMMENE CORPORATION        CONSOLIDATED CASH FLOW STATEMENT

|                                                                  |  | Year ended December 31, |  
|----------------------------------------------------------------- |  | ----------------------- | -
|
|
|
|Cash flow from operating activities                               |  |                         |  
|Profit for the period                                             |  | 446                     |  
|Adjustments to profit for the period(1)                           |  | 1,577                   |  
|Interest received                                                 |  | 12                      |  
|Interest paid                                                     |  | (247                    | )
|Dividends received                                                |  | 21                      |  
|Other financial items, net                                        |  | (24                     | )
|Income taxes paid                                                 |  | (210                    | )
|Change in working capital(2)                                      |  | 28                      |  
|                                                                  |  |                         |  
|Net cash provided by operating activities                         |  | 1,603                   |  
|                                                                  |  |                         |  
|Cash flow from investing activities                               |  |                         |  
|Acquisition of subsidiary shares, net of cash (Note 5)            |  |                        |  
|Acquisition of shares in associated companies                     |  | (90                     | )
|Acquisition of available-for-sale investments                     |  |                        |  
|Capital expenditures                                              |  | (838                    | )
|Proceeds from disposal of subsidiary shares, net of cash (Note 5) |  | 268                     |  
|Proceeds from disposal of shares in associated companies          |  | 69                      |  
|Proceeds from disposal of available-for-sale investments          |  | 4                       |  
|Proceeds from sale of fixed assets                                |  | 143                     |  
|Proceeds from long-term receivables                               |  | 30                      |  
|Increase in long-term receivables                                 |  |                        |  
|Other investing cash flow                                         |  |                        |  
|                                                                  |  |                         |  
|Net cash used in investing activities                             |  | (414                    | )
|                                                                  |  |                         |  
|Cash flow from financing activities                               |  |                         |  
|Proceeds from long-term liabilities                               |  | 548                     |  
|Payments of long-term liabilities                                 |  | (758                    | )
|Proceeds from (payment of) short-term borrowings, net             |  | (525                    | )
|Share options exercised                                           |  |                        |  
|Dividends paid                                                    |  | (517                    | )
|Purchase of own shares                                            |  |                        |  
|Other financing cash flow                                         |  | (3                      | )
|                                                                  |  |                         |  
|Net cash used in financing activities                             |  | (1,255                  | )
|                                                                  |  |                         |  

The notes are an integral part of these financial statements.

F-7

---



|                                                            |  | Year ended December 31, |  
|----------------------------------------------------------- |  | ----------------------- | -
|
|
|
|Change in cash and cash equivalents                         |  | (66                     | )
|Cash and cash equivalents at the beginning of year          |  | 332                     |  
|Foreign exchange effect on cash                             |  | (3                      | )
|Change in cash and cash equivalents                         |  | (66                     | )
|                                                            |  |                         |  
|Cash and cash equivalents at year-end                       |  | 263                     |  
|                                                            |  |                         |  
|Notes to the consolidated cash flow statement               |  |                         |  
|(2) Adjustments to profit for the period                    |  |                         |  
|Taxes                                                       |  | 38                      |  
|Depreciation, amortization and impairment charges           |  | 1,502                   |  
|Share of results in associated companies and joint ventures |  | (81                     | )
|Profits and losses on sale of fixed assets and investments  |  | (207                    | )
|Gains on available-for-sale investments, net                |  | 3                       |  
|Finance costs, net                                          |  | 220                     |  
|Rosenlew cartel fine                                        |  | (75                     | )
|Change in the Finnish pension system                        |  |                        |  
|Other adjustments                                           |  | 177                     |  
|                                                            |  |                         |  
|                                                            |  | 1,577                   |  
|                                                            |  |                         |  
|(2) Change in working capital                               |  |                         |  
|Inventories                                                 |  | (79                     | )
|Current receivables                                         |  | (91                     | )
|Current non-interest bearing liabilities                    |  | 198                     |  
|                                                            |  |                         |  
|                                                            |  | 28                      |  
|                                                            |  |                         |  

The notes are an integral part of these financial statements.

F-8

---





UPM-KYMMENE CORPORATION        NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(In the notes all amounts are shown in millions of euros unless otherwise stated.)

1.     ACCOUNTING POLICIES

The principal accounting policies to be adopted in the preparation of the consolidated financial statements are set out below:

Principal Activities

UPM is a global paper and forest products company engaged in the production of paper, with an emphasis on the manufacture and sale of printing and writing papers.
The Group is vertically integrated with operations that are organized through five divisions: Magazine Papers, Newsprint, Fine and Speciality Papers, Converting and Wood Products. The biggest units of
UPM's Other Operations are forestry departments and energy department in Finland. The Group's activities are centred in the European Union countries, North America and Asia with production facilities
in 15 countries.

Basis of Preparation

These consolidated financial statements of UPM-Kymmene Corporation, a Finnish limited liability company, domiciled in Helsinki in the Republic of
Finland, are prepared in accordance
with International Financial Reporting Standards as adopted by the EU (IFRS). These Group consolidated financial statements were authorized for issue by the Board of Directors on 1 February
2007.

The
financial statements have been prepared under the historical cost convention as modified by the revaluation of biological assets, available-for-sale financial
assets and certain other financial assets and financial liabilities. Share-based payments are recognized at fair value on the grant date.

The
preparation of financial statements requires the use of accounting estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Accounting estimates are employed in the financial
statements to determine reported amounts, including the realizability of certain assets, the useful lives of tangible and intangible assets, income taxes and others. Although these estimates are based
on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates. The preparation of financial statements also requires management to exercise
its judgement in the process of applying the Group's accounting policies.

Consolidation Principles

Subsidiaries

The consolidated financial statements of UPM include the financial statements of the parent company, UPM-Kymmene Corporation, and its subsidiaries.
Subsidiaries are those entities in which UPM-Kymmene Corporation either owns, directly or indirectly, over fifty percent of the voting rights, or otherwise has the power to govern their
operating and financial policies.

Acquisitions
of subsidiaries are accounted for using the purchase method of accounting. The cost of an acquisition is measured as the fair value of the assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifyable assets acquired and liabilities and contingent liabilities assumed
in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The

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excess
of the cost of acquisition over the fair value of the Group's share of the identifyable net assets of the subsidiary acquired is recorded as goodwill. If the cost of acquisition is less
than the fair value of the Group's share of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement (see"Intangible Assets" for the accounting
policy on goodwill). Subsidiaries acquired during the year are included in the consolidated financial statements from the date on which control is transferred to the Group, and subsidiaries sold are
included up to the date that control is relinquished. Where necessary, the accounting policies of subsidiaries have been adjusted to ensure consistency with the policies adopted by the Group.

All
intercompany transactions, receivables, liabilities and unrealized profits, as well as intragroup profit distributions, are eliminated.

Associated Companies and Joint Ventures

Associated companies are entities over which the Group generally holds between 20% and 50% of the voting rights, or over which the Group has significant influence
but not control. Joint ventures are entities over which the Group has contractually agreed to share the power to govern the financial and operating policies of that entity with another venturer or
venturers.

Interests
in associated companies and joint ventures are accounted for using the equity method of accounting. Under this method the Group's share of the associated company's and joint
venture's profit or loss for the year is recognized on the income statement and its share of movements in reserves is recognized in reserves. The Group's interest in an associated company and joint
venture is carried on the balance sheet at an amount that reflects its share of the net assets of the associated company and joint venture together with goodwill on acquisition (net of any accumulated
impairment loss), less any impairment in the value of individual investments. Gains and losses on transactions between the Group and its associated companies and joint ventures are eliminated to the
extent of the Group's interest in the associated company and joint venture. Associated company and joint venture accounting policies have been changed where necessary to ensure consistency with the
policies adopted by the Group. Equity accounting is discontinued when the carrying amount of the investment in an associated company or interest in a joint venture reaches zero, unless the Group has
incurred or guaranteed obligations in respect of the associated company or joint venture.

Minority Interests

The profit or loss attributable to the parent shareholders and minority interests is presented on the face of the income statement. Minority interests are
presented in the consolidated balance sheet within equity, separately from the parent shareholders' equity.

Foreign Currency Transactions

Items included in the financial statements of each subsidiary in the Group are measured using the currency of the primary economic environment in which the
subsidiary operates ("the functional currency"). The consolidated financial statements are presented in euros, which is the functional and presentation currency of the parent company.

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Foreign
currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Receivables and liabilities in foreign
currencies are translated into the functional currency at the exchange rates prevailing on the balance sheet date. Foreign exchange gains and losses resulting from the settlement of such transactions
and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in
equity as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange differences arising in respect of operating business items are included in operating profit in the
appropriate income statement account, and those arising in respect of financial assets and liabilities are included as a net amount in finance costs.

Income
and expenses for each income statement of subsidiaries that have a functional currency different from the Group's presentation currency are translated into euros at quarterly
average exchange rates. Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet. All resulting translation differences are
recognized as a separate component of equity. When a foreign entity is partially disposed of, sold or liquidated, such translation differences are recognized in the income statement as part of the
gain or loss on sale.

Derivative Financial Instruments

Derivatives are initially recognized on the balance sheet at cost and thereafter revalued at their fair value. The method of recognizing the resulting gain or
loss is dependent on the nature of the item being hedged. On the date a derivative contract is entered into, the Group designates certain derivatives as either hedges of the fair value of a recognized
asset or liability (fair value hedge), a hedge of a forecasted transaction or of a firm commitment (cash flow hedge), or hedges of net investments in foreign operations (net investment hedge.

Changes
in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective both prospectively and retrospectively are recorded in the
income statement under financial items, along with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

Changes
in the fair value of derivatives that are designated and qualify as cash flow hedges and that are highly effective both prospectively and retrospectively are recognized in equity
(at the spot rate difference). Amounts deferred in equity are transferred to the income statement and classified as revenue or an expense in the same period during which the hedged firm commitment or
forecasted transaction affects the income statement (for example, when the forecasted external sale to the Group that is hedged takes place). The period when the hedging reserve is released to sales
after each derivative has matured is approximately 1 month.

When
a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting under IAS 39, any cumulative gain or loss existing in equity at that time
remains in equity and is recognized when the committed or forecasted transaction is ultimately recognized in the income statement. However, if a committed or forecasted transaction is no longer
expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

Hedges
of net investments in foreign operations are accounted for similarly to cash flow hedges. The fair value changes of the forward exchange contracts that reflect the change in spot
exchange rates are

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deferred
in equity and included in cumulative translation differences. Any gain or loss relating to the interest portion of the forward exchange contracts is recognized immediately in the income
statement under financial items. Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold. The Group has terminated in
2006 hedging of net investment in a foreign operation.

Certain
derivative transactions, while providing effective economic hedges under the Group Financial Policy, do not qualify for hedge accounting under the specific rules in IAS 39. Such
derivatives are classified held for trading, and changes in the fair value of any derivative instruments that do not qualify for hedge accounting under IAS 39 are recognized immediately in the income
statement as other operating income or under financial items.

At
the inception of the transaction the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions.
The Group also documents its assessment, both at the hedge inception and on an ongoing basis, as to whether the derivatives that are used in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items.

Fair
values of derivative financial instruments have been estimated as follows: Interest forward rate agreements and futures contracts are fair valued based on quoted market rates on the
balance sheet date; forward foreign exchange contracts are fair valued based on the contract forward rates in effect on the balance sheet date; foreign currency options are fair valued based on quoted
market rates on the balance sheet date; interest and currency swap agreements are fair valued based on discounted cash flow analyses; and commodity derivatives are fair valued based on quoted market
rates on the balance sheet date.

In
assessing the fair value of non-traded derivatives such as embedded derivatives the Group uses valuation methods that are based on market conditions existing at each
balance sheet date. Embedded derivatives that are identified and are monitored by the Group and the fair value changes are reported in other operating income in the income statement.

Segment Reporting

Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical
segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic
environments.

The
accounting policies of the segments and Other Operations are the same as those of the Group. The costs and revenues as well as assets and liabilities of the segments are allocated on
a symmetrical basis. All inter-segment sales are based on market prices, and all inter-segment sales are eliminated on consolidation.

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Non-current Assets Held for Sale and Discontinued Operations

Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to
sell if their carrying amount is recovered principally through a sale transaction rather than through a continuing use. Non-current assets classified as held for sale, or included within a
disposal group that is classified as held for sale, are not depreciated.

A
discontinued operation is a component of an entity that either has been disposed of, or that is classified as held for sale, and represents a separate major line of business or
geographical area of operations, is a part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired
exclusively with a view to resale. The post-tax profit or loss from discontinued operations is shown as a separate single item in the consolidated income statement.

Revenue Recognition

Sales are recognized when it is probable that future economic benefits will flow to the entity, the associated costs and the amount of revenue can be measured
reliably and the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price to the buyer is fixed or determinable, and
collectibility is reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership and the Group has neither continuing
managerial involvement with the goods, nor a continuing right to dispose of the goods, nor effective control of those goods. The timing of revenue recognition is largely dependent on delivery terms.
Group terms of delivery are based on Incoterms 2000, the official rules for interpretation of trade terms issued by International Chamber of Commerce.

Revenue
is recorded when the product is delivered to the destination point for terms designated Delivered Duty Paid ("DDP"). For sales transactions designated Free on Board ("FOB") or
Cost,
Insurance and Freight ("CIF"), revenue is recorded at the time of shipment. Revenues from services are recorded when the service has been performed. Sales are recognized net of indirect sales taxes,
discounts, rebates and exchange differences on sales in foreign currency. The costs of distributing products sold are included in costs and expenses.

Income Taxes

The Group's income taxes include income taxes of Group companies based on taxable profit for the financial period, together with tax adjustments for previous
periods and the change of deferred income taxes. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a
transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred
income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred
income tax asset is realized or the deferred income tax liability is settled. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associated companies and
joint ventures, except where

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the
timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax
assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Intangible Assets

Amortization
of intangible assets with finite lives is based on the following expected useful lives:

|Computer software       |  | 35 years 
|----------------------- |  | ----------
|Other intangible assets |  | 510 years

Goodwill and other intangible assets that are deemed to have an indefinite life are not amortized.

Goodwill

Goodwill represents the excess of the cost of acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary,
associated company or joint venture at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associated companies and joint
ventures is included in investments in associated companies and joint ventures and is tested for impairment as part of the overall balance. Goodwill is initially recognized as an asset at cost and is
subsequently measured at cost less any accumulated impairment losses.

Cash-generating
units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired.
If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill
allocated to the unit and then to other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not
reversed in a subsequent period.

The
gain or loss on disposal of an entity includes the carrying amount of goodwill related to the entity sold.

Research and Development

Research and development costs are expensed as incurred, except for certain development costs, which are capitalized when it is probable that a development
project will generate future economic benefits, and the cost can be measured reliably. Capitalized development costs are amortized on a systematic basis over their expected useful future lives, not
exceeding five years.

Computer Software

Costs associated with maintaining computer software programs and costs related to the preliminary project phase of internally developed software are recognized as
an expense as incurred. Development costs relating to the application development phase of internally developed software are capitalized as intangible assets. Direct costs include external direct
costs of material and services and staff costs of the

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software
development team. Computer software development costs recognized as assets are amortized using the straightline method over their useful lives.

Other Intangible Assets

Acquired patents, trademarks and licenses with a finite useful life are recognized at cost less accumulated amortization and impairment. Amortization is
calculated using the straight-line method to allocate the cost over their estimated useful lives. Other intangible assets that are deemed to have an indefinite life are not amortized and
are tested annually for impairment.

Emission Allowances

The Group participates in government schemes aimed at reducing greenhouse gas emissions. Allowances received from the governments free of charge are initially
recognized as intangible assets based on market value at the date of initial recognition. Allowances are not amortized but are recognized at amount not exceeding the market value at the balance sheet
date. Government grants are
recognized as deferred income in the balance sheet at the same time as the allowances and recognized in the income statement systematically over the compliance period to which the corresponding
emission rights relate. Emission rights and associated provisions are derecognized when delivered or sold. Any profit or loss on disposal is taken to the income statement.

Property, Plant and Equipment

Property, plant and equipment acquired by Group companies are stated at historical cost. Assets of acquired subsidiaries are stated at fair value at the date of
acquisition. Depreciation is calculated on a straight-line basis and the carrying value is adjusted for impairment charges, if any. The carrying value of the property, plant and equipment
on the balance sheet represents the cost less accumulated depreciation and any impairment charges.

Borrowing
costs incurred for the construction of any qualifying assets are capitalized during the period of time that is required to complete and prepare the asset for its intended use.
Other borrowing costs are expensed.

Land
is not depreciated, but otherwise depreciation is based on the following expected useful lives:

|Buildings                     |  | 2540 years
|----------------------------- |  | -----------
|Heavy machinery               |  | 1520 years
|Light machinery and equipment |  | 515 years 

Expected useful lives of assets are reviewed at each balance sheet date and, where they differ significantly from previous estimates, depreciation
periods are changed prospectively.

Subsequent
costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that the future economic benefit associated with
the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the income
statement during the financial period in which they are incurred. Major renovations are depreciated over the remaining useful life of the related asset or to the date of the next major renovation,
whichever is sooner.

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Gains
and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in operating profit. Assets to be disposed of are reported at
the lower of the carrying amount and the fair value less selling costs.

Government Grants

Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset and recognized as a reduction to
the depreciation charge of the related asset when it is practicable to determine that the eligibility conditions attached to the grant will be met and the grant will be received. Other government
grants are recognized in the income statement in the period necessary to match them with the costs they are intended to compensate when the reimbursement is received or when it is practicable to
determine the amount and eligibility for the grant.

Investment Property

Investment property includes real estate investments such as flats and other premises occupied by third parties.

Investment
property is treated as a long-term investment and is stated at historical cost. Depreciation is calculated on a straight-line basis and the carrying
value is adjusted for impairment charges, if any. Useful lives are the same as for property, plant and equipment. The balance sheet value of investment property reflects the cost less accumulated
depreciation and any impairment charges.

Biological Assets

Biological assets (i.e. living trees) are measured at their fair value less estimated point-of-sale costs. The fair value of biological
assets other than young seedling stands is based on discounted cash flows from continuous operations. The fair value of young seedling stands is the actual reforestation cost of those stands.
Continuous operations, the maintenance of currently existing seedling stands and the felling of forests during one rotation, are based on the Company's forest management guidelines. The calculation
takes into account the growth potential and environmental restrictions and other reservations of the forests. Felling revenues and maintenance costs are calculated on the basis of actual costs and
prices, taking into account the Company's projection of future price development.

Periodic
changes resulting from growth, felling, prices, discount rate, costs and other premise changes are included in operating profit on the income statement.

Financial Assets

Financial assets have been classified into financial assets at fair value through profit or loss (including financial assets held for trading), loans and
receivables and available-for-sale categories.

Loans
and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in
non-current assets unless they mature within 12 months of the balance sheet date. Loan receivables originated by the company that have a fixed maturity are measured at amortized
cost using the effective interest method, and those that do not have a

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fixed
maturity are measured at cost. Loan receivables are impaired if the carrying amount is greater than the estimated recoverable amount.

Available-for-sale
investments are included in non-current assets unless they are intended to be disposed of within 12 months of the balance
sheet date. Purchases and sales of financial investments are recognized on the settlement date, which is the date that the asset is delivered to or by the Group. Investments are initially recognized
at cost, including transaction costs, and subsequently carried at fair value.

The
fair values of listed investments are based on quoted prices. Unlisted equity securities, for which fair values cannot be measured reliably, are recognized at cost less impairment.

Unrealized
gains and losses arising from changes in the fair value of securities classified as available-for-sale are recognized in equity. When securities
classified as available-for-sale are sold or impaired, the accumulated fair value adjustments in equity are included in the income statement as gains and losses from available
for-sale investments.

The
Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities
classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such
evidence exists for available-for-sale financial assets, the cumulative lossmeasured as the difference between the acquisition cost and the current fair value,
less any impairment loss on that financial asset previously recognized in profit or lossis removed from equity and recognized in the income statement. Impairment losses recognized in the
income statement on equity instruments are not subsequently reversed through the income statement.

Impairment of Non-Financial Assets

Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to depreciation (or
amortization) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which
the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. The value in use is determined by
reference to discounted future cash flows expected to be generated by the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately
identifiable cash flows (cash-generating units).

Non-financial
assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Where an impairment loss
subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount
that would have been determined had no impairment loss been recognized for the asset in prior years.

An
impairment loss recognized for goodwill is not reversed in a subsequent period.

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Leases

Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases
are recognized as assets and liabilities in the balance sheet at the commencement of lease term at the lower of the fair value of the leased property and the present value of the minimum lease
payments. Each lease payment is apportioned between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in other long-term
interest-bearing liabilities. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining
balance of the liability for each period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset's useful life and the lease term.

Leases
where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases are charged to the income
statement on a straight-line basis over the period of the lease.

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined by the method most appropriate to the particular nature of inventory, the
first in, first out (FIFO) or weighted average cost. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based
on normal operating capacity) but excludes borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses.

Trade Receivables

Trade receivables are carried at their anticipated realizable value, which is the original invoice amount less an allowance for doubtful accounts. An allowance
for doubtful accounts is made when there is
objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables.

Cash and Cash Equivalents

Cash and cash equivalents comprise cash in hand, deposits held at call with banks and other short-term highly liquid investments with original
maturities of three months or less. Bank overdrafts are included within borrowings in current liabilities on the balance sheet.

Treasury Shares

Where any Group company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental
costs (net of income taxes), is deducted from equity attributable to the Company's equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any
consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company's equity holders.

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Interest-Bearing Liabilities

Interest-bearing liabilities are classified as originated loans and are recognized initially at fair value, net of transaction costs incurred. In subsequent
periods, interest-bearing liabilities are stated at amortized cost using the effective interest method; any difference between proceeds (net of transaction costs) and the redemption value is
recognized in the income statement over the period of the interest-bearing liabilities.

Most
long-term interest-bearing liabilities are designated as hedged items in a fair value hedge relationship. Fair value variations resulting from the hedged interest rate
risk are recorded to adjust the carrying amount of the hedged item and reported on the income statement under finance income and expenses. If the hedge accounting is discontinued, the carrying amount
of the hedged item is no longer adjusted for fair value changes attributable to the hedged risk and the cumulative fair
value adjustment recorded during the hedge relationship is amortized based on a new effective interest recalculation through the income statement under finance income and expenses.

Interest-bearing
liabilities are classified as non-current liabilities unless they are due to be settled within twelve months after the balance sheet date.

Employee Benefits

Pension Obligations

The Group operates a mixture of pension schemes in accordance with the local conditions and practices in the countries in which it operates. Such benefit plans
vary according to the customary benefit plans prevailing in the country concerned. These programs include defined benefit pension schemes with retirement, disability and termination benefits. The
retirement benefits are generally a function of years of employment and final salary with the Company. Generally, the schemes are either funded through payments to insurance companies or to
trustee-administered funds as determined by periodic actuarial calculations. In addition, the Group also operates defined contribution pension arrangements. Most of Finnish pension arrangements are
defined contribution plans.

For
defined benefit plans, the liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance
sheet date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service cost. The defined benefit obligation is calculated annually by
independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates
of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension
liability. The cost of providing pensions is charged to the income statement so as to spread the regular cost over the service lives of the employees. Actuarial gains and losses arising from
experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over
the expected average remaining service lives of the employees concerned. Past service costs are recognized immediately in income, unless the changes to the pension plan are conditional on the
employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting
period.

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For
defined contribution plans, contributions are paid to pension insurance companies. Once the contributions have been paid, there are no further payment obligations. Contributions to
defined contribution plans are charged to the income statement in the period to which the contributions relate.

Other Post-Retirement Obligations

Some Group companies provide post-retirement healthcare benefits to their retirees. The entitlement to these benefits is usually conditional on the
employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using an accounting
methodology similar to that for defined benefit pension plans. Valuations of these obligations are carried out by independent qualified actuaries.

Share-Based Compensation

The Group has granted share options to top management and key personnel. In addition, the Group has established a share ownership program for its executive
management. These compensation plans are recognized as equity-settled or cash-settled share-based payment transactions depending on the settlement. The fair value of the granted options
and shares are recognized as indirect employee costs over the vesting period. The fair values of the options granted are determined
using the Black-Scholes valuation model on the grant date. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The estimates of
the number of the exercisable options are revised quarterly and the impact of the revision of original estimates, if any, is recognized in the income statement and equity.

Based
on the share ownership program, the executive management is compensated with shares depending on Group's financial performance. Shares are valued using the market rate on the grant
date. The settlement is a combination of shares and cash. The Group can obtain the necessary shares by using its treasury shares or purchase shares from the market.

Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of
resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract,
the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain.

Restructuring Provisions

Restructuring provisions are recognized in the period in which the Group becomes legally or constructively committed to payment. Employee termination benefits are
recognized only after either an agreement has been made with the appropriate employee representatives on the terms of redundancy and the numbers of employees affected, or after employees have been
advised of the specific terms. Costs related to the ongoing activities of the Group are not provisioned in advance.

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Environmental Remediation Provisions

Expenditures that result from remediation of an existing condition caused by past operations and do not contribute to current or future revenues are expensed. The
recognition of environmental remediation provisions is based on current interpretations of environmental laws and regulations. Such
provisions are recognized when it is likely that the liability has been incurred and the amount of such liability can be reasonably estimated. Amounts provisioned do not include third-party
recoveries.

Emission allowances

Emission obligations are recognized in provisions when the liability to deliver emission allowances is incurred based on emissions made. The liability to deliver
allowances is recognized based on the carrying amount of allowances on hand, if the liability is expected to be settled by those allowances, or if excess emissions are incurred, at the market value of
the allowances at the balance sheet date.

Dividends

Dividend distribution to the Company's shareholders is recognized as a liability in the Group's financial statements in the period in which the dividends are
approved by the Company's shareholders.

Comparatives

Where necessary, comparative figures have been reclassified to conform to changes in presentation in the current year. In addition, comparative figures have been
revised, where necessary, to reflect the impact of the adoption of a number of new and revised IFRS-standards.

Earnings per Share

The basic earnings per share are computed using the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using
the weighted average number of shares outstanding during the period plus the dilutive effect of convertible bonds and share options.

Adoption of new or revised International Financial Reporting Standards

Standards, Interpretations and Amendments to Published Standards

In 2006, the Group has adopted all of the standards, interpretations and amendments to published standards issued by the International Accounting Standards Board
(the IASB) that are relevant to its operations and effective for accounting periods beginning on January 1, 2006. The adoption has resulted in changes to the Group's accounting policies or the
amounts reported for the current or prior years in the following areas:

Amendment
to IAS 19 Employee BenefitsActuarial Gains and Losses, Group Plans and Disclosures is effective for annual periods beginning on or after January 1, 2006. As
the Group decided to retain its former accounting policy regarding the recognition of actuarial gains and losses, adoption of this amendment has only impacted format and extent of disclosures
presented in financial statement (Note 29).

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IFRIC 8 Scope of IFRS 2 is effective for annual periods beginning on or after May 1, 2006. IFRS 2 applies to share based payment transactions in which the
entity receives or acquires goods or services. IFRIC 8 includes into the scope of IFRS 2 the transactions where the entity, when granting its own shares, cannot identify the goods or services
received. The Group early adopted IFRIC 8 as of the beginning of 2006 resulting in a charge in other costs and expenses of €3 million in 2006.

Amendment
to IAS 39 Financial Instruments: Recognition and MeasurementThe Fair Value Option is effective for annual periods beginning on or after January 1, 2006. The
amendment changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category. This
amendment does not have any impact on the classification and designation of the Group's financial instruments classified as at fair value through profit or loss in current or prior years.

Amendment
to IAS 21 The Effects of Changes in Foreign Exchange RatesNet Investment in a Foreign Operation is effective for annual periods beginning on or
after January 1, 2006. The amendment has broadened and clarified the definition of a net investment. This amendment does not have any impact on the Group's financial statements in current or
prior years.

Amendments
to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 4 Insurance ContractsFinancial Guarantee Contracts are effective for annual periods
beginning on or after January 1, 2006. The amendments require issued financial guarantees, other than those previously asserted by the entity to be insurance contracts, to be initially
recognized at their fair value and subsequently measured at the higher of the unamortized balance of the related fees received and deferred, and the expenditure required to settle the commitment at
the balance sheet date. These amendments do not have any impact on the Group's financial statements in current or prior years.

IFRIC
4 Determining whether an Arrangement contains a Lease is effective for annual periods beginning on or after January 1, 2006. The Group has reviewed its contracts whether
they are required to be accounted as leases in accordance with IAS 17 Leases. This interpretation does not have any impact on the Group's financial statements in current or prior years.

Revision to Financial Statements Presentation and Reporting

Operating profit for 2005 and 2004 has been revised to correspond with the current reporting format. The share of results of associated companies and joint
ventures, related to business operations, previously reported after operating profit, is now included in operating profit. As a consequence of this change the operating profit was increased by
€41 million and €58 million in 2005 and 2004, respectively. In addition, from the beginning of 2006, part of the results of derivative instruments
relating to cash flow hedges are allocated to the respective division. Comparative years have been revised accordingly.

Adoption of IFRS 3

The Group adopted IFRS 3, Business Combinations, and the revised standards IAS 36, Impairment of Assets, and IAS 38, Intangible Assets, as of January 1,
2005. IFRS 3 is required to be applied to all business combinations for which the agreement date is on or after March 31, 2004. Goodwill related to acquisitions prior to March 31, 2004
continued to be amortized through December 31, 2004 as required under the IFRS transition guidance, while goodwill related to acquisitions subsequent to March 31, 2004 is not

F-22

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amortized.
Intangible assets with indefinite useful lives are not amortized. Amortization of acquired goodwill in 2004 totaled €100 million.

Standards, Interpretations and Amendments to Published Standards that are not yet effective.

Certain standards, interpretations and amendments to existing standards have been published that are mandatory for accounting periods beginning on January
1, 2007 or later but which the Group has not early adopted:

IFRS
7 Financial Instruments: Disclosures, and a complementary amendment to IAS 1 Presentation of Financial StatementsCapital Disclosures are effective for annual periods
beginning on or after January 1, 2007. IFRS 7 introduces new disclosures to improve the information about financial instruments. The amendment to IAS 1 introduces disclosures about how an
entity manages its capital. The Group will apply IFRS 7 and the amendment to IAS 1 from annual periods beginning on January
1, 2007. Adoption of IFRS 7 and the amendment to IAS 1 will expand disclosures presented in the financial statements.

IFRS
8 Operating Segments is effective for annual periods beginning on or after January 1, 2009. IFRS 8 replaces IAS 14 Segment Reporting and requires the amount reported for each
segment item to be the measure reported to the chief operating decision maker for the purposes of allocating resources to that segment and assessing its performance. The Group is currently evaluating
the effects of implementing this standard.

IFRIC
7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies is effective for annual periods beginning on or after March 1, 2006. The
interpretation provides guidance on how to apply the requirements of IAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional
currency, when that economy was not hyperinflationary in the prior period. The Group does not expect the interpretation to be relevant for the Group.

IFRIC
9 Reassessment of Embedded Derivatives is effective for annual periods beginning on or after June 1, 2006. The interpretation concluded that an entity generally should not
reassess its conclusion as to whether an embedded derivative needs to be separated from the hybrid contract after it is initially recognized. The Group believes that this interpretation should not
have a significant impact on the reassessment of embedded derivatives as the Group already assess if embedded derivative should be separated using principles consistent with IFRIC 9.

IFRIC
10 Interim Financial Reporting and Impairment is effective for annual periods beginning on or after November 1, 2006. The interpretation concludes that an impairment loss
recognized in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost should not be reversed in subsequent interim
financial statements or in annual financial statements. The Group believes that this interpretation should not have an impact on the Group's accounts.

IFRIC
11 IFRS 2Group and Treasury Share Transactions is effective for annual periods beginning on or after March 1, 2007. The Interpretation addresses how to apply
IFRS 2 Share-based Payment to share-based payment arrangements involving an entity's own equity instruments or equity instruments of

F-23

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another
entity in the same group (e.g. equity instruments of its parent). The Group believes that this interpretation should not have an impact on the Group's accounts.

IFRIC
12 Service Concession Arrangements is effective for annual periods beginning on or after January 1, 2008. The Interpretation addresses the accounting by private sector
operators involved in the provision of public sector infrastructure assets and services. The Group does not expect the interpretation to be relevant for the Group.

2.     CRITICAL JUDGMENTS IN APPLYING ACCOUNTING POLICIES AND KEY SOURCES OF ESTIMATION UNCERTAINTY

Impairment of non-current assets

Goodwill, intangible assets not yet available for use and intangible assets with indefinite useful lives are tested at least annually for impairment. Other
long-lived assets are reviewed when there is an indication that impairment may have occurred. Estimates are made of the future cash flows expected to result from the use of the asset and
its eventual disposal. If the balance sheet carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized. Actual cash flows could vary from estimated discounted future
cash flows. The long useful lives of assets, changes in estimated future sales prices of products, changes in product costs and changes in the discount rates used could lead to significant impairment
charges. Details of the impairment tests are provided in Note 16.

Biological assets

The Group owns about 1 million hectare of forest land. Biological assets (i.e. living trees) are measured at their fair value at each balance sheet date.
The fair value of biological assets is determined based among other estimates on growth potential, harvesting, price development and discount rate. Changes in any estimates could lead to recognition
of significant fair value changes in income statement.

Employee benefits

The Group operates a mixture of pension and other post-employment benefit schemes. Several statistical and other actuarial assumptions are used in
calculating the expense and liability related to the plans. These factors include, among others, assumptions about the discount rate, expected return on plan assets and changes in future compensation.
Statistical information used may
differ materially from actual results due to changing market and economic conditions, changes in service period of plan participants or changes in other factors. Actual results that differ from
assumptions and the effects of changes in assumptions are accumulated and charged or credited to income over the expected average remaining service lives of the employees to the extent that these
exceed 10% of the higher of the pension plan assets and defined benefit obligation. Significant differences in actual experience or significant changes in assumptions may materially affect the future
amounts of the defined benefit obligation and future expense.

Environmental provisions

Operations of the Group are based on heavy process industry which requires large production facilities. In addition to basic raw materials, considerable amount of
chemicals, water and energy is used in processes. The Group's operations are subject to several environmental laws and regulations. The Group

F-24

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aims
to operate in compliance with regulations related to the treatment of waste water, air emissions and landfill sites. The Group has provisions for normal environmental remediation costs.
Unexpected events occurred during production processes and waste treatment could cause material losses and additional costs in the Group's operations.

Income taxes

Management judgment is required for the calculation of provision for income taxes and deferred tax assets and liabilities. The Group reviews at each balance sheet
date the carrying amount of deferred tax assets. The Group considers whether it is probable that the subsidiaries will have sufficient taxable profits against which the unused tax losses or unused tax
credits can be utilized. The factors used in estimates may differ from actual outcome which could lead to significant adjustment to deferred tax assets recognized in the income statement.

Legal contingencies

Management judgment is required in measurement and recognition of provisions related to pending litigation. Provisions are recorded when the Group has a present
legal or constructive obligation as a result of past event, an unfavourable outcome is probable and the amount of loss can be reasonably
estimated. Due to inherent uncertain nature of litigation, the actual losses may differ significantly from the originally estimated provision.

3.     FINANCIAL RISK MANAGEMENT

Financial Risks

The objective of financial risk management is to protect the Group from unfavourable changes in financial markets and thus help to secure profitability. The
objectives and limits for financing activities are defined in the Group Treasury Policy approved by the company's Board of Directors.

In
financial risk management, various financial instruments are used within the limits specified in the Group Treasury Policy. Only such instruments whose market value and risk profile
can be continuously and reliably monitored are used for this purpose.

Financial
services are provided and financial risk management carried out by a central treasury department (Group Treasury). The centralization of Treasury functions enables efficient
financial risk management, cost-efficiency and efficient cash management.

Foreign Currency Risks

Management of foreign currency exposure is divided into two parts: that relating to foreign currency flows and that relating to balance sheet items denominated in
foreign currency.

The
first concerns mainly the 12-month forecasted commercial foreign currency flows and contracts longer than 12 months. Hedging of 50% of the net foreign currency
flow for the 12 months ahead is considered neutral. Most of the forwards made to hedge highly probable foreign currency flows meet the

F-25

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IFRS
hedge accounting requirements. The table below shows the nominal values of the hedging instruments at December 31, 2006.

|         |  | Nominal values of hedging instruments |  
|-------- |  | ------------------------------------- | -
|
|Currency |  |                                       |  
|USD      |  | 543                                   |  
|GBP      |  | 384                                   |  
|JPY      |  | 61                                    |  
|AUD      |  | 164                                   |  
|SEK      |  | 52                                    |  
|CAD      |  | (77                                   | )
|NOK      |  | 32                                    |  
|DKK      |  | 40                                    |  
|Others   |  | 19                                    |  
|         |  |                                       |  
|Total    |  | 1,218                                 |  
|         |  |                                       |  

The Group's financial results and competitiveness are also affected indirectly by changes in the values of the domestic currencies of its main
competitors, principally the US dollar, the Canadian dollar, and the Swedish krona. Exposure to these risks is not hedged. However, the company's own production in the United States and Canada reduces
this risk.

The
balance sheet position comprises foreign currency denominated debts and receivables. According to the Group Treasury Policy, the aim is a fully hedged position. At December
31, 2006 the balance sheet position was €11 million (at December 31, 2005: €27 million). Also the net of accounts receivable and accounts payable
is hedged. Foreign currency risks associated with the shareholders' equity of foreign subsidiaries are not hedged. In 2006, the Group has terminated the hedging of a net investment in a Canadian
subsidiary.

Interest Rate Risks

The Group's net debt per currency corresponds to the parent company's and subsidiaries' loan portfolios in their home currencies.

The
nominal values of the Group's interest-bearing net debts (including derivatives) by currency at December 31, 2006 were as follows:

|         |  | Amount
|-------- |  | ------
|
|Currency |  |       
|EUR      |  | 3.4   
|USD      |  | 0.3   
|CNY      |  | 0.5   
|         |  |       
|Total    |  | 4.2   
|         |  |       

F-26

---



Management of interest rate risks is based on the 6-month average duration of the net debt portfolio as defined in the Group Treasury
Policy. This relatively short duration is based on the assumption that, on average, yield curves will be positive. This approach thus reduces interest costs in the long term. The duration may deviate
between 3 and 12 months. At December 31, 2006, the average duration of the net debt portfolio was 6 months (at December 31, 2005: 6 months). Most of the
long-term loans and the interest rate derivatives related to them meet the IFRS hedge accounting requirements. Changes in the fair value of any derivative instruments that do not qualify
for hedge accounting are recognized immediately in the income statement.

Liquidity and Refinancing Risks

The Group seeks to maintain adequate liquidity under all circumstances by means of efficient cash management and restricting investments to those that can be
readily converted into cash.

In
addition to cash funds of €199 million and €251 million at December 31, 2006 and 2005, respectively, the Group had committed
credit facilities amounting to €2.7 billion (at December 31, 2005: €2.7 billion). As of December 31, 2006, these facilities were unused
(used €80 million at December 31, 2005.)

Refinancing
risks are minimized by ensuring that the loan portfolio has a balanced maturity schedule and that loans have sufficiently long maturities. The average loan maturity
at December 31, 2006 was 7.1 years (7.5 years at December 31, 2005).

The
most important financial programs in use at present are:



Counterparty Risk

Counterparty risk is defined as the risk that a counterparty will be unable to fulfill its contractual obligations. According to the Group Treasury Policy,
derivative instruments and investments of cash funds may be made only with a counterparty who meets a certain standard of creditworthiness. Creditworthiness of counterparties is monitored by Group
Treasury.

Credit Risk

Potential concentrations of credit risk with respect to trade and other receivables are limited due to the large number and geographic dispersion of companies
that comprise the Group's customer base. Customer credit limits are established and monitored, and on-going evaluations of customers' financial condition are performed. Most of the
receivables are covered by credit risk insurances. The Group considers that no significant concentration of credit risk exists.

F-27

---





Derivatives Related to Commodity Price Risk Management

The Group's manufacturing process requires a significant amount of electricity and recycled fiber. The procurement and sales of electricity (mainly to own mills)
is managed and optimized by Group. The Group uses electricity forward contracts to manage price risks associated with the Group's electricity exposure, which is the difference between the Group's
electricity consumption and production. Recycled paper price risk management includes the use of recycled fiber derivatives.

4.     SEGMENT INFORMATION

The Group is organized on a worldwide basis into the following primary business segments:



Activities
outside the segments are reported under Other Operations.

Magazine Papers Division

Magazine papers have a high mechanical pulp content and are generally used in magazines, newspaper supplements, catalogues and direct mailings. The division
manufactures both coated and uncoated papers. Coated magazine papers are mainly used in the manufacture of high-quality, multi-coated printed products, including magazines, catalogues,
brochures, direct mail advertising and other advertising materials. Uncoated papers are mainly used for magazines, weekend newspaper supplements, catalogues, and flyers.

Newsprint Division

This division produces standard newsprint and machine-finished uncoated papers. The end-uses include daily newspapers, direct mail, telephone
catalogues and books.

Fine and Speciality Papers Division

This division produces a complete range of coated and uncoated wood-free papers for graphic use and office communication. Fine papers are used for
copying, non-impact printing, facsimile, direct mail advertising, brochures, and special interest magazines, while speciality papers include label papers and packaging papers.

Converting Division

This division produces self-adhesive labelstock, RFID tags and industrial wrappings.

Wood Products Division

This division includes plywood manufacturing, sawmilling.

F-28

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Other Operations

This includes forestry departments, and energy department in Finland, logistics operations and real estate units, as well as the new ventures business unit. It
also includes the share of net earnings of associated companies (mainly Oy Metsä-Botnia Ab and Pohjolan Voima Oy) and the central administrative functions for the Group. The sales of
Other Operations comprise only sales outside the Group.

Primary Reporting FormatSegment Data for the Year Ended December 31, 2006

|                                                  |  | Magazine
Papers |    | Newsprint |   | Fine and
Speciality
Papers |   | Converting |   | Wood
Products |   | Other
operations(1) |  | Eliminations |   | Group  |  
|------------------------------------------------- |  | --------------- | -- | --------- | - | -------------------------- | - | ---------- | - | ------------- | - | ------------------- |  | ------------ | - | ------ | -
|
|External sales                                    |  | 3,237           |    | 1,433     |   | 2,315                      |   | 1,240      |   | 1,226         |   | 571                 |  |             |   | 10,022 |  
|Internal sales                                    |  | 117             |    | 3         |   | 245                        |   | 34         |   | 95            |   |                    |  | (494         | ) |       |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Total sales                                       |  | 3,354           |    | 1,436     |   | 2,560                      |   | 1,274      |   | 1,321         |   | 571                 |  | (494         | ) | 10,022 |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Share of results of associates and joint ventures |  |                |    |          |   |                           |   |           |   |              |   | 61                  |  |             |   | 61     |  
|Operating profit(2)                               |  | (56             | )  | 148       |   | 108                        |   | 64         |   | 144           |   | 128                 |  |             |   | 536    |  
|Gains on available-for-sale investments, net      |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | (2     | )
|Finance costs, net                                |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | (167   | )
|Income taxes(3)                                   |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | (29    | )
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Profit for the period                             |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 338    |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Assets(4)                                         |  | 3,964           |    | 2,033     |   | 2,903                      |   | 671        |   | 631           |   | 2,256               |  | (207         | ) | 12,251 |  
|Associates and joint ventures(4)                  |  |                |    |          |   |                           |   |           |   |              |   | 1,177               |  |             |   | 1,177  |  
|Unallocated assets                                |  |                |    |          |   |                           |   |           |   |              |   |                    |  |             |   | 1,041  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Total assets                                      |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 14,469 |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Liabilities(5)                                    |  | 221             |    | 129       |   | 237                        |   | 168        |   | 77            |   | 151                 |  | (207         | ) | 776    |  
|Unallocated liabilities                           |  |                |    |          |   |                           |   |           |   |              |   |                    |  |             |   | 6,404  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Total liabilities                                 |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 7,180  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Other items                                       |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Depreciation and amortization                     |  | 376             |    | 190       |   | 218                        |   | 37         |   | 43            |   | 26                  |  |             |   | 890    |  
|Impairment charge                                 |  | 228             |    |          |   | 19                         |   | 1          |   |              |   |                    |  |             |   | 248    |  
|Capital expenditure                               |  | 155             |    | 145       |   | 189                        |   | 73         |   | 39            |   | 98                  |  |             |   | 699    |  
|Capital employed, December 31(6)                  |  | 3,743           |    | 1,905     |   | 2,666                      |   | 503        |   | 554           |   | 3,282               |  | (1,019       | ) | 11,634 |  
|Capital employed, average                         |  | 4,010           |    | 1,921     |   | 2,760                      |   | 489        |   | 616           |   |                    |  |             |   | 12,142 |  
|Return on capital employed, %(7)                  |  | (1.4            | )% | 7.7       | % | 3.9                        | % | 13.1       | % | 23.4          | % |                    |  |             |   | 4.7    | %

---

F-29

---



F-30

---



Primary Reporting FormatSegment Data for the Year Ended December 31, 2005

|                                                  |  | Magazine
Papers |    | Newsprint |   | Fine and
Speciality
Papers |   | Converting |   | Wood
Products |   | Other
operations(1) |  | Eliminations |   | Group  |  
|------------------------------------------------- |  | --------------- | -- | --------- | - | -------------------------- | - | ---------- | - | ------------- | - | ------------------- |  | ------------ | - | ------ | -
|
|External sales                                    |  | 3,010           |    | 1,304     |   | 2,003                      |   | 1,313      |   | 1,201         |   | 517                 |  |             |   | 9,348  |  
|Internal sales                                    |  | 84              |    | 4         |   | 231                        |   | 34         |   | 89            |   |                    |  | (442         | ) |       |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Total sales                                       |  | 3,094           |    | 1,308     |   | 2,234                      |   | 1,347      |   | 1,290         |   | 517                 |  | (442         | ) | 9,348  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Share of results of associates and joint ventures |  |                |    |          |   |                           |   |           |   |              |   | 41                  |  |             |   | 41     |  
|Operating profit(2)                               |  | (76             | )  | 77        |   | 85                         |   | 70         |   | 6             |   | 156                 |  |             |   | 318    |  
|Gains on available-for-sale investments, net      |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 90     |  
|Finance costs, net                                |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | (151   | )
|Income taxes(3)                                   |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | (46    | )
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Profit for the period                             |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 211    |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Assets(4)                                         |  | 4,424           |    | 2,000     |   | 3,145                      |   | 615        |   | 734           |   | 2,614               |  | (219         | ) | 13,313 |  
|Associates and joint ventures(4)                  |  |                |    |          |   |                           |   |           |   |              |   | 1,034               |  |             |   | 1,034  |  
|Unallocated assets                                |  |                |    |          |   |                           |   |           |   |              |   |                    |  |             |   | 1,194  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Total assets                                      |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 15,541 |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Liabilities(5)                                    |  | 214             |    | 122       |   | 220                        |   | 148        |   | 100           |   | 147                 |  | (219         | ) | 732    |  
|Unallocated liabilities                           |  |                |    |          |   |                           |   |           |   |              |   |                    |  |             |   | 7,461  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Total liabilities                                 |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 8,193  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Other items                                       |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Depreciation and amortization                     |  | 407             |    | 192       |   | 216                        |   | 44         |   | 48            |   | 22                  |  |             |   | 929    |  
|Impairment charge                                 |  | 159             |    | 6         |   | 8                          |   | 1          |   | 27            |   |                    |  |             |   | 201    |  
|Capital expenditure                               |  | 177             |    | 135       |   | 265                        |   | 52         |   | 51            |   | 69                  |  |             |   | 749    |  
|Capital employed, December 31(6)                  |  | 4,210           |    | 1,878     |   | 2,925                      |   | 467        |   | 634           |   | 3,501               |  | (965         | ) | 12,650 |  
|Capital employed, average                         |  | 4,397           |    | 1,900     |   | 2,843                      |   | 603        |   | 660           |   |                    |  |             |   | 12,801 |  
|Return on capital employed, %(7)                  |  | (1.7            | )% | 4.1       | % | 3.0                        | % | 11.6       | % | 0.9           | % |                    |  |             |   | 3.4    | %

---

F-31

---





F-32

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Primary Reporting FormatSegment Data for the Year Ended December 31, 2004

|                                                  |  | Magazine
Papers |    | Newsprint |   | Fine and
Speciality
Papers |   | Converting |   | Wood
Products |   | Other
operations(1) |  | Eliminations |   | Group  |  
|------------------------------------------------- |  | --------------- | -- | --------- | - | -------------------------- | - | ---------- | - | ------------- | - | ------------------- |  | ------------ | - | ------ | -
|
|External sales                                    |  | 3,217           |    | 1,293     |   | 2,001                      |   | 1,373      |   | 1,398         |   | 538                 |  |             |   | 9,820  |  
|Internal sales                                    |  | 91              |    | 11        |   | 285                        |   | 41         |   | 94            |   |                    |  | (522         | ) |       |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Total sales                                       |  | 3,308           |    | 1,304     |   | 2,286                      |   | 1,414      |   | 1,492         |   | 538                 |  | (522         | ) | 9,820  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Share of results of associates and joint ventures |  |                |    |          |   |                           |   |           |   |              |   | 58                  |  |             |   | 58     |  
|Operating profit(2)                               |  | (67             | )  | 7         |   | 171                        |   | 71         |   | 111           |   | 392                 |  |             |   | 685    |  
|Gains on available-for-sale investments, net      |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 1      |  
|Finance costs, net                                |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | (130   | )
|Income taxes(3)                                   |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 414    |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Profit for the period                             |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 970    |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Assets(4)                                         |  | 4,673           |    | 2,016     |   | 2,871                      |   | 777        |   | 737           |   | 2,527               |  | (203         | ) | 13,398 |  
|Associates and joint ventures(4)                  |  |                |    |          |   |                           |   |           |   |              |   | 1,047               |  |             |   | 1,047  |  
|Unallocated assets                                |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 1,432  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Total assets                                      |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 15,877 |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Liabilities(5)                                    |  | 197             |    | 111       |   | 197                        |   | 142        |   | 90            |   | 219                 |  | (203         | ) | 753    |  
|Unallocated liabilities                           |  |                |    |          |   |                           |   |           |   |              |   |                    |  |             |   | 7,462  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Total liabilities                                 |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   | 8,215  |  
|                                                  |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Other items                                       |  |                 |    |           |   |                            |   |            |   |               |   |                     |  |              |   |        |  
|Depreciation and amortization                     |  | 460             |    | 224       |   | 197                        |   | 53         |   | 52            |   | 38                  |  |             |   | 1,024  |  
|Impairment charge                                 |  | 75              |    |          |   | 2                          |   |           |   | 21            |   |                    |  |             |   | 98     |  
|Capital expenditure                               |  | 149             |    | 74        |   | 345                        |   | 32         |   | 30            |   | 56                  |  |             |   | 686    |  
|Capital employed, December 31(6)                  |  | 4,476           |    | 1,905     |   | 2,674                      |   | 635        |   | 647           |   | 3,355               |  | (739         | ) | 12,953 |  
|Capital employed, average                         |  | 4,749           |    | 2,002     |   | 2,640                      |   | 654        |   | 748           |   |                    |  |             |   | 12,882 |  
|Return on capital employed, %(7)                  |  | (1.4            | )% | 0.3       | % | 6.5                        | % | 10.9       | % | 14.8          | % |                    |  |             |   | 6.0    | %

---

F-33

---



Personnel (Average) by Segment

|                           |  | Year ended December 31,
|-------------------------- |  | -----------------------
|
|Magazine Papers            |  | 7,869                  
|Newsprint                  |  | 3,361                  
|Fine and Speciality Papers |  | 6,680                  
|Converting                 |  | 3,607                  
|Wood Products              |  | 6,158                  
|Other operations           |  | 3,364                  
|                           |  |                        
|Total                      |  | 31,039                 
|                           |  |                        
|Personnel at year end      |  | 28,704                 

Secondary Reporting Format

External Sales by Destination

|                         |  | Year ended December 31,
|------------------------ |  | -----------------------
|
|
|Germany                  |  | 1,587                  
|Great Britain            |  | 1,223                  
|Finland                  |  | 920                    
|France                   |  | 661                    
|Other EU countries       |  | 2,247                  
|Other European countries |  | 661                    
|United States            |  | 1,124                  
|Canada                   |  | 126                    
|China                    |  | 526                    
|Rest of world            |  | 947                    
|                         |  |                        
|Total                    |  | 10,022                 
|                         |  |                        

Group's sales arise mainly from the sale of goods.

F-34

---





Total External Assets by Country

|                         |  | Year ended December 31,
|------------------------ |  | -----------------------
|
|
|Germany                  |  | 3,028                  
|Great Britain            |  | 702                    
|Finland                  |  | 6,779                  
|France                   |  | 612                    
|Other EU countries       |  | 682                    
|Other European countries |  | 131                    
|United States            |  | 660                    
|Canada                   |  | 735                    
|China                    |  | 909                    
|Rest of world            |  | 231                    
|                         |  |                        
|Total                    |  | 14,469                 
|                         |  |                        

Capital Expenditure by Country

|                         |  | Year ended December 31,
|------------------------ |  | -----------------------
|
|
|Germany                  |  | 123                    
|Great Britain            |  | 52                     
|Finland                  |  | 255                    
|France                   |  | 74                     
|Russia                   |  | 4                      
|Other European countries |  | 11                     
|North America            |  | 46                     
|China                    |  | 45                     
|Rest of world            |  | 89                     
|                         |  |                        
|Total                    |  | 699                    
|                         |  |                        

5.     ACQUISITIONS AND DISPOSALS

In
2006, no acquisitions were made. In 2005 and 2004, the acquisitions amounted to €6 million and €10 million respectively.

In November
2005, the Group acquired 99% of the shares of the Russian wood procurement company ZAO Tikhvinsky Komplexny Lespromkhoz. €3 million of the
acquisition price was allocated to intangible assets in respect of felling rights.

F-35

---



No
significant arrangement fees or corresponding expenses were paid in connection with acquisitions in the years 20042005.

In June
2006, UPM sold the Group Head Office real estate for €77 million, which generated a pre-tax capital gain of
€41 million. In August 2006, UPM sold its Finnish building merchant Puukeskus Oy, part of the Wood Products segment, to the private equity investor Triton and Puukeskus's
management. A tax exempt capital gain of €93 million was recognized on the sale.

In August
2005, UPM sold Loparex Group, a part of the Converting division, for €200 million (€230 million of cash consideration less
€30 million of net liabilities). A capital gain of €26 million was recognized on the sale.

In August
2004, UPM sold Brooks Group Limited, the Irish building material merchant, for €213 million. A pre-tax capital gain of
€110 million was recognized on the sale.

None
of these disposals are classified as discontinued operations.

Assets and Liabilities Arising from the Acquisition

|                                  |                                                  | Year ended December 31, |  
|--------------------------------- | ------------------------------------------------ | ----------------------- | -
|
|
|Cash and cash equivalents         |                                                  |                        |  
|Other intangible assets           |                                                  |                        |  
|Property, plant and equipment     |                                                  |                        |  
|Inventories                       |                                                  |                        |  
|Receivables                       |                                                  |                        |  
|Borrowings and other liabilities  |                                                  |                        |  
|                                  |                                                  |                         |  
|Fair value of net assets acquired |                                                  |                        |  
|Goodwill                          |                                                  |                        |  
|                                  |                                                  |                         |  
|Total purchase price              |                                                  |                        |  
|                                  |                                                  |                         |  
|Less:                             |                                                  |                         |  
|                                  | Cash and cash equivalents in subsidiary acquired |                         | 
|                                  |                                                  |                         |  
|Cash flow on acquisition          |                                                  |                        |  
|                                  |                                                  |                         |  

F-36

---



Net Assets and Liabilities of Disposals

|                                                 |  | Year ended December 31, |  
|------------------------------------------------ |  | ----------------------- | -
|
|
|Cash and cash equivalents                        |  | 6                       |  
|Other intangible assets                          |  | 2                       |  
|Goodwill                                         |  |                        |  
|Property, plant and equipment                    |  | 63                      |  
|Shares                                           |  | 1                       |  
|Inventories                                      |  | 36                      |  
|Receivables                                      |  | 55                      |  
|Accounts payables and other liabilities          |  | (42                     | )
|Borrowings and other liabilities                 |  | (36                     | )
|                                                 |  |                         |  
|                                                 |  | 85                      |  
|Gain/loss on disposal                            |  | 124                     |  
|                                                 |  |                         |  
|Total consideration                              |  | 209                     |  
|                                                 |  |                         |  
|Satisfied by cash and cash equivalents           |  | 209                     |  
|Cash and cash equivalents in subsidiary disposed |  | (6                      | )
|                                                 |  |                         |  
|Net cash inflow arising on disposals             |  | 203                     |  
|                                                 |  |                         |  

6.     OTHER OPERATING INCOME

|                                       |  | Year ended December 31,
|-------------------------------------- |  | -----------------------
|
|
|Gains on sale of non-current assets(1) |  | 172                    
|Rental income, investment property     |  | 12                     
|Rental income, other                   |  | 8                      
|Emission allowances received (Note 7)  |  | 18                     
|Other                                  |  | 21                     
|                                       |  |                        
|                                       |  | 231                    
|                                       |  |                        

---

F-37

---





7.     COSTS AND EXPENSES

|                                                             |                                                       | Year ended December 31, |      
|------------------------------------------------------------ | ----------------------------------------------------- | ----------------------- | -----
|
|
|Change in inventories of finished goods and work in progress |                                                       | (92                     | )    
|Production for own use                                       |                                                       | (24                     | )    
|                                                             |                                                       |                         |      
|                                                             |                                                       | (116                    | )    
|                                                             |                                                       |                         |      
|Materials and services                                       |                                                       |                         |      
|Raw materials, consumables and goods                         |                                                       |                         |      
|                                                             | Purchased during the period                           |                         | 4,997
|                                                             | Change in inventories                                 |                         | 42   
|External services(1)                                         |                                                       | 745                     |      
|                                                             |                                                       |                         |      
|                                                             |                                                       | 5,784                   |      
|                                                             |                                                       |                         |      
|Personnel expenses                                           |                                                       |                         |      
|Salaries and fees                                            |                                                       |                         |      
|                                                             | Salaries of board of directors and managing directors |                         | 16   
|                                                             | Other salaries                                        |                         | 1,202
|                                                             |                                                       |                         |      
|                                                             |                                                       | 1,218                   |      
|                                                             |                                                       |                         |      
|Indirect employee costs                                      |                                                       |                         |      
|Pension costs-defined benefit plans (Note 29)                |                                                       |                         |      
|                                                             | Pension expenses                                      |                         | 42   
|                                                             | Change in the Finnish pension system(2)               |                         |     
|                                                             |                                                       |                         |      
|                                                             |                                                       | 42                      |      
|Pension costs-defined contribution plans                     |                                                       | 170                     |      
|Other post-employment benefits (Note 29)                     |                                                       | 4                       |      
|Share-based payments (Note 36)                               |                                                       | 7                       |      
|Other indirect employee costs(3)                             |                                                       | 175                     |      
|                                                             |                                                       |                         |      
|                                                             |                                                       | 356                     |      
|                                                             |                                                       |                         |      
|Other operating costs and expenses                           |                                                       |                         |      
|Rents and lease expenses                                     |                                                       | 56                      |      
|Emissions expenses (Note 6)                                  |                                                       | 10                      |      
|Losses on sale of non-current assets                         |                                                       | 15                      |      
|Other operating expenses(4)                                  |                                                       | 1,149                   |      
|                                                             |                                                       |                         |      
|                                                             |                                                       | 1,230                   |      
|                                                             |                                                       |                         |      
|Costs and expenses, total                                    |                                                       | 8,514                   |      
|                                                             |                                                       |                         |      

---

F-38

---



The research and development costs included in costs and expenses were €44 million (2005:
€50 million and 2004: €47 million).

Remuneration Paid to the Members of the Board of Directors and the Executive Team

Shareholdings (no of shares) and fees of the Board of Directors

|                             |  |         |  | Year ended December 31,
|---------------------------- |  | ------- |  | -----------------------
|
|
|
|Board members                |  |         |  |                        
|Vesa Vainio, Chairman        |  | 14,073  |  | 160                    
|Berndt Brunow, Vice Chairman |  | 264,613 |  | 110                    
|Jorma Ollila, Vice Chairman  |  | 34,193  |  | 110                    
|Martti Ahtisaari             |  | 7,790   |  | 85                     
|Michael C.Bottenheim         |  | 8,401   |  | 110                    
|Karl Grotenfelt              |  | 10,767  |  | 85                     
|Georg Holzhey                |  | 433,546 |  | 85                     
|Wendy E. Lane                |  | 2,078   |  | 85                     
|Ursula Ranin                 |  | 1,140   |  | 85                     
|Francoise Sampermans         |  | 4,767   |  | 85                     
|Former Board members         |  |         |  |                        
|Gustaf Serlachius            |  |         |  |                       
|Carl H. Amon III             |  |         |  |                       
|Donna Soble Kaufman          |  |         |  |                       
|                             |  |         |  |                        
|Total                        |  | 781,368 |  | 1,000                  
|                             |  |         |  |                        
|of which in company shares   |  |         |  |                       

In accordance with the decision made by the 2006, 2005 and 2004 Annual General Meetings, the Chairman of the Board of Directors received a fee of
€160,000 for the year, the Vice Chairmen of the Board of Directors and the Chairman of the Audit Committee a fee of €110,000, and the members of the Board of Directors
a fee of €85,000. Of this fee in 2005 and 2004, 60 per cent was paid in cash and 40 per cent in the form of company shares purchased on the members' behalf. Additionally,
in 2004, the members were paid €4,000 for attendance allowances.

F-39

---



Executive team remuneration

|                                |  | Year ended December 31,
|------------------------------- |  | -----------------------
|
|
|President and CEO Jussi Pesonen |  |                        
|Remuneration                    |  |                        
|Salaries                        |  | 883                    
|Incentives                      |  |                       
|Benefits                        |  | 16                     
|                                |  |                        
|Total                           |  | 899                    
|                                |  |                        
|Pension costs                   |  |                        
|Finnish TEL scheme              |  | 161                    
|Voluntary pension plan          |  | 154                    
|                                |  |                        
|Total                           |  | 315                    
|                                |  |                        

The former President and CEO Juha Niemelä received termination benefits amounting to €490 thousand (2005:
€735 and 2004: €306 thousand). The combined value of his salary and fringe benefits in 2004 was €467 thousand. Contributions paid to the
voluntary pension plan amounted to €1,883 thousand in 2006 (2005: €0 and 2004: €116 thousand), and the expenses recognized with respect to
pension costs arising from the Finnish TEL scheme totalled €89 thousand in 2004.

The
14 (2005: 14 and 2004: 13) members of the Executive Team, including President and CEO, were paid salaries and fringe benefits totaling €5.5 (2005:
€6.4 and 2004: €4.6) million, of which €0.3 (2005: €1.0 and 2004: €0.4) million were paid as bonuses. The remunerations
paid are based on the performance of the Executive Team members in the previous year.

According
to the company's pay scheme, CEO can be paid an 18 months' maximum reward, and the other executives can be paid a performance-related reward amounting to not more than
twelve months' salary. In addition to salaries and bonuses the members of the Executive Team are also entitled to participate in the company's stock option plans and share ownership plan. The expenses
recognized in respect of share-based payments were €0.8 (2005: €1.2 and 2004: €2.2) million.

The
retirement age of President and CEO Jussi Pesonen is 60 years. Depending on the service contracts, the retirement age of the other members of the Executive Team is
6263 years. The target pension is 60% of the average indexed earnings from the last ten years. The costs of lowering the retirement age or supplementing statutory pension security
are generally covered by voluntary pension insurance. The expenses of the Executive team members' defined benefit pension plans in 2006 were €0.9 (2005: €1.5 and 2004:
€0.4) million, and the expenses of their defined contribution plans were €0.8 (2005: €0.9 and 2004: €0.8) million.

Members
of the Executive Team have certain benefits in the event of their service contracts being terminated prior to the expiration date stated in them. If UPM-Kymmene
Corporation gives notice of termination to Jussi Pesonen, the President and CEO, a severance compensation of 24 months' basic salary will be paid, in addition to the six months' salary for the
notice period. For other members of the Executive

F-40

---



team,
the period for additional severance compensation is 12 months in addition to the six months' salary for the notice period.

The
President and CEO is appointed by the Board of Directors. If there is a change of control in UPM-Kymmene Corporation as defined in the service contracts, each member of
the Executive Team may terminate such service contract within one month or, in the case of Jussi Pesonen within three months, from the date of the event that triggered the change of control, and shall
receive compensation equivalent to 24 months' basic salary.

Audit Fees

|                    |  | Year ended December 31,
|------------------- |  | -----------------------
|
|
|Audit fees          |  | 4.9                    
|Audit related fees  |  | 1.6                    
|Tax consulting fees |  | 1.3                    
|                    |  |                        
|Total               |  | 7.8                    
|                    |  |                        

8.     CHANGE IN FAIR VALUE OF BIOLOGICAL ASSETS AND WOOD HARVESTED

|                                              |  | Year ended December 31, |  
|--------------------------------------------- |  | ----------------------- | -
|
|
|Biological assets harvested during the period |  | (107                    | )
|Fair value change of biological assets        |  | (19                     | )
|                                              |  |                         |  
|Total                                         |  | (126                    | )
|                                              |  |                         |  

9.     SHARE OF RESULTS OF ASSOCIATED COMPANIES AND JOINT VENTURES

|                   |  | Year ended December 31, |  
|------------------ |  | ----------------------- | -
|
|
|Oy Metsä-Botnia Ab |  | 69                      |  
|Pohjolan Voima Oy  |  | (14                     | )
|Others             |  | 6                       |  
|                   |  |                         |  
|                   |  | 61                      |  
|                   |  |                         |  

F-41

---





10.   DEPRECIATION, AMORTIZATION AND IMPAIRMENT CHARGES

|                                                         |  | Year ended December 31,
|-------------------------------------------------------- |  | -----------------------
|
|
|Depreciation on property, plant and equipment            |  |                        
|Buildings                                                |  | 101                    
|Machinery and equipment                                  |  | 671                    
|Other tangible assets                                    |  | 32                     
|                                                         |  |                        
|                                                         |  | 804                    
|Depreciation on investment property                      |  |                        
|Buildings                                                |  | 1                      
|Amortization of intangible assets                        |  |                        
|Intangible rights                                        |  | 16                     
|Goodwill                                                 |  |                       
|Other intangible assets                                  |  | 69                     
|                                                         |  |                        
|                                                         |  | 85                     
|Impairment charges of property, plant and equipment      |  |                        
|Buildings                                                |  | 62                     
|Machinery and equipment                                  |  | 177                    
|Other tangible assets                                    |  | 4                      
|                                                         |  |                        
|                                                         |  | 243                    
|Impairment of intangible assets                          |  |                        
|Other intangible assets                                  |  | 5                      
|                                                         |  |                        
|                                                         |  | 5                      
|                                                         |  |                        
|Depreciation, amortization and impairment charges, total |  | 1,138                  
|                                                         |  |                        

In 2006, impairments of fixed assets include €135 million impairment charges in respect of production capacity close-downs
and restructuring measures in Finland, and a €115 million impairment charge relating to the Miramichi papermill in New Brunswick in Canada.

In
2006, UPM started a programme to restore its profitability. The programme covers all of the company's activities and includes both streamlining of operations and closures of
uncompetitive production capacity. As part of the programme, UPM closed, in the Magazine Papers segment, a total of 410,000 t/a of coated magazine paper capacity at the Voikkaa paper mill, and in the
Fine and Speciality Papers segment, a total of 150,000 t/a of coated fine paper capacity at the Kymi mill. In addition, in 2007, related to the profitability programme, UPM will close 115,000 t/a of
sack paper capacity at the Tervasaari mill belonging to the Fine and Speciality Papers segment.

In
2006, relating to the Miramichi paper mill, which belongs to Magazine Paper Segment's, UPM recognized an impairment charge of €115 million mainly due to the
negative currency impact. The cash flow of Miramichi mill has remained weak especially due to the strengthened Canadian dollar in relation to the US dollar. The mill's recoverable amount was
determined based on value in use and using a pre-tax discount rate of 9.96%.

F-42

---



In
2005, impairments of fixed assets include €151 million relating to the Miramichi paper mill in Canada, €10 million relating to the
Augsburg mill in Germany, €8 million relating to the Nordland mill in Germany and €25 million relating to Finnish sawmills. Miramichi mill's recoverable
amount was determined based on value in use and using discount rate of 10.14%. In Wood Products segment, the recoverable amount of Finnish sawmills was determined based on value in use and using
discount rate of 8.70%.

In
2004, impairments of fixed assets included €75 million relating to the closure of the Magazine Papers segment's Miramichi pulp mill in Canada and
€21 million relating to restructuring of the wood product industry in Finland.

11.   GAINS ON AVAILABLE-FOR-SALE INVESTMENTS, NET

|                                            |  | Year ended December 31,
|------------------------------------------- |  | -----------------------
|
|
|Fair value gains and losses on disposals(1) |  | (2                     
|                                            |  |                        
|Total                                       |  | (2                     
|                                            |  |                        

---

12.   FINANCE COSTS

|                                                                           |  | Year ended December 31, |  
|-------------------------------------------------------------------------- |  | ----------------------- | -
|
|
|Interest expenses                                                          |  | (190                    | )
|Interest income                                                            |  | 7                       |  
|Dividend income from available-for-sale investments                        |  |                        |  
|Exchange gains and losses                                                  |  | (8                      | )
|Fair value gains and losses on derivative financial instruments(1)         |  | 26                      |  
|Gains and losses on sale of associated companies and joint ventures shares |  | 10                      |  
|Other financial income                                                     |  |                        |  
|Other financial expenses                                                   |  | (12                     | )
|                                                                           |  |                         |  
|Total                                                                      |  | (167                    | )
|                                                                           |  |                         |  

---

F-43

---



The Aggregate Foreign Exchange Gains and Losses included in the Consolidated Income Statement

|                    |  | Year ended December 31,
|------------------- |  | -----------------------
|
|
|Sales               |  | (25                    
|Costs and expenses  |  | 20                     
|Net financial items |  | (8                     
|                    |  |                        
|Total               |  | (13                    
|                    |  |                        

13.   INCOME TAXES

|                                                                     |  | Year ended December 31, |  
|-------------------------------------------------------------------- |  | ----------------------- | -
|
|
|Major components of tax expenses                                     |  |                         |  
|Current tax expense                                                  |  | 187                     |  
|Change in deferred taxes (Note 28)                                   |  | (158                    | )
|                                                                     |  |                         |  
|Income taxes, total                                                  |  | 29                      |  
|                                                                     |  |                         |  
|Income tax reconciliation statement                                  |  |                         |  
|Profit before tax                                                    |  | 367                     |  
|Computed tax at Finnish statutory rate of 26% (2005: 26%, 2004: 29%) |  | 95                      |  
|Difference between Finnish and foreign rates                         |  | (2                      | )
|Non-deductible expenses and tax exempt income                        |  | (20                     | )
|Non-deductible purchase price difference                             |  |                        |  
|Tax loss with no tax benefit                                         |  | 1                       |  
|Results of associated companies                                      |  | (16                     | )
|Change in tax legislation                                            |  | (5                      | )
|Other                                                                |  | (24                     | )
|                                                                     |  |                         |  
|Income taxes, total                                                  |  | 29                      |  
|                                                                     |  |                         |  
|Effective tax rate                                                   |  | 7.8                     | %

Income taxes for 2006 include tax expense of €22 million due to a decrease in the income tax rate in Canada and a tax
income of €28 million from a tax receivable arising from the change in German tax legislation. Other items include a tax income of €20 million due to an
increase in deferred tax assets related to the change in the Group's structure in Canada. Profit before taxes for 2006 includes tax-exempt capital gains totaling
€93 million. Income taxes for 2005 include tax expense of €16 million relating to an associated company due to a change in tax law. Profit before taxes
for 2005 includes tax-exempt capital gains totaling €126 million. Taxes for 2004 include tax benefit of €235 million due to a change in
Finnish tax legislation and tax benefit of €284 million resulting from a decrease in the German deferred tax liability

F-44

---



(included
in Other items), as well as tax income of €50 million related to recognition of tax benefits of tax losses and depreciation difference in Canada.

14.   EARNINGS PER SHARE

|                                                                                                       |  | Year ended December 31,
|------------------------------------------------------------------------------------------------------ |  | -----------------------
|
|
|Profit attributable to the parent company's shareholders                                               |  | 340                    
|Average weighted number of shares (1,000)                                                              |  | 523,220                
|Basic earnings per share (€)                                                                           |  | 0.65                   
|For the diluted earnings per share the number of shares is adjusted by the effect of the share options |  |                        
|Profit attributable to the parent company's shareholders                                               |  | 340                    
|Adjustments to the profit                                                                              |  |                       
|                                                                                                       |  |                        
|Profit used to determine diluted earnings per share                                                    |  | 340                    
|Average weighted number of shares (1,000)                                                              |  | 523,220                
|Effect of options                                                                                      |  | 2,821                  
|                                                                                                       |  |                        
|Average weighted number of shares for diluted earnings per share (1,000)                               |  | 526,041                
|Diluted earnings per share (€)(1)                                                                      |  | 0.65                   

---

15.   DIVIDEND PER SHARE

The dividends paid in 2006 and 2005 were €392 million (€0.75 per share) and €387 million
(€0.75 per share). The Board of Directors proposes to the Annual General Meeting that a dividend of €392 million (€0.75 per share) will be paid
in respect of 2006.

F-45

---



16.   GOODWILL IMPAIRMENT TESTS

|                                                       |  | As at December 31, | 
|------------------------------------------------------ |  | ------------------ | 
|
|
|Acquisition cost at January 1                          |  | 1,514              | 
|Transfer of accumulated amortization                   |  |                   | 
|Additions                                              |  |                   | 
|Disposals                                              |  |                   | 
|                                                       |  |                    | 
|Carrying value at December 31                          |  | 1,514              | 
|                                                       |  |                    | 
|Accumulated amortization at January 1                  |  |                   | 
|Transfer of accumulated amortization                   |  |                   | 
|                                                       |  |                    | 
|Accumulated amortization and impairment at December 31 |  |                   | 
|                                                       |  |                    | 
|Carrying value at January 1                            |  | 1,514              | 
|Carrying value at December 31                          |  | 1,514              | 

The carrying value of goodwill is divided among the following groups of cash generating units:

|                |  | As at December 31,
|--------------- |  | ------------------
|
|
|Magazine Papers |  | 915               
|Newsprint       |  | 475               
|Fine Papers     |  | 102               
|Other           |  | 22                
|                |  |                   
|                |  | 1,514             
|                |  |                   

Impairment tests

The company prepares impairment test calculations annually. The key assumptions for calculations are those regarding the business growth outlooks, product prices,
cost development, and the discount rate.

Business
growth outlooks are based on general forecasts for the businesses in question. Ten-year forecasts are used in the calculations as the nature of the company's
business is long-term due to its capital intensity, and exposed to cyclical changes. In estimates of product prices and cost development, the budgets prepared by management for the next
year and estimates made for the following nine years are taken into consideration. The company's recent profitability trend is taken into account in the forecasts. In addition, when preparing
estimates, consideration is given to the investment decisions already made by the company as well as the profitability programmes that the Group has implemented and the views of knowledgeable experts
of the industry on the long-term development of demand and prices. Discount rate is estimated using the costs of debt on the calculation date as well as risks specific to businesses in
question. The pre-tax discount rates used in 2006 for Magazine Papers, Newsprint and Fine Papers were 8.72%, 9.60% and 9.14% (2005: 8.08%, 8.42% and 8.68%), respectively.

F-46

---





The recoverable amount of groups of cash generating units is determined based on value in use calculations.

No
impairments were recognized based on goodwill tests prepared in 2006 and 2005.

The
estimated product prices are the most important assumptions in impairment tests. A hypothetic 4% decrease in product prices used in impairment tests would lead to a recognition of
impairment loss against goodwill approximately by €300 million in Magazine Papers and approximately by €300 million in Newsprint. In Fine Papers, a
hypothetic decrease of 2% in product prices used in impairment test would lead to an impairment of the entire goodwill of €102 million. Group believes that any reasonably
possible change in the other key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of
cash-generating units.

17.   OTHER INTANGIBLE ASSETS

|                                                       |  | As at December 31, |  
|------------------------------------------------------ |  | ------------------ | -
|
|
|Intangible rights                                      |  |                    |  
|Acquisition cost at January 1                          |  | 394                |  
|Additions                                              |  | 2                  |  
|Disposals                                              |  | (2                 | )
|Reclassifications                                      |  | 19                 |  
|Acquisitions through business combinations             |  |                   |  
|Translation differences                                |  | (2                 | )
|                                                       |  |                    |  
|Acquisition cost at December 31                        |  | 411                |  
|                                                       |  |                    |  
|Accumulated amortization and impairment at January 1   |  | (110               | )
|Amortization                                           |  | (16                | )
|Disposals                                              |  | 2                  |  
|                                                       |  |                    |  
|Accumulated amortization and impairment at December 31 |  | (124               | )
|                                                       |  |                    |  
|Carrying value at January 1                            |  | 284                |  
|Carrying value at December 31                          |  | 287                |  
|Other intangible assets(1)                             |  |                    |  
|Acquisition cost at January 1                          |  | 508                |  
|Additions                                              |  | 6                  |  
|Disposals                                              |  | (34                | )
|Reclassifications                                      |  | 33                 |  
|Translation differences                                |  | (2                 | )
|                                                       |  |                    |  
|Acquisition cost at December 31                        |  | 511                |  
|                                                       |  |                    |  
|                                                       |  |                    |  

F-47

---



|Accumulated amortization and impairment at January 1   |  | (326 | ) | (261 | )
|------------------------------------------------------ |  | ---- | - | ---- | -
|Amortization                                           |  | (69  | ) | (67  | )
|Impairment charges                                     |  | (4   | ) | (1   | )
|Disposals                                              |  | 30   |   | 1    |  
|Reclassifications                                      |  | 4    |   | 5    |  
|Translation differences                                |  | 1    |   | (3   | )
|                                                       |  |      |   |      |  
|Accumulated amortization and impairment at December 31 |  | (364 | ) | (326 | )
|                                                       |  |      |   |      |  
|Carrying value at January 1                            |  | 182  |   | 184  |  
|Carrying value at December 31                          |  | 147  |   | 182  |  
|Advance payments and construction in progress          |  |      |   |      |  
|Acquisition cost at January 1                          |  | 33   |   | 68   |  
|Additions                                              |  | 16   |   | 3    |  
|Disposals                                              |  |     |   | (6   | )
|Reclassifications                                      |  | (38  | ) | (32  | )
|                                                       |  |      |   |      |  
|Acquisition cost at December 31                        |  | 11   |   | 33   |  
|                                                       |  |      |   |      |  
|Carrying value at January 1                            |  | 33   |   | 68   |  
|Carrying value at December 31                          |  | 11   |   | 33   |  
|Emission allowances                                    |  |      |   |      |  
|Acquisition cost at January 1                          |  | 36   |   |     |  
|Additions(2)                                           |  | 19   |   | 40   |  
|Disposals and settlements                              |  | (39  | ) | (4   | )
|                                                       |  |      |   |      |  
|Acquisition cost December 31                           |  | 16   |   | 36   |  
|                                                       |  |      |   |      |  
|Carrying value at January 1                            |  | 36   |   |     |  
|Carrying value at December 31.                         |  | 16   |   | 36   |  
|                                                       |  |      |   |      |  
|Other intangible assets, total                         |  | 461  |   | 535  |  
|                                                       |  |      |   |      |  

---

Water rights

Intangible rights include €189 million (2005: €178 million) in respect of the water rights of hydropower plants
belonging to the Other Operations segment. In 2006, €0million (2005: €123million) of water rights was acquired under finance lease agreements. The water rights of power
plants are deemed to have an indefinite useful life as the company has a contractual right to exploit water resources in the energy production of power plants. The values of water rights are tested
annually for impairment.

F-48

---



18.   PROPERTY, PLANT AND EQUIPMENT

|                                                       |  | As at December 31, |  
|------------------------------------------------------ |  | ------------------ | -
|
|
|Land and water areas                                   |  |                    |  
|Acquisition cost at January 1                          |  | 357                |  
|Additions                                              |  | 14                 |  
|Disposals                                              |  | (11                | )
|Reclassifications                                      |  | 2                  |  
|Translation differences                                |  | (1                 | )
|                                                       |  |                    |  
|Acquisition cost at December 31                        |  | 361                |  
|                                                       |  |                    |  
|Accumulated depreciation and impairment at January 1   |  | (4                 | )
|Disposals                                              |  |                   |  
|Impairment                                             |  | (3                 | )
|                                                       |  |                    |  
|Accumulated depreciation and impairment at December 31 |  | (7                 | )
|                                                       |  |                    |  
|Carrying value at January 1                            |  | 353                |  
|Carrying value at December 31                          |  | 354                |  
|Buildings                                              |  |                    |  
|Acquisition cost at January 1                          |  | 3,062              |  
|Additions                                              |  | 45                 |  
|Acquisitions through business combinations             |  |                   |  
|Disposals                                              |  | (182               | )
|Reclassifications                                      |  | 36                 |  
|Translation differences                                |  | (20                | )
|                                                       |  |                    |  
|Acquisition cost at December 31                        |  | 2,941              |  
|                                                       |  |                    |  
|Accumulated depreciation and impairment at January 1   |  | (1,382             | )
|Depreciation                                           |  | (101               | )
|Impairment                                             |  | (59                | )
|Disposals                                              |  | 87                 |  
|Reclassifications                                      |  | 2                  |  
|Translation differences                                |  | 6                  |  
|                                                       |  |                    |  
|Accumulated depreciation and impairment at December 31 |  | (1,447             | )
|                                                       |  |                    |  
|Carrying value at January 1                            |  | 1,680              |  
|Carrying value at December 31                          |  | 1,494              |  
|                                                       |  |                    |  

F-49

---



|Machinery and equipment                                |  |        |   |        |  
|------------------------------------------------------ |  | ------ | - | ------ | -
|Acquisition cost at January 1                          |  | 12,911 |   | 12,856 |  
|Additions                                              |  | 315    |   | 178    |  
|Acquisitions through business combinations             |  |       |   | 4      |  
|Disposals                                              |  | (732   | ) | (618   | )
|Reclassifications                                      |  | 167    |   | 230    |  
|Translation differences                                |  | (116   | ) | 261    |  
|                                                       |  |        |   |        |  
|Acquisition cost at December 31                        |  | 12,545 |   | 12,911 |  
|                                                       |  |        |   |        |  
|Accumulated depreciation and impairment at January 1   |  | (8,181 | ) | (7,840 | )
|Depreciation                                           |  | (667   | ) | (710   | )
|Impairment                                             |  | (174   | ) | (138   | )
|Disposals                                              |  | 565    |   | 554    |  
|Reclassifications                                      |  | 26     |   | 99     |  
|Translation differences                                |  | 54     |   | (146   | )
|                                                       |  |        |   |        |  
|Accumulated depreciation and impairment at December 31 |  | (8,377 | ) | (8,181 | )
|                                                       |  |        |   |        |  
|Carrying value at January 1                            |  | 4,730  |   | 5,016  |  
|Carrying value at December 31                          |  | 4,168  |   | 4,730  |  
|Other tangible assets                                  |  |        |   |        |  
|Acquisition cost at January 1                          |  | 874    |   | 845    |  
|Additions                                              |  | 21     |   | 17     |  
|Acquisitions through business combinations             |  |       |   | 1      |  
|Disposals                                              |  | (9     | ) | (17    | )
|Reclassifications                                      |  | (1     | ) | 19     |  
|Translation differences                                |  | (6     | ) | 9      |  
|                                                       |  |        |   |        |  
|Acquisition cost at December 31                        |  | 879    |   | 874    |  
|                                                       |  |        |   |        |  
|Accumulated depreciation and impairment at January 1   |  | (649   | ) | (622   | )
|Depreciation                                           |  | (32    | ) | (34    | )
|Disposals                                              |  | 16     |   | 14     |  
|Reclassifications                                      |  | (1     | ) |       |  
|Impairment                                             |  | (3     | ) | (2     | )
|Translation differences                                |  | 3      |   | (5     | )
|                                                       |  |        |   |        |  
|Accumulated depreciation and impairment at December 31 |  | (666   | ) | (649   | )
|                                                       |  |        |   |        |  
|Carrying value at January 1                            |  | 225    |   | 223    |  
|Carrying value at December 31                          |  | 213    |   | 225    |  
|                                                       |  |        |   |        |  

F-50

---



|Advance payments and construction in progress |  |       |   |       |  
|--------------------------------------------- |  | ----- | - | ----- | -
|Acquisition cost at January 1                 |  | 328   |   | 255   |  
|Additions                                     |  | 209   |   | 446   |  
|Disposals                                     |  | (25   | ) | (12   | )
|Reclassifications                             |  | (238  | ) | (392  | )
|Translation differences                       |  | (3    | ) | 31    |  
|                                              |  |       |   |       |  
|Acquisition cost at December 31               |  | 271   |   | 328   |  
|                                              |  |       |   |       |  
|Carrying value at January 1                   |  | 328   |   | 255   |  
|Carrying value at December 31                 |  | 271   |   | 328   |  
|                                              |  |       |   |       |  
|Property, plant and equipment total           |  | 6,500 |   | 7,316 |  
|                                              |  |       |   |       |  

In 2006, additions include assets of €0 million (2005: €4million) acquired under finance lease
arrangements.

Finance Lease Arrangements

Property, plant and equipment includes property that is acquired under finance lease and sale and leaseback contracts:

|                              |  | As at December 31, |  
|----------------------------- |  | ------------------ | -
|
|
|Land and water areas          |  |                    |  
|Acquisition cost              |  |                   |  
|Accumulated depreciation      |  |                   |  
|                              |  |                    |  
|Carrying value at December 31 |  |                   |  
|Buildings                     |  |                    |  
|Acquisition cost              |  |                   |  
|Accumulated depreciation      |  |                   |  
|                              |  |                    |  
|Carrying value at December 31 |  |                   |  
|Machinery and equipment       |  |                    |  
|Acquisition cost              |  | 77                 |  
|Accumulated depreciation      |  | (45                | )
|                              |  |                    |  
|Carrying value at December 31 |  | 32                 |  
|                              |  |                    |  
|Leased assets, total          |  | 32                 |  
|                              |  |                    |  

There is no property, plant and equipment leased to third parties under operating leasing contracts.

F-51

---





Capitalized Borrowing Costs

The borrowing costs capitalized as part of non-current assets amounted to €6 million in 2006 and
€9 million in 2005. Amortization of capitalized borrowing costs was €10 million in 2006 (2005: €13 million and 2004:
€16 million). In 2006, 2005 and 2004 there were no capitalized borrowing costs associated with sold assets.

The
average interest rate used was 3.9% (2005: 3.5%), which represents the costs of the loan used to finance the projects.

19.   INVESTMENT PROPERTY

|                                                       |  | As at December 31, |  
|------------------------------------------------------ |  | ------------------ | -
|
|
|Acquisition cost at January 1                          |  | 81                 |  
|Additions                                              |  | 3                  |  
|Disposals                                              |  | (5                 | )
|Reclassifications                                      |  | (5                 | )
|                                                       |  |                    |  
|Acquisition cost at December 31                        |  | 74                 |  
|                                                       |  |                    |  
|Accumulated depreciation and impairment at January 1   |  | (46                | )
|Depreciation                                           |  | (1                 | )
|Disposals                                              |  | 3                  |  
|Reclassifications                                      |  |                   |  
|                                                       |  |                    |  
|Accumulated depreciation and impairment at December 31 |  | (44                | )
|                                                       |  |                    |  
|Carrying value at January 1                            |  | 35                 |  
|Carrying value at December 31                          |  | 30                 |  

The fair value of investment property is determined annually on December 31 by the Group. Fair value is based on active market prices,
adjusted, if necessary, for any difference in the nature of the specific asset.

Investment
property in Finland includes investments in flats and other premises occupied by third parties. The fair value of these flats at December 31, 2006 was
€55 million (2005: €28 million). At December 31, 2006 approximately 85% (2005: 84%) of the flats were statesubsidized buildings, for which certain
restrictions for sale apply. The fair value of other premises at December 31, 2006 was €5 million (2005: €10 million). The fair value of investment
property in other countries at December 31, 2006 was €13 million (2005: €14 million).

F-52

---



The amounts recognized in the income statement:

|                                                                                         |  | Year ended December 31,
|---------------------------------------------------------------------------------------- |  | -----------------------
|
|
|Rental income                                                                            |  | 12                     
|Direct operating expenses arising from investment properties that generate rental income |  | 6                      

There were no contractual obligations for future repair and maintenance or purchase of investment property.

All
assets under investment property are leased to third parties under operating leasing contracts.

20.   BIOLOGICAL ASSETS

|                                                     |  | As at December 31, |  
|---------------------------------------------------- |  | ------------------ | -
|
|
|At January 1                                         |  | 1,174              |  
|Purchases during the period                          |  | 3                  |  
|Sales during the period                              |  | (12                | )
|Harvested during the period                          |  | (107               | )
|Gains and losses arising from changes in fair values |  | (19                | )
|Translation differences                              |  | (2                 | )
|                                                     |  |                    |  
|At December 31                                       |  | 1,037              |  
|                                                     |  |                    |  

The discount rate used in determing the fair value in 2006 was 7.50% (2005: 7.0%). A 1% decrease (increase) in discount rate would increase
(decrease) the fair value of biological assets by approximately €120 million.

21.   INVESTMENTS IN ASSOCIATED COMPANIES AND JOINT VENTURES

|                                     |  | As at December 31, |  
|------------------------------------ |  | ------------------ | -
|
|
|At January 1                         |  | 1,034              |  
|Increases                            |  | 126                |  
|Decreases                            |  | (8                 | )
|Share of results after tax           |  | 61                 |  
|Dividends received                   |  | (16                | )
|Reclassified as assets held for sale |  |                   |  
|Translation differences              |  | (20                | )
|                                     |  |                    |  
|At December 31                       |  | 1,177              |  
|                                     |  |                    |  

F-53

---



Investments in associated companies at December 31, 2006 include goodwill of €51 million which relates to Pohjolan
Voima Oy's shares (2005: €36 million).

|                                                                               |  | As at December 31,
|------------------------------------------------------------------------------ |  | ------------------
|
|
|Sales and lease back contracts included in investments in associated companies |  |                   
|Acquisition cost                                                               |  | 13                
|Accumulated increases                                                          |  | 5                 
|                                                                               |  |                   
|Carrying value at December 31                                                  |  | 18                
|                                                                               |  |                   

Associated Companies and Joint Ventures

|                                                       |  | Group holding percentage |   | Carrying value
|------------------------------------------------------ |  | ------------------------ | - | --------------
|
|
|Associated companies                                   |  |                          |   |               
|Austria Papier Recycling Ges.m.b.H., AT                |  | 33.30                    | % | 33.30         
|Oy Keskuslaboratorio-Centrallaboratorium Ab, FI        |  | 38.65                    |   | 38.65         
|Oy Metsä-Botnia South America S.A. Uruguay(2)          |  | 12.40                    |   |              
|Oy Metsä-Botnia Ab, FI                                 |  | 47.00                    |   | 47.00         
|Paperinkeräys Oy, FI                                   |  | 22.98                    |   | 22.98         
|Pohjolan Voima Oy, FI                                  |  | 42.19                    |   | 40.90         
|Powest Oy, FI(1)                                       |  | 9.98                     |   | 9.98          
|RETS Timber Oy Ltd, FI                                 |  | 50.00                    |   | 50.00         
|Steveco Oy, FI                                         |  | 34.32                    |   | 34.32         
|Other                                                  |  |                         |   |              
|At December 31                                         |  |                          |   |               
|Joint ventures                                         |  |                          |   |               
|Kainuun Voima Oy, FI                                   |  | 50.00                    |   | 50.00         
|At December 31                                         |  |                          |   |               
|Associated companies and joint ventures at December 31 |  |                          |   |               

---

F-54

---



Pohjolan Voima Oy ("PVO") holds a 57.72% shareholding in Teollisuuden Voima Oy ("TVO"), which owns and operates nuclear powers plants in
Olkiluoto, Finland. The operation of a nuclear power plant involves potential costs and liabilities related to decommissioning and dismantling of the nuclear power plant and storage and disposal of
spent fuel, and is governed by international, European Union and local nuclear regulatory regimes. Pursuant to the Finnish Nuclear Liability Act, the operator of a nuclear facility is strictly liable
for damage resulting from a nuclear incident at the operator's installation or occurring in the course of transporting nuclear fuels. Shareholders of power companies that own and operate nuclear power
plants are not subject to liability under the Nuclear Liability Act. In Finland, the future costs of conditioning, storage and final disposal of spent fuel, management of low and intermediate-level
radioactive waste and nuclear power plant decommissioning are the responsibility of the operator. Reimbursements of the operators' costs related to decommissioning and dismantling of the power plant
and storage and disposal of spent fuel are provided for by state-established funds funded by annual contributions from nuclear power plant operators. Pursuant to PVO and TVO shareholders' agreements,
the Group bears its proportionate share of the costs related to decommissioning and dismantling of the nuclear power plant and storage and disposal of spent fuel through the price of electricity
acquired from PVO. The contributions to such funds are intended to be sufficient to cover estimated future costs. If the actual costs deviate from fund provisions, the Group would be affected
accordingly. Contributions to the fund are recognized in accordance with IFRIC 5 "Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds".

The
Group's share of the results of its principal associates and joint ventures equity accounted for, all of which are unlisted, and its share of the assets, liabilities and sales are as
follows:

|2006                                    |  | Assets |  | Liabilities |  | Sales |  | Profit/Loss |  
|--------------------------------------- |  | ------ |  | ----------- |  | ----- |  | ----------- | -
|
|Associated companies and joint ventures |  |        |  |             |  |       |  |             |  
|Oy Metsä-Botnia Ab, FI                  |  | 1,038  |  | 410         |  | 627   |  | 69          |  
|Pohjolan Voima Oy, FI                   |  | 1,125  |  | 618         |  | 327   |  | (14         | )
|Others                                  |  | 248    |  | 206         |  | 270   |  | 6           |  
|                                        |  |        |  |             |  |       |  |             |  
|Total                                   |  | 2,411  |  | 1,234       |  | 1,224 |  | 61          |  
|                                        |  |        |  |             |  |       |  |             |  

|2005                                    |  | Assets |  | Liabilities |  | Sales |  | Profit/Loss
|--------------------------------------- |  | ------ |  | ----------- |  | ----- |  | -----------
|
|Associated companies and joint ventures |  |        |  |             |  |       |  |            
|Oy Metsä-Botnia Ab, FI                  |  | 775    |  | 257         |  | 445   |  | 36         
|Pohjolan Voima Oy, FI                   |  | 1,003  |  | 525         |  | 219   |  |           
|Others                                  |  | 260    |  | 222         |  | 259   |  | 5          
|                                        |  |        |  |             |  |       |  |            
|Total                                   |  | 2,038  |  | 1,004       |  | 923   |  | 41         
|                                        |  |        |  |             |  |       |  |            

F-55

---



The amounts representing the Group's share of the assets and liabilities and sales and results of the joint ventures that have been accounted for
using the equity method are presented in the table below.

|                                                                              |  | Year ended December 31, |  
|----------------------------------------------------------------------------- |  | ----------------------- | -
|
|
|The amount of assets and liabilities related to investments in joint ventures |  |                         |  
|Non-current assets                                                            |  | 32                      |  
|Current assets                                                                |  | 2                       |  
|Non-current liabilities                                                       |  | (23                     | )
|Current liabilities                                                           |  | (4                      | )
|                                                                              |  |                         |  
|Net assets                                                                    |  | 7                       |  
|                                                                              |  |                         |  
|The income and expenses related to investments in joint ventures              |  |                         |  
|Sales                                                                         |  | 14                      |  
|Expenses                                                                      |  | (14                     | )
|                                                                              |  |                         |  
|Profit                                                                        |  |                        |  
|                                                                              |  |                         |  
|The average number of employees in the joint ventures                         |  | 44                      |  

Transactions and Balances with Associates and Joint Ventures

|                                                           |  | Year ended December 31, |  
|---------------------------------------------------------- |  | ----------------------- | -
|
|
|Sales to associates and joint ventures                     |  | 61                      |  
|Purchases from associates and joint ventures               |  | 448                     |  
|Non-current receivables from associates and joint ventures |  |                        |  
|Receivables from associates and joint ventures             |  | 20                      |  
|Payables to associates and joint ventures                  |  | 23                      |  
|Loan receivables from associates and joint ventures(1)     |  |                         |  
|At January 1                                               |  | 11                      |  
|Loans granted                                              |  |                        |  
|Repayments                                                 |  | (5                      | )
|                                                           |  |                         |  
|At December 31                                             |  | 6                       |  
|                                                           |  |                         |  

---

F-56

---



Assets held for sale

In 2005, assets held for sale include the Group's share of Compañia Forestal Oriental S.A, a forest company based in Uruguay. The carrying value on
the balance sheet is based on preliminary agreement relating to the pulp mill building in Uruguay. Before reclassification to assets held for sale the Group's share of Compañia Forestal
Oriental S.A. was included in investments in joint ventures. The sale was realized in March 2006.

22.   AVAILABLE-FOR-SALE INVESTMENTS (NON-CURRENT)

|                                    |  | Year ended December 31, |  
|----------------------------------- |  | ----------------------- | -
|
|
|At January 1                        |  | 153                     |  
|Additions                           |  | 5                       |  
|Disposals                           |  | (8                      | )
|Changes in fair values              |  | 1                       |  
|Transferred to associated companies |  | (20                     | )
|Other changes (impairment)          |  | (4                      | )
|                                    |  |                         |  
|At December 31                      |  | 127                     |  
|                                    |  |                         |  

Available-for-sale investments comprise of investments in unlisted equity shares and equity securities in listed
companies. Equity securities in listed companies are fair valued. Certain unlisted equities, where the fair value cannot be measured reliably are carried at cost, less impairment. The fair value of
the shares in Kemijoki Oy cannot be reliably measured as the redemption clause in the articles of association of the company limits fair market transactions.

The
fair value of equity investments traded in active markets is €2 million in 2006 and 2005. The fair value of equity investments traded in active markets is
determined by using quoted prices.

Principal Available-for-sale Investments

|                                                                 |  | Number of
shares |  | Group holding
percentage |  | Carrying value
|---------------------------------------------------------------- |  | ---------------- |  | ------------------------ |  | --------------
|
|
|Kemijoki Oy                                                      |  | 100,797          |  | 4.13%                    |  | 106           
|Listed companies                                                 |  |                  |  |                          |  | 2             
|Other                                                            |  |                  |  |                          |  | 19            
|Carrying value of available-for-sale investments at December 31, |  |                  |  |                          |  | 127           

F-57

---



23.   NON-CURRENT FINANCIAL ASSETS

|                                          |  | As at December 31,
|----------------------------------------- |  | ------------------
|
|
|Loans to associates and joint ventures(1) |  |                  
|Other loans receivables(1)                |  | 8                 
|Derivative financial instruments          |  | 66                
|                                          |  |                   
|At December 31                            |  | 74                
|                                          |  |                   

---

There were no loans granted to the Executive Team or managing director at December 31, 2006 or 2005.

24.   OTHER NON-CURRENT ASSETS

|                                |  | As at December 31,
|------------------------------- |  | ------------------
|
|
|Defined benefit plans (Note 29) |  | 45                
|Other non-current assets        |  | 28                
|                                |  |                   
|At December 31                  |  | 73                
|                                |  |                   

25.   INVENTORIES

|                              |  | As at December 31,
|----------------------------- |  | ------------------
|
|
|Raw materials and consumables |  | 485               
|Work in progress              |  | 63                
|Finished products and goods   |  | 667               
|Advance payments              |  | 40                
|                              |  |                   
|At December 31                |  | 1,255             
|                              |  |                   

F-58

---





26.   TRADE AND OTHER RECEIVABLES

|                                 |  | As at December 31,
|-------------------------------- |  | ------------------
|
|
|Trade receivables                |  | 1,349             
|Loan receivables                 |  | 13                
|Other receivables                |  | 142               
|Derivative financial instruments |  | 73                
|Prepayments and accrued income   |  | 80                
|                                 |  |                   
|At December 31                   |  | 1,657             
|                                 |  |                   

Doubtful Accounts Receivable

Trade receivables are recorded net of the following allowances for doubtful accounts:

|               |  | As at December 31, |  
|-------------- |  | ------------------ | -
|
|
|At January 1   |  | 2                  |  
|Additions      |  | 6                  |  
|Deductions     |  | (5                 | )
|               |  |                    |  
|At December 31 |  | 3                  |  
|               |  |                    |  

Main Items included in Prepayments and Accrued Income

|                   |  | As at December 31,
|------------------ |  | ------------------
|
|
|Personnel expenses |  | 3                 
|Interest income    |  |                  
|Indirect taxes     |  | 31                
|Other items        |  | 46                
|                   |  |                   
|At December 31     |  | 80                
|                   |  |                   

The carrying value of trade and other receivables is considered to approximate the fair value

F-59

---



27.   EQUITY AND RESERVES

Share Capital and Share Premium Reserve

|                              |  | Number of
shares |   | Share capital |   | Share premium |  | Total
|----------------------------- |  | ---------------- | - | ------------- | - | ------------- |  | -----
|
|At January 1, 2005            |  | 524,320          |   | 891           |   | 745           |  | 1,636
|Exercise of share options(1)  |  | 6,935            |   | 12            |   | 68            |  | 80   
|Treasury shares declared void |  | (8,000           | ) | (13           | ) | 13            |  |     
|                              |  |                  |   |               |   |               |  |      
|At December 31, 2005          |  | 523,255          |   | 890           |   | 826           |  | 1,716
|                              |  |                  |   |               |   |               |  |      
|Exercise of share options     |  | 4                |   |              |   |              |  |     
|                              |  |                  |   |               |   |               |  |      
|At December 31, 2006          |  | 523,259          |   | 890           |   | 826           |  | 1,716
|                              |  |                  |   |               |   |               |  |      

---

Share capital

Under UPM-Kymmene Corporation's Articles of Association, the company's issued share capital may be not less than €750,000,000 and no
more than €3,000,000,000. The issued share capital may be increased or decreased between these limits without amendment to the Articles of Association. At December 31, 2006, the
company's fully paid-in share capital was €889,541,031.00 and the number of shares was 523,259,430. Each share, which has an equivalent value of €1.70,
carries one vote. The shares are kept in a computerized book entry system.

Treasury shares

At the beginning of the year, the company held 162,000, representing 0.031% of share capital, of its own shares. These shares have been bought in 2005 based on
the decision of the Annual General Meeting of March 31, 2005 with an acquisition cost of €2.5 million, on average €15.50 per share. The Annual General
Meeting held on March 22, 2006 authorized the Board to donate these shares to a Cultural Foundation to be established. As at December 31, 2006, UPM did not own any of its shares.

During
2006, the company did not buy any of its own shares under the authorizations from the 2005 and 2006 Annual General Meetings. The Annual General Meeting of March 22, 2006
approved a proposal to buy back a minimum of 100 and a maximum of 49,825,000 own shares using funds available for the distribution of profit.

Authorizations to Increase Share Capital

The Annual General Meeting of March 22, 2006 authorized the Board of Directors to decide to increase the company's share capital by issuing new shares
and/or convertible bonds in one or more issues. The number of the company's new shares carrying the equivalent value of €1.70 per share made available for subscription under this
authorization may not exceed 99,650,000 and the share capital may be increased by a maximum total amount of €169,405,000.00. Under the same authorization, the number of shares at the
end of the year may rise by 19.04%. The share issue authorization was not used during the year.

F-60

---



In
2006, a total of 2,150 E options issued in 2002 were exercised to subscribe 4,300 shares.

If
all the remaining 3,800,000 2002D share options and all 3,795,850 2002E share options are exercised to subscribe all 15,191,700 shares and all 3,000,000 2005F share options, 3,000,000
2005G share options and 3,000,000 2005H share options authorized in 2005 are exercised to subscribe all 9,000,000 shares, the number of the company's shares will increase by a total of 24,191,700,
i.e. by 4.62%.

The
shares available for subscription under the Board's share issue authorization and through the exercise of options may increase the total number of the company's shares by 23.67%,
i.e. by 123,841,700 shares, to 647,101,130 shares, and the share capital by €210,530,890 to €1,100,071,921.00.

Redemption Clause

Under § 12 of UPM-Kymmene Corporation's Articles of Association, a shareholder who alone or jointly with another shareholder owns
331/3 percent or 50 percent or more of all the company's shares or their associated voting rights shall, at the request of other shareholders, be liable to redeem in the manner
prescribed in § 12 their shares and any securities that, under the Companies Act, carry the right to such shares.

A
resolution of general meeting of shareholders to amend or delete this redemption clause must be carried by shareholders representing not less than three-quarters of the votes cast and
shares represented at the meeting.

Fair Value and Other Reserves

|                                                     |  | As at December 31, | 
|---------------------------------------------------- |  | ------------------ | 
|
|
|Fair value reserve of available-for-sale investments |  | 1                  | 
|Hedging reserve                                      |  | 19                 | 
|Legal reserve                                        |  | 225                | 
|Share-based compensation                             |  | 33                 | 
|                                                     |  |                    | 
|At December 31                                       |  | 278                | 
|                                                     |  |                    | 

F-61

---



28.   DEFERRED INCOME TAXES

Reconciliation of the Movements of Deferred Tax Assets and Liabilities Balances During the Period

|                                                                    |  | As at
January 1, 2006 |  | Charged to
the income
statement |   | Charged to equity |  | Translation
differences |   | Acquisitions and disposals |   | As at
December 31,
2006
|------------------------------------------------------------------- |  | --------------------- |  | ------------------------------- | - | ----------------- |  | ----------------------- | - | -------------------------- | - | -----------------------
|
|Deferred tax assets                                                 |  |                       |  |                                 |   |                   |  |                         |   |                            |   |                        
|Retirement benefit and other provisions                             |  | 108                   |  | 6                               |   |                  |  | (3                      | ) |                           |   | 111                    
|Intercompany profit in inventory                                    |  | 14                    |  | (3                              | ) |                  |  |                        |   |                           |   | 11                     
|Book over tax depreciation                                          |  | 215                   |  | 28                              |   |                  |  | (22                     | ) |                           |   | 221                    
|Tax losses and tax credits carried forward                          |  | 210                   |  | 23                              |   |                  |  | (6                      | ) |                           |   | 227                    
|Other temporary differences                                         |  | 31                    |  | (27                             | ) |                  |  |                        |   | (1                         | ) | 3                      
|                                                                    |  |                       |  |                                 |   |                   |  |                         |   |                            |   |                        
|Deferred tax assets, total                                          |  | 578                   |  | 27                              |   |                  |  | (31                     | ) | (1                         | ) | 573                    
|                                                                    |  |                       |  |                                 |   |                   |  |                         |   |                            |   |                        
|Deferred tax liabilities                                            |  |                       |  |                                 |   |                   |  |                         |   |                            |   |                        
|Tax over book depreciation                                          |  | 772                   |  | (75                             | ) |                  |  | 2                       |   | (1                         | ) | 698                    
|Fair value adjustments of net assets acquired and biological assets |  | 317                   |  | (51                             | ) |                  |  |                        |   |                           |   | 266                    
|Other temporary differences                                         |  | 24                    |  | (5                              | ) | 18                |  |                        |   |                           |   | 37                     
|                                                                    |  |                       |  |                                 |   |                   |  |                         |   |                            |   |                        
|Deferred tax liabilities, total                                     |  | 1,113                 |  | (131                            | ) | 18                |  | 2                       |   | (1                         | ) | 1,001                  
|                                                                    |  |                       |  |                                 |   |                   |  |                         |   |                            |   |                        
|The amounts recognized in the balance sheet                         |  |                       |  |                                 |   |                   |  |                         |   |                            |   |                        
|Assets                                                              |  | 352                   |  | 42                              |   |                  |  | (31                     | ) | (1                         | ) | 362                    
|Liabilities                                                         |  | 887                   |  | (116                            | ) | 18                |  | 2                       |   | (1                         | ) | 790                    
|                                                                    |  |                       |  |                                 |   |                   |  |                         |   |                            |   |                        
|Deferred tax liabilities, less deferred tax assets                  |  | 535                   |  | (158                            | ) | 18                |  | 33                      |   |                           |   | 428                    
|                                                                    |  |                       |  |                                 |   |                   |  |                         |   |                            |   |                        

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax
liabilities and when the deferred income taxes relate to the same fiscal authority.

F-62

---



Reconciliation of the Movements of Deferred Tax Assets and Liabilities Balances During the Period

|                                                                    |  | As at
January 1, 2005 |  | Charged to
the income
statement |   | Charged to equity |   | Translation
differences |   | Acquisitions and disposals |   | As at
December 31,
2005
|------------------------------------------------------------------- |  | --------------------- |  | ------------------------------- | - | ----------------- | - | ----------------------- | - | -------------------------- | - | -----------------------
|
|Deferred tax assets                                                 |  |                       |  |                                 |   |                   |   |                         |   |                            |   |                        
|Retirement benefit and other provisions                             |  | 90                    |  | 18                              |   |                  |   |                        |   |                           |   | 108                    
|Intercompany profit in inventory                                    |  | 15                    |  | (1                              | ) |                  |   |                        |   |                           |   | 14                     
|Book over tax depreciation                                          |  | 134                   |  | 55                              |   |                  |   | 26                      |   |                           |   | 215                    
|Tax losses and tax credits carried forward                          |  | 243                   |  | (34                             | ) |                  |   | 2                       |   | (1                         | ) | 210                    
|Other temporary differences                                         |  | 59                    |  | (24                             | ) |                  |   |                        |   | (4                         | ) | 31                     
|                                                                    |  |                       |  |                                 |   |                   |   |                         |   |                            |   |                        
|Deferred tax assets, total                                          |  | 541                   |  | 14                              |   |                  |   | 28                      |   | (5                         | ) | 578                    
|                                                                    |  |                       |  |                                 |   |                   |   |                         |   |                            |   |                        
|Deferred tax liabilities                                            |  |                       |  |                                 |   |                   |   |                         |   |                            |   |                        
|Tax over book depreciation                                          |  | 812                   |  | (36                             | ) |                  |   |                        |   | (4                         | ) | 772                    
|Fair value adjustments of net assets acquired and biological assets |  | 320                   |  | (4                              | ) |                  |   |                        |   | 1                          |   | 317                    
|Other temporary differences                                         |  | 45                    |  | 9                               |   | (23               | ) | (1                      | ) | (6                         | ) | 24                     
|                                                                    |  |                       |  |                                 |   |                   |   |                         |   |                            |   |                        
|Deferred tax liabilities, total                                     |  | 1,177                 |  | (31                             | ) | (23               | ) | (1                      | ) | (9                         | ) | 1,113                  
|                                                                    |  |                       |  |                                 |   |                   |   |                         |   |                            |   |                        
|The amounts recognized in the balance sheet                         |  |                       |  |                                 |   |                   |   |                         |   |                            |   |                        
|Assets                                                              |  | 296                   |  | 33                              |   |                  |   | 28                      |   | (5                         | ) | 352                    
|Liabilities                                                         |  | 932                   |  | (12                             | ) | (23               | ) | (1                      | ) | (9                         | ) | 887                    
|                                                                    |  |                       |  |                                 |   |                   |   |                         |   |                            |   |                        
|Deferred tax liabilities, less deferred tax assets                  |  | 636                   |  | (45                             | ) | (23               | ) | (29                     | ) | (4                         | ) | 535                    
|                                                                    |  |                       |  |                                 |   |                   |   |                         |   |                            |   |                        

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax
liabilities and when the deferred income taxes relate to the same fiscal authority.

F-63

---



The deferred income tax charged to equity during the years:

|                     |  | 2006 |  | 2005 |  
|-------------------- |  | ---- |  | ---- | -
|
|Cash flow hedges     |  | 15   |  | (23  | )
|Net investment hedge |  | 3    |  |     |  
|                     |  |      |  |      |  
|Total                |  | 18   |  | (23  | )
|                     |  |      |  |      |  

At December 31, 2006, the net operating loss carry-forwards for which the Group has recorded a deferred tax asset amounted to
€639 million (2005: €568 million), of which €274 million (2005: €243 million) was attributable to German
subsidiaries, €212 million (2005: €139 million) to a Canadian subsidiary and €56 million (2005:
€73 million) to French subsidiaries. In Germany and France net operating loss carry forwards do not expire. In other countries net operating loss carry forwards expire at
various dates and in varying amounts. The net operating loss carry-forwards for which no deferred tax asset is recognized due to uncertainty of their utilization amounted to
€38 million in 2006 (2005: €120 million). These net operating loss carry-forwards are mainly attributable to Canadian and Chinese subsidiaries. The
capital loss carry-forwards for which no deferred tax asset is recognized due to uncertainty of their utilization amounted to €63 million in 2006 (2005:
€74 million). The Group does not believe that it will be possible to use these losses in the future as reductions of qualifying taxable income.

In
2006, the Group has recorded additional deferred tax assets of €20 million relating to the change in Group's structure in Canada. On December 31, 2006
the Group had deferred tax assets of €203 million (2005: €206 million) relating to book over tax depreciation in Canada which do not expire. The Group has
implemented a prudent and feasible tax planning strategy to utilize deferred tax assets in Canada. The tax planning strategy intends to generate sufficient taxable income against which the deferred
tax assets may be utilized.

No
deferred tax liability has been recognized for the undistributed profits of Finnish subsidiaries and associated companies as, in most cases, such earnings are transferred to the Group
without any tax consequences.

In
addition the Group does not recognize a deferred tax liability in respect of undistributed earnings of non-Finnish subsidiaries to the extent that such earnings are
intended to be permanently reinvested in those operations.

29.   RETIREMENT BENEFIT OBLIGATIONS

The Group operates a number of defined benefit and contribution plans all over the world.

The
most significant pension plan in Finland is the statutory Finnish employee pension scheme (TEL), according to which benefits are directly linked to the beneficiary's earnings. The
TEL pension scheme is mainly arranged with pension insurance companies. As a consequence of changes made in the Finnish TEL scheme, the disability pensions arranged with insurance companies changed
from being a defined benefit to a defined contribution plan on January 1, 2006. As the change was enacted in 2004 the Company's pension liability decreased by
€246 million in 2004. The pension liability also decreased by €23 million in 2004 due to other changes in the TEL pension scheme.

F-64

---



In
Finland, the pensions of less than 10% of employees are arranged through Group's own pension funds. All schemes managed by the pension funds are classified as defined benefit plans.

The
foreign plans include both defined contribution and defined benefit plans.

Defined benefit plans

|                                         |  | As at December 31,
|---------------------------------------- |  | ------------------
|
|
|Defined benefit pension plans            |  | 327               
|Other post-employment benefits (medical) |  | 23                
|                                         |  |                   
|Net liability                            |  | 350               
|                                         |  |                   
|Other long-term employee benefits        |  | 32                
|Overfunded plan shown as asset (Note 24) |  | 45                
|                                         |  |                   
|Total liability in balance sheet         |  | 427               
|                                         |  |                   

DEFINED BENEFIT PENSION PLANS

The amounts recognized in the balance sheet:

|                                        |  | As at December 31, |  
|--------------------------------------- |  | ------------------ | -
|
|
|Present value of funded obligations     |  | 806                |  
|Present value of unfunded obligations   |  | 388                |  
|                                        |  |                    |  
|                                        |  | 1,194              |  
|Fair value of plan assets               |  | (681               | )
|Unrecognized actuarial gains and losses |  | (185               | )
|Unrecognized past service costs         |  | (1                 | )
|                                        |  |                    |  
|Net liability                           |  | 327                |  
|                                        |  |                    |  

F-65

---





The amounts recognized in the income statement:

|                                                          |  | Year ended December 31, |  
|--------------------------------------------------------- |  | ----------------------- | -
|
|
|Current service cost                                      |  | 23                      |  
|Interest cost                                             |  | 51                      |  
|Expected return on plan assets                            |  | (41                     | )
|Net actuarial gains and losses recognized during the year |  | 7                       |  
|Transfers from inside the plan                            |  |                        |  
|Past service cost                                         |  | 2                       |  
|Settlements                                               |  |                        |  
|Curtailment                                               |  |                        |  
|                                                          |  |                         |  
|Total included in personnel expenses (Note 7)             |  | 42                      |  
|                                                          |  |                         |  

The actual return on plan assets was €61 million in 2006 (2005: €59 million and 2004:
€40 million).

Changes in the present value of defined benefit obligations

|                                                   |  | As at December 31, |  
|-------------------------------------------------- |  | ------------------ | -
|
|
|Defined benefit obligation as of beginning of year |  | 1,145              |  
|Current service cost                               |  | 23                 |  
|Interest cost                                      |  | 51                 |  
|Contributions by plan participants                 |  | 4                  |  
|Actuarial gains and losses                         |  | 32                 |  
|Past service costs                                 |  | 1                  |  
|Disposals                                          |  |                   |  
|Curtailments and settlements                       |  |                   |  
|Other adjustments                                  |  | 10                 |  
|Benefits paid                                      |  | (49                | )
|Translation differences                            |  | (23                | )
|                                                   |  |                    |  
|Defined benefit obligation as of end of the year   |  | 1,194              |  
|                                                   |  |                    |  

F-66

---



Changes in the fair value of plan assets

|                                                  |  | As at December 31, |  
|------------------------------------------------- |  | ------------------ | -
|
|
|Fair value of plan assets as of beginning of year |  | 625                |  
|Expected return on plan assets                    |  | 41                 |  
|Actuarial gains and losses                        |  | 20                 |  
|Contributions by plan participants                |  | 4                  |  
|Contributions by the employer                     |  | 54                 |  
|Disposals                                         |  |                   |  
|Settlements                                       |  |                   |  
|Other adjustments                                 |  | 2                  |  
|Benefits paid                                     |  | (49                | )
|Transfers from inside the plan                    |  |                   |  
|Translation difference                            |  | (16                | )
|                                                  |  |                    |  
|Fair value of plan assets of end of the year      |  | 681                |  
|                                                  |  |                    |  

The Group expects to contribute €75 million to its defined benefit pension plans in 2007.

The major categories of plan assets as a percentage of total plan assets

|                  |  | As at December 31,
|----------------- |  | ------------------
|
|
|Equity securities |  | 45%               
|Debt securities   |  | 35%               
|Real estate       |  | 6%                
|Money market      |  | 3%                
|Bonds             |  | 11%               
|                  |  |                   
|Total             |  | 100%              
|                  |  |                   

In Finland, the pension plan assets include ordinary shares issued by the company with a fair value of €3 million (2005:
€7 million) and a loan receivable of €168 million issued to the company (2005: €185 million) by the company's own fund. The
interest paid on the loan in 2006 was €7 million (2005: €6 million and 2004: €6 million).

F-67

---



OTHER POST-EMPLOYMENT BENEFITS (MEDICAL)

The Group also funds certain other post-employment benefits in North America relating to retirement medical and life insurance programmes.

The amounts recognized in the balance sheet:

|                                        |  | As at December 31, |  
|--------------------------------------- |  | ------------------ | -
|
|
|Present value of unfunded obligations   |  | 33                 |  
|Unrecognized actuarial gains and losses |  | (10                | )
|                                        |  |                    |  
|Net Liability                           |  | 23                 |  
|                                        |  |                    |  

The amounts recognized in the income statement:

|                                                          |  | Year ended December 31,
|--------------------------------------------------------- |  | -----------------------
|
|
|Current service cost                                      |  | 1                      
|Interest cost                                             |  | 2                      
|Net actuarial gains and losses recognized during the year |  | 1                      
|                                                          |  |                        
|Total included in personnel expenses (Note 7)             |  | 4                      
|                                                          |  |                        

Changes in the present value of defined benefit obligations

|                                                   |  | As at December 31, |  
|-------------------------------------------------- |  | ------------------ | -
|
|
|Defined benefit obligation as of beginning of year |  | 37                 |  
|Current service cost                               |  | 1                  |  
|Interest cost                                      |  | 2                  |  
|Contributions by plan participants                 |  | 2                  |  
|Actuarial gains and losses                         |  |                   |  
|Benefits paid                                      |  | (5                 | )
|Translation differences                            |  | (4                 | )
|                                                   |  |                    |  
|Defined benefit obligation as of end of the year   |  | 33                 |  
|                                                   |  |                    |  

F-68

---



Changes in the fair value of plan assets

|                                               |  | As at December 31, |  
|---------------------------------------------- |  | ------------------ | -
|
|
|Fair value of plan assets of beginning of year |  |                   |  
|Contributions by plan participants             |  | 2                  |  
|Contributions by the employer                  |  | 3                  |  
|Benefits paid                                  |  | (5                 | )
|                                               |  |                    |  
|Fair value of plan assets as end of the year   |  |                   |  
|                                               |  |                    |  

The Group expects to contribute €3 million to its other post-employment benefits plans in 2007.

POST EMPLOYMENT BENEFITS (PENSION AND MEDICAL)

Post employment benefits: the principal actuarial assumptions used as at December 31,

|                                                  |  | Finland |   | Canada |   | Germany |   | USA  |   | Great Britain |   | Other |  
|------------------------------------------------- |  | ------- | - | ------ | - | ------- | - | ---- | - | ------------- | - | ----- | -
|
|
|Discount rate                                     |  | 4.25    | % | 4.25   | % | 5.20    | % | 5.00 | % | 4.25          | % | 4.25  | %
|Expected return on plan assets                    |  | 6.15    |   | 5.93   |   | 7.50    |   | 7.50 |   | N/A           |   | N/A   |  
|Future salary increases                           |  | 3.75    |   | 3.75   |   | 2.05    |   | 2.01 |   | 2.50          |   | 2.50  |  
|Future pension increases                          |  | N/A     |   | N/A    |   | 1.22    |   | 1.19 |   | 1.50          |   | 1.50  |  
|Expected average remaining working years of staff |  | 12.3    |   | 12.2   |   | 11.3    |   | 12.1 |   | 14.5          |   | 14.8  |  

For foreign plans, the assumption for the weighted average expected return on plan assets is based on target asset allocation of each plan,
historical market performance, relevant forward-looking economic analyses, expected returns, variances, and correlations for different asset categories held. For domestic plans, the overall expected
return on plan assets is based on the weighted average of the expected returns on the different asset categories held.

The
assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation for U.S. plans was 10.0% in 2006, 11.0% in 2005, declining to 5%
by the year 2011 and remaining at that level thereafter. A one-percentage-point increase and decrease in assumed health care cost trend rates in the USA would effect post employment
benefit obligation by €2 million and €(2) million, correspondingly.

F-69

---



The amounts of pension and other post-employment benefit plans recognized in the balance sheet as at December 31, 2006

|                                        |  | Finland |   | Canada |   | Germany |   | USA |   | Great
Britain |   | Other |   | Total |  
|--------------------------------------- |  | ------- | - | ------ | - | ------- | - | --- | - | ------------- | - | ----- | - | ----- | -
|
|Present value of funded obligations     |  | 233     |   | 208    |   |        |   | 31  |   | 322           |   | 12    |   | 806   |  
|Present value of unfunded obligations   |  |        |   | 21     |   | 322     |   | 29  |   |              |   | 49    |   | 421   |  
|Fair value of plan assets               |  | (235    | ) | (172   | ) |        |   | (30 | ) | (234          | ) | (10   | ) | (681  | )
|Unrecognized actuarial gains and losses |  | (42     | ) | (14    | ) | (40     | ) | (9  | ) | (85           | ) | (5    | ) | (195  | )
|Unrecognized past service costs         |  |        |   | (1     | ) |        |   |    |   |              |   |      |   | (1    | )
|                                        |  |         |   |        |   |         |   |     |   |               |   |       |   |       |  
|Net Liability                           |  | (44     | ) | 42     |   | 282     |   | 21  |   | 3             |   | 46    |   | 350   |  
|                                        |  |         |   |        |   |         |   |     |   |               |   |       |   |       |  

The amounts of pension and other post-employment benefit plans recognized in the balance sheet as at December 31, 2005

|                                        |  | Finland |   | Canada |   | Germany |   | USA |   | Great
Britain |   | Other |   | Total |  
|--------------------------------------- |  | ------- | - | ------ | - | ------- | - | --- | - | ------------- | - | ----- | - | ----- | -
|
|Present value of funded obligations     |  | 199     |   | 235    |   |        |   | 36  |   | 289           |   | 11    |   | 770   |  
|Present value of unfunded obligations   |  |        |   | 24     |   | 306     |   | 33  |   |              |   | 49    |   | 412   |  
|Fair value of plan assets               |  | (218    | ) | (168   | ) |        |   | (35 | ) | (198          | ) | (6    | ) | (625  | )
|Unrecognized actuarial gains and losses |  | (15     | ) | (34    | ) | (29     | ) | (11 | ) | (92           | ) | (9    | ) | (190  | )
|Unrecognized past service cost          |  |        |   | (2     | ) |        |   |    |   |              |   |      |   | (2    | )
|                                        |  |         |   |        |   |         |   |     |   |               |   |       |   |       |  
|Net Liability                           |  | (34     | ) | 55     |   | 277     |   | 23  |   | (1            | ) | 45    |   | 365   |  
|                                        |  |         |   |        |   |         |   |     |   |               |   |       |   |       |  

Amounts for the current and previous periods

|                                             |  | As at December 31, |  
|-------------------------------------------- |  | ------------------ | -
|
|
|Present value of defined benefit obligations |  | (1,227             | )
|Fair value of plan assets                    |  | 681                |  
|                                             |  |                    |  
|Funded status                                |  | (546               | )
|                                             |  |                    |  
|Experience adjustments on plan liabilities   |  | (20                | )
|Experience adjustments on plan assets        |  | 20                 |  

F-70

---



30.   PROVISIONS

|                                                           |  | Closure and
restructuring
provisions |   | Environmental
provisions |   | Termination
provisions |   | Reforestation
provisions |   | Tax
provisions |   | Actual
emissions,
provision |   | Other
provisions |   | Total |  
|---------------------------------------------------------- |  | ------------------------------------ | - | ------------------------ | - | ---------------------- | - | ------------------------ | - | -------------- | - | --------------------------- | - | ---------------- | - | ----- | -
|
|At January 1, 2005                                         |  | 29                                   |   | 19                       |   | 61                     |   | 4                        |   | 23             |   |                            |   | 41               |   | 177   |  
|Translation difference                                     |  | 2                                    |   |                         |   | 3                      |   |                         |   |               |   |                            |   | 1                |   | 6     |  
|Additional provisions and increases to existing provisions |  | 7                                    |   | 10                       |   | 12                     |   |                         |   | 1              |   | 31                          |   | 6                |   | 67    |  
|Utilized during year                                       |  | (13                                  | ) | (1                       | ) | (22                    | ) | (1                       | ) | (1             | ) |                            |   | (16              | ) | (54   | )
|Unused amounts reversed                                    |  |                                     |   |                         |   |                       |   |                         |   | (5             | ) |                            |   | (1               | ) | (6    | )
|                                                           |  |                                      |   |                          |   |                        |   |                          |   |                |   |                             |   |                  |   |       |  
|At December 31, 2005                                       |  | 25                                   |   | 28                       |   | 54                     |   | 3                        |   | 18             |   | 31                          |   | 31               |   | 190   |  
|                                                           |  |                                      |   |                          |   |                        |   |                          |   |                |   |                             |   |                  |   |       |  
|At January 1, 2006                                         |  | 25                                   |   | 28                       |   | 54                     |   | 3                        |   | 18             |   | 31                          |   | 31               |   | 190   |  
|Translation difference                                     |  | (1                                   | ) | (1                       | ) |                       |   |                         |   |               |   |                            |   |                 |   | (2    | )
|Additional provisions and increases to existing provisions |  | 7                                    |   | 1                        |   | 56                     |   | 8                        |   | 1              |   | 8                           |   | 3                |   | 84    |  
|Utilized during year                                       |  | (17                                  | ) | (3                       | ) | (21                    | ) | (2                       | ) |               |   | (25                         | ) | (12              | ) | (80   | )
|Unused amounts reversed                                    |  |                                     |   |                         |   | (5                     | ) |                         |   |               |   |                            |   |                 |   | (5    | )
|                                                           |  |                                      |   |                          |   |                        |   |                          |   |                |   |                             |   |                  |   |       |  
|At December 31, 2006                                       |  | 14                                   |   | 25                       |   | 84                     |   | 9                        |   | 19             |   | 14                          |   | 22               |   | 187   |  
|                                                           |  |                                      |   |                          |   |                        |   |                          |   |                |   |                             |   |                  |   |       |  

|                       |  | December 31,
|---------------------- |  | ------------
|
|
|Non-current provisions |  | 125         
|Current provisions     |  | 62          
|                       |  |             
|Total                  |  | 187         
|                       |  |             

Provisions

Closure and restructuring provisions include charges related primarily to dismantling of closed mills. Environmental provisions include expenses relating to old
mill sites and the remediation of industrial landfills. Termination provisions are concerned with operational restructuring as well as unemployment arrangements and disability pensions primarily in
Finland.

In
2006, UPM started programme to restore its profitability. The programme covers all of the company's operations and includes both streamlining of operations and closures of
uncompetitive production capacity. The programme seeks to achieve a reduction of approximately 3,600 employees. A provision amounting to €35 million relating to unemployment,
early retirement and termination arrangements was recognized in 2006.

The
company takes part in government programmes aimed at reducing greenhouse gas emissions. In 2006, the Group has recognized a provision amounting to €14 million
(2005: €31 million) to cover the obligation to return emission allowances. The company possesses emission allowances worth of €16 million (2005:
€36 million) as intangible assets.

F-71

---



In
2005, mainly restructuring expenses relating to the US and European sales network for wood products were recognized in closure and restructuring.

31.   INTEREST-BEARING LIABILITIES

|                                         |  | As at December 31,
|---------------------------------------- |  | ------------------
|
|
|Non-current interest-bearing liabilities |  |                   
|Bonds                                    |  | 2,244             
|Loans from financial institutions        |  | 550               
|Pension loans                            |  | 213               
|Trade payables                           |  | 10                
|Finance lease liabilities                |  | 115               
|Derivative financial instruments         |  | 98                
|Other liabilities                        |  | 123               
|                                         |  |                   
|Total liability                          |  | 3,353             
|Current interest-bearing liabilities     |  |                   
|Current portion of long-term debt        |  | 521               
|Short-term loans                         |  | 105               
|Derivative financial instruments         |  | 117               
|Other liabilities(1)                     |  | 249               
|                                         |  |                   
|                                         |  | 992               
|                                         |  |                   
|Total interest-bearing liabilities       |  | 4,345             
|                                         |  |                   

---

Maturity of Non-Current Interest-Bearing Liabilities

|                                         |  | 2007 |  | 2008 |  | 2009 |  | 2010 |  | 2011 |  | 2012+ |  | Total |  
|---------------------------------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ---- |  | ----- |  | ----- | -
|
|Bonds                                    |  | 280  |  | 87   |  | 249  |  | 58   |  | 2    |  | 1,848 |  | 2,524 |  
|Loans from financial institutions        |  | 59   |  | 145  |  | 43   |  | 26   |  | 39   |  | 297   |  | 609   |  
|Pension loans                            |  | 172  |  | 148  |  | 42   |  | 15   |  | 8    |  |      |  | 385   |  
|Trade payables                           |  | 1    |  | 1    |  |     |  | 1    |  | 1    |  | 7     |  | 11    |  
|Finance lease liabilities                |  | 5    |  | 5    |  | 11   |  | 4    |  | 84   |  | 11    |  | 120   |  
|Derivative financial instruments         |  |     |  |     |  | 1    |  |     |  | 1    |  | 96    |  | 98    |  
|Other liabilities                        |  | 4    |  | 7    |  | 3    |  | 4    |  | 3    |  | 106   |  | 127   |  
|                                         |  |      |  |      |  |      |  |      |  |      |  |       |  |       |  
|                                         |  | 521  |  | 393  |  | 349  |  | 108  |  | 138  |  | 2,365 |  | 3,874 |  
|Current portion of long-term debt        |  |      |  |      |  |      |  |      |  |      |  |       |  | (521  | )
|Non-current interest-bearing liabilities |  |      |  |      |  |      |  |      |  |      |  |       |  | 3,353 |  

F-72

---



Bonds in Interest-Bearing Liabilities

|                         |  |       |   |     |  |        |  | As at December 31, |  
|------------------------ |  | ----- | - | --- |  | ------ |  | ------------------ | -
|
|
|
|Fixed rate               |  |       |   |     |  |        |  |                    |  
|19972007                |  | 6.875 | % | USD |  | 215    |  | 159                |  
|19972007                |  | 6.625 |   | EUR |  | 102    |  | 105                |  
|19972027                |  | 7.450 |   | USD |  | 375    |  | 300                |  
|19992009                |  | 6.350 |   | EUR |  | 250    |  | 250                |  
|20002030                |  | 3.550 |   | JPY |  | 10,000 |  | 14                 |  
|20012006                |  | 0.962 |   | JPY |  | 2,000  |  |                   |  
|20012007                |  | 6.875 |   | USD |  | 10     |  | 7                  |  
|20022007                |  | 0.869 |   | JPY |  | 2,000  |  | 12                 |  
|20022012                |  | 6.125 |   | EUR |  | 600    |  | 603                |  
|20022014                |  | 5.625 |   | USD |  | 500    |  | 350                |  
|20022017                |  | 6.625 |   | GBP |  | 250    |  | 361                |  
|20032018                |  | 5.500 |   | USD |  | 250    |  | 179                |  
|                         |  |       |   |     |  |        |  | 2,340              |  
|Floating-rate            |  |       |   |     |  |        |  |                    |  
|20022008                |  | 4.528 | % | EUR |  | 39     |  | 39                 |  
|20022008                |  | 4.348 |   | EUR |  | 50     |  | 50                 |  
|20022010                |  | 4.350 |   | EUR |  | 59     |  | 59                 |  
|20022012                |  | 4.155 |   | EUR |  | 25     |  | 25                 |  
|20022012                |  | 4.748 |   | EUR |  | 11     |  | 11                 |  
|                         |  |       |   |     |  |        |  | 184                |  
|Bonds, total             |  |       |   |     |  |        |  | 2,524              |  
|current portion         |  |       |   |     |  |        |  | (280               | )
|Bonds, long-term portion |  |       |   |     |  |        |  | 2,244              |  

Fair Value Hedge of the Long-Term Interest-Bearing Liabilities

Fair value hedge accounting in accordance with IAS 39 results in a cumulative fair value adjustment totaling €90 million (2005:
€59 million), which has decreased (2005: increased) the carrying amounts of the liabilities. Accordingly, the positive fair value of the hedging instruments excluding accrued
interest amounts to €68 million (2005: €161 million) in assets, and negative fair value of €98 million in liabilities (2005:
€61 million). The carrying amounts of the hedged liabilities and the fair values of the hedging instruments are included in the net interest bearing liabilities. The effect of
the fair value hedge ineffectiveness on the income statement was €19 million (2005: €19 million).

F-73

---



The Interest Rate Ranges of Interest-Bearing Liabilities

|                                  |  | As at December 31, |  
|--------------------------------- |  | ------------------ | -
|
|
|Loans from financial institutions |  | 3.555.77          | %
|Pension loans                     |  | 3.657.50          |  
|Finance lease liabilities         |  | 2.706.90          |  

Fair values of non-current liabilities

|                                  |  | As at December 31,
|--------------------------------- |  | ------------------
|
|
|
|Bonds                             |  | 2,524             
|Loans from financial institutions |  | 609               
|Pensions loans                    |  | 385               
|                                  |  |                   
|                                  |  | 3,518             
|                                  |  |                   

Fair values of long-term loans, including the current portion and accrued interests, have been estimated as follows:

The
fair value of the quoted bonds is based on the quoted market value as of December 31. The fair value of fixed rate and market-based floating rate loans is estimated using the
expected future payments discounted at market interest rates.

Interest Rate Swaps

The Group uses interest rate swap agreements to hedge the interest rate risk relating to long-term loans.

At December
31, 2006 the fixed interest rates varied from 0.87% to 7.45% (0.87% to 8.0% in 2005) and the floating rates varied from 2.48% to 7.09% (1.12% to 6.28% in 2005).

F-74

---





Net interest bearing liabilities

|                                    |                                                | As at December 31,
|----------------------------------- | ---------------------------------------------- | ------------------
|
|
|Interest-bearing liabilities, total |                                                | 4,345             
|Interest-bearing financial assets   |                                                |                   
|Non-current                         |                                                |                   
|                                    | Loan receivables                               |                   
|                                    | Available-for-sale investments (listed shares) |                   
|                                    | Derivative financial instruments               |                   
|                                    | Other receivables                              |                   
|                                    |                                                |                   
|                                    |                                                | 80                
|Current                             |                                                |                   
|                                    | Loans receivable                               |                   
|                                    | Trade receivables                              |                   
|                                    | Other receivables                              |                   
|                                    | Derivative financial instruments               |                   
|                                    | Cash and cash equivalents                      |                   
|                                    |                                                |                   
|                                    |                                                | 217               
|                                    |                                                |                   
|Interest-bearing financial assets   |                                                | 297               
|                                    |                                                |                   
|Net interest-bearing liabilities    |                                                | 4,048             
|                                    |                                                |                   

Finance Lease Liabilities

In December 2006, the Group exercised its option to purchase Kymi River power plants which resulted in a decrease of lease liability by
€126 million. After that the Group has two power plants leased under sale and leaseback agreements. The Group uses the electrical power generated by these plants in its own
production. Payments of the power plants are due by the end of 2011.

In April
2006, the control over Wisapower Oy was transferred from UPM to Pohjolan Voima Oy, decreasing the lease liability by €85 million.

In
addition the Group leases certain tangible assets under long-term arrangements.

F-75

---



Finance lease liabilitiesminimum lease payments

|                                                                      |  | As at December 31, |  
|--------------------------------------------------------------------- |  | ------------------ | -
|
|
|Not later than 1 year                                                 |  | 12                 |  
|12 years                                                             |  | 12                 |  
|23 years                                                             |  | 17                 |  
|34 years                                                             |  | 10                 |  
|45 years                                                             |  | 89                 |  
|Later than 5 years                                                    |  | 11                 |  
|                                                                      |  |                    |  
|                                                                      |  | 151                |  
|Future finance charges                                                |  | (31                | )
|                                                                      |  |                    |  
|Finance lease liabilitiesthe present value of minimum lease payments |  | 120                |  
|                                                                      |  |                    |  

Finance lease liabilitiesthe present value of minimum lease payments

|                      |  | As at December 31,
|--------------------- |  | ------------------
|
|
|Not later than 1 year |  | 11                
|12 years             |  | 11                
|23 years             |  | 14                
|34 years             |  | 8                 
|45 years             |  | 68                
|Later than 5 years    |  | 8                 
|                      |  |                   
|                      |  | 120               
|                      |  |                   

32.   OTHER LIABILITIES

|                                 |  | As at December 31,
|-------------------------------- |  | ------------------
|
|
|Derivative financial instruments |  | 2                 
|Other                            |  | 11                
|                                 |  |                   
|                                 |  | 13                
|                                 |  |                   

F-76

---



33.   TRADE AND OTHER PAYABLES

|                                             |  | As at December 31,
|-------------------------------------------- |  | ------------------
|
|
|Advances received                            |  | 15                
|Trade payables                               |  | 727               
|Amounts due to associates and joint ventures |  | 23                
|Accrued expenses and deferred income         |  | 451               
|Derivative financial instruments             |  | 53                
|Fine imposed by the EU Commission(1)         |  |                  
|Other current liabilities                    |  | 130               
|                                             |  |                   
|                                             |  | 1,399             
|                                             |  |                   

---

Main items included in accrued expenses and deferred income

|                   |  | As at December 31,
|------------------ |  | ------------------
|
|
|Personnel expenses |  | 193               
|Interest expenses  |  | 28                
|Indirect taxes     |  | 21                
|Other items(1)     |  | 209               
|                   |  |                   
|                   |  | 451               
|                   |  |                   

---

The carrying value of trade and other payables is considered to approximate the fair value.

34.   DERIVATIVE FINANCIAL INSTRUMENTS

Derivative Financial Instruments are recorded on the balance sheet at fair value, which is defined as the monetary amount for which the instruments could be
exchanged between willing parties in a current transaction, other than in a liquidation or forced sale.

The
fair values of such financial items have been estimated on the following basis:



F-77

---





Net fair values of derivative financial instruments

|                                      |  | As at December 31, | 
|------------------------------------- |  | ------------------ | 
|
|
|
|Interest rate swaps(1)                |  | 120                | 
|Forward foreign exchange contracts(2) |  | 69                 | 
|Interest rate options                 |  |                   | 
|Cross currency swaps(3)               |  | 1                  | 
|Commodity contracts                   |  | 3                  | 
|                                      |  |                    | 
|                                      |  | 193                | 
|                                      |  |                    | 

---

The fair value of forward foreign exchange contracts designated as hedges of net investments in foreign
units was €0 million at December 31, 2006 (€(5) million at December 31, 2005). They are reported in Translation differences of the Group's equity,
net of tax, as €4 million at December 31, 2006 (€(4) million at December 31, 2005).

Positive and negative fair values of financial instruments are shown under non-current financial assets, trade and other receivables,
interest-bearing liabilities and trade and other payables.

Notional amounts of derivative financial instruments

|                                   |  | December 31,
|---------------------------------- |  | ------------
|
|
|Interest rate swaps                |  | 2,566       
|Forward foreign exchange contracts |  | 4,293       
|Currency options                   |  | 30          
|Cross currency swaps               |  | 570         
|Commodity contracts                |  | 29          
|Interest rate forward contracts    |  | 2,500       

F-78

---





35.   PRINCIPAL SUBSIDIARIES AS AT DECEMBER 31, 2006

|Name of the subsidiary, country of incorporation    |  | Group holding
|--------------------------------------------------- |  | -------------
|
|Blandin Paper Company, US                           |  | 100.00       
|Oy Botnia Shipping Ab, FI                           |  | 100.00       
|Lignis GmbH & Co. KG, DE                            |  | 74.90        
|Nordland Papier GmbH, DE                            |  | 100.00       
|NorService GmbH, DE                                 |  | 100.00       
|nortrans Speditionsgesellschaft mbH, DE             |  | 100.00       
|Raflatac Shanghai Co. Ltd, CN                       |  | 100.00       
|Oy Rauma Stevedoring Ltd, FI                        |  | 100.00       
|STAG-SCA Frischholz GmbH, AT                        |  | 66.67        
|Steyrermühl Sägewerksgesellschaft m.b.H. Nfg KG, AT |  | 100.00       
|ZAO Tikhvinsky Komplexny Lespromkhoz, RU            |  | 99.36        
|Tilhill Forestry Ltd, GB                            |  | 100.00       
|UPM-Asunnot Oy, FI                                  |  | 100.00       
|UPM Sähkönsiirto Oy, FI                             |  | 100.00       
|UPM Tehdasmittaus Oy, FI                            |  | 100.00       
|UPM-Kymmene AB, SE                                  |  | 100.00       
|UPM-Kymmene AG, CH                                  |  | 99.80        
|UPM-Kymmene AS, NO                                  |  | 100.00       
|UPM-Kymmene Asia Pacific Pte Ltd., SG               |  | 100.00       
|UPM-Kymmene Austria GmbH, AT                        |  | 100.00       
|UPM-Kymmene A/S, DK                                 |  | 100.00       
|UPM-Kymmene B.V., NL                                |  | 100.00       
|OOO UPM-Kymmene Chuduvo, RU                         |  | 100.00       
|UPM-Kymmene Forest AS, EE                           |  | 100.00       
|OOO UPM-Kymmene Forest Russia, RU                   |  | 100.00       
|UPM-Kymmene France S.A.S., FR                       |  | 100.00       
|UPM-Kymmene Inc., US                                |  | 100.00       
|UPM-Kymmene Japan K.K., JP                          |  | 100.00       
|UPM-Kymmene Miramichi Inc., CA                      |  | 100.00       
|UPM-Kymmene NV/SA, BE                               |  | 99.60        
|UPM-Kymmene Otepää AS, EE                           |  | 100.00       
|OOO UPM-Kymmene Pestovo, RU                         |  | 100.00       
|UPM-Kymmene Papier GmbH & Co. KG, DE                |  | 100.00       
|UPM-Kymmene Sales GmbH, DE                          |  | 100.00       
|UPM-Kymmene Seven Seas Oy, FI                       |  | 100.00       
|UPM-Kymmene Sp. z o.o., PL                          |  | 100.00       
|UPM-Kymmene Srl., IT                                |  | 100.00       
|UPM-Kymmene S.A., ES                                |  | 100.00       
|UPM-Kymmene Wood Ab, SE                             |  | 100.00       
|UPM-Kymmene Wood A/S, DK                            |  | 99.93        
|                                                    |  |              

F-79

---



|UPM-Kymmene Wood B.V., NL                         |  | 100.00
|------------------------------------------------- |  | ------
|UPM-Kymmene Wood GmbH, DE                         |  | 100.00
|UPM-Kymmene Wood Ltd, GB                          |  | 100.00
|UPM-Kymmene Wood Oy, FI                           |  | 100.00
|UPM-Kymmene Wood S.A., ES                         |  | 100.00
|UPM-Kymmene Wood S.A., FR                         |  | 99.99 
|UPM-Kymmene Wood S.r.l., IT                       |  | 100.00
|UPM-Kymmene (Changshu) Paper Industry Co. Ltd, CN |  | 100.00
|UPM-Kymmene (Shanghai) Trading Co., CN            |  | 100.00
|UPM-Kymmene (UK) Ltd, GB                          |  | 100.00
|UPM Raflatac Canada Inc., CA                      |  | 100.00
|UPM Raflatac CZ s.r.o., CZ                        |  | 100.00
|UPM Raflatac GmbH, DE                             |  | 100.00
|UPM Raflatac Iberica S.A., ES                     |  | 100.00
|UPM Raflatac Inc., US                             |  | 100.00
|UPM Raflatac Italia S.r.l., IT                    |  | 100.00
|UPM Raflatac Kft., HU                             |  | 100.00
|UPM Raflatac Ltd, GB                              |  | 100.00
|UPM Raflatac Mexico S.A. de C.V., ME              |  | 100.00
|UPM Raflatac Oy, FI                               |  | 100.00
|UPM Raflatac Polska Sp. z o.o., PL                |  | 100.00
|UPM Raflatac South Africa (Pty) Ltd, ZA           |  | 100.00
|UPM Raflatac S.A.S., FR                           |  | 100.00
|UPM Raflatac Sdn. Bhd., MY                        |  | 100.00
|UPM Raflatac Pty Ltd, AU                          |  | 100.00
|UPM Raflatac (Thailand) Co., Ltd, TH              |  | 100.00
|Walki Wisa Converflex Ab, SE                      |  | 51.60 
|Walki Wisa GmbH, DE                               |  | 100.00
|Walki Wisa Ltd, GB                                |  | 100.00
|Walki Wisa Oy, FI                                 |  | 100.00
|Walki Wisa Packaging Paper (Changshu) Co, CN      |  | 100.00
|Werla Insurance Company Ltd, GB                   |  | 100.00

The table includes subsidiaries with sales exceeding €2 million.

F-80

---



36.   SHARE BASED PAYMENTS

Share options granted to key personnel

As authorized by the Annual General Meeting of March 19, 2002, D and E options have been issued to key personnel. Of these, 3,800,000 are designated 2002D
and 3,800,000 are designated 2002E. Each option entitles the holder to subscribe two UPM-Kymmene Corporation shares. The subscription period for 2002D options is April 1, 2004
to April 30, 2007 and that for 2002E options April 1, 2005 to April 30, 2008. The share subscription price is €43.90 per two shares for 2002D options and
€14.27 per share for 2002E options. The share subscription prices will be reduced by the amount of dividend confirmed after the end of the subscription price determination period and
before the date of share subscription, in each case on the record date for dividend distribution. Share subscriptions based on these options may raise the share capital by a maximum of
€25,840,000.

The
Annual General Meeting held on March 31, 2005 approved the Board of Directors' proposal to issue share options to the Group's key personnel. The number of share options is
9,000,000 and these can be exercised to subscribe a maximum total of 9,000,000 UPM-Kymmene Corporation shares. A total of 3,000,000 of the share options are designated 2005F, 3,000,000
2005G and 3,000,000 2005H. The subscription periods are October 1, 2006 to October 31, 2008 for 2005F options, October 1, 2007 to October 31, 2009 for 2005G options,
and October 1, 2008 to October 31, 2010 for 2005H options.

The
subscription price for 2005F share options is the average tradeweighted price for the company's share on the Helsinki Stock Exchange between January 1, and February 28,
2005 plus 10%, i.e. €18.23 per share. The subscription price for 2005G options is the average tradeweighted share price between January 1, and February 28, 2006 plus 10%,
i.e. €18.65 per share, and that for 2005H options the average tradeweighted share price between January 1, and February 28, 2007 plus 10%. The share subscription prices
will be reduced by the amount of dividend confirmed after the end of the subscription price determination period and before the date of share subscription, in each case on the record date for dividend
distribution. Share subscriptions based on 2005F, 2005G and 2005H options may raise the share capital by a total maximum of €15,300,000.

Equity-based rewards scheme

Key personnel of the Group who fall within the scope of the equitybased rewards scheme may be rewarded with UPM-Kymmene shares annually in the
calendar years 2005, 2006 and 2007. The reward will be paid at the end of each year as a combination of shares and cash. Altogether not more than 1,046,400 shares will be given to key personnel on the
basis of the scheme. The amount to be paid in cash may be not more than 1.5 times the value of the shares given. The amount of the reward is tied to the achievement of set performance targets. For
2006, no decision for rewards has been made. No rewards were given for 2005.

F-81

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Changes in the numbers of share options granted

|                          |  | 2006  |  | 2005       |   | 2004  | 
|------------------------- |  | ----- |  | ---------- | - | ----- | 
|
|
|At January 1              |  | 16.55 |  | 10,348,700 |   | 16.16 | 
|Share options granted     |  | 16.73 |  | 6,500      |   | 17.48 | 
|Share options forfeited   |  | 16.73 |  | (47,500    | ) | 17.48 | 
|Share options exercised   |  | 12.02 |  | (2,150     | ) | 11.47 | 
|Share options expired     |  |      |  |           |   | 10.30 | 
|At December 31            |  | 15.80 |  | 10,305,550 |   | 16.55 | 
|Exercisable share options |  |       |  | 10,305,550 |   |       | 

Weighted average remaining contractual life was 13, 26 and 29 months as at December 31, 2006, 2005 and 2004, respectively.

Outstanding Share Option plans as at December 31, 2006

|          |  |   |  | Exercise price(1) |  |       |  |            |  |            |  |                     
|--------- |  | - |  | ----------------- |  | ----- |  | ---------- |  | ---------- |  | --------------------
|
|
|2005      |  | F |  | 17.48             |  | 16.73 |  | 3,000,000  |  | 2,922,000  |  | 1.10.200631.10.2008
|2002/2003 |  | E |  | 12.77             |  | 12.02 |  | 3,800,000  |  | 3,754,050  |  | 1.4.200530.4.2008  
|2002/2002 |  | D |  | 39.40             |  | 37.90 |  | 3,800,000  |  | 3,629,500  |  | 1.4.200430.4.2007  
|          |  |   |  |                   |  |       |  | 10,600,000 |  | 10,305,550 |  |                     

---

F-82

---



The Black-Scholes valuation model and the following weighted average assumptions are used in measuring the fair value of share options

|                                       |  | 2006  |   | 2005  |   | 2004  |  
|-------------------------------------- |  | ----- | - | ----- | - | ----- | -
|
|Share price                            |  | 16.81 |   | 16.02 |   | 16.03 |  
|Exercise price                         |  | 16.73 |   | 17.48 |   | 13.52 |  
|Volatility (%)(1)                      |  | 28    | % | 35    | % | 32    | %
|Risk-free interest rate (%)            |  | 3.03  | % | 2.26  | % | 3.28  | %
|Assumed annual dividend yield          |  |      |   |      |   |      |  
|Expected option life (year)            |  | 3     |   | 3     |   | 4     |  
|Weighted-average grant-date fair value |  | 3.36  |   | 3.95  |   | 11.87 |  

---

Assumed forfeiture used in 2006 was 0%, 2005 5% and 2004 8%.

37.   RELATED PARTY TRANSACTIONS

The Group holds a 47% interest in Oy Metsä-Botnia Ab ("Metsä-Botnia"), a joint venture between M-real Oyj
("M-real") and Metsäliitto Group. M-real is a Finnish paper producer, and Metsäliitto Group is a co-operative organization of Finnish
forest owners. Metsäliitto Group is also the controlling shareholder of M-real. Chemical pulp produced by Metsä-Botnia is sold to the Group and to
M-real at the market price less certain transportation and other costs. In 2006, 2005 and 2004 the Group's chemical pulp
entitlement with respect to the production of Metsä-Botnia was 1.1 million tonnes per year. Total purchases of chemical pulp from Metsä-Botnia amounted to
€197 million in 2006, €201 million in 2005 and €238 million in 2004. Metsä-Botnia is currently building a new pulp
mill in Uruguay. The total cost of the project is about USD 1.1 billion. The annual capacity of the mill will be approximately one million tonnes of bleached eucalyptus pulp. UPM will invest
USD 99 million in the pulp mill project. In 2006, related to the pulp mill project, UPM sold its shares in the Uruguayan forestry company, Compañia Forestal Oriental S.A. to
Metsä-Botnia for €36 million.

The
Group obtains most of the energy for its production units in Finland from the Group's owned and leased power plants, as well as through ownership in power companies which entitles it
to receive electricity and heat from those companies. A significant proportion of the Group's electricity procurement comes from Pohjolan Voima Oy, a Finnish energy producer in which the Group holds a
42.19% equity interest, and from Kemijoki Oy, a Finnish hydropower producer in which the Group holds a 4.13% equity interest. Pohjolan Voima Oy is also a majority shareholder in Teollisuuden Voima Oy,
one of Finland's two nuclear power companies. The combined total of these energy purchases was €194 million in 2006, €166 million in 2005 and
€198 million in 2004. In accordance with the articles of association of the power companies and with related shareholder agreements, the prices paid by the Group to the power
companies are based on production costs, which are generally lower than market prices. Internal sales to the Group's segments are based on the prevailing market price.

F-83

---



Approximately
10 to 15% of the Group's research and development work is conducted by Oy Keskuslaboratorio-Centrallaboratorium Ab (the Finnish Pulp and Paper Research Institute or
"FPPRI"), in which the Group is one of four corporate owners with a 38.65% interest. Ownership of FPPRI provides the Group with fundamental research information regarding the Group's main raw
materials, major manufacturing processes and key product attributes. In addition to joint research at FPPRI, the Group also utilizes the institute for contract research in connection with product and
process development. These services are provided on an arm's-length basis and upon terms that the Group believes to be customary within the industry and generally no less favourable than would be
available from independent third parties.

The
Group purchases raw materials from certain other associated companies, the most significant of which is Paperinkeräys Oy, a Finnish company engaged in the procurement,
processing and transport of recovered paper in which the Group has a 22.98% interest. The total value of raw material purchases from associated companies was €15 million in
2006, €17 million in 2005 and €15 million in 2004. Recovered paper is sold to the Group and other shareholders of Paperinkeräys Oy at a
contractbased price that takes into account paper recycling expenses and the world market prices for recovered paper. In Austria, the Group has a similar arrangement concerning recovered paper which
is purchased from Austria Papier Recycling G.m.b.H., a company in which the Group owns a 33.3% equity interest. The total value of recovered paper purchases was €12 million in
2006, €14 million in 2005 and €12 million in 2004.

In
Finland, UPM has a pension foundation (Kymin Eläkesäätiö) which is a separate legal entity. The pensions of about 9% of the
Group's Finnish employees are arranged through the foundation. The contributions paid by UPM to the foundation amounted to €17 million in 2006
(€16 million in 2005 and €19 million in 2004). The foundation manages and invests the contributions paid to the plan. The fair value of the foundation's
assets at December 31, 2006 was €206 million, of which 84% was in the form of loans to the company and 16% invested in equities and property.

The
pensions of about 68% of the Group's employees in Great Britain are arranged through the Pension Funds. UPM-Kymmene UK Pension Scheme is a separate legal entity. The
contributions paid by the Group to this fund amounted to GBP 5 million in 2006 (GBP 6 million in 2005 and GBP 3 million in 2004). The fair value of the fund's assets
at December 31, 2006 was GBP 131 million, of which 68% is invested in equities and 32% in debt instruments and property.

38.   COMMITMENTS AND CONTINGENCIES

Contingent Liabilities

The Group is a defendant or plaintiff in a number of legal proceedings incidental to its operations. These lawsuits primarily involve claims arising out of
commercial law issues.

The
competition authorities are continuing investigations into alleged antitrust activities with respect to various products of the company. The US Department of Justice, the EU
authorities and the authorities in several of its Member States, Canada and certain other countries have granted UPM conditional full immunities with respect to certain conducts disclosed to the
authorities.

F-84

---



During
2006, the investigations of the U.S. labelstock industry and European fine paper, newsprint, magazine paper, label paper and self-adhesive labelstock markets were
closed by the U.S. Department of Justice and the European Commission competition authority. In December 2006, the Finnish Competition Authority decided not to propose a fine for UPM in its
investigation of raw wood procurement in Finland.

UPM
has been named as a defendant in multiple class-action lawsuits against labelstock and magazine paper manufacturers in the United States. The remaining litigation matters may last
several years. No provisions have been made in relation to these investigations, due to the considerable uncertainties associated with these matters.

In March
2006, UPM paid a fine of €56.55 million imposed by the European Commission concerning antitrust activities in the market for plastic sacks but has
appealed the decision.

Commitments

In the normal course of business, UPM-Kymmene Corporation and some of its subsidiaries enter into various agreements providing financial or
performance assurance to third parties on behalf of those subsidiaries. These agreements are entered into primarily to support or enhance the creditworthiness of subsidiaries so that they can
accomplish their intended business purposes. The maximum amount of future payments for which UPM-Kymmene Corporation is liable on behalf of its subsidiaries are disclosed in the table
below under "Other commitments".

The
Group has also entered into various agreements to provide financial or performance assurance to third parties on behalf of certain companies in which the Group has a minority
interest. These agreements are entered into primarily to support or enhance the creditworthiness of these companies. The Group has no collateral or other recourse provisions related to these
guarantees. The maximum amounts of future payments by UPM-Kymmene Corporation on behalf of its associated companies under these guarantees are disclosed in the table below under
"Guarantees on behalf of associated companies". It is the Group's policy not to give guarantees on behalf third parties, and the commitments included under the caption "Guarantees on behalf of others"
in the table relate mainly to companies that have been sold.

In
the normal course of business, certain subsidiaries of UPM Kymmene Corporation, especially in Germany, grant commercial guarantee to their customers to help them purchase goods from
the subsidiary. The Group has no liability with respect to these commercial guarantees, but they are covered by its credit risk insurance. These guarantees mature within one year. The maximum
potential amount of future payments under these guarantees amounted to €10 million at December 31, 2006 and €6 million at December 31, 2005.
They are included in the amounts disclosed in the table under "Other commitments".

F-85

---



Commitments

|                                                     |  | As at December 31,
|---------------------------------------------------- |  | ------------------
|
|
|On own behalf                                        |  |                   
|Mortgages                                            |  | 92                
|On behalf of associated companies and joint ventures |  |                   
|Guarantees                                           |  | 12                
|On behalf of others                                  |  |                   
|Guarantees                                           |  | 6                 
|Other commitments, own                               |  |                   
|Operating leases, due within 12 months               |  | 23                
|Operating leases, due after 12 months                |  | 94                
|Other commitments                                    |  | 69                
|                                                     |  |                   
|Total                                                |  | 296               
|                                                     |  |                   

|                  |  | As at December 31,
|----------------- |  | ------------------
|
|
|Mortgages         |  | 92                
|Guarantees        |  | 18                
|Operating leases  |  | 117               
|Other commitments |  | 69                
|                  |  |                   
|Total             |  | 296               
|                  |  |                   

Property under mortgages given as collateral for own commitments include industrial estates and forest land.

Commitments related to associated companies and joint ventures

|                                                                              |  | As at December 31,
|----------------------------------------------------------------------------- |  | ------------------
|
|
|Proportionate interest in joint ventures' commitments                         |  | 22                
|Contingent liabilities relating to the Group's interest in the joint ventures |  | 10                
|Share of associated companies contingent liabilities                          |  | 141               

F-86

---



Operating lease commitmentswhere a Group company is the lessee

The Group leases office, manufacturing and warehouse space under various non-cancelable operating leases.

Certain
contracts contain renewal options for various periods of time.

The future costs for contracts exceeding one year and for non-cancelable operating leasing contracts

|                 |  | As at December 31,
|---------------- |  | ------------------
|
|
|Less than 1 year |  | 23                
|12 years        |  | 25                
|23 years        |  | 17                
|34 years        |  | 15                
|45 years        |  | 14                
|Over 5 years     |  | 23                
|                 |  |                   
|                 |  | 117               
|                 |  |                   

Capital commitments at the balance sheet date but not recognized in the financial statements; major commitments under construction listed below

|                                 |  |     |  | Commitment as at December 31,
|-------------------------------- |  | --- |  | -----------------------------
|
|
|Pulp mill rebuild, Kymi          |  | 325 |  | 300                          
|New mill in USA, Raflatac        |  | 88  |  | 80                           
|New bioboiler, Caledonia         |  | 72  |  | 72                           
|PM5 quality upgrade, Jämsänkoski |  | 38  |  | 38                           
|PM4 rebuild, Jämsänkoski         |  | 45  |  | 34                           

F-87

---





39.   EVENTS AFTER THE BALANCE SHEET DATE

On January 30, 2007, M-real announced to sell 9% of Metsä-Botnia's shares to its parent company Metsäliitto for
€240 million. Consequently, M-real rejected UPM's offer made in November 2006 to buy 15% of Metsä-Botnia's shares for
€500 million.

On February
26, 2007, UPM announced it has signed an agreement on the sale of the Walki Wisa Group, a business unit of UPM's Converting Division. UPM estimates the sale of the
business will result in a capital gain of approximately €25 million. The transaction is expected to be concluded in the second quarter of 2007. The deal is subject to approval
by competition authorities.

The
Group's management is not aware of any other significant events occurring after December 31, 2006 which would have had an impact on the financial statements.

40.   SUMMARY OF DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES

The Group's consolidated financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU ("IFRS"), which
differs in certain respects from accounting principles generally accepted in the United States ("U.S. GAAP"). Such differences include methods for measuring and presenting the amounts shown in the
consolidated financial statements, as well as additional disclosures required by U.S. GAAP.

I.     Reconciliation of Profit and Shareholders' Equity

The following is a summary of the significant adjustments to profit and shareholders' equity required when reconciling such amounts recorded in the Group's
consolidated financial statements under IFRS to the corresponding amounts in accordance with U.S. GAAP.

F-88

---



Reconciliation of Profit

|                                                                                |                                                               | Year ended December 31,                                                                                                          |        
|------------------------------------------------------------------------------- | ------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | -------
|
|
|Profit in accordance with IFRS                                                  |                                                               | 338                                                                                                                              |        
|Less minority interest                                                          |                                                               | 2                                                                                                                                |        
|                                                                                |                                                               |                                                                                                                                  |        
|Profit attributable to equity holders of parent company in accordance with IFRS |                                                               | 340                                                                                                                              |        
|U.S. GAAP adjustments:                                                          |                                                               |                                                                                                                                  |        
|                                                                                | Business combinations (a)                                     |                                                                                                                                  | (14    
|                                                                                | Reversal of goodwill amortization (b)                         |                                                                                                                                  |       
|                                                                                | Impairment of long lived assets (c)                           |                                                                                                                                  | (5     
|                                                                                | Leasing transactions (d)                                      |                                                                                                                                  | (26    
|                                                                                | Forest assets (e)                                             |                                                                                                                                  | 109    
|                                                                                | Employee benefits (f)                                         |                                                                                                                                  | 52     
|                                                                                | Derivative financial instruments (g)                          |                                                                                                                                  | (3     
|                                                                                | Compensation cost (h)                                         |                                                                                                                                  |       
|                                                                                | Change in estimates of the tax basis of acquired assets (i)   |                                                                                                                                  |       
|                                                                                | Share of results of associated companies (j)                  |                                                                                                                                  | 6      
|                                                                                | Deferred tax effect of U.S. GAAP adjustments                  |                                                                                                                                  | (35    
|                                                                                |                                                               |                                                                                                                                  |        
|                                                                                | Net income in accordance with U.S. GAAP                       |                                                                                                                                  | 424    
|                                                                                | Out of which:                                                 |                                                                                                                                  |        
|                                                                                |                                                               | Income from continuing operations                                                                                                |        
|                                                                                |                                                               | Income from discontinued operations, net of tax expense of 2 million and tax expense of 6 million in 2005 and 2004, respectively |        
|                                                                                |                                                               |                                                                                                                                  |        
|                                                                                | Net income in accordance with U.S. GAAP                       |                                                                                                                                  | 424    
|                                                                                | Earnings per share in accordance with U.S. GAAP (in euro) (k) |                                                                                                                                  |        
|                                                                                | Basic earnings per share                                      |                                                                                                                                  | 0.81   
|                                                                                |                                                               | Income from continuing operations                                                                                                |        
|                                                                                |                                                               | Income from discontinued operations                                                                                              |        
|                                                                                | Diluted earnings per share                                    |                                                                                                                                  | 0.81   
|                                                                                |                                                               | Income from continuing operations                                                                                                |        
|                                                                                |                                                               | Income from discontinued operations                                                                                              |        
|                                                                                | Basic weighted average number of shares (thousands)           |                                                                                                                                  | 523,220
|                                                                                | Diluted weighted average number of shares (thousands)         |                                                                                                                                  | 526,041

F-89

---



Reconciliation of Equity

|                                                                            |                                                                  | As of December 31, |     
|--------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------ | ----
|
|
|Total equity in accordance with IFRS                                        |                                                                  | 7,289              |     
|Less minority interest                                                      |                                                                  | (18                | )   
|                                                                            |                                                                  |                    |     
|Equity attributable to equity holders of the parent in accordance with IFRS |                                                                  | 7,271              |     
|U.S. GAAP adjustments:                                                      |                                                                  |                    |     
|                                                                            | Business combinations (excluding forest assets and goodwill) (a) |                    | (43 
|                                                                            | Reversal of goodwill amortization (b)                            |                    | 309 
|                                                                            | Impairment of long lived assets (c)                              |                    | 28  
|                                                                            | Leasing transactions (d)                                         |                    | (24 
|                                                                            | Forest assets (e)                                                |                    | 43  
|                                                                            | Employee benefits (f)                                            |                    | (309
|                                                                            | Change of estimates of the tax basis of acquired assets (i)      |                    | (284
|                                                                            | Share of results of associated companies (j)                     |                    | 85  
|                                                                            | Deferred tax of U.S. GAAP adjustments                            |                    | 76  
|                                                                            |                                                                  |                    |     
|Shareholders' equity in accordance with U.S. GAAP                           |                                                                  | 7,152              |     
|                                                                            |                                                                  |                    |     

(a)   Business Combinations

Cost of Acquisition

Under IFRS, equity shares issued as purchase consideration in a business combination are valued based on the weighted average trading price of the shares shortly
before and after the date of the exchange transaction, which is the date when the Group obtains control over the acquiree's net assets and operations.

Under
U.S. GAAP, such equity shares are valued based on the average share price for a reasonable period before and after the acquisition is publicly announced or, if the number of shares
is uncertain on such date, the first day on which both the number of acquirer shares and the amount of other consideration becomes fixed.

Intangible Assets

Under IFRS, prior to the adoption of IFRS 3, customer relationships acquired were not separately recognized upon acquisition as identifiable intangible rights but
were included within goodwill and amortized accordingly.

Under
U.S. GAAP, customer relationships acquired in a business combination are fair valued at acquisition and recognized within identifiable intangible rights separately from goodwill,
with an associated deferred tax liability. The intangible rights are amortized over their estimated useful lives.

F-90

---



Restructuring Provisions

Under IFRS, certain indemnities to be paid to collaboration partners in connection with the termination of sales agreements of acquired businesses were expensed
as incurred, as they did not meet the criteria for recognizing a provision at acquisition.

Under
U.S. GAAP, these costs met the required criteria for inclusion in acquisition accounting and the Group recognized a liability in the purchase price allocation of the acquisition
cost and adjusted the goodwill accordingly.

Translation of Goodwill and Fair Value Adjustments

Under IFRS, the Group has historically translated goodwill and fair value adjustments arising on the acquisition of foreign subsidiaries at the corporate level
based on historical foreign exchange rates prevailing at the acquisition date. Subsequent to the adoption of IAS 21 (revised 2004) as of January 1, 2005, the Group translates goodwill and fair
value adjustments arising on prospective acquisitions of foreign companies at balance sheet date closing rates.

Under
U.S. GAAP, goodwill and fair value adjustments are pushed down to the subsidiary and maintained in the original foreign currency. At each balance sheet date, the goodwill and fair
value adjustments are translated at the closing foreign exchange rate, with gains and losses recorded as a component of other comprehensive income.

The
total impact of all business combinations' adjustments on the reconciliations of net income and shareholders' equity to U.S. GAAP is summarized below:

|                     |                                                   | Year ended December 31, |    
|-------------------- | ------------------------------------------------- | ----------------------- | ---
|
|
|Net income           |                                                   |                         |    
|                     | Amortization of intangible assets                 |                         | (10
|                     | Translation gain on property, plant and equipment |                         |   
|                     | Deferred taxes                                    |                         | 4  
|                     | Disposal of subsidiary shares                     |                         | (8 
|                     |                                                   |                         |    
|Total                |                                                   | (14                     | )  
|                     |                                                   |                         |    
|Shareholders' equity |                                                   |                         |    
|                     | Goodwill                                          |                         | (71
|                     | Other intangible assets                           |                         | 64 
|                     | Property, plant and equipment                     |                         | (19
|                     | Deferred tax liabilities                          |                         | (17
|                     |                                                   |                         |    
|Total                |                                                   | (43                     | )  
|                     |                                                   |                         |    

F-91

---



(b)   Reversal of Goodwill Amortization

Under IFRS, the Group adopted the provisions of IFRS 3 on January 1, 2005. As a result, goodwill recognized relating to purchase acquisitions and
acquisitions of associated companies are no longer subject to amortization. Under the transitional provisions of IFRS 3, this change in accounting policy was effective immediately for acquisitions
made after March 31, 2004.

Under
U.S. GAAP, the Group records goodwill in accordance with FAS 142,Goodwill and Other Intangible Assets, (FAS 142). The
Group adopted the provisions of FAS 142 on January 1, 2002 and as a result, goodwill relating to purchase acquisitions and acquisitions of associated companies is no longer subject to
amortization subsequent to the date of adoption.

The
U.S. GAAP adjustment for 2004 reverses amortization expense and the associated movement in accumulated amortization recorded under IFRS prior to the adoption of IFRS 3. The U.S. GAAP
adjustment for 2005 reflects the decrease of goodwill under U.S. GAAP of €9 million that was fully amortized under IFRS related to the disposal of Loparex Group.

(c)   Impairment of Long Lived Assets

Under IFRS, the Group recognized an impairment charge on long-lived tangible assets of €250 million and
€201 million in 2006 and 2005, respectively. Under IFRS the impairment loss was determined as the difference between the recoverable amount of the asset and its carrying value.
In determining the recoverable amount of these assets the Group discounted future cash flows expected to result from the use and eventual disposition of these assets. Under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, an impairment charge should be recognized only if the carrying amount of the
asset is not recoverable. The carrying amount of an asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

The
impairment in 2006 is primarily related to the closure of Voikkaa paper mill and Kymi PM7, and the Miramichi paper mill. Voikkaa paper mill and Kymi PM7 were closed in 2006 resulting
in an impairment of €135 million. Given that the carrying value exceeded the recoverable amount an impairment was recognized under IFRS. Similarly, under U.S. GAAP the
carrying value exceeded the undiscounted cash flows and therefore an impairment of equal amount was recognized.

The
impairment of the Miramichi paper mill amounted to €115 million and €151 million in 2006 and 2005, respectively. Under IFRS the carrying
value exceeded the recoverable amount and therefore the assets were impaired. Since the undiscounted cash flows were less than the carrying value the Group also recognized an impairment, of equivalent
amount, under U.S. GAAP in 2006. The fair value of these long-lived assets under U.S. GAAP was determined based on discounted cash flows expected to result from the use and eventual
disposition of the assets. In 2005, the impairment loss was €8 million less under U.S. GAAP than recorded under IFRS due to the difference in the cumulative translation
adjustment of non-current assets.

F-92

---



In
2005, the impairment of €25 million recorded under IFRS was reversed for U.S. GAAP because the Finnish sawmills were determined to be recoverable based on
undiscounted cash flows. In 2006, the Group recognized a depreciation adjustment under U.S. GAAP of €5 million related to the Finnish sawmills due to different carrying
values of the impaired assets under IFRS and U.S. GAAP.

(d)   Leasing Transactions

UPM entered into a lease arrangement for the financing of certain equipment for Wisapower Oy's power plant in Finland. Under IFRS, the arrangement is accounted
for as a finance lease as of the date the construction started in 2003. Interest expense has been recognized in the income statement on the finance lease liability through the end of the contractual
lease term, which started in 2005.

Under
U.S. GAAP, UPM was considered the owner of the leased assets during the construction period and the equipment was accounted for as an asset and a lease liability with interest
costs being capitalized. At the beginning of the lease term in 2005, the asset was considered to be sold and leased back to the Group. Due to the Group's continuing involvement with the equipment, the
lease is classified as a financing lease, consistent with IFRS. From January 15, 2005 onwards, the finance lease has been accounted for at the same basis under IFRS and U.S. GAAP.

The
Group Head Office real estate was sold in June 2006, which generated a €41 million capital gain under IFRS. UPM will continue to occupy the premises
under a lease contract which qualifies as an operating lease under IFRS and U.S. GAAP. As UPM retains more than a minor part, but not substantially all of the use of the asset, only the profit in
excess of the present value of the minimum lease payments is recognized at date of sale under U.S. GAAP. The present value of the minimum lease payments, which amounted to
€24 million in 2006, is deferred and amortized over the lease term.

(e)   Forest Assets

Under IFRS, biological assets (i.e., living trees) are measured at their fair value, less estimated point-of-sale costs, on the balance
sheet. The fair value of biological assets, other than young seedling stands, is based on discounted cash flows from continuous operations. The fair value of young seedling stands is based on the
actual reforestation cost of those stands. Changes in the fair value of biological assets resulting from growth, felling, prices, discount rate, costs and other assumption changes amount to
€(137) million, €31 million and €16 million during the years ended December 31, 2006, 2005 and 2004, respectively (as
disclosed in the Note 20 Biological assets). The land on which the trees grow is recorded at cost.

Under
U.S. GAAP, forest assets are accounted for as long lived assets under FAS 144, and are carried at cost less depletions. Cost includes all expenditures incurred on
acquisition of the forests plus reforestation and forestry development costs. Capitalized costs related to forest assets harvested each year are taken to the profit and loss account as depletions.

The
fair market values recorded under IFRS are reversed under U.S. GAAP. The capitalized costs under U.S. GAAP were €18 million,
€20 million and €16 million and depletion of the forest assets was €

F-93

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(46)
million, €(18) million and €(26) million during the years ended December 31, 2006, 2005 and 2004, respectively.

In
2006, the Company determined that the decrease in the fair value of biological assets under IFRS constituted a triggering event to perform an impairment test under FAS 144.
Based on the undiscounted cash flows expected to be generated by the forest assets, the Company concluded that the forest assets were recoverable and impairment did not exist.

As
of December 31, 2006 and 2005 the carrying amount of forest assets under U.S. GAAP was €1,080 million and €1,107 million,
respectively.

(f)    Employee Benefits

For purposes of U.S. GAAP, pension costs for defined benefit plans are accounted for in accordance with SFAS No. 87,Employers'
Accounting for Pensions, and SFAS No. 88,Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and the disclosure is presented in accordance with SFAS 132(R), Employers' Disclosures about Pensions and Other
Postretirement Benefits. In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plansan Amendment of FASB Statements No. 87, 88, 106, and 132(R).This statement requires the Company to
fully recognize, as an asset or liability, the overfunded or underfunded status of benefit plan(s) in the 2006 year-end balance sheet, with an offsetting adjustment to accumulated
other comprehensive income. The incremental effect of applying FAS 158 on individual line items in the statement of financial position as of December 31, 2006 is summarized below:

|                                                          |  | Before
Application
of FAS 158 |   | Adjustments |   | After
Application
of FAS 158 |  
|--------------------------------------------------------- |  | ----------------------------- | - | ----------- | - | ---------------------------- | -
|
|Prepaid pension asset / (Accrued pension liability)       |  | (492                          | ) | (180        | ) | (672                         | )
|Minimum pension liability                                 |  | (89                           | ) | 89          |   |                             |  
|Intangible assets                                         |  | 526                           |   | (14         | ) | 512                          |  
|Accumulated other comprehensive (income) loss, pre-tax    |  | 275                           |   | 105         |   | 380                          |  
|Accumulated other comprehensive (income) loss, net of tax |  | 253                           |   | 70          |   | 323                          |  

FAS 158 also requires a company to measure its plan assets and benefit obligations as of its year-end balance sheet date
beginning with fiscal years ending after December 15, 2008. This will not have any impact on Group's financial statements as the Group already uses a December 31 measurement date for its
pension and other post-retirement benefit plans.

Except
as described below, the plan liabilities and assets are the same under U.S. GAAP as IFRS. The difference in the balance sheet and income statement amounts are attributable to
different classifications of the Finnish TEL scheme, how and when the respective standards were implemented, the recognition of a funded status under U.S. GAAP, differences in accounting for prior
service costs and differences in accounting for settlements.

F-94

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Following
changes in the Finnish TEL scheme, under IFRS, the disability pensions arranged with insurance companies have changed from a defined benefit to a defined contribution plan
beginning from January 1, 2006 as the insurance premiums paid to insurance companies are the funding mechanism for the liability. As the change was enacted in 2004, the Company's pension
liability decreased by €246 million in 2004. IFRS provides that the use of insurance premiums to fund benefits should be accounted for using defined contribution accounting so
long as the company retains no ongoing legal or constructive obligations, under any circumstances.

U.S.
GAAP does not contain a similar provision to IFRS regarding insurance premiums. The costs and benefits are determined without regard to how an employer finances the plan. Therefore,
defined benefit accounting remains for U.S. GAAP. In 2006, the termination of employees in connection with the profitability programme and the disposal of Puukeskus Oy resulted in recognition
of curtailment and settlement gains on Finnish TEL scheme. As a consequence, a gain was recorded under U.S. GAAP which reduced the net pension costs under U.S. GAAP compared to
IFRS. In 2005, additional expense was recorded for the additional pension cost under U.S. GAAP compared to IFRS. In 2004, an adjustment was recorded for the reversal of the curtailment gain recorded
under IFRS resulting from the reduction of the pension liability.

The
Group applied FAS 87 as of January 1, 1994 (as adoption on the actual effective date of January 1, 1989 was not feasible) and IAS 19 as of January 1,
2002. As allowed by IFRS 1, all unrecognized actuarial gains and losses were recognized upon the adoption of IAS 19. As the unrecognized balances were different under U.S. GAAP compared to
IFRS, a difference in amortization arises. As discussed above, a difference also arises due to the defined benefit accounting for the Finnish TEL scheme.

Under
U.S. GAAP, prior to the adoption of FAS 158, the pension liability could not be less than the amount by which the accumulated benefit obligation exceeded plan assets as
determined for each individual plan. If an additional minimum liability was recognized, an intangible asset up to the amount of the unrecognized prior service cost for each plan was also recognized
and the remaining amount was recorded as part of other comprehensive income (reduction of equity), net of income taxes. This concept does not exist under IFRS.

Under
U.S. GAAP, following the adoption of FAS 158 on December 31, 2006 the Company recognized a net liability or asset to report the funded status of its defined
benefit and other postretirement benefit plans on balance sheet. The gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net
periodic benefit cost pursuant to FAS 87 or FAS 106 are recognized as a component of other comprehensive income. Amounts recognized in accumulated other comprehensive income are adjusted as
they are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of FAS 87 or FAS 106.

Under
IFRS, prior service cost may be recognized immediately to the extent that affected employees' benefits are vested, otherwise they are recognized over the remaining vesting period.
Under U.S. GAAP, prior service cost is recognized as a component of net periodic benefit cost prospectively over the

F-95

---



remaining
service period. As discussed above, a difference also arises due to the defined benefit accounting for the Finnish TEL scheme.

Under
IFRS, a settlement occurs when all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan has been eliminated, which is
generally when a settlement agreement has been reached with employees. Under U.S. GAAP, while the principles are similar, a settlement is generally recognized when a lump-sum cash payment
is made to employees. Certain plans have been settled under IFRS but were either settled in a later period or are not yet settled under U.S. GAAP; accordingly, adjustments are required for gains or
losses recognized under IFRS that are not recognizable as a component of net periodic benefit cost under U.S. GAAP. Additionally, differences can arise on settlement due to differing amounts of
unrecognized prior service costs and actuarial gains and losses under IFRS and net gain or loss included in accumulated other comprehensive income under U.S. GAAP for the reasons discussed above.

The
German government has implemented an early retirement program, called Altersteilzeit ("ATZ") designed to create an incentive for employees within a certain age group, to transition
from employment into retirement before their legal retirement age. Under the ATZ program, the employee either works full time for half of the ATZ period (usually a period of
4-6 years) or half time for the full ATZ period and receives fifty percent of his or her salary each year during the entire ATZ period. In addition to salary, the employee is
entitled to an additional ATZ bonus for the service rendered during the ATZ period. During the idle portion of the ATZ period, the employer is required to make additional contributions on behalf of
the employee to the German pension scheme to compensate for the reduced salary received during the ATZ period. In addition, the employer can claim a subsidy from the German government for these costs
if certain conditions are met.

Under
IFRS, the Company records an accrual for the amount of the additional pension contributions and bonus payments when the employee agrees to enter the ATZ program. In addition, a
provision is established for those employees who are considered probable to enter the ATZ program as they are eligible but have not yet agreed to enter the ATZ program.

Under
U.S. GAAP, as of January 1, 2006, the Company adopted EITF 05-5 "Accounting for Early Retirement or Post-employment Programs with Specific Features
("EITF 05-5"), for its accounting for the ATZ program. In accordance with EITF 05-5, the employer recognizes the additional pension contributions and bonus payments as post
employment benefits in accordance with FAS 112, ratably from the signing of the ATZ contact to the end of the active working period. No provision for employees who have not yet entered the ATZ
program is permitted. The effect on the pension obligation under U.S. GAAP compared to IFRS is a reversal of €13 million.

The
adoption of EITF 05-5 is reported as a change in accounting estimate effected by a change in accounting principle and as such, the impact of the adoption is reported in
current year income with no retrospective adjustments made to the financial statements presented for prior periods. The impact of the adoption of EITF 05-5 is an increase of
€8 million of net income and an increase of €0.02 on both basic and diluted earnings per share.

F-96

---





Net
periodic benefit cost for pension plans and foreign post-retirement benefit plans in accordance with U.S. GAAP for the years ended December 31, 2006, 2005
and 2004 is comprised of the following:

|                                                  |  | Year ended December 31, 2006 |   | Year ended December 31, 2005 |   | Year ended December 31, 2004 |  
|------------------------------------------------- |  | ---------------------------- | - | ---------------------------- | - | ---------------------------- | -
|
|
|Service cost                                      |  | 15                           |   | 22                           |   | 37                           |  
|Interest cost                                     |  | 15                           |   | 45                           |   | 60                           |  
|Expected return on plan assets                    |  | (13                          | ) | (28                          | ) | (41                          | )
|Amortization of actuarial (gains) losses          |  | 1                            |   | 11                           |   | 12                           |  
|Amortizations of prior service costs (credits)    |  | (9                           | ) | 1                            |   | (8                           | )
|Amortization of transition obligation             |  |                             |   |                             |   |                             |  
|Transfers from inside the plan                    |  |                             |   |                             |   |                             |  
|FAS 88 events                                     |  | (43                          | ) |                             |   | (43                          | )
|                                                  |  |                              |   |                              |   |                              |  
|Net periodic benefit cost under U.S. GAAP         |  | (34                          | ) | 51                           |   | 17                           |  
|                                                  |  |                              |   |                              |   |                              |  
|Net amount recognized under IFRS                  |  |                              |   |                              |   | 46                           |  
|                                                  |  |                              |   |                              |   |                              |  
|Additional (less) pension cost under U.S. GAAP(1) |  |                              |   |                              |   | (29                          | )
|                                                  |  |                              |   |                              |   |                              |  

---

|                                     |                                            | As of December 31, 2006 |     | As of December 31, 2005 |    
|------------------------------------ | ------------------------------------------ | ----------------------- | --- | ----------------------- | ---
|
|
|Change in Benefit Obligation         |                                            |                         |     |                         |    
|                                     | Benefit obligation as of beginning of year |                         | 345 |                         | 992
|                                     | Service cost                               |                         | 15  |                         | 22 
|                                     | Interest cost                              |                         | 15  |                         | 45 
|                                     | Employee contributions                     |                         |    |                         | 6  
|                                     | FAS 88 events                              |                         | (15 | )                       |   
|                                     | Plan amendments                            |                         |    |                         | 1  
|                                     | Divestitures                               |                         | (7  | )                       |   
|                                     | Other Adjustment                           |                         | 2   |                         | 8  
|                                     | Actuarial loss (gain)                      |                         | 23  |                         | (4 
|                                     | Benefits paid                              |                         | (20 | )                       | (47
|                                     | Foreign currency effect                    |                         |    |                         | (26
|                                     |                                            |                         |     |                         |    
|Benefit obligation as of end of year |                                            | 358                     |     | 997                     |    
|                                     |                                            |                         |     |                         |    
|                                     |                                            |                         |     |                         |    

F-97

---



|Change in fair value of plan assets                  |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|---------------------------------------------------- | ------------------------------------------------- | --- | ---- | --- | ---- | ---- | ---- | --- | ---- | --- | ---- | ---- | ----
|                                                     | Fair value of plan assets as of beginning of year |     | 218  |     | 416  |      | 634  |     | 186  |     | 337  |      | 523 
|                                                     | Actual return on plan assets                      |     | 19   |     | 42   |      | 61   |     | 5    |     | 54   |      | 59  
|                                                     | Employer contribution                             |     | 18   |     | 48   |      | 66   |     | 17   |     | 41   |      | 58  
|                                                     | Employee contributions                            |     |     |     | 6    |      | 6    |     |     |     | 5    |      | 5   
|                                                     | FAS 88 events                                     |     |     |     |     |      |     |     |     |     | (1   | )    | (1  
|                                                     | Divestitures                                      |     |     |     |     |      |     |     |     |     | (25  | )    | (25 
|                                                     | Other adjustments                                 |     |     |     | 2    |      | 2    |     | 27   |     | 5    |      | 32  
|                                                     | Transfers, from inside the plan                   |     |     |     |     |      |     |     | 2    |     |     |      | 2   
|                                                     | Benefits paid                                     |     | (20  | )   | (47  | )    | (67  | )   | (19  | )   | (37  | )    | (56 
|                                                     | Foreign currency effect                           |     |     |     | (19  | )    | (19  | )   |     |     | 37   |      | 37  
|                                                     |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|Fair value of plan assets as of end of year          |                                                   | 235 |      | 448 |      | 683  |      | 218 |      | 416 |      | 634  |     
|                                                     |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|Funded status                                        |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|                                                     | Funded status at the end of year                  |     | (123 | )   | (549 | )    | (672 | )   | (127 | )   | (576 | )    | (703
|                                                     | Unrecognized transition obligation                |     |     |     |     |      |     |     |     |     | 1    |      | 1   
|                                                     | Unrecognized prior service cost (credit)          |     |     |     |     |      |     |     | (70  | )   | 15   |      | (55 
|                                                     | Unrecognized actuarial loss (gain)                |     |     |     |     |      |     |     | (4   | )   | 236  |      | 232 
|                                                     | Minimum pension liability                         |     |     |     |     |      |     |     | (2   | )   | (124 | )    | (126
|                                                     |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|                                                     | Net amount recognized under U.S. GAAP             |     | (123 | )   | (549 | )    | (672 | )   | (203 | )   | (448 | )    | (651
|                                                     |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|Amounts recognized in the consolidated balance sheet |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|                                                     | Accrued benefit liability                         |     | (135 | )   | (549 | )    | (684 | )   | (291 | )   | (465 | )    | (756
|                                                     | Prepaid benefit cost                              |     | 12   |     |     |      | 12   |     | 88   |     |     |      | 88  
|                                                     | Intangible assets                                 |     |     |     |     |      |     |     |     |     | 17   |      | 17  
|                                                     |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|                                                     | Net amount recognized under U.S. GAAP             |     | (123 | )   | (549 | )    | (672 | )   | (203 | )   | (448 | )    | (651
|                                                     |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|Net amount recognized under IFRS                     |                                                   |     |      |     |      | (350 | )    |     |      |     |      | (365 | )   
|                                                     |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|Additional Pension Obligation under U.S. GAAP        |                                                   |     |      |     |      | (322 | )    |     |      |     |      | (286 | )   
|                                                     |                                                   |     |      |     |      |      |      |     |      |     |      |      |     
|                                                     |                                                   |     |      |     |      |      |      |     |      |     |      |      |     

F-98

---



|Amounts recognized in accumulated other comprehensive income |                                 |     |     |     |     |     |     |   |   |     |     |     |    
|------------------------------------------------------------ | ------------------------------- | --- | --- | --- | --- | --- | --- | - | - | --- | --- | --- | ---
|                                                             | Actuarial loss (gain)           |     | 24  |     | 205 |     | 229 |   |  |     |    |     |   
|                                                             | Prior service cost (credit)     |     | (50 | )   | 14  |     | (36 | ) |  |     |    |     |   
|                                                             | Transitional obligation (asset) |     |    |     | 1   |     | 1   |   |  |     |    |     |   
|                                                             | Minimum pension liability       |     |    |     |    |     |    |   | 2 |     | 124 |     | 126
|                                                             |                                 |     |     |     |     |     |     |   |   |     |     |     |    
|                                                             |                                 | (26 | )   | 220 |     | 194 |     | 2 |   | 124 |     | 126 |    
|                                                             |                                 |     |     |     |     |     |     |   |   |     |     |     |    

The estimated amounts to be amortized from accumulated other comprehensive income into net periodic benefit cost in 2007 are as follows:

|                            |  | Domestic |   | Foreign |  | Total |  
|--------------------------- |  | -------- | - | ------- |  | ----- | -
|
|Actuarial loss (gain)       |  | 2        |   | 8       |  | 10    |  
|Prior service cost (credit) |  | (8       | ) | 1       |  | (7    | )
|                            |  |          |   |         |  |       |  
|                            |  | (6       | ) | 9       |  | 3     |  
|                            |  |          |   |         |  |       |  

|                                                                             |                                | As of December 31, 2006 |     | As of December 31, 2005
|---------------------------------------------------------------------------- | ------------------------------ | ----------------------- | --- | -----------------------
|
|
|Pension plans with accumulated benefit obligations in excess of plan assets: |                                |                         |     |                        
|                                                                             | Accumulated benefit obligation |                         | 83  |                        
|                                                                             | Projected benefit obligation   |                         | 132 |                        
|                                                                             | Fair value of plan assets      |                         | 2   |                        

The accumulated benefit obligation for the domestic pension plans was €303 million and
€305 million, and for the foreign pension plans €849 million and €850 million as of December 31, 2006 and
December 31, 2005, respectively.

For
plans where the projected benefit obligation is in excess of the plan assets, the aggregate projected benefit obligation is €1,332 million and
€1,143 million for 2006 and 2005, respectively, and the aggregate fair value of plan assets is €648 million and €417 million for
2006 and 2005, respectively.

F-99

---



The
decrease in the minimum liability, prior to the adoption of FAS 158, included in other comprehensive income in 2006 for the domestic and foreign plans is
€1 million and €36 million, respectively. The increase in the minimum liability included in other comprehensive income in 2005 for the domestic and
foreign plans is € 2 million and €14 million, respectively.

|                                                                                                          |                                        | As of December 31, 2006 |       | As of December 31, 2005
|--------------------------------------------------------------------------------------------------------- | -------------------------------------- | ----------------------- | ----- | -----------------------
|
|Weighted average rate assumptions used in determining pension costs and the projected benefit obligation. |                                        |                         |       |                        
|                                                                                                          | Discount rate                          |                         | 4.25% |                        
|                                                                                                          | Expected rate of compensation increase |                         | 3.75% |                        
|                                                                                                          | Expected return on plan assets         |                         | 6.15% |                        

For foreign plans, the assumption for the weighted average expected return on plan assets is based on target asset allocation of each plan,
historical market performance, relevant forward-looking economic analyses, expected returns, variances, and correlations for different asset categories held. For domestic plans, the overall expected
return on plan assets is based on the weighted average of the expected returns on the different asset categories held.

The
above amounts for foreign pension plans include certain other post-retirement benefits, which are not significant to the Group.

Plan Assets

The Group's pension plan weighted average asset allocation at December 31, 2006 and 2005, by asset category, are as follows:

|                  |  | As of December 31, 2006 |   | As of December 31, 2005 |  
|----------------- |  | ----------------------- | - | ----------------------- | -
|
|Asset Category:   |  |                         |   |                         |  
|Equity securities |  | 11                      | % | 63                      | %
|Debt securities   |  | 76                      |   | 14                      |  
|Real estate       |  | 9                       |   | 4                       |  
|Money Market      |  | 4                       |   | 2                       |  
|Bonds             |  |                        |   | 17                      |  
|                  |  |                         |   |                         |  
|Total             |  | 100                     | % | 100                     | %
|                  |  |                         |   |                         |  

F-100

---



The purpose of the investment policy is to ensure that the assets are invested at all times in a prudent manner with regard to the nature of the
liabilities of the Plans, appropriate investment return within an accepted risk level according to each plan, diversification measures conducive to the overall reduction risk in respect of each Plan,
and all other relevant factors in respect of each Plan. The long-term investment return of all assets is taken into account when assessing investment profitability. The weighted average
target asset allocation is as follows:

|                  |  | Domestic |   | Foreign |  
|----------------- |  | -------- | - | ------- | -
|Asset Category:   |  |          |   |         |  
|Equity securities |  | 28       | % | 63      | %
|Debt securities   |  | 59       |   | 12      |  
|Real estate       |  | 9        |   | 4       |  
|Money Market      |  | 4        |   | 2       |  
|Bonds             |  |         |   | 19      |  
|                  |  |          |   |         |  
|Total             |  | 100      | % | 100     | %
|                  |  |          |   |         |  

Cash Flows

The Group expects to make contributions of €46 million to its domestic pension plans and €41 million to its foreign
plans in 2007.

The
following estimated future benefits, which reflect expected future service, as appropriate, are expected to be paid:

|                |  | Domestic |  | Foreign
|--------------- |  | -------- |  | -------
|
|2007            |  | 18       |  | 43     
|2008            |  | 19       |  | 39     
|2009            |  | 19       |  | 41     
|2010            |  | 19       |  | 42     
|2011            |  | 19       |  | 44     
|Years 20122016 |  | 90       |  | 249    

F-101

---



Termination of Pension Plans

The Group is in the process of terminating most of its defined benefit plans in the United States related to its Blandin operations. The Blandin Salaried Plan is
still in the process of being terminated. The assets have not yet been distributed pending receipt of appropriate government approval. The Blandin Salaried Plan includes the following elements:

|                                                                          |  | Year Ended December 31, |  
|------------------------------------------------------------------------- |  | ----------------------- | -
|
|
|Funded Status at end of year                                              |  |                         |  
|Projected benefit obligation                                              |  | (32                     | )
|Accumulated benefit obligation                                            |  | (32                     | )
|Fair Value of plan assets                                                 |  | 30                      |  
|                                                                          |  |                         |  
|(Unfunded) Funded Status                                                  |  | (2                      | )
|                                                                          |  |                         |  
|Amounts recognized in the consolidated balance sheet                      |  |                         |  
|(Unfunded) Funded Status                                                  |  | (2                      | )
|Unrecognized net loss                                                     |  |                        |  
|Additional minimum liability                                              |  |                        |  
|                                                                          |  |                         |  
|Net amount recognized                                                     |  | (2                      | )
|                                                                          |  |                         |  
|Amounts recognized in accumulated other comprehensive income, (gain) loss |  | 18                      |  
|                                                                          |  |                         |  

(g)   Derivative Financial Instruments

Under IFRS, the Group adopted IAS 39(R) (revised)Financial Instruments: Recognition and Measurement, as of
January 1, 2005, which supersedes IAS 39 (revised 2000). Under U.S. GAAP, the Group applies FAS 133,Accounting for Derivative Instruments and
Hedging Activities.

The
Group has met the cash-flow hedge accounting criteria both for IFRS and U.S. GAAP purposes for forecasted future currency flows since February 2003. Since
then the changes in the fair values of new forward exchange contracts designated as cash flow hedges are deferred in equity and recycled to profit and loss as the external sales take place.

Under
IFRS, the Group has applied hedge accounting for all third party forward contracts that the euro-functional parent company has entered into on behalf of the Canadian
dollar-functional subsidiary. These forward exchange contracts are designated as cash flow hedges of forecasted future sales of the Canadian subsidiary denominated in USD beginning in February
2003 and the unrealized gains and losses on the cash flow hedges are deferred in equity.

Under
U.S. GAAP, these forward exchange contracts are not accounted for under hedge accounting as they are not hedges against the Group's functional currency. The unrealized gains
and losses of the

F-102

---



forward
exchange contracts have been included in the determination of net income for 2006, 2005 and 2004. The change in unrealized results for these hedging instruments were
€(3) million, €(7) million and nil in 2006, 2005 and 2004, respectively. The realized results for these hedging instruments were
€3 million, €9 million and €7 million in 2006, 2005 and 2004, respectively. The realized results for these hedging instruments have
been reclassified from sales to other income and expenses under U.S. GAAP (refer to paragraph (m)).

(h)   Compensation Cost

As described in Note 36, Share-Based Payments, the Group has three classes of options outstanding (D, E and F) granted to the Group's key personnel as of
December 31, 2006. The Group adopted IFRS 2 from January 1, 2005 and applied it retrospectively to shares, share options and other equity instruments that were granted
after November 7, 2002 and have not yet vested as of the effective date of the standard. The share-based payment expense under IFRS was €7 million,
€8 million and €12 million in 2006, 2005 and 2004, respectively. Prior to the adoption of IFRS 2, the Group did not recognize share-based payment
expense.

Until
December 31, 2005 the Group accounted for its employee share-based compensation programs under U.S. GAAP in accordance with Accounting Principles Board Opinion
no. 25: Accounting for Stock Issued to Employees (ABP 25). The Group recognized compensation expense associated with stock options granted based on the difference between the quoted
market price of the company's shares at the end of each reporting period and the current exercise price of each stock option, until the earlier of the exercise date, cancellation date or the date of
sale on the Helsinki Stock Exchange if applicable. Changes in the quoted market price were reflected as an adjustment to deferred compensation and compensation expense in the periods in which the
changes occur until the final exercise price was known.

Effective
January 1, 2006, the Group adopted FAS No. 123(R), Share Based Payment, using the modified prospective method, whereby any portion of awards that were granted
after 1995 and have not been vested on January 1, 2006 and awards granted subsequent to January 1, 2006 are measured at the grant date fair value and recognized in the income statement
over the requisite service period. Prior periods have not been restated, so the differences with IFRS in prior years' income statements for share based compensation remain.

Total
share-based compensation expense under U.S. GAAP was €7 million, €8 million and €32 million for the
years ended December 31, 2006, 2005 and 2004, respectively. As a result of adopting FAS 123(R) the Group's net income in 2006 was €3 million lower, than if the
Group had continued to apply APB 25. The Group's basic and diluted earnings per share in 2006 was €0.01 lower, than if the Group had continued to apply APB 25. At
December 31, 2006, the total intrinsic value of share options outstanding and exercisable amounted to €35 million.

F-103

---



During
2005 and 2004, if the Group had determined compensation expense based on the fair value at the grant date for its stock options under FAS 123, the Group's earnings would
have been increased or decreased to the pro forma amounts indicated below (inclusive of tax effects):

|                   |         | Year Ended December 31,
|------------------ | ------- | -----------------------
|
|
|Net income         |         |                        
|As reported        |         | 171                    
|Pro forma          |         | 171                    
|Earnings per share |         |                        
|As reported:       |         |                        
|                   | Basic   |                        
|                   | Diluted |                        
|Pro forma:         |         |                        
|                   | Basic   |                        
|                   | Diluted |                        

The assumptions used in determining the fair value are disclosed in Note 36.

Under
IFRS, the Group assesses at each balance sheet date the amount of social security provisions for the share options. The provision is based on the amount that the Group would be
liable to pay for the granted options if the options were sold or exercised by the employees. The provision is calculated based on the value of the options, which is the difference between the market
price of a share and the exercise prices of the options. Under U.S. GAAP the social security costs are expensed as the options are sold or exercised. This results in an adjustment of
€0 million, €2 million and €1 million for the three years ended December 31, 2006, 2005 and 2004, respectively.

(i)    Change in Estimates of the Tax Basis of Acquired Assets

In connection with the acquisition of Haindl in November 2001, a new tax basis was determined for acquired net assets located in Germany. As a result, a
portion of the total goodwill could be deductible for tax purposes. Prior to 2004, uncertainty of the tax treatment in Germany of the tax bases resulted in the Group recording a tax provision for the
tax benefit taken for the acquired net assets and tax deductible portion of the goodwill. In 2004, the uncertainty regarding the tax treatment was removed and, under IFRS, the Group recorded
€284 million as a reduction of the deferred tax liability and a corresponding release of the tax provision.

In
2004 under U.S. GAAP, goodwill was reduced with a corresponding release of the tax provisions for the acquired net assets and the tax deductible portion of goodwill.

F-104

---



(j)    Share of Results of Associated Companies

The Group's share of results in associated companies is determined using the equity method and is based on the financial statements of the investees prepared in
accordance with IFRS. The U.S. GAAP share of results of associated companies is adjusted to reflect differences between IFRS and U.S. GAAP relating to the associates.

The
disability pensions of Finnish associated companies have been accounted for using defined contribution accounting under IFRS while under U.S. GAAP defined benefit accounting
is applied. See note (f) Employee benefits.

Revaluations
and fair value adjustments of forest assets recorded under IFRS are reversed under U.S. GAAP.

As
described in Note 21, the Group's associated company, PVO, holds an equity investment in TVO, which owns and operates nuclear power plants in Olkiluoto, Finland.

Under
IFRS, the Group recognizes the equity impact of accounting for the liability related to the nuclear power plants at TVO, capitalizing that cost as an asset to be depreciated over
the remaining life of the nuclear power plants, and capitalizing the contributions paid to the state-established fund up to the amount of the liability. The remaining contributions and changes in fair
value of the fund, over the amount of the liability, are recorded to the income statement.

Under
U.S. GAAP, under FAS 143, the Group recorded the equity impact of TVO accounting for the liability for the asset retirement obligations adjusted for the cumulative
accretion as of the adoption date, those costs capitalized as an increase to the carrying amount of the nuclear power plant, to be depreciated over the life of the nuclear power plant, and the
accumulated depreciation on that asset retirement cost.

The
reconciling adjustment represents differences related to the discount rate applied and the treatment of the fund asset, which is not limited to the amount of the liability under
U.S. GAAP.

(k)   Earnings per Share

In accordance with both IFRS and U.S. GAAP, basic EPS is computed by dividing income available to common shareholders by the weighted average number of
common shares outstanding for the year. The computation of diluted EPS is similar to basic EPS, except that it assumes the potentially dilutive

F-105

---



securities,
such as convertible bonds, were converted to shares as of the beginning of the year. EPS has been calculated on a U.S. GAAP basis for the years ended December 31, 2006, 2005
and 2004 as follows:

|                                                                |                                                                                             | Year Ended December 31,                                                                         
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------
|
|
|Numerator for basic EPSincome available to common shareholders |                                                                                             | 424                                                                                             
|Effect of dilutive securities:                                  |                                                                                             |                                                                                                 
|                                                                | Numerator for diluted EPSincome available to common shareholders after assumed conversions |                                                                                                 
|Denominator for basic EPSweighted average shares (thousands)   |                                                                                             | 523,220                                                                                         
|Effect of dilutive securities (thousands):                      |                                                                                             |                                                                                                 
|                                                                | Convertible bond loan                                                                       |                                                                                                 
|                                                                | Stock options                                                                               |                                                                                                 
|                                                                |                                                                                             | Denominator for diluted EPSadjusted weighted average shares and assumed conversions (thousands)
|EPS:                                                            |                                                                                             |                                                                                                 
|                                                                | Basic                                                                                       |                                                                                                 
|                                                                | Diluted                                                                                     |                                                                                                 

F-106

---



(l)    Consolidated Statement of Comprehensive Income

Comprehensive income measured in accordance with U.S. GAAP for the years ended December 31, 2006, 2005 and 2004 is as follows:

|                                                                                                                            |  | Year ended December 31, |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -
|
|
|Net income in accordance with U.S. GAAP                                                                                     |  | 424                     |  
|Other comprehensive income                                                                                                  |  |                         |  
|Unrealized holding gains (net of income taxes of 0 million in 2006, in 2005 and in 2004)                                    |  |                        |  
|Unrealized cash flow hedges (net of income taxes of (15) million in 2006, 19 million in 2005 and (2) million in 2004)       |  | 42                      |  
|Foreign currency translation adjustments                                                                                    |  | (129                    | )
|Additional minimum pension liability (net of income taxes of (12) million in 2006, 5 million in 2005 and 4 million in 2004) |  | 25                      |  
|                                                                                                                            |  |                         |  
|Comprehensive income in accordance with U.S. GAAP                                                                           |  | 362                     |  
|                                                                                                                            |  |                         |  
|Accumulated other comprehensive income                                                                                      |  |                         |  
|Unrealized holding gains (net of income taxes of 0 million in 2006, in 2005 and in 2004)                                    |  | 1                       |  
|Unrealized cash flow hedges (net of income taxes of (8) million in 2006, 7 million in 2005 and (12) million in 2004)        |  | 19                      |  
|Foreign currency translation adjustments                                                                                    |  | (214                    | )
|Additional minimum pension liability (net of income taxes of 42 million in 2005, and 37 million in 2004)                    |  |                        |  
|Actuarial gains and losses (net of income taxes of 74 million in 2006)                                                      |  | (156                    | )
|Prior service credits (net of income taxes of (9) million in 2006)                                                          |  | 27                      |  
|                                                                                                                            |  |                         |  
|                                                                                                                            |  | (323                    | )
|                                                                                                                            |  |                         |  

(m)  Classification Differences

Minority Interest

Under IFRS, minority interest is presented within total equity on the balance sheet and within profit on the income statement.

Under
U.S. GAAP, minority interest is presented as a separate item on the balance sheet outside of equity and excluded from income within the income statement.

F-107

---





Consolidated Income Statement

Under IFRS, The Group classifies realized and unrealized gains and losses on foreign currency denominated transactions in sales, costs and expenses, and financial
income and expenses, as appropriate. In accordance with U.S. GAAP, realized and unrealized gains and losses on foreign currency denominated transactions would be classified as a component of
other income (expense), net.

The
aggregate foreign currency exchange gains (losses) included in the income statement are as follows for the years ended December 31, 2006, 2005 and 2004:

|                                |                               | Year Ended December 31, |    
|------------------------------- | ----------------------------- | ----------------------- | ---
|
|
|Classification under IFRS:      |                               |                         |    
|                                | Sales                         |                         | (14
|                                | Costs and expenses            |                         | 7  
|                                | Other operating income        |                         | 17 
|                                | Financial income and expenses |                         | 47 
|                                |                               |                         |    
|Classification under U.S. GAAP: |                               |                         |    
|                                | Other income (expense), net   |                         | 57 
|                                |                               |                         |    

Under IFRS, the Group applies hedge accounting for certain forward contracts (as explained in paragraph (g) above) that resulted in a gain
included in net sales of €3 million, €9 million and €7 million for the years ended December 31, 2006, 2005 and 2004,
respectively. Under U.S. GAAP, hedge accounting is not applied, and therefore, these amounts would be classified as financial income.

Consolidated Balance Sheet

In addition to the classification differences previously discussed in this section, other differences exist in the balance sheet classification between IFRS and
U.S. GAAP.

Under
IFRS, the Group classifies advance payments on inventories as a component of inventories. In accordance with U.S. GAAP, advance payments due within one year would generally
be classified as a component of other current assets.

Under
IFRS, the cancellation of treasury shares involves an increase in the share premium reserve account corresponding to the reduction in share capital for the nominal value of
treasury shares cancelled. The treasury shares are reduced by the acquisition cost of cancelled treasury shares and a corresponding reduction is booked in retained earnings.

Under
U.S. GAAP, the accounting treatment for cancellation of treasury shares does not affect the share premium reserve. The reduction in retained earnings is offset in part by the
reduction in share capital for the nominal value of treasury shares cancelled. The impact of this difference is a reduction in the share premium reserve amounting to
€13 million in 2005.

F-108

---



II.    Additional Disclosures

The following disclosures are included to comply with the U.S. GAAP and United States Securities and Exchange Commission's regulations for foreign
registrants. As indicated, certain disclosures are presented on an IFRS measurement basis.

(a)   Goodwill and Other Intangible Assets

The Group completed the annual impairment test required by FAS 142 as of September 30, 2006, 2005 and 2004, which resulted in no impairment charges.

The
changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005 measured on a U.S. GAAP basis and allocated by reportable segment, are as
follows:

|                                |  | Magazine
Paper |   | Newsprint |  | Fine &
Speciality
Paper |   | Converting
Materials |   | Wood
Products |   | Other
Operations |   | Total |  
|------------------------------- |  | -------------- | - | --------- |  | ----------------------- | - | -------------------- | - | ------------- | - | ---------------- | - | ----- | -
|
|Balance as of January 1, 2005   |  | 888            |   | 389       |  | 125                     |   | 67                   |   | 44            |   | 7                |   | 1,520 |  
|Acquisitions                    |  |               |   |          |  |                        |   |                     |   |              |   | 3                |   | 3     |  
|Translation adjustments         |  | 87             |   | 1         |  | 13                      |   | 10                   |   | (5            | ) | (2               | ) | 104   |  
|Disposals                       |  |               |   |          |  |                        |   | (58                  | ) |              |   |                 |   | (58   | )
|                                |  |                |   |           |  |                         |   |                      |   |               |   |                  |   |       |  
|Balance as of December 31, 2005 |  | 975            |   | 390       |  | 138                     |   | 19                   |   | 39            |   | 8                |   | 1,569 |  
|                                |  |                |   |           |  |                         |   |                      |   |               |   |                  |   |       |  
|Balance as of January 1, 2006   |  | 975            |   | 390       |  | 138                     |   | 19                   |   | 39            |   | 8                |   | 1,569 |  
|Acquisition                     |  |               |   |          |  |                        |   |                     |   |              |   |                 |   |      |  
|Translation adjustments         |  | (55            | ) |          |  | (6                      | ) |                     |   | (2            | ) | (3               | ) | (66   | )
|Disposals                       |  |               |   |          |  |                        |   |                     |   | (8            | ) |                 |   | (8    | )
|                                |  |                |   |           |  |                         |   |                      |   |               |   |                  |   |       |  
|Balance as of December 31, 2006 |  | 920            |   | 390       |  | 132                     |   | 19                   |   | 29            |   | 5                |   | 1,495 |  
|                                |  |                |   |           |  |                         |   |                      |   |               |   |                  |   |       |  

F-109

---



The following disclosure relates to the Group's other intangibles and has been prepared on a U.S. GAAP measurement basis:

|                                                                                                                                   |                                  | As of December 31, 2006 |    | As of December 31, 2005
|---------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ----------------------- | -- | -----------------------
|
|
|Subject to amortization:                                                                                                           |                                  |                         |    |                        
|Customer relationships                                                                                                             |                                  | 118                     |    | 54                     
|Technology                                                                                                                         |                                  | 112                     |    | 103                    
|Patents                                                                                                                            |                                  | 41                      |    | 16                     
|Software                                                                                                                           |                                  | 350                     |    | 207                    
|Intangible rights                                                                                                                  |                                  | 222                     |    | 156                    
|Intangible pension asset                                                                                                           |                                  |                        |    |                       
|                                                                                                                                   |                                  |                         |    |                        
|Total                                                                                                                              |                                  | 843                     |    | 536                    
|                                                                                                                                   |                                  |                         |    |                        
|Not subject to amortization:                                                                                                       |                                  |                         |    |                        
|Water rights                                                                                                                       |                                  | 189                     |    |                       
|Emission rights                                                                                                                    |                                  | 16                      |    |                       
|                                                                                                                                   |                                  |                         |    |                        
|Total                                                                                                                              |                                  | 1,048                   |    | 536                    
|                                                                                                                                   |                                  |                         |    |                        
|Under U.S. GAAP, intangible assets include customer relationships and do not include advance payments or construction in progress. |                                  |                         |    |                        
|Amortization expense:                                                                                                              |                                  |                         |    |                        
|                                                                                                                                   | For year ended December 31, 2006 |                         | 96 |                        
|Estimated amortization expense:                                                                                                    |                                  |                         |    |                        
|                                                                                                                                   | For year ended December 31, 2007 |                         | 84 |                        
|                                                                                                                                   | For year ended December 31, 2008 |                         | 65 |                        
|                                                                                                                                   | For year ended December 31, 2009 |                         | 51 |                        
|                                                                                                                                   | For year ended December 31, 2010 |                         | 23 |                        
|                                                                                                                                   | For year ended December 31, 2011 |                         | 24 |                        

(b)   Discontinued Operations

The Group applies FAS 144 and EITF 0313 "Applying the Conditions in Paragraph 42 of FAS 144 in
Determining Whether to Report Discontinued Operations." These address financial accounting and reporting for the impairment or disposal of long-lived assets, as
well as the reporting of discontinued operations. FAS 144 requires a component of an entity that either has been disposed of or is classified as held for sale to be reported as discontinued
operations if (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the Group as a result of the disposal transaction; and
(b) the Group will not have any significant continuing involvement in the operations of the component

F-110

---



after
the disposal transaction. A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the
entity. A component of an entity may be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group.

In
accordance with IFRS the Group classifies a discontinued operation as a component of an entity, which (a) pursuant to a single plan, the entity is disposing of in its entirety,
(b) represents a separate major line of business or geographical activity and (c) can be distinguished operationally and for financial reporting purposes.

The
following transactions are classified as discontinued operations under U.S. GAAP. However, as none of these transactions represent a major line of business, they have not been
classified as discontinued operations under IFRS.

Loparex Group

As discussed in Note 5, the Group sold Loparex Group to Mountaintop Investments B.V. in August 31, 2005. Loparex is the world's leading producer of
siliconized release materials for hygiene products, labels and industrial applications. Loparex Group's production plants are located in Finland, Great Britain, the Netherlands, the United States and
China and a joint venture in India. Loparex Group was previously reported in the Converting segment. Under IFRS, the results from operations and sale of Loparex Group have been classified as part of
income from continuing operations. Under U.S. GAAP, Loparex Group should be classified as a discontinued operation in the income statement. Net income and earnings per share under
U.S. GAAP for prior years have been reclassified to reflect Loparex Group as a discontinued operation. The revenues associated with the discontinued operations prior to inter-company
eliminations were €224 million and €336 million for the years ended December 31, 2005 and 2004, respectively. The pretax result associated with the
discontinued operations was a loss of €1 million for the year ended December 31, 2005 and income of €14 million for the year ended
December 31, 2004. As discussed in Note 5, the non-taxable gain on disposal associated with the discontinued operations was €26 million under IFRS for
the year ended December 31, 2005. Under U.S. GAAP, this gain was €21 million, as the U.S. GAAP carrying value of Loparex is
more than that of IFRS due to the differences in amortization of goodwill and employee benefits. For the years ended December 31, 2005 and 2004 the intercompany sales to Loparex Group consisted
of €22 million and €43 million, respectively. Intercompany purchases from Loparex Group were €6 million and
€5 million for the years ended December 31, 2005 and 2004, respectively. After the disposal, UPM will have minor involvement with Loparex Group as a paper and electricity
supplier in the normal course of business.

Brooks Group Ltd

In August 2004, the Group sold the Irish building materials merchant, Brooks Group Limited, to Wolseley Group. Brooks Group is the leading builders'
merchant chain for wood based products in Ireland. Brooks Group was previously reported in the Wood Products reportable segment. Under IFRS, the results from operations and sale of Brooks Group have
been classified as part of income from continuing operations. Under U.S. GAAP, Brooks Group should be classified as a discontinued operation

F-111

---



in
the statement of income. Net income and earnings per share under U.S. GAAP for prior years have been reclassified to reflect Brooks Group as a discontinued operation. The revenues associated
with the discontinued operations were €143 million and the pretax income was €7 million for the year ended December 31, 2004. The nontaxable gain
on disposal associated with the discontinued operations was €110 million for the year ended December 31, 2004. For the year ended December 31, 2004, the
intercompany sales to Brooks Group consisted of €8 million. After the disposal, UPM will have minor involvement with Brooks Group as a supplier of wood products in the normal
course of business.

(c)   Income Taxes

The Group's profit before income taxes and minority interest under IFRS for the years ended December 31, 2006, 2005 and 2004 consists of the following:

|                                                         |  | Year Ended December 31, | 
|-------------------------------------------------------- |  | ----------------------- | 
|
|
|Profit (loss) before income taxes and minority interest: |  |                         | 
|Domestic                                                 |  | 344                     | 
|Foreign                                                  |  | 23                      | 
|                                                         |  |                         | 
|                                                         |  | 367                     | 
|                                                         |  |                         | 

The Group's income tax expense under IFRS for the years ended December 31, 2006, 2005 and 2004 consists of the following:

|                   |          | Year Ended December 31, |     
|------------------ | -------- | ----------------------- | ----
|
|
|Current:           |          |                         |     
|                   | Domestic |                         | 154 
|                   | Foreign  |                         | 33  
|                   |          |                         |     
|                   |          | 187                     |     
|Deferred:          |          |                         |     
|                   | Domestic |                         | (108
|                   | Foreign  |                         | (50 
|                   |          |                         |     
|                   |          | (158                    | )   
|                   |          |                         |     
|Total income taxes |          | 29                      |     
|                   |          |                         |     

Current income tax expense is stated after the benefit arising from the utilization of loss carry-forwards amounting to
€19 million, €42 million and €20 million in 2006, 2005 and 2004, respectively.

F-112

---



The
tax effects of the temporary differences and carry-forwards that give rise to significant portions of the Group's deferred tax liabilities and assets under IFRS as of
December 31, 2006 and 2005 are as follows:

|                                           |                                               | As of December 31,          |     
|------------------------------------------ | --------------------------------------------- | --------------------------- | ----
|
|
|Deferred tax assetscurrent:               |                                               |                             |     
|                                           | Retirement benefit and other provisions       |                             | 27  
|                                           | Intercompany profit in inventory              |                             | 11  
|                                           | Tax losses and tax credits carried forward    |                             |    
|                                           |                                               |                             |     
|Total deferred tax assetscurrent          |                                               | 38                          |     
|Deferred tax assetsnon-current:           |                                               |                             |     
|                                           | Retirement benefit and other provisions       |                             | 84  
|                                           | Book over tax depreciation                    |                             | 221 
|                                           | Tax losses and tax credits carried forward    |                             | 247 
|                                           | Finance leases                                |                             | 3   
|                                           |                                               |                             |     
|Total deferred tax assetsnon-current      |                                               | 555                         |     
|                                           |                                               |                             |     
|Valuation allowance                        |                                               | (20                         | )   
|                                           |                                               |                             |     
|Total deferred tax assets                  |                                               | 573                         |     
|                                           |                                               |                             |     
|Deferred tax liabilitiescurrent:          |                                               |                             |     
|                                           |                                               | Other temporary differences |     
|                                           |                                               |                             |     
|Total deferred tax liabilitiescurrent     |                                               | 6                           |     
|Deferred tax liabilitiesnon-current:      |                                               |                             |     
|                                           | Tax over book depreciation                    |                             | (698
|                                           | Fair value adjustments of biological assets   |                             | (173
|                                           | Fair value adjustments of net assets acquired |                             | (93 
|                                           | Other temporary differences                   |                             | (43 
|                                           |                                               |                             |     
|Total deferred tax liabilitiesnon-current |                                               | (1,007                      | )   
|                                           |                                               |                             |     
|Total deferred tax liabilities             |                                               | (1,001                      | )   
|                                           |                                               |                             |     
|Net deferred tax liability                 |                                               | (428                        | )   
|                                           |                                               |                             |     

(d)   Associated Companies

Separate financial statements of Oy Metsä-Botnia Ab for the years ended December 31, 2006, 2005 and 2004 beginning on page F-117 of
this annual report are being filled pursuant to Rule 3-09 of Regulation S-X under the Securities Act.

F-113

---



(e)   Other Accounting Policies and Disclosures

Available-For-Sale Investments

Proceeds from sales of available-for-sale and cost-method investments were €10 million,
€284 million and €38 million during the years ended December 31, 2006, 2005 and 2004, respectively. Gross gains of
€2 million, €90 million, and €1 million and gross losses of nil, nil, and nil million were realized on those sales during the years
ended December 31, 2006, 2005 and 2004 respectively. The gross gain in 2005 was primarily related to the sale of Metso Corporation shares.

Supply Risk

The Group's manufacturing operations depend upon obtaining adequate supplies of appropriate raw materials in a timely manner. Certain Group companies may at times
be substantially dependent on a limited number of suppliers of key resources due to availability, locale, price, quality and other considerations. Also, from time to time, suppliers may extend lead
times, limit supplies or increase prices due to capacity constraints or other factors.

As
a result, self-sufficiency in key resources is vital to the Group's operations and the Group attempts to mitigate supply risk by producing many of its necessary resources
in-house or obtaining them through associated companies. In addition, the Group works closely with its key suppliers around the world to ensure that adequate supplies are available for its
use.

If
the Group were unable to obtain adequate supplies of raw materials in a timely manner, or if there were significant increases in the costs of raw materials, the Group's results of
operations could be adversely affected in the short term.

(f)    New Accounting Standards

In February 2006, the FASB issued Statement No. 155, "Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statement
No. 133 and 140," which provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its
host to contract in accordance with FAS 133. This Statement allows an entity to make an irrevocable election to measure such a hybrid financial instrument at fair value in its entirety, with
changes in fair value recognized in earnings. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that
begins after September 15, 2006. The Group does not believe that the adoption of FAS 155 will have a material impact on its consolidated financial statements.

In
June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109." The
Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and transition, and significantly expands income tax disclosure
requirements. It applies to all tax positions accounted for in accordance with

F-114

---



SFAS
No. 109 and is effective for fiscal years beginning after December 15, 2006. The Group is currently estimating the impact of implementing FIN 48.

In
September 2006, the FASB issue Statement No. 157, "Fair Value Measurements". This Statement does not add any new fair value measurements but improves existing guidance for
measuring assets and liabilities using fair value including defining fair value, establishing a framework for measuring fair value, and expands disclosures about fair value. This Statement emphasis
that fair value is a market based measurement and sets forth a fair value hierarchy with the highest priority being quoted prices in active markets. This Statement is effective for fiscal years
beginning after November 15, 2007. The Group is currently estimating the impact of implementing FAS 157.

In
February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB
Statement No.115," which permits entities to choose to measure many financial instruments and certain other items at fair value. The Statement's objective is to improve financial reporting by allowing
entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting
provisions. SFAS No. 159 is effective as of the beginning of a reporting entity's first fiscal year beginning after November 15, 2007. The Group does not believe that the adoption
of FAS 159 will have a material impact on its consolidated financial statements.

F-115

---



(This
page has been left blank intentionally.)

F-116

---





OY METSÄ-BOTNIA AB        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders
of Oy Metsä-Botnia Ab:

In
our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Oy Metsä-Botnia Ab and its subsidiaries at 31 December 2006, and the results of their operations and their cash flows for the year then ended
in conformity with International Financial Reporting Standards as adopted by the EU. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Helsinki,
12 March 2007

|                                           |  |                                                       
|------------------------------------------ |  | ------------------------------------------------------
|                                           |  | PricewaterhouseCoopers OyAuthorised Public Accountants
|Ilkka Haarlaa
Authorised Public Accountant |  | Göran Lindell                                         
|Authorised Public Accountant               |  |                                                       

F-117

---





OY  METSÄ-BOTNIA  AB  CONSOLIDATED INCOME  STATEMENT

|                                                        |                        | Note |   | 2006      |         | 2005
(Unaudited) |         | 2004
(Unaudited) |        
|------------------------------------------------------- | ---------------------- | ---- | - | --------- | ------- | ---------------- | ------- | ---------------- | -------
|
|Sales                                                   |                        | (3   | ) | 1,311,294 |         | 946,512          |         | 1,065,966        |        
|Increase/decrease in finished goods                     |                        |      |   | 11,517    |         | 14,590           |         | 2,304            |        
|Other operating income                                  |                        | (4   | ) | 27,051    |         | 27,629           |         | 26,889           |        
|Materials and services                                  |                        |      |   |           |         |                  |         |                  |        
|                                                        | Materials and supplies |      |   |           | 669,318 |                  | 558,617 |                  | 590,173
|                                                        | External services      |      |   |           | 172,040 |                  | 84,407  |                  | 79,460 
|Personnel expenses                                      |                        | (5   | ) | 96,693    |         | 81,558           |         | 88,422           |        
|Depreciation, amortisation and impairment charges       |                        | (6   | ) | 103,764   |         | 112,207          |         | 120,480          |        
|Other operating expenses                                |                        | (5   | ) | 95,549    |         | 72,187           |         | 75,150           |        
|                                                        |                        |      |   |           |         |                  |         |                  |        
|Operating profit                                        |                        |      |   | 212,498   |         | 79,755           |         | 141,474          |        
|Share of results in associated companies                |                        |      |   | (440      | )       | 515              |         | 76               |        
|Exchange gains and losses                               |                        | (7   | ) | (250      | )       | 3,849            |         | (5,125           | )      
|Other financial income and expenses                     |                        | (7   | ) | (9,509    | )       | (3,711           | )       | (1,808           | )      
|                                                        |                        |      |   |           |         |                  |         |                  |        
|Result from continuing business operations before taxes |                        |      |   | 202,299   |         | 80,407           |         | 134,617          |        
|Income taxes                                            |                        | (8   | ) | (62,482   | )       | (21,029          | )       | (24,306          | )      
|                                                        |                        |      |   |           |         |                  |         |                  |        
|Profit for the financial period                         |                        |      |   | 139,817   |         | 59,377           |         | 110,311          |        
|Distribution of profit                                  |                        |      |   |           |         |                  |         |                  |        
|To parent company shareholders                          |                        |      |   | 147,998   |         | 58,223           |         | 107,994          |        
|To minority interests                                   |                        |      |   | (8,181    | )       | 1,155            |         | 2,317            |        
|                                                        |                        |      |   |           |         |                  |         |                  |        
|                                                        |                        |      |   | 139,817   |         | 59,377           |         | 110,311          |        
|                                                        |                        |      |   |           |         |                  |         |                  |        

F-118

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OY METSÄ-BOTNIA AB        CONSOLIDATED CASH FLOW STATEMENT

|                                                    |  | 2006     |   | 2005
(Unaudited) |   | 2004
(Unaudited) |  
|--------------------------------------------------- |  | -------- | - | ---------------- | - | ---------------- | -
|
|Cash flow from operating activities                 |  |          |   |                  |   |                  |  
|Net profit for the period                           |  | 147,998  |   | 58,223           |   | 107,994          |  
|Adjustments to net profit                           |  | 170,785  |   | 124,630          |   | 152,246          |  
|Interest received                                   |  | 4,010    |   | 3,638            |   | 4,014            |  
|Interest paid                                       |  | (9,247   | ) | (5,911           | ) | (6,020           | )
|Dividends received                                  |  | 12       |   | 5                |   | 543              |  
|Other financial items, net                          |  | (3,249   | ) | 1,992            |   | (4,008           | )
|Income taxes paid                                   |  | (33,058  | ) | (21,016          | ) | (30,474          | )
|Change in working capital                           |  | 34,675   |   | (50,764          | ) | 3,453            |  
|                                                    |  |          |   |                  |   |                  |  
|Net cash provided by operating activities           |  | 311,928  |   | 110,797          |   | 227,748          |  
|                                                    |  |          |   |                  |   |                  |  
|Cash flow from investing activities                 |  |          |   |                  |   |                  |  
|Acquisition of subsidiary shares                    |  | (41,671  | ) | (2,045           | ) | (273             | )
|Acquisition of shares in associated companies       |  | (714     | ) | (2,209           | ) | (2,379           | )
|Capital expenditure                                 |  | (527,428 | ) | (254,408         | ) | (85,564          | )
|Proceed from sales of fixed assets                  |  | 24,342   |   | 16,149           |   | 3,335            |  
|Increase in long-term receivables, net              |  | 14,535   |   | (15,303          | ) | 95,162           |  
|                                                    |  |          |   |                  |   |                  |  
|Net cash flow from investing activities             |  | (530,936 | ) | (257,816         | ) | 10,281           |  
|                                                    |  |          |   |                  |   |                  |  
|Cash flow from financing activities                 |  |          |   |                  |   |                  |  
|Increase in long-term liabilities                   |  | 137,268  |   | 0                |   | 0                |  
|Payment of long-term liabilities                    |  | 0        |   | (1,853           | ) | (31,170          | )
|Proceed from short-term liabilities, net            |  | 22,822   |   | (19,102          | ) | 19,309           |  
|Change in short-term receivables, net               |  | (41,390  | ) | 225,742          |   | (180,246         | )
|Dividends paid                                      |  | (31,980  | ) | (39,796          | ) | (52,552          | )
|Other financing cash flow                           |  | 79,111   |   | 40,434           |   | 0                |  
|                                                    |  |          |   |                  |   |                  |  
|Net cash flow from financing activities             |  | 165,831  |   | 205,425          |   | (244,659         | )
|                                                    |  |          |   |                  |   |                  |  
|Changes in cash and cash equivalents                |  | (53,177  | ) | 58,405           |   | (6,629           | )
|Cash and cash equivalents at beginning of period    |  | 71,259   |   | 11,998           |   | 19,123           |  
|Translation difference in cash and cash equivalents |  | (6,194   | ) | 856              |   | (496             | )
|Changes in cash and cash equivalents                |  | (53,177  | ) | 58,405           |   | (6,629           | )
|                                                    |  |          |   |                  |   |                  |  
|Cash and cash equivalents at end of period          |  | 11,888   |   | 71,259           |   | 11,998           |  
|                                                    |  |          |   |                  |   |                  |  
|Notes to consolidated cash flow statement           |  |          |   |                  |   |                  |  
|Adjustments to net profit                           |  |          |   |                  |   |                  |  
|Taxes                                               |  | 62,482   |   | 21,029           |   | 24,306           |  
|Depreciation, amortisation and impairment charges   |  | 103,764  |   | 112,207          |   | 120,480          |  
|Share of results in associated companies            |  | 440      |   | (515             | ) | (76              | )
|Profits and losses on sale of fixed assets          |  | (5,477   | ) | (11,184          | ) | (1,638           | )
|Finance costs, net                                  |  | 10,199   |   | 1,166            |   | 6,856            |  
|Other adjustments                                   |  | (624     | ) | 1,927            |   | 2,318            |  
|                                                    |  |          |   |                  |   |                  |  
|                                                    |  | 170,785  |   | 124,630          |   | 152,246          |  
|Change in working capital                           |  |          |   |                  |   |                  |  
|Inventories                                         |  | 9,591    |   | (37,872          | ) | 20,590           |  
|Current receivables                                 |  | (218     | ) | (81,159          | ) | (321             | )
|Current non-interest-bearing liabilities            |  | 25,302   |   | 68,267           |   | (16,816          | )
|                                                    |  |          |   |                  |   |                  |  
|                                                    |  | 34,675   |   | (50,764          | ) | 3,453            |  
|                                                    |  |          |   |                  |   |                  |  

F-119

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OY METSÄ-BOTNIA AB        CONSOLIDATED BALANCE SHEET

|                                                   |  | Note   |  | 31 December
2006 |   | 31 December
2005
(Unaudited)
|-------------------------------------------------- |  | ------ |  | ---------------- | - | ----------------------------
|
|ASSETS                                             |  |        |  |                  |   |                             
|Non-current assets                                 |  |        |  |                  |   |                             
|Goodwill                                           |  | 9      |  | 3,075            |   | 3,874                       
|Other intangible assets                            |  | 9      |  | 12,260           |   | 12,244                      
|Property, plant and equipment                      |  | 9      |  | 1,443,947        |   | 1,089,691                   
|Biological assets                                  |  | 10     |  | 134,346          |   | 91,565                      
|Investments in associated companies                |  | 11     |  | 3,475            |   | 7,310                       
|Investments in other companies                     |  | 11     |  | 7,580            |   | 7,649                       
|Interest-bearing receivables                       |  | 12     |  | 255              |   | 15,867                      
|Other non-interest-bearing non current receivables |  | 12     |  | 1,077            |   | 0                           
|                                                   |  |        |  |                  |   |                             
|                                                   |  |        |  | 1,606,014        |   | 1,228,200                   
|                                                   |  |        |  |                  |   |                             
|Current assets                                     |  |        |  |                  |   |                             
|Inventories                                        |  | 14     |  | 146,238          |   | 155,829                     
|Interest-bearing receivables                       |  | 15     |  | 65,811           |   | 24,422                      
|Trade and other non-interest-bearing receivables   |  | 15     |  | 169,165          |   | 168,947                     
|Cash and cash equivalents                          |  | 16     |  | 11,888           |   | 71,259                      
|                                                   |  |        |  |                  |   |                             
|                                                   |  |        |  | 393,103          |   | 420,457                     
|                                                   |  |        |  |                  |   |                             
|Total assets                                       |  |        |  | 1,999,117        |   | 1,648,657                   
|                                                   |  |        |  |                  |   |                             
|EQUITY AND LIABILITIES                             |  |        |  |                  |   |                             
|Equity attributable to parent company shareholders |  |        |  |                  |   |                             
|Share capital                                      |  | 17     |  | 179,664          |   | 179,664                     
|Share premium                                      |  | 17     |  | 233,771          |   | 233,771                     
|Translation differences                            |  | 17     |  | (24,485          | ) | 5,823                       
|Other reserves                                     |  | 17     |  | 223,186          |   | 223,186                     
|Retained earnings                                  |  | 17     |  | 585,307          |   | 469,289                     
|                                                   |  |        |  |                  |   |                             
|                                                   |  |        |  | 1,197,444        |   | 1,111,734                   
|                                                   |  |        |  |                  |   |                             
|Minority interest                                  |  | 17     |  | 117,884          |   | 69,242                      
|                                                   |  |        |  |                  |   |                             
|Total shareholders' equity                         |  |        |  | 1,315,328        |   | 1,180,976                   
|Non-current liabilities                            |  |        |  |                  |   |                             
|Deferred tax liabilities                           |  | 13     |  | 106,437          |   | 112,360                     
|Retirement benefit obligations                     |  | 18     |  | 2,626            |   | 3,428                       
|Provisions                                         |  | 19     |  | 1,726            |   | 1,359                       
|Interest-bearing liabilities                       |  | 20     |  | 285,612          |   | 148,344                     
|Other non-interest-bearing liabilities             |  | 21     |  | 12,060           |   | 13,404                      
|                                                   |  |        |  |                  |   |                             
|                                                   |  |        |  | 408,462          |   | 278,895                     
|Current liabilities                                |  |        |  |                  |   |                             
|Interest-bearing liabilities                       |  | 20     |  | 60,832           |   | 38,010                      
|Trade and other non-interest-bearing liabilities   |  | 22, 23 |  | 214,496          |   | 150,776                     
|                                                   |  |        |  |                  |   |                             
|                                                   |  |        |  | 275,327          |   | 188,786                     
|Total liabilities                                  |  |        |  | 683,789          |   | 467,681                     
|                                                   |  |        |  |                  |   |                             
|Total equity and liabilities                       |  |        |  | 1,999,117        |   | 1,648,657                   
|                                                   |  |        |  |                  |   |                             

F-120

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OY METSÄ-BOTNIA AB        CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

|                                |  | Share
Capital |  | Share
premium
reserve |  | Other
reserves |  | Translation
financial
difference |   | Results from
previous
periods |   | Minority
interest (%) |   | Total     |  
|------------------------------- |  | ------------- |  | --------------------- |  | -------------- |  | -------------------------------- | - | ----------------------------- | - | --------------------- | - | --------- | -
|
|(Unaudited)                     |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|Balance at 1 January 2004       |  | 179,664       |  | 233,771               |  | 223,186        |  | (5,356                           | ) | 400,910                       |   | 31,300                |   | 1,063,476 |  
|Translation difference          |  |               |  |                       |  |                |  | 2,564                            |   | (5,496                        | ) |                       |   | (2,933    | )
|Minority interest               |  |               |  |                       |  |                |  |                                  |   |                               |   | (1,277                | ) | (1,277    | )
|Result for the period           |  |               |  |                       |  |                |  |                                  |   | 107,994                       |   |                       |   | 107,994   |  
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|                                |  | 179,664       |  | 233,771               |  | 223,186        |  | (2,792                           | ) | 503,408                       |   | 30,023                |   | 1,167,261 |  
|Dividend paid                   |  |               |  |                       |  |                |  |                                  |   | (52,552                       | ) |                       |   | (52,552   | )
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|Balance at 31 December 2004     |  | 179,664       |  | 233,771               |  | 223,186        |  | (2,792                           | ) | 450,856                       |   | 30,023                |   | 1,114,709 |  
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|(Unaudited)                     |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|Balance at 1 January 2005       |  | 179,664       |  | 233,771               |  | 223,186        |  | (2,792                           | ) | 450,856                       |   | 30,023                |   | 1,114,709 |  
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|Translation difference          |  |               |  |                       |  |                |  | 8,615                            |   |                               |   |                       |   | 8,615     |  
|Minority interest               |  |               |  |                       |  |                |  |                                  |   |                               |   | 39,219                |   | 39,219    |  
|Profit for the financial period |  |               |  |                       |  |                |  |                                  |   | 58,223                        |   |                       |   | 58,223    |  
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|                                |  | 179,664       |  | 233,771               |  | 223,186        |  | 5,823                            |   | 509,079                       |   | 69,242                |   | 1,220,766 |  
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|Dividend paid                   |  |               |  |                       |  |                |  |                                  |   | (39,795                       | ) |                       |   | (39,795   | )
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|Balance at 31 December 2005     |  | 179,664       |  | 233,771               |  | 223,186        |  | 5,823                            |   | 469,289                       |   | 69,242                |   | 1,180,976 |  
|(Unaudited)                     |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|Balance at 1 January 2006       |  | 179,664       |  | 233,771               |  | 223,186        |  | 5,823                            |   | 469,289                       |   | 69,242                |   | 1,180,976 |  
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|Translation difference          |  |               |  |                       |  |                |  | (30,308                          | ) |                               |   |                       |   | (30,308   | )
|Minority interest               |  |               |  |                       |  |                |  |                                  |   |                               |   | 48,641                |   | 48,641    |  
|Profit for the financial period |  |               |  |                       |  |                |  |                                  |   | 147,998                       |   |                       |   | 147,998   |  
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|                                |  | 179,664       |  | 233,771               |  | 223,186        |  | (24,485                          | ) | 617,287                       |   | 117,884               |   | 1,347,308 |  
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|Dividend paid                   |  |               |  |                       |  |                |  |                                  |   | (31,980                       | ) |                       |   | (31,980   | )
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|(Audited)                       |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  
|Balance at 31 December 2006     |  | 179,664       |  | 233,771               |  | 223,186        |  | (24,485                          | ) | 585,307                       |   | 117,884               |   | 1,315,328 |  
|                                |  |               |  |                       |  |                |  |                                  |   |                               |   |                       |   |           |  

F-121

---





OY METSÄ-BOTNIA AB        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     ACCOUNTING POLICIES

The following is a description of the principal accounting policies to be adopted in preparation of the consolidated financial statements.

Principal activities

Oy Metsä-Botnia Ab is a Finnish joint stock company domiciled in Helsinki. Oy Metsä-Botnia Ab and its subsidiaries together
form a forest industry group whose main products are softwood, birch and aspen pulps. The Metsä-Botnia Group is part of the Metsäliitto Group, whose parent company
is Metsäliitto Cooperative.

Basis of preparation and valuation

Oy Metsä-Botnia Ab's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).
The financial statements have been prepared under the historical cost convention as modified by the revaluation of biological assets and derivative agreements.

Use of estimates in the financial statements

The preparation of financial statements under IFRS requires the use of estimates and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses for the reporting period. While these estimates
are based on the management's best knowledge at the date of closing the accounts, actual results may differ.

Consolidation principles

The consolidated financial statements include the financial statements of the parent company Oy Metsä-Botnia Ab and of all those
subsidiaries in which the parent company controlled, either directly or indirectly, over 50 per cent of the voting rights at the end of the year or in which it otherwise had a controlling interest.

Companies
acquired during the financial period are consolidated from the date of their acquisition.

Where
necessary, the financial statements of subsidiaries have been adjusted to ensure consistency with the Group's accounting policies.

Acquisitions
of subsidiaries are accounted for using the purchase method of accounting. The excess cost of acquisition over the shareholders' equity of acquired subsidiaries is recorded
in the balance sheet as goodwill.

In
accordance with IFRS 3 "Business Combinations", which came into effect on 1 April 2004, no amortization of goodwill has been made in the financial statements.

All
inter-company transactions, unrealized profits, receivables and liabilities, and intra-group profit distributions are eliminated.

Minority
interests are disclosed separately from the consolidated financial result attributable to the parent company's shareholders and from shareholders' equity, and are recorded as a
separate deduction under shareholders' equity.

Associated
companies are those in which Oy Metsä-Botnia Ab holds, either directly or indirectly, 20-50 per cent of the voting rights, or over which the company
has significant influence but not overall control. Interests in associated companies are calculated in the consolidated financial statements using the

F-122

---



equity
method of accounting and shown in the income statement under "Share of results of associated companies". The Group's interest in associated companies is shown in the balance sheet at an amount
that reflects its share of the net assets together with goodwill on acquisition, as amortized up to 31 December 2003, under "Investments in associated companies".

Foreign currency transactions

Foreign currency transactions are translated into euros using the exchange rate at the date of the transaction. Receivables and liabilities in foreign currencies
are translated into euros using the exchange rate prevailing at the balance sheet date. Foreign exchange gains and losses arising from such translations are disclosed in full under "Financial income
and expenses".

The
income statements of subsidiaries whose reporting currencies are other than euros are translated into euros using average exchange rates for the reporting period, and their balance
sheets at the exchange rates prevailing at the balance sheet date. Translation differences arising on translation and on adoption of the purchase method of accounting are entered in shareholders'
equity. In conjunction with the transition to IFRS, translation differences arising before 1 January 2004 are entered in retained earnings and are no longer shown in the income statement when
the subsidiary is subsequently sold.

Financial assets

The Group has complied with standards IAS 32 and IAS 39 since 1 January 2004. Previous to this, financial assets and liabilities were valued in accordance
with Finnish accounting practice. From January 2004, financial assets have been categorized according to the standard as follows: 1) Financial assets recognized in the income statement
at fair value, 2) Investments to be held to maturity, 3) Loans and other receivables, and 4) Financial assets available for sale. Categorization depends on the purpose for which
the assets were acquired and is made at the time of the original entry in the accounts. Financial asset purchases and sales are recorded at the clearance date of the transaction.

The
Group's financial assets are categorized primarily as "Investments to be held to maturity" or as "Loans and other receivables".

Investments
to be held to maturity include those investments which the Group fully intends to retain until the date of their maturity. Loans and other receivables comprises the Group's
internal deposits. Financial assets in both categories are valued at amortized cost.

Financial liabilities

All the Group's financial liabilities are included under "Other liabilities" and loans are not classed as "Financial liabilities to be entered in the income
statement at fair value". Financial liabilities entered in the accounts are valued at cost equal to the fair value of the equivalent.

Transaction
costs are included in the original carrying value of all financial liabilities. All financial liabilities are later revalued at amortized cost using the effective interest
method.

Derivative financial instruments and hedge accounting

The Group processes derivative financial instruments according to the IAS 32 and IAS 39 standard. In accordance with standards IAS 32 and IAS 39, derivative
financial instruments are initially recognized in the balance sheet at cost and thereafter are revalued at their fair value.

The
Botnia Group has not yet begun to apply IFRS hedge accounting for derivative financial instruments. All derivative financial instruments are therefore stated at their fair value, and
changes in fair value are recognized immediately under financial items in the income statement. Derivative instruments

F-123

---



are
valued according to accepted financial market practice. The fair values of forward foreign exchange contracts are based on forward prices prevailing at the balance sheet date.

Derivative
financial instruments mature within one year and their fair value is therefore disclosed in current non-interest-bearing receivables or liabilities.

Hedge
accounting has been applied to hedges for net investment in a foreign unit, and effectiveness testing required by hedge accounting has been performed to verify that changes in the
fair value of the hedging instrument cover effectively enough, with respect to the hedged risk, any changes in the fair value of the hedged item. Changes in the fair value of a derivative hedge proven
effective are recognized directly against the translation differences accumulated in shareholders' equity.

Revenue recognition

Sales are shown net of indirect sales taxes, discounts and other sales adjustment items. Sales are recognized after transfer of the decisive risks and rewards
connected with ownership of the goods sold to the buyer, and the seller has neither a continuing right to dispose of the goods nor effective control of the goods. Revenues from services are recorded
when the service has been performed.

Delivery and handling costs

The costs of goods delivery and handling are included in the income statement under operating costs and expenses.

Research and development

Research and development costs are expensed as they are incurred. There were no development costs capitalisable under IFRS.

Income taxes

Income taxes shown in the income statement comprise tax on the Group's taxable result for the financial period and deferred tax. Income taxes are entered on an
accrual basis based on the taxable result of each reporting unit at the income tax rate applicable in the country in question. Taxes are adjusted by any income taxes for previous periods.

Deferred
tax assets and liabilities are calculated on all temporary differences between the tax bases and their carrying amounts in the financial statements. The main temporary
differences are due to differences in the depreciation of fixed assets.

Deferred
tax is calculated using the official tax rates prevailing at the balance sheet date. Deferred tax assets are recognized to the extent that it is probable that future taxable
profit will be available against which the temporary differences can be utilized.

Leases

Leases of property, plant and equipment in which the Group bears a substantial portion of the risks and rewards of ownership are classed as finance leases.
Finance leases are capitalized at the time of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. The corresponding leasing obligations
are included in other non-current interest-bearing liabilities. Property, plant and equipment acquired under finance leases are depreciated over the shorter of their useful lives or the
term of the lease. Lease payments are apportioned between the liability and finance charges.

F-124

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Leases
where a significant portion of the risks and rewards of ownership are retained by the lessor are not classed as finance leases. Payments made under such leases are charged to the
income statement on a straight-line basis over the period of the lease.

Inventories

Inventories are stated at the lower of cost or net realizable value. The cost of finished goods and work in progress comprises raw materials, direct labour, other
direct production costs and a portion of indirect production overheads. Indirect costs of manufacture are allocated to the different product units on the basis of normal operating capacity.

The
cost of inventories is determined using either the first-in, first-out (FIFO) method or the weighted average price. Net realizable value is determined as the
estimated selling price less completion costs and selling expenses.

Property, plant and equipment

Property, plant and equipment acquired by the Group is stated at historical cost. Assets of acquired subsidiaries are stated at the fair values at the date of
acquisition. The carrying value of property, plant and equipment in the balance sheet represents the cost less accumulated depreciation and any impairment charges. Interest costs on borrowings to
finance the construction of property, plant and equipment are capitalized as fixed assets during the period of time required to complete the asset for its intended use.

Depreciation
of property, plant and equipment is made on a straight-line basis using the following expected useful lives:

Buildings and structures

2040 yearsHeavy machinery

1520 yearsLight machinery and equipment

510 yearsOther tangible assets

1020 years


Land
and water areas are not depreciated. If significant portions of any property, plant or equipment have different useful lives, each portion is treated separately.

Expected
useful lives are reviewed at each balance sheet date and, where these differ significantly from previous estimates, the depreciation periods are changed accordingly.

The
cost of major renovations is included in the asset's carrying amount when it is probable that the economic benefits derived from the project will exceed the originally assessed
standard of performance of the asset. Other repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred.

Gains
and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in operating profit.

Biological assets

Biological assets (i.e. living trees) are measured at fair value less estimated point-of-sale costs. The fair value of biological assets
other than young seedling stands is based on discounted cash flows. Felling revenues and maintenance costs are calculated on the basis of actual prices and the company's predicted future trend in
costs and prices. Forests acquired from third parties are entered at cost. Changes in the fair value of forests are included in operating profit in the income statement.

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Intangible assets

Goodwill

Goodwill represents the excess of the cost of acquisition over the fair value of assets less liabilities of acquired subsidiaries at the date of acquisition. This
IFRS 3 treatment of goodwill has been used by Metsä-Botnia for all acquisitions made since 1 January 2004. As provided for under IFRS 1, acquisitions made prior to this date have
been accounted for in accordance with the previously adopted accounting principles and no retrospective adjustments have been made.

Instead
of amortization, goodwill is evaluated annually and any impairment is charged to the income statement. Goodwill is stated at acquisition cost less amortization accumulated up to
31 December 2003.

Computer software

The costs of developing and producing major computer programs are recognized in the balance sheet under intangible assets and amortized on a
straight-line basis over the useful lives of the assets concerned up to a maximum of five years. Direct costs include consultation and other fees paid to outside experts, software
licences, personnel costs directly attributable to the project, and other direct costs. The costs associated with maintaining and using computer software are expensed during the reporting period in
which they are incurred.

Other intangible assets

Expenditure on patents, licences and trademarks that have limited useful lives is capitalized under intangible assets and amortized on a straight-line
basis over their useful lives.

Emission allowances

Emission rights received from governments at no charge have been recognized as intangible assets and the corresponding government grant as prepayment in the
balance sheet under liabilities at fair value at the date of acquisition. Emission rights are measured at initial cost or a lower fair value. Emission rights are not depreciated. Liabilities
concerning actual emissions are recognized as expenses and liabilities, and the corresponding government grant as income at the same time as the actual emissions at initial cost. Therefore, the
emission rights received in the initial allocation have no impact on profit and loss. Only purchases of additional rights or sale of surplus rights have an impact on profit and loss.

Accounts receivable

Trade receivables are carried at their anticipated realizable value, which is the original invoice amount less an allowance for doubtful accounts. Such an
allowance is made when there is justifiable reason to believe that the Group will not be able to collect the amount due under the original terms of the receivable.

Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources
will be required to settle the obligation and a reliable estimate of the amount can be made. If the obligation is expected to be met in full or in part by reimbursement from a third party, the
reimbursement is recognized as a separate asset, but only in cases where the reimbursement is virtually certain.

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Environmental obligations

Expenditure resulting from remediation of existing conditions and that does not contribute to current or future revenues is expensed. Environmental obligations
are recognized based on current environmental laws and regulations when it is likely that liability has arisen and the amount can be reasonably estimated.

Cost of liabilities

The costs of liabilities are in most cases charged to the accounts during the financial period in which they are incurred. In the case of major
long-term investments in tangible fixed assets, the cost of liabilities arising from the acquisition and construction of the asset is included directly in the acquisition cost of the asset
in question. The direct transaction costs of loans are deducted from the original cost of the loan and allocated as interest expenditure using the effective interest method.

Employee benefits

Pension obligations

The Group operates pension schemes in several countries based on the regulations and practices in force in each country. Most of these are defined contribution
schemes. In the case of defined benefit schemes, the employer is generally responsible for ensuring that past and present employees covered by such schemes receive the benefits to which they are
entitled.

The
liability in respect of defined benefit pension schemes is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together
with adjustments for actuarial gains and losses. The defined benefit obligation is calculated by independent actuaries. Pension obligations are shown in the balance sheet under liabilities as
retirement benefit obligations.

In
the case of defined contribution schemes, pension contributions are paid to pension insurance companies on the basis of earnings during their period of employment, after which the
Group has no further payment obligations. Contributions to such schemes are charged to the income statement during the period to which they relate.

Share-based payments

A share-based incentive scheme has been established for top management. The potential compensation under the incentive scheme is based on Oy
Metsä-Botnia AB's operating profit and return on capital employed and is paid partly in category B shares in M-real Corporation and shares in Oy
Metsä-Botnia Ab, and partly in cash. The fair value of the share is its market value at the date of grant.

Dividends

Dividends are set against shareholders' equity in the period in which they are approved by the company's shareholders.

2.     FINANCIAL RISK MANAGEMENT

The financial risks associated with business are managed in accordance with the financial policy endorsed by the Board of Directors and the company's senior
management. The policy provides detailed instructions on the management of foreign currency exposure and interest rate and counterparty risks, and for employing derivative financial instruments. The
purpose is to protect the Group against major financing-related risks, to achieve a balanced cash flow and to allow the business units time to adjust their operations to changing conditions.

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Foreign currency exposure

Foreign currency exposure consists of the risks associated with foreign currency flows and balance sheet items denominated in foreign currencies. Most of the
Group's costs are incurred in the euro-zone, but some sales are in dollars, while share sales are based on market prices quoted in dollars. Sales revenues therefore vary along with changes
in the exchange rate for the dollar, while production costs remain unchanged. A strengthening of the dollar therefore has a positive impact on the consolidated financial result and a weakening of the
dollar a negative impact.

Translation
risk concerning equity denominated in foreign currency arises from the consolidation of the equity of subsidiaries and associated companies outside the euro area in euros in
the financial statements. At the end of the period, 15.5% of the USD-denominated equity position was hedged.

Interest rate risks

Interest rate risks relate mainly to interest-bearing receivables and liabilities in the balance sheet. The main currencies in terms of interest rate risk
management are the euro and the US dollar. The Group seeks to hedge selectively the biggest interest rate risks in accordance with the instructions contained in its financial policy. The Group has no
interest rate derivative agreements open at the balance sheet date.

Commodity risk

Commodity risk hedging may be applied selectively in the management of pulp price risks and electricity price risks. Management of pulp price risks is based on
compliance with the pulp pricing policies, as contained in the shareholder agreement, in different commercial situations. The Group has no commodity derivative agreements open at the balance sheet
date.

Liquidity risk

Liquidity risk is defined as the risk that funds become insufficient to meet business needs, or that extra costs are incurred in arranging the necessary
financing. Liquidity risk is monitored by estimating the need for liquidity 12-24 months ahead and comparing this with the total liquidity available.

Counterparty risk

Financial instruments carry the risk that the Group may incur losses should the counterparty be unable to meet its commitments. Such risk is managed by entering
into financial transactions only with parties with good credit ratings and within pre-determined limits.

During
the period, credit risks did not result in any losses.

New and revised standards and interpretations

The Group has not applied the standard Financial Instruments: Disclosures (IFRS 7). The standard includes new requirements concerning notes on financial
instruments in financial statements and is applicable to periods beginning after 1 January 2007. The Group will apply the new standard to the period beginning on 1 January 2007. The
Group estimates that the implementation of the standard will affect primarily the presentation of notes. The Group has not applied the standard Operating Segments (IFRS 8). Application of this
standard will be enforced as of 1 January 2009. The Group estimates that the implementation of the standard will affect primarily the presentation of notes.

The
Group has not applied the interpretations Reassessment of Embedded Derivatives (IFRIC 9) and Group and Treasury Share Transactions (IFRIC 11). The
non-application has no material impact on the figures presented.

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3.     SEGMENT DATA

The accounting policies used for the segments are the same as those used for the Group. The data is presented in accordance with the geographical distribution of
the Group's segments.

Geographical
segment sales are presented in accordance with customers' locations, and assets and investments according to their location.

Geographical segments

|                |  | Sales according to
customer location |  | Assets by country |  | Capital expenditure
|--------------- |  | ------------------------------------ |  | ----------------- |  | -------------------
|
|
|Finland         |  | 754,870                              |  | 598,444           |  | 636,777            
|Other EU        |  | 286,261                              |  | 230,216           |  | 288,977            
|Rest of Europe  |  | 107,212                              |  | 62,775            |  | 54,011             
|Other countries |  | 162,951                              |  | 55,077            |  | 86,201             
|                |  |                                      |  |                   |  |                    
|Total           |  | 1,311,294                            |  | 946,512           |  | 1,065,966          
|                |  |                                      |  |                   |  |                    

Personnel at year-end

According to location

|                |  | 2006  |  | 2005 (Unaudited) |  | 2004 (Unaudited)
|--------------- |  | ----- |  | ---------------- |  | ----------------
|Finland         |  | 1,150 |  | 1,312            |  | 1,371           
|Uruguay         |  | 590   |  | 222              |  | 209             
|Other countries |  | 158   |  | 120              |  | 9               
|                |  |       |  |                  |  |                 
|Total           |  | 1,898 |  | 1,654            |  | 1,589           
|                |  |       |  |                  |  |                 

4.     OTHER OPERATING INCOME

|                       |                                   | 2006 |        | 2005 (Unaudited) |        | 2004 (Unaudited)
|---------------------- | --------------------------------- | ---- | ------ | ---------------- | ------ | ----------------
|
|Other operating income |                                   |      |        |                  |        |                 
|                       | Gains on sale of fixed assets     |      | 5,477  |                  | 7,413  |                 
|                       | Rents                             |      | 1,027  |                  | 950    |                 
|                       | Services sold                     |      | 6,664  |                  | 5,801  |                 
|                       | Government grants                 |      | 1,991  |                  | 1,774  |                 
|                       | Proceeds from emission allowances |      | 6,235  |                  | 5,936  |                 
|                       | Others                            |      | 5,657  |                  | 5,757  |                 
|                       |                                   |      |        |                  |        |                 
|                       | Total                             |      | 27,051 |                  | 27,629 |                 
|                       |                                   |      |        |                  |        |                 

Government
grants relate to training, healthcare and R&D costs and to energy subsidies.

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5.     OTHER OPERATING COSTS AND EXPENSES

|                                    |                                      | 2006      |         | 2005 (Unaudited) |         | 2004 (Unaudited) |        
|----------------------------------- | ------------------------------------ | --------- | ------- | ---------------- | ------- | ---------------- | -------
|
|Increase/decrease in finished goods |                                      | (11,517   | )       | (14,590          | )       | (2,304           | )      
|Materials and services              |                                      |           |         |                  |         |                  |        
|                                    | Materials and supplies               |           | 663,207 |                  | 570,643 |                  | 590,891
|                                    | Increase/decrease in inventories     |           | 6,111   |                  | (12,026 | )                | (718   
|                                    | External services                    |           | 172,040 |                  | 84,407  |                  | 79,460 
|                                    |                                      |           |         |                  |         |                  |        
|                                    |                                      | 841,358   |         | 643,024          |         | 669,633          |        
|                                    |                                      |           |         |                  |         |                  |        
|Personnel expenses                  |                                      |           |         |                  |         |                  |        
|Salaries and fees                   |                                      |           |         |                  |         |                  |        
|                                    | Board members' salaries and fees     |           | 219     |                  | 227     |                  | 103    
|                                    | Other salaries                       |           | 59,215  |                  | 48,305  |                  | 50,736 
|                                    |                                      |           |         |                  |         |                  |        
|                                    |                                      | 59,434    |         | 48,532           |         | 50,839           |        
|Other personnel expenses            |                                      |           |         |                  |         |                  |        
|                                    | Pensions                             |           |         |                  |         |                  |        
|                                    | Defined contribution plans           |           | 10,841  |                  | 10,376  |                  | 13,311 
|                                    | Other personnel expenses             |           | 26,418  |                  | 22,650  |                  | 24,272 
|                                    |                                      |           |         |                  |         |                  |        
|                                    |                                      | 37,259    |         | 33,027           |         | 37,583           |        
|Total personnel expenses            |                                      | 96,693    |         | 81,558           |         | 88,422           |        
|Operating expenses                  |                                      |           |         |                  |         |                  |        
|                                    | Rents and lease expenses             |           | 3,559   |                  | 3,121   |                  | 2,955  
|                                    | Other operating expenses             |           | 91,989  |                  | 69,067  |                  | 72,196 
|                                    |                                      |           |         |                  |         |                  |        
|                                    |                                      | 95,549    |         | 72,187           |         | 75,151           |        
|                                    |                                      |           |         |                  |         |                  |        
|Total                               |                                      | 1,022,083 |         | 782,179          |         | 830,902          |        
|                                    |                                      |           |         |                  |         |                  |        
|Directors' salaries and fees        |                                      |           |         |                  |         |                  |        
|                                    | The President and CEO and his deputy |           | 374     |                  | 482     |                  | 328    
|                                    | Directors and deputy directors       |           | 137     |                  | 137     |                  | 103    
|                                    |                                      |           |         |                  |         |                  |        
|                                    |                                      | 511       |         | 619              |         | 431              |        
|                                    |                                      |           |         |                  |         |                  |        

Pension arrangements for board members and Managing Director

The president and CEO of the parent company is entitled to retire on reaching the age of 60.

Other
operating expenses include freight, energy, maintenance and administrative costs.

Research
and development costs were EUR 9.6 million in 2006, EUR 8.2 million and EUR 7.5 million in 2005 and 2004, respectively.

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6.     DEPRECIATION, AMORTISATION AND IMPAIRMENT CHARGES

|                                                         |                               | 2006    |        | 2005 (Unaudited) |         | 2004 (Unaudited)
|-------------------------------------------------------- | ----------------------------- | ------- | ------ | ---------------- | ------- | ----------------
|
|Scheduled depreciation and amortisation                  |                               |         |        |                  |         |                 
|                                                         | Intangible rights             |         | 1,794  |                  | 1,905   |                 
|                                                         | Other capitalised expenditure |         | 958    |                  | 706     |                 
|                                                         | Buildings and structures      |         | 15,237 |                  | 14,404  |                 
|                                                         | Machinery and equipment       |         | 79,868 |                  | 86,402  |                 
|                                                         | Other tangible assets         |         | 1,895  |                  | 3,135   |                 
|                                                         |                               |         |        |                  |         |                 
|                                                         | Total                         |         | 99,752 |                  | 106,552 |                 
|                                                         |                               |         |        |                  |         |                 
|Impairment charges                                       |                               |         |        |                  |         |                 
|                                                         | Goodwill                      |         | 4,012  |                  | 5,655   |                 
|                                                         |                               |         |        |                  |         |                 
|                                                         | Total                         |         | 4,012  |                  | 5,655   |                 
|                                                         |                               |         |        |                  |         |                 
|Depreciation, amortization and impairment changes, total |                               | 103,764 |        | 112,207          |         | 120,480         
|                                                         |                               |         |        |                  |         |                 

7.     FINANCIAL INCOME AND EXPENSES

|                          |  | 2006    |   | 2005 (Unaudited) |   | 2004 (Unaudited) |  
|------------------------- |  | ------- | - | ---------------- | - | ---------------- | -
|
|Interest income           |  | 3,702   |   | 4,268            |   | 4,860            |  
|Interest expenses         |  | (11,120 | ) | (5,811           | ) | (5,833           | )
|Dividend income           |  | 12      |   | 5                |   | 543              |  
|Exchange gains and losses |  | (250    | ) | 3,849            |   | (5,125           | )
|Other financial expenses  |  | (2,544  | ) | (1,659           | ) | (1,302           | )
|                          |  |         |   |                  |   |                  |  
|Total                     |  | (10,199 | ) | 652              |   | (6,856           | )
|                          |  |         |   |                  |   |                  |  

8.     INCOME TAXES

|                                               |  | 2006   |   | 2005 (Unaudited) |   | 2004 (Unaudited) |  
|---------------------------------------------- |  | ------ | - | ---------------- | - | ---------------- | -
|
|Tax on taxable income for the financial period |  | 67,600 |   | 22,172           |   | 37,428           |  
|Taxes for previous financial periods           |  | 341    |   | 246              |   | 29               |  
|Deferred taxes                                 |  | (5,922 | ) | (1,709           | ) | (13,151          | )
|Other taxes                                    |  | 463    |   | 320              |   | 0                |  
|                                               |  |        |   |                  |   |                  |  
|Total                                          |  | 62,482 |   | 21,029           |   | 24,306           |  
|                                               |  |        |   |                  |   |                  |  

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Reconciliation of income statement taxes with local tax rates

|                                                              |  | 2006    |  | 2005 (Unaudited) |   | 2004 (Unaudited) |  
|------------------------------------------------------------- |  | ------- |  | ---------------- | - | ---------------- | -
|
|Result before taxes                                           |  | 202,299 |  | 80,407           |   | 134,617          |  
|Tax computed at Finnish statutory rate                        |  | 52,598  |  | 20,906           |   | 39,039           |  
|Change in tax rate from 29% to 26%                            |  | 0       |  | 0                |   | (13,429          | )
|Tax-free income and non-deductible expenses                   |  | 6,435   |  | (1,053           | ) | (422             | )
|Subsidiary losses, with no recognition of deferred tax assets |  | 3,449   |  | 1,876            |   | 0                |  
|Others                                                        |  | 0       |  | (699             | ) | (882             | )
|Tax shown in consolidated income statement                    |  | 62,482  |  | 21,029           |   | 24,306           |  
|Effective tax rate                                            |  | 30.9    |  | 26.2             |   | 28.0             |  

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9.     INTANGIBLE ASSETS AND TANGIBLE FIXED ASSETS

Goodwill and other intangible assets

|                                         |  | Goodwill |   | Intangible
rights |   | Other
capitalised
expenditure |   | Construction
in progress |   | Total   |  
|---------------------------------------- |  | -------- | - | ----------------- | - | ----------------------------- | - | ------------------------ | - | ------- | -
|
|Acquisition cost at 1 Jan. 2006          |  | 21,583   |   | 19,008            |   | 13,062                        |   | 65                       |   | 53,719  |  
|Translation differences                  |  | (2,335   | ) | (1                | ) | 0                             |   | 0                        |   | (2,335  | )
|Increase                                 |  | 1,536    |   | 10,235            |   | 9                             |   | 13                       |   | 11,792  |  
|Decrease                                 |  | 0        |   | (9,539            | ) | 0                             |   | (3                       | ) | (9,542  | )
|Transfers between items                  |  | 0        |   | 1,961             |   | 91                            |   | 0                        |   | 2,052   |  
|                                         |  |          |   |                   |   |                               |   |                          |   |         |  
|Acquisition cost at 31 Dec. 2006         |  | 20,784   |   | 21,665            |   | 13,162                        |   | 76                       |   | 55,686  |  
|                                         |  |          |   |                   |   |                               |   |                          |   |         |  
|Accumulated amortization at 1 Jan. 2006  |  | (17,709  | ) | (13,808           | ) | (6,083                        | ) | 0                        |   | (37,600 | )
|Amortization for the period              |  | 0        |   | (1,794            | ) | (958                          | ) | 0                        |   | (2,752  | )
|                                         |  |          |   |                   |   |                               |   |                          |   |         |  
|Accumulated amortization at 31 Dec. 2006 |  | (17,709  | ) | (15,601           | ) | (7,041                        | ) | 0                        |   | (40,351 | )
|                                         |  |          |   |                   |   |                               |   |                          |   |         |  
|Carrying value at 1 Jan. 2006            |  | 3,874    |   | 5,200             |   | 6,980                         |   | 65                       |   | 16,118  |  
|Carrying value at 31 Dec. 2006           |  | 3,075    |   | 6,063             |   | 6,122                         |   | 76                       |   | 15,335  |  
|(Unaudited)                              |  |          |   |                   |   |                               |   |                          |   |         |  
|Acquisition cost at 1 Jan. 2005          |  | 15,940   |   | 16,659            |   | 10,118                        |   | 0                        |   | 42,717  |  
|Increase                                 |  | 5,643    |   | 3,876             |   | 1,331                         |   | 65                       |   | 10,916  |  
|Decrease                                 |  | 0        |   | (1,559            | ) | 0                             |   | 0                        |   | (1,559  | )
|Transfers between items                  |  | 0        |   | 31                |   | 1,614                         |   | 0                        |   | 1,644   |  
|                                         |  |          |   |                   |   |                               |   |                          |   |         |  
|Acquisition cost at 31 Dec. 2005         |  | 21,583   |   | 19,008            |   | 13,062                        |   | 65                       |   | 53,719  |  
|                                         |  |          |   |                   |   |                               |   |                          |   |         |  
|Accumulated amortization at 1 Jan. 2005  |  | (12,054  | ) | (11,903           | ) | (5,377                        | ) | 0                        |   | (29,334 | )
|Amortization for the period              |  | 0        |   | (1,905            | ) | (706                          | ) | 0                        |   | (2,611  | )
|Impairment charges                       |  | (5,655   | ) | 0                 |   | 0                             |   | 0                        |   | (5,655  | )
|                                         |  |          |   |                   |   |                               |   |                          |   |         |  
|Accumulated amortization at 31 Dec. 2005 |  | (17,709  | ) | (13,808           | ) | (6,083                        | ) | 0                        |   | (37,600 | )
|                                         |  |          |   |                   |   |                               |   |                          |   |         |  
|Carrying value at 1 Jan. 2005            |  | 3,886    |   | 4,756             |   | 4,741                         |   | 0                        |   | 13,383  |  
|Carrying value at 31 Dec. 2005           |  | 3,874    |   | 5,200             |   | 6,980                         |   | 65                       |   | 16,118  |  

R&D
expenditure is not capitalized in the consoldiated financial statements.

Emission
rights have been recognized in accordance with IFRIC 3, such that emission rights received are measured at cost in the balance sheet as intangible assets and as advances
received that are recognized as revenue in accordance with the use of emission rights.

Intangible
rights in 2006 included EUR 2.5 million in emission rights.

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Tangible assets

|                                                        |  | Land and
water |   | Buildings and
structures |   | Machinery and
equipment |   | Other
tangible
assets |   | Construction
in progress |   | Total      |  
|------------------------------------------------------- |  | -------------- | - | ------------------------ | - | ----------------------- | - | --------------------- | - | ------------------------ | - | ---------- | -
|
|Acquisition cost at 1 Jan. 2006                         |  | 91,764         |   | 372,099                  |   | 1,505,457               |   | 28,739                |   | 155,741                  |   | 2,153,800  |  
|Translation differences                                 |  | (10,778        | ) | (2,066                   | ) | (1,335                  | ) | (20                   | ) | (27,632                  | ) | (41,830    | )
|Increase                                                |  | 58,638         |   | 45,201                   |   | 27,919                  |   | 741                   |   | 419,792                  |   | 552,290    |  
|Decrease                                                |  | (6,816         | ) | (171                     | ) | (1,858                  | ) | (43                   | ) | (47,530                  | ) | (56,419    | )
|Transfers between items                                 |  | 1,062          |   | 14,905                   |   | 6,379                   |   | 0                     |   | (25,740                  | ) | (3,395     | )
|                                                        |  |                |   |                          |   |                         |   |                       |   |                          |   |            |  
|Acquisition cost at 31 Dec. 2006                        |  | 133,869        |   | 429,968                  |   | 1,536,561               |   | 29,417                |   | 474,631                  |   | 2,604,446  |  
|                                                        |  |                |   |                          |   |                         |   |                       |   |                          |   |            |  
|Accumulated depreciation and impairment at 1 Jan. 2006  |  | 0              |   | (136,085                 | ) | (907,451                | ) | (20,678               | ) | 0                        |   | (1,064,215 | )
|Accumulated depreciation on decrease and transfer       |  | 0              |   | (393                     | ) | 565                     |   | 106                   |   | 0                        |   | 277        |  
|Depreciation for the period                             |  | 0              |   | (15,237                  | ) | (79,868                 | ) | (1,895                | ) | 0                        |   | (97,001    | )
|Translation differences                                 |  | (217           | ) | 156                      |   | 494                     |   | 4                     |   | 0                        |   | 438        |  
|                                                        |  |                |   |                          |   |                         |   |                       |   |                          |   |            |  
|Accumulated depreciation and impairment at 31 Dec. 2006 |  | (217           | ) | (151,559                 | ) | (986,260                | ) | (22,464               | ) | 0                        |   | (1,160,500 | )
|                                                        |  |                |   |                          |   |                         |   |                       |   |                          |   |            |  
|Carrying value at 1 Jan. 2006                           |  | 91,764         |   | 236,014                  |   | 598,006                 |   | 8,166                 |   | 155,741                  |   | 1,089,691  |  
|Carrying value at 31 Dec. 2006                          |  | 133,652        |   | 278,409                  |   | 550,301                 |   | 6,953                 |   | 474,631                  |   | 1,443,947  |  
|(Unaudited)                                             |  |                |   |                          |   |                         |   |                       |   |                          |   |            |  
|Acquisition cost at 1 Jan. 2005                         |  | 53,534         |   | 356,335                  |   | 1,490,698               |   | 30,733                |   | 21,531                   |   | 1,952,831  |  
|Translation differences                                 |  | 9,053          |   | 528                      |   | 821                     |   | 190                   |   | 6,994                    |   | 17,586     |  
|Increase                                                |  | 26,832         |   | 5,977                    |   | 24,041                  |   | 750                   |   | 155,823                  |   | 213,422    |  
|Decrease                                                |  | (6             | ) | (269                     | ) | (15,029                 | ) | (2,933                | ) | (10,157                  | ) | (28,395    | )
|Transfers between items                                 |  | 2,351          |   | 9,528                    |   | 4,927                   |   | 0                     |   | (18,451                  | ) | (1,644     | )
|                                                        |  |                |   |                          |   |                         |   |                       |   |                          |   |            |  
|Acquisition cost at 31 Dec. 2005                        |  | 91,764         |   | 372,099                  |   | 1,505,457               |   | 28,739                |   | 155,741                  |   | 2,153,800  |  
|                                                        |  |                |   |                          |   |                         |   |                       |   |                          |   |            |  
|Accumulated depreciation and impairment at 1 Jan. 2005  |  | 0              |   | (121,694                 | ) | (835,413                | ) | (17,542               | ) | 0                        |   | (974,649   | )
|Accumulated depreciation on decrease and transfer       |  | 0              |   | 60                       |   | 14,666                  |   | 106                   |   | 0                        |   | 14,832     |  
|Depreciation for the period                             |  | 0              |   | (14,404                  | ) | (86,402                 | ) | (3,135                | ) | 0                        |   | (103,941   | )
|Translation differences                                 |  | 0              |   | (47                      | ) | (303                    | ) | (1                    | ) | 0                        |   | (351       | )
|                                                        |  |                |   |                          |   |                         |   |                       |   |                          |   |            |  
|Accumulated depreciation and impairment at 31 Dec. 2005 |  | 0              |   | (136,085                 | ) | (907,451                | ) | (20,573               | ) | 0                        |   | (1,064,109 | )
|                                                        |  |                |   |                          |   |                         |   |                       |   |                          |   |            |  
|Carrying value at 1 Jan. 2005                           |  | 53,534         |   | 234,641                  |   | 655,285                 |   | 13,191                |   | 21,531                   |   | 978,182    |  
|Carrying value at 31 Dec. 2005                          |  | 91,764         |   | 236,014                  |   | 598,006                 |   | 8,166                 |   | 155,741                  |   | 1,089,691  |  

F-134

---



The
acquisition cost of tangible fixed assets includes the following assets leased under finance lease arrangements:

|                        |  | Machinery
and equipment |  
|----------------------- |  | ----------------------- | -
|Acquisition cost        |  | 4,786                   |  
|Cumulative depreciation |  | (2,279                  | )
|Carrying value          |  | 2,507                   |  

10.   BIOLOGICAL ASSETS

Biological assets (living trees) were previously entered in the balance sheet at acquisition cost. Under IFRS accounting practice, they are shown at fair value.
Changes in fair value are shown annually in the income statement. The valuation is based on the following assumptions: The Group owns forests in Finland and Uruguay. Forested land is included in land
and water areas under fixed assets.

|                                                     |  | 2006    |   | 2005
(Unaudited) |  
|---------------------------------------------------- |  | ------- | - | ---------------- | -
|
|At 1 Jan.                                            |  | 91,565  |   | 63,511           |  
|Purchases during the financial                       |  | 52,821  |   | 11,120           |  
|Harvested during the period                          |  | (97,834 | ) | (24,028          | )
|Gains and losses arising from changes in fair values |  | 96,919  |   | 31,376           |  
|Translation difference                               |  | (9,125  | ) | 9,585            |  
|                                                     |  |         |   |                  |  
|At 31 Dec.                                           |  | 134,346 |   | 91,565           |  
|                                                     |  |         |   |                  |  

11.   INVESTMENTS IN ASSOCIATES

|                               |  | 2006   |   | 2005
(Unaudited) |  
|------------------------------ |  | ------ | - | ---------------- | -
|
|At 1 Jan.                      |  | 7,310  |   | 4,218            |  
|Share of result for the period |  | (440   | ) | 515              |  
|Dividends received             |  | 31     |   | 0                |  
|Increase                       |  | 696    |   | 2,209            |  
|Decrease                       |  | (34    | ) | (92              | )
|Transfers between items        |  | (3,780 | ) | 0                |  
|Translation differences        |  | (307   | ) | 460              |  
|                               |  |        |   |                  |  
|At 31 Dec.                     |  | 3,475  |   | 7,310            |  
|                               |  |        |   |                  |  

Investments
in associates includes goodwill with a carrying value of EUR 0.1 million at 31 Dec. 2006 (EUR 1.2 million at 31 Dec. 2005).

F-135

---





Principal associated companies

|2006                      |  | Domicile |  | Assets |  | Liabilities |  | Sales  |  | Result |   | Group
holding (%) |   | Value in
balance sheet
|------------------------- |  | -------- |  | ------ |  | ----------- |  | ------ |  | ------ | - | ----------------- | - | ----------------------
|
|Oy Botnia Mill Service Ab |  | Finland  |  | 17,127 |  | 11,402      |  | 62,006 |  | 1,413  |   | 50.2              | % | 595                   
|Kemi Shipping Oy          |  | Finland  |  | 21,314 |  | 19,538      |  | 15,766 |  | (1,149 | ) | 35.0              | % | 194                   
|Mittaportti Oy            |  | Finland  |  | 1,830  |  | 1,485       |  | 11,369 |  | 45     |   | 33.4              | % | 112                   
|Ontur S.A.                |  | Uruguay  |  | 9,445  |  | 3,151       |  | 0      |  | (180   | ) | 40.0              | % | 2,574                 
|                          |  |          |  |        |  |             |  |        |  |        |   |                   |   |                       
|Total                     |  |          |  | 49,716 |  | 35,577      |  | 89,141 |  | 130    |   |                   |   | 3,475                 
|                          |  |          |  |        |  |             |  |        |  |        |   |                   |   |                       

Business transactions with associates

|                  |             | 2006   |       | 2005
(Unaudited) |        | 2004
(Unaudited)
|----------------- | ----------- | ------ | ----- | ---------------- | ------ | ----------------
|
|Sales             |             | 1,708  |       | 942              |        | 1,039           
|Purchases         |             | 55,668 |       | 38,112           |        | 33,141          
|Interest income   |             | 13     |       | 12               |        | 7               
|Interest expenses |             | 15     |       | 0                |        |                 
|Receivables       |             |        |       |                  |        |                 
|                  | Current     |        | 1,408 |                  | 6,389  |                 
|                  | Non-current |        | 0     |                  | 15,432 |                 
|Liabilities       |             |        |       |                  |        |                 
|                  | Current     |        | 6,069 |                  | 7,421  |                 

12.   NON-CURRENT RECEIVABLES

|                                             |                                | 2006  |       | 2005
(Unaudited)
|-------------------------------------------- | ------------------------------ | ----- | ----- | ----------------
|
|Interest-bearing non-current receivables     |                                |       |       |                 
|                                             | From associated companies      |       | 0     |                 
|                                             | From others                    |       | 255   |                 
|                                             |                                |       |       |                 
|                                             |                                | 255   |       | 15,867          
|                                             |                                |       |       |                 
|Non-interest-bearing non-current receivables |                                |       |       |                 
|                                             | Accrued income and prepayments |       | 77    |                 
|                                             | Other receivables              |       | 1,000 |                 
|                                             |                                |       |       |                 
|                                             |                                | 1,077 |       | 0               
|                                             |                                |       |       |                 

F-136

---



13.   DEFERRED TAXES

Reconciliation of deferred tax assets and liabilities in the balance sheet in 2006

|                                           |  | 1 January
2006 |   | In income-
statement |   | Company
acquisitions/
sales |  | Translation
differences |   | Charged in
Shareholders'
equity |  | 31 December
2006 |  
|------------------------------------------ |  | -------------- | - | -------------------- | - | --------------------------- |  | ----------------------- | - | ------------------------------- |  | ---------------- | -
|
|Deferred tax assets in balance sheet       |  |                |   |                      |   |                             |  |                         |   |                                 |  |                  |  
|Other temporary differences                |  | (2,833         | ) | 408                  |   | 0                           |  | (1,816                  | ) | 0                               |  | (4,292           | )
|Deferred tax assets, total                 |  | (2,833         | ) | 408                  |   | 0                           |  | (1,816                  | ) | 0                               |  | (4,292           | )
|Offset against deferred tax liabilities    |  | 2,833          |   | (408                 | ) | 0                           |  | 1,816                   |   |                                 |  | 4,292            |  
|                                           |  |                |   |                      |   |                             |  |                         |   |                                 |  |                  |  
|Deferred tax assets in balance sheet       |  | 0              |   | 0                    |   | 0                           |  | 0                       |   | 0                               |  | 0                |  
|Deferred tax liabilities in balance sheet  |  |                |   |                      |   |                             |  |                         |   |                                 |  |                  |  
|Book over tax deprecation                  |  | 115,244        |   | (4,514               | ) | 0                           |  | 0                       |   | 0                               |  | 110,730          |  
|Deferred tax liabilities, total            |  | 115,244        |   | (4,514               | ) | 0                           |  | 0                       |   | 0                               |  | 110,730          |  
|Tax losses and other temporary differences |  | (2,833         | ) | 408                  |   | 0                           |  | (1,816                  | ) | 0                               |  | (4,292           | )
|                                           |  |                |   |                      |   |                             |  |                         |   |                                 |  |                  |  
|Deferred tax liabilities in balance sheet  |  | 112,360        |   | (4,107               | ) | 0                           |  | (1,816                  | ) | 0                               |  | 106,437          |  
|Deferred tax liabilities, net              |  | 112,360        |   | (4,107               | ) | 0                           |  | (1,816                  | ) | 0                               |  | 106,437          |  
|                                           |  |                |   |                      |   |                             |  |                         |   |                                 |  |                  |  

F-137

---



Reconciliation of deferred tax assets and liabilities in the balance sheet in 2005

|                                           |  | 1 January
2005 |   | In income-
statement |   | Company
acquisitions/
sales |   | Translation
differences |  | Charged in
Shareholders'
equity |  | 31 December
2005 |  
|------------------------------------------ |  | -------------- | - | -------------------- | - | --------------------------- | - | ----------------------- |  | ------------------------------- |  | ---------------- | -
|
|(Unaudited)                                |  |                |   |                      |   |                             |   |                         |  |                                 |  |                  |  
|Deferred tax assets in balance sheet       |  |                |   |                      |   |                             |   |                         |  |                                 |  |                  |  
|Other temporary differences                |  | (3,015         | ) | 121                  |   | 11                          |   | 0                       |  | 0                               |  | (2,833           | )
|Deferred tax assets, total                 |  | (3,015         | ) | 121                  |   | 11                          |   | 0                       |  | 0                               |  | (2,833           | )
|                                           |  |                |   |                      |   |                             |   |                         |  |                                 |  |                  |  
|Offset against deferred tax liabilities    |  | 3,015          |   | (121                 | ) | (11                         | ) | 0                       |  | 0                               |  | 2,833            |  
|                                           |  |                |   |                      |   |                             |   |                         |  |                                 |  |                  |  
|Deferred tax assets in balance sheet       |  | 0              |   | 0                    |   | 0                           |   | 0                       |  | 0                               |  | 0                |  
|                                           |  |                |   |                      |   |                             |   |                         |  |                                 |  |                  |  
|Deferred tax liabilities in balance sheet  |  |                |   |                      |   |                             |   |                         |  |                                 |  |                  |  
|Book over tax deprecation                  |  | 117,073        |   | (1,829               | ) | 0                           |   | 0                       |  | 0                               |  | 115,244          |  
|Deferred tax liabilities, total            |  | 117,073        |   | (1,829               | ) | 0                           |   | 0                       |  | 0                               |  | 115,244          |  
|Tax losses and other temporary differences |  | (3,015         | ) | 121                  |   | 11                          |   | 0                       |  | 0                               |  | (2,833           | )
|                                           |  |                |   |                      |   |                             |   |                         |  |                                 |  |                  |  
|Deferred tax liabilities in balance sheet  |  | 114,058        |   | (1,709               | ) | 11                          |   | 0                       |  | 0                               |  | 112,360          |  
|                                           |  |                |   |                      |   |                             |   |                         |  |                                 |  |                  |  
|Deferred tax liabilities, net              |  | 114,058        |   | (1,709               | ) | 11                          |   | 0                       |  | 0                               |  | 112,360          |  
|                                           |  |                |   |                      |   |                             |   |                         |  |                                 |  |                  |  

14.   INVENTORIES

|                          |  | 2006    |  | 2005
(Unaudited)
|------------------------- |  | ------- |  | ----------------
|
|Inventories               |  |         |  |                 
|Materials and consumables |  | 54,971  |  | 59,286          
|Work in progress          |  | 4,334   |  | 3,315           
|Finished products         |  | 64,418  |  | 52,660          
|Advance payments          |  | 22,515  |  | 40,568          
|                          |  |         |  |                 
|                          |  | 146,238 |  | 155,829         
|                          |  |         |  |                 

The
carrying value of inventories does not include entries in net realization value.

F-138

---



15.   CURRENT RECEIVABLES

|                                                 |                                | 2006    |         | 2005
(Unaudited)
|------------------------------------------------ | ------------------------------ | ------- | ------- | ----------------
|
|Current interest-bearing loan receivables        |                                |         |         |                 
|                                                 | From group companies           |         | 65,652  |                 
|                                                 | From others                    |         | 159     |                 
|                                                 |                                |         |         |                 
|                                                 |                                | 65,811  |         | 24,422          
|                                                 |                                |         |         |                 
|Trade and other non-interest-bearing receivables |                                |         |         |                 
|                                                 | From group companies           |         |         |                 
|                                                 | Accounts receivable            |         | 26,415  |                 
|                                                 | Accrued income and prepayments |         | 632     |                 
|                                                 |                                |         |         |                 
|                                                 |                                | 27,048  |         | 58,034          
|                                                 |                                |         |         |                 
|From associated companies                        |                                |         |         |                 
|                                                 | Accounts receivable            |         | 1,408   |                 
|                                                 |                                |         |         |                 
|                                                 |                                | 1,408   |         | 6,389           
|                                                 |                                |         |         |                 
|From others                                      |                                |         |         |                 
|                                                 | Accounts receivable            |         | 112,866 |                 
|                                                 | Other receivables              |         | 12,058  |                 
|                                                 | Accrued income and prepayments |         | 15,785  |                 
|                                                 |                                |         |         |                 
|                                                 |                                | 140,709 |         | 104,525         
|                                                 |                                |         |         |                 
|Total                                            |                                | 234,976 |         | 193,369         
|                                                 |                                |         |         |                 

There
were no loans receivable from the managing directors of Group companies, their deputies, board members or members of corresponding bodies.

Principal items relating to prepayments and accrued income

|        |            | 2006   |       | 2005
(Unaudited)
|------- | ---------- | ------ | ----- | ----------------
|
|Current |            |        |       |                 
|        | Taxes      |        | 6,518 |                 
|        | Insurances |        | 1,606 |                 
|        | Others     |        | 7,661 |                 
|        |            |        |       |                 
|Total   |            | 15,785 |       | 15,268          
|        |            |        |       |                 

F-139

---



16.   CASH AND CASH EQUIVALENTS

|                                          |  | 2006   |  | 2005
(Unaudited)
|----------------------------------------- |  | ------ |  | ----------------
|
|Investments to be retained until maturity |  | 1,382  |  | 12,293          
|Cash and bank                             |  | 10,506 |  | 58,966          
|                                          |  |        |  |                 
|Total                                     |  | 11,888 |  | 71,259          
|                                          |  |        |  |                 

17.   SHAREHOLDERS' EQUITY

Changes in share capital

|                          |  | Number
of shares |  | Share
capital |  | Share
premium |  | Other
reserves |  | Total  
|------------------------- |  | ---------------- |  | ------------- |  | ------------- |  | -------------- |  | -------
|
|(Unaudited)               |  |                  |  |               |  |               |  |                |  |        
|At 1 Jan. 2004            |  | 89,832           |  | 179,664       |  | 223,771       |  | 223,186        |  | 636,622
|At 31 Dec. 2004           |  | 89,832           |  | 179,664       |  | 223,771       |  | 223,186        |  | 636,622
|(Unaudited)               |  |                  |  |               |  |               |  |                |  |        
|At 1 Jan. 2005            |  | 89,832           |  | 179,664       |  | 233,771       |  | 223,186        |  | 636,622
|Issue                     |  |                  |  |               |  |               |  |                |  |        
|Acquisition of own shares |  |                  |  |               |  |               |  |                |  |        
|At 31 Dec. 2005           |  | 89,832           |  | 179,664       |  | 233,771       |  | 223,186        |  | 636,622
|Issue                     |  |                  |  |               |  |               |  |                |  |        
|Acquisition of own shares |  |                  |  |               |  |               |  |                |  |        
|At 31 Dec. 2006           |  | 89,832           |  | 179,664       |  | 233,771       |  | 223,186        |  | 636,622

|Distributable funds at 31 Dec. |  | 2006    |   | 2005
(Unaudited)
|------------------------------ |  | ------- | - | ----------------
|Retained earnings              |  | 109,340 |   | 77,891          
|Net profit for the period      |  | 147,998 |   | 58,223          
|Translation differences        |  | (24,485 | ) | 5,823           
|                               |  |         |   |                 
|Distributable funds            |  | 232,854 |   | 141,936         
|                               |  |         |   |                 

18.   RETIREMENT BENEFIT OBLIGATIONS

The principal pension plan in Finland is the statutory pension employment scheme (TEL), under which benefits are directly linked to the employee's earnings. Under
the TEL scheme disability benefits are treated entirely on the basis of contributions.

F-140

---



Pensions and other post-employment benefit provisions

|                                  |  | 2006  |  | 2005
(Unaudited)
|--------------------------------- |  | ----- |  | ----------------
|
|Defined benefit pension plans     |  | 897   |  | 1,027           
|Other long-term employee benefits |  | 1,729 |  | 2,401           
|                                  |  |       |  |                 
|Total liability                   |  | 2,626 |  | 3,428           
|                                  |  |       |  |                 

DEFINED BENEFIT PLANS

Pension commitments in balance sheet

|                                          |  | 2006 |  | 2005
(Unaudited)
|----------------------------------------- |  | ---- |  | ----------------
|
|Present value of funded obligations       |  | 815  |  | 968             
|Unrecognized actuarial profits and losses |  | 82   |  | 59              
|                                          |  |      |  |                 
|Total liability in balance sheet          |  | 897  |  | 1,027           
|                                          |  |      |  |                 

Pension commitments in income statement

|                                           |  | 2006 |   | 2005
(Unaudited) |  
|------------------------------------------ |  | ---- | - | ---------------- | -
|
|Current service cost                       |  | (100 | ) | (131             | )
|Interest                                   |  | (30  | ) | 49               |  
|                                           |  |      |   |                  |  
|Total is included in other operating costs |  | (130 | ) | (82              | )
|                                           |  |      |   |                  |  

Balance sheet reconciliation

|                                            |  | 2006  |   | 2005
(Unaudited) |  
|------------------------------------------- |  | ----- | - | ---------------- | -
|
|Net obligation at 1 Jan.                    |  | 1,027 |   | 1,108            |  
|Net expenses recognized in income statement |  | (130  | ) | (82              | )
|                                            |  |       |   |                  |  
|Net liability at 31 Dec.                    |  | 897   |   | 1,027            |  
|                                            |  |       |   |                  |  

Actuarial assumptions used:

|                           |  | 2006 |  | 2005
(Unaudited)
|-------------------------- |  | ---- |  | ----------------
|
|Discount rate, %           |  | 4.25 |  | 4.5             
|Future salary increases, % |  | 2.1  |  | 2.1             

F-141

---





19.   PROVISIONS

|                      |  | Provisions for
environmental liabilities |  | Provisions for
pensions |  | Provisions
in total
|--------------------- |  | ---------------------------------------- |  | ----------------------- |  | -------------------
|
|1 January 2006        |  | 1,359                                    |  | 3,428                   |  | 4,787              
|Additional provisions |  | 367                                      |  | 144                     |  | 511                
|Provisions used       |  | 0                                        |  | 946                     |  | 946                
|                      |  |                                          |  |                         |  |                    
|31 December 2006      |  | 1,726                                    |  | 2,626                   |  | 4,352              
|                      |  |                                          |  |                         |  |                    

Environmental
obligations includes landfill site costs EUR 1.7 million.

20.   INTEREST-BEARING LIABILITIES

Interest-bearing liabilities

|                                         |  | 2006    |  | 2005
(Unaudited)
|---------------------------------------- |  | ------- |  | ----------------
|
|Non-current interest-bearing liabilities |  |         |  |                 
|Loans from financial institutions        |  | 278,024 |  | 134,431         
|Finance lease liabilities                |  | 1,983   |  | 2,673           
|Other liabilities                        |  | 5,606   |  | 11,240          
|                                         |  |         |  |                 
|Total                                    |  | 285,612 |  | 148,344         
|                                         |  |         |  |                 
|Current interest-bearing liabilities     |  |         |  |                 
|Current portion of long-term liabilities |  | 21,661  |  | 3,881           
|Other liabilities                        |  | 39,171  |  | 34,129          
|                                         |  |         |  |                 
|Total                                    |  | 60,832  |  | 38,010          
|                                         |  |         |  |                 
|Interest-bearing liabilities, total      |  | 346,444 |  | 186,354         
|                                         |  |         |  |                 

Net interest-bearing liabilities

|                                                        |  | 2006    |  | 2005
(Unaudited)
|------------------------------------------------------- |  | ------- |  | ----------------
|
|Non-current interest-bearing liabilities                |  | 285,612 |  | 148,344         
|Current interest-bearing liabilities                    |  | 60,832  |  | 38,010          
|Cash, cash equivalents and interest-bearing receivables |  | 77,954  |  | 111,547         
|                                                        |  |         |  |                 
|Interest-bearing net liabilities, total                 |  | 268,490 |  | 74,807          
|                                                        |  |         |  |                 

F-142

---



Maturation of long-term interest-bearing liabilities

|                                         |  | Loans from
financial institutions |  | Finance lease
liabilities |  | Other
loans |  | Total  
|---------------------------------------- |  | --------------------------------- |  | ------------------------- |  | ----------- |  | -------
|2007                                     |  | 18,167                            |  | 690                       |  | 2,803       |  | 21,661 
|2008                                     |  | 166,799                           |  | 718                       |  | 2,803       |  | 170,320
|2009                                     |  | 17,502                            |  | 747                       |  | 2,803       |  | 21,051 
|2010                                     |  | 17,502                            |  | 518                       |  | 0           |  | 18,019 
|2011                                    |  | 76,222                            |  | 0                         |  | 0           |  | 76,222 
|                                         |  |                                   |  |                           |  |             |  |        
|Total                                    |  | 296,191                           |  | 2,673                     |  | 8,409       |  | 307,273
|                                         |  |                                   |  |                           |  |             |  |        
|Current portion of long-term liabilities |  |                                   |  |                           |  |             |  | 21,661 
|Non-current interest-bearing liabilities |  |                                   |  |                           |  |             |  | 285,612

Maturation of finance lease liabilities

|                                        |  | 2006  |  | 2005
(Unaudited)
|--------------------------------------- |  | ----- |  | ----------------
|
|Minimum lease payments                  |  |       |  |                 
|Under 1 year                            |  | 797   |  | 797             
|12 years                               |  | 797   |  | 797             
|23 years                               |  | 797   |  | 797             
|34 years                               |  | 532   |  | 797             
|45 years                               |  | 0     |  | 532             
|                                        |  |       |  |                 
|                                        |  | 2,924 |  | 3,721           
|                                        |  |       |  |                 
|Future finance charges                  |  | 251   |  | 384             
|Finance lease liabilities present value |  | 2,673 |  | 3,337           
|Present value of minimum                |  |       |  |                 
|Under 1 year                            |  | 690   |  | 664             
|12 years                               |  | 718   |  | 690             
|23 years                               |  | 747   |  | 718             
|34 years                               |  | 518   |  | 747             
|45 years                               |  | 0     |  | 518             
|                                        |  |       |  |                 
|                                        |  | 2,673 |  | 3,337           
|                                        |  |       |  |                 

---

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21.    OTHER NON-CURRENT NON-INTEREST-BEARING LIABILITIES

|                                                          |                                                    | 2006   |       | 2005
(Unaudited)
|--------------------------------------------------------- | -------------------------------------------------- | ------ | ----- | ----------------
|
|Payables to Group companies                               |                                                    |        |       |                 
|                                                          | Other non-current non-interest-bearing liabilities |        | 1,833 |                 
|Other liabilities                                         |                                                    |        |       |                 
|                                                          | Other non-current non-interest-bearing liabilities |        | 327   |                 
|                                                          | Accrued expenses and deferred income               |        | 9,900 |                 
|                                                          |                                                    |        |       |                 
|                                                          |                                                    | 10,227 |       | 11,571          
|                                                          |                                                    |        |       |                 
|Other non-current non-interest-bearing liabilities, total |                                                    | 12,060 |       | 13,404          
|                                                          |                                                    |        |       |                 

22.    ACCOUNT PAYABLES AND OTHER NON-INTEREST-BEARING LIABILITIES

|                                                |                                      | 2006    |        | 2005
(Unaudited)
|----------------------------------------------- | ------------------------------------ | ------- | ------ | ----------------
|
|Payables to Group companies                     |                                      |         |        |                 
|                                                | Accounts payable                     |         | 14,093 |                 
|                                                | Accrued expenses and deferred income |         | 20,389 |                 
|                                                |                                      |         |        |                 
|                                                |                                      | 34,482  |        | 71,200          
|                                                |                                      |         |        |                 
|Liabilities to associated companies             |                                      |         |        |                 
|                                                | Accounts payable                     |         | 0      |                 
|                                                | Other liabilities                    |         | 5,539  |                 
|                                                | Accrued expenses and deferred income |         | 512    |                 
|                                                |                                      |         |        |                 
|                                                |                                      | 6,051   |        | 7,421           
|                                                |                                      |         |        |                 
|Other liabilities                               |                                      |         |        |                 
|                                                | Advance payments received            |         | 1,230  |                 
|                                                | Accounts payable                     |         | 95,781 |                 
|                                                | Other liabilities                    |         | 4,715  |                 
|                                                | Accrued expenses and deferred income |         | 72,237 |                 
|                                                |                                      |         |        |                 
|                                                |                                      | 173,963 |        | 72,155          
|                                                |                                      |         |        |                 
|Current non-interest-bearing liabilities, total |                                      | 214,496 |        | 150,776         
|                                                |                                      |         |        |                 

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23.    ACCRUED EXPENSES AND DEFERRED INCOME

|        |                               | 2006   |        | 2005
(Unaudited)
|------- | ----------------------------- | ------ | ------ | ----------------
|
|Current |                               |        |        |                 
|        | Salary and personnel expenses |        | 22,188 |                 
|        | Interest                      |        | 2,146  |                 
|        | Purchases                     |        | 8,820  |                 
|        | Taxes                         |        | 34,147 |                 
|        | Others                        |        | 4,936  |                 
|        |                               |        |        |                 
|Total   |                               | 72,237 |        | 36,402          
|        |                               |        |        |                 

24.    DERIVATIVE INSTRUMENTS

|                                                              |  |        |   | Fair value |  
|------------------------------------------------------------- |  | ------ | - | ---------- | -
|
|
|Forward foreign exchange contracts                            |  | 37,967 |   | (155       | )
|Foreign exchange derivatives, total                           |  | 37,967 |   | (155       | )
|                                                              |  |        |   |            |  
|Derivative instruments, total                                 |  | 37,967 |   | (155       | )
|                                                              |  |        |   |            |  
|Derivative financial instruments assets in balance sheet      |  | 0      |   |            |  
|Derivative financial instruments liabilities in balance sheet |  | (155   | ) |            |  

|                                                              |  |         |  | Fair value
|------------------------------------------------------------- |  | ------- |  | ----------
|
|
|(Unaudited)                                                   |  |         |  |           
|Forward foreign exchange contracts                            |  | 584,721 |  | 50        
|Foreign exchange derivatives, total                           |  | 584,721 |  | 50        
|Forward pulp contracts                                        |  | 9,833   |  | 372       
|                                                              |  |         |  |           
|Commodity derivatives, total                                  |  | 9,833   |  | 372       
|                                                              |  |         |  |           
|Derivative instruments, total                                 |  | 594,554 |  | 422       
|                                                              |  |         |  |           
|Derivative financial instruments assets in balance sheet      |  | 422     |  |           
|Derivative financial instruments liabilities in balance sheet |  | 0       |  |           

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25.    SUBSIDIARITIES AND ASSOCIATED COMPANIES

|                          |                           | Country |                 | Group holding, % |       | Number of shares
|------------------------- | ------------------------- | ------- | --------------- | ---------------- | ----- | ----------------
|Subsidiary company shares |                           |         |                 |                  |       |                 
|Finnish                   |                           |         |                 |                  |       |                 
|                          | Oy Silva Shipping Ab      |         | Finland         |                  | 100.0 |                 
|                          | Metsä-Botnia Metsät Oy    |         | Finland         |                  | 100.0 |                 
|                          | Asunto Oy Puistokatu 15   |         | Finland         |                  | 100.0 |                 
|Foreign                   |                           |         |                 |                  |       |                 
|                          | Botnia Pulps GmbH         |         | Germany         |                  | 100.0 |                 
|                          | Botnia Pulps SA           |         | France          |                  | 99.9  |                 
|                          | Botnia BV                 |         | The Netherlands |                  | 100.0 |                 
|                          | Forestal Oriental S.A.    |         | Uruguay         |                  | 82.1  |                 
|                          | Botnia S.A.               |         | Uruguay         |                  | 78.0  |                 
|                          | Botnia Fray Bentos S.A.   |         | Uruguay         |                  | 82.1  |                 
|                          | Botnia South America S.A. |         | Uruguay         |                  | 82.1  |                 
|                          | Tile Forestal S.A.        |         | Uruguay         |                  | 82.1  |                 
|                          | Uruwood S.A.              |         | Uruguay         |                  | 65.7  |                 
|                          | Premeland S.A.            |         | Uruguay         |                  | 82.1  |                 
|                          | Teromill S.A.             |         | Uruguay         |                  | 82.1  |                 
|                          | Uninor S.A.               |         | Uruguay         |                  | 82.1  |                 
|                          | Valafir S.A.              |         | Uruguay         |                  | 82.1  |                 
|                          | OOO Svir Timber           |         | Russia          |                  | 100.0 |                 
|                          | Baltic Pulp AS            |         | Latvia          |                  | 67.0  |                 
|Associated companies      |                           |         |                 |                  |       |                 
|                          | Oy Botnia Mill Service Ab |         | Finland         |                  | 50.2  |                 
|                          | Kemi Shipping Oy          |         | Finland         |                  | 35.0  |                 
|                          | Mittaportti Oy            |         | Finland         |                  | 33.4  |                 
|                          | Ontur S.A.                |         | Uruguay         |                  | 40.0  |                 

Botnia
South America S.A. has a conditional purchase option for all actual shares of Botnia S.A. (Put Optio).

Oy
Metsä-Botnia Ab has proposed to the Latvian government that the jointly owned pulp mill project will be discontinued and the shares of Baltic Pulps AS owned by Oy
Metsä-Botnia Ab are for sale.

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26.    COMMITMENTS AND CONTINGENCIES

|                                  |                                          | 2006                              |        | 2005
(Unaudited)
|--------------------------------- | ---------------------------------------- | --------------------------------- | ------ | ----------------
|
|For own liabilities               |                                          |                                   |        |                 
|                                  | Debts secured against property mortgages |                                   |        |                 
|                                  |                                          | Loans from financial institutions |        | 253,179         
|                                  |                                          | Other liabilities                 |        | 9,909           
|                                  | Property mortgages                       |                                   | 67,275 |                 
|On behalf of Group companies      |                                          |                                   |        |                 
|                                  | Guarantee commitments                    |                                   | 3,528  |                 
|On behalf of associated companies |                                          |                                   |        |                 
|                                  | Guarantee commitments                    |                                   | 2,995  |                 
|Other commitments                 |                                          |                                   |        |                 
|                                  | Collateral for own commitments           |                                   | 224    |                 
|                                  | Collateral for others' commitments       |                                   | 3      |                 
|Leasing commitments               |                                          |                                   |        |                 
|                                  | Under 1 year                             |                                   | 1,189  |                 
|                                  | 15 years                                |                                   | 2,533  |                 
|                                  |                                          |                                   |        |                 
|Total                             |                                          | 3,723                             |        | 4,693           
|Mortgages                         |                                          | 67,275                            |        | 67,275          
|Guarantees                        |                                          | 6,523                             |        | 6,145           
|Other commitments                 |                                          | 227                               |        | 130             
|Leasing commitments               |                                          | 3,723                             |        | 4,693           
|                                  |                                          |                                   |        |                 
|Total                             |                                          | 77,748                            |        | 78,243          
|                                  |                                          |                                   |        |                 

Purchase commitments

|                                                          |  | 2006    |  | 2005
(Unaudited)
|--------------------------------------------------------- |  | ------- |  | ----------------
|
|Purchase agreements, fixed assets, payments due in a year |  | 353,172 |  | 496,108         
|Purchase agreements, fixed assets, due later              |  | 30,372  |  | 54,900          
|Purchase agreements, others, payments due in a year       |  | 5,581   |  | 0               
|Purchase agreements, others, fixed assets, due later      |  | 168,299 |  | 0               

27.    TRANSACTIONS WITH RELATED PARTIES

Metsä-Botnia is part of the Finnish Metsäliitto Group. Oy Metsä-Botnia Ab's owners are M-real Corporation
(39%), Metsäliitto Cooperative (14%) and UPM-Kymmene Corporation (47%). Metsä-Botnia has sold 63% of its pulp to the companies of the M-real and UPM groups.
Metsä-Botnia procures its wood raw material from Metsäliitto Cooperative, the Metsäliitto Group's parent company.

F-147

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Transactions with the owners

|                       |             | 2006    |         | 2005
(Unaudited)
|---------------------- | ----------- | ------- | ------- | ----------------
|
|Sales                  |             | 776,210 |         | 663,828         
|Other operating income |             | 8,411   |         | 6,409           
|Purchases              |             | 498,837 |         | 462,377         
|Interest income        |             | 1,340   |         | 3,158           
|Interest expenses      |             | 409     |         | 482             
|Receivables            |             |         |         |                 
|                       | Current     |         | 108,603 |                 
|Liabilities            |             |         |         |                 
|                       | Non-current |         | 9,090   |                 
|                       | Current     |         | 38,643  |                 

Receivables
from Botnia's owners do not include doubtful receivables, and no credit losses have been booked in respect of these during the financial period.

No
receivables are outstanding from the company's directors, and no commitments have been made on their behalf. For transactions with associated companies see Note 11.

28.   COMPENSATION WITH SHARES

Oy Metsä-Botnia Ab has a share-based incentive system where the compensation is based on the value of the share. The system offers a possibility
for the target group to receive a compensation which consists of Category B shares of M-real Corporation and shares of UPM-Kymmene Corporation. The period consists of two one
calendar year long earning periods, with the compensation coming into effect if pre-defined goals are met for each period. The earning periods are calendar years 2006 and 2007. After the
earning period is over, the compensation is paid as a combination of shares and cash.

The
Board of Directors decides annually who in the directors will be included in the target group and what their maximum compensation will be. The maximum compensation is expressed as
number of shares. The success in meeting the goals during the earning period defines how large percentage of the maximum compensation is paid to the directors. The goals are set by the Board of
Directors at the beginning of each earning period. The compensation is tied to the development of Botnia's operating profit (EBIT) and

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return
on capital employed. The fair value of share compensations awarded during the reporting period was EUR 0.6 million. The effect on Botnia's result during the reporting period was EUR
0.1 million.

|Date of issue 28 February 2006
Instrument                |                         | Share compensation
system 2006 |      
|-------------------------------------------------------- | ----------------------- | ------------------------------ | -----
|Share price at the start of the compensation system, EUR |                         |                                |      
|                                                         | M-real Corporation      |                                | 4.21 
|                                                         | UPM-Kymmene Corporation |                                | 17.80
|Share price at the end of the earning period, EUR        |                         |                                |      
|                                                         | M-real Corporation      |                                | 4.79 
|                                                         | UPM-Kymmene Corporation |                                | 19.12
|Earning period                                           |                         | 1.1.31.12.06                  |      
|Criteria                                                 |                         |                                |      
|50% weight                                               |                         | EBIT                           |      
|50% weight                                               |                         | ROCE                           |      
|Realisation/realisation estimate                         |                         | 50                             | %    
|Obligation to own shares, years                          |                         | 2                              |      
|Release date of shares                                   |                         | 1.1.2009                       |      
|Remaining commitment time, years                         |                         | 2                              |      

The
amounts of share compensations shown in the table describe the number of shares awarded by the share compensation system. In addition, the company has committed to pay at least 1,5
the value of the shares in cash (tax portion).

29.   ENVIRONMENTAL ISSUES

Income statement

|                          |                          | 2006   |     | 2005
(Unaudited) |     | 2004
(Unaudited)
|------------------------- | ------------------------ | ------ | --- | ---------------- | --- | ----------------
|
|Other operating income    |                          | 585    |     | 610              |     | 1,900           
|Materials and consumables |                          | 5,355  |     | 4,976            |     | 5,370           
|Personnel expenses        |                          |        |     |                  |     |                 
|                          | Salaries and fees        |        | 773 |                  | 571 |                 
|                          | Other personnel expenses |        | 440 |                  | 384 |                 
|Depreciation              |                          | 5,593  |     | 5,586            |     | 5,563           
|Other operating expenses  |                          | 864    |     | 784              |     | 867             
|                          |                          |        |     |                  |     |                 
|Total                     |                          | 12,439 |     | 11,690           |     | 11,016          
|                          |                          |        |     |                  |     |                 

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Balance sheet

|                          |                                    | 2006   |         | 2005
(Unaudited) |        
|------------------------- | ---------------------------------- | ------ | ------- | ---------------- | -------
|
|Tangible assets           |                                    |        |         |                  |        
|                          | Acquisition cost at 1 Jan.         |        | 83,562  |                  | 82,551 
|                          | Increase (+)                       |        | 1,597   |                  | 1,010  
|                          | Decrease ()                       |        | 0       |                  | 0      
|                          | Accumulated depreciation 31.12.(-) |        | (40,423 | )                | (34,836
|                          |                                    |        |         |                  |        
|Carrying value at 31 Dec. |                                    | 44,736 |         | 48,726           |        
|                          |                                    |        |         |                  |        

|           |                                          | 2006 |       | 2005
(Unaudited)
|---------- | ---------------------------------------- | ---- | ----- | ----------------
|
|Provisions |                                          |      |       |                 
|           | Provisions for environmental liabilities |      | 1,726 |                 

Emissions trading

|                                     |  | 2006  |  | 2005
(Unaudited)
|------------------------------------ |  | ----- |  | ----------------
|Emission rights (1,000 tons)         |  | 76    |  | 12              
|Actual emissions (1,000 tons)        |  | 304   |  | 281             
|Sales of emission rights (EUR 1,000) |  | 2,214 |  | 3,707           

30.   SUMMARY OF DIFFERENCES BETWEEN IFRS AND U.S. GAAP

(a)   Forest Assets

Under IFRS, biological assets (i.e., living trees) are measured at their fair value, less estimated point-of-sale costs, on the balance
sheet. The fair value of biological assets, other than young seedling stands, is based on discounted cash flows from continuous operations. The fair value of young seedling stands is based on the
actual reforestation cost of those stands. Changes in the value of biological assets result from growth, felling, prices, discount rate, costs and other assumption changes. The land on which the trees
grow is recorded at cost.

Under
U.S. GAAP, forest assets are accounted for as long lived assets under FAS 144, and are carried at cost less depletions. Cost includes all expenditures incurred on
acquisition of the forests plus reforestation and forestry development costs. Capitalized costs related to forest assets harvested each year are taken to the profit and loss account as depletions.

(b)   Pensions

Following changes in the Finnish TEL scheme, under IFRS, the disability pensions arranged with insurance companies have changed from a defined benefit to a
defined contribution plan beginning from January 1, 2006 as the insurance premiums paid to insurance companies are the funding mechanism for the liability. IFRS provides that the use of
insurance premiums to fund benefits should be accounted for using

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defined
contribution accounting so long as the company retains no ongoing legal or constructive obligations, under any circumstances.

U.S.
GAAP does not contain a similar provision to IFRS regarding insurance premiums. The costs and benefit are determined without regard to how an employer finances the plan. Therefore,
defined benefit accounting is applied under U.S. GAAP.

(c)   Revaluations

According to IFRS 1,First-time Adoption of International Financial Reporting Standards, an entity may
elect to use a previous GAAP revaluation at or before the date of transition to IFRS as deemed cost for an item of property, plant and equipment.

U.S.
GAAP generally does not allow such revaluations except in certain respects involving business combinations.

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