**Exhibit13.3**

 

**The following** ismanagement’s discussion and analysis (“MD&A”) of the operating results andthe financial position of Cascades inc. (“Cascades” or “the Company”),which should be read in conjunction with the Company’s consolidated financial statementsand accompanying notes for the years ended December 31, 2007 and2006, and with the most recent audited consolidated financial statements.Information contained herein includes any significant developments as at March 14,2008, the date on which the MD&A was approved by the Company’s board ofdirectors. For additional information, readers are referred to the Company’sannual information form (“AIF”), which is published separately. Additionalinformation relating to the company is also available on SEDAR atwww.sedar.com.

 

This MD&A is intended to provide readerswith the information that management believes is required to gain an understandingof Cascades’ current results and to assess the Company’s future prospects.Accordingly, certain statements herein, including statements regarding futureresults and performance, are forward-looking statements within the meaning ofsecurities legislation based on current expectations. The accuracy of suchstatements is subject to a number of risks, uncertainties and assumptions thatmay cause actual results to differ materially from those projected, including,but not limited to, the effect of general economic conditions, decreases in demandfor the Company’s products, increases in the cost of raw materials, changes inthe relative values of certain currencies, fluctuations in selling prices andadverse changes in general market and industry conditions. This MD&A alsoincludes price indices as well as variance and sensitivity analyses that areintended to provide the reader with a better understanding of the trendsrelated to our business activities. These items are based on the bestestimates available to the Company.

 

The financial information contained herein,including tabular amounts, is expressed in Canadian dollars unless otherwisespecified, and is prepared in accordance with generally accepted accountingprinciples in Canada (Canadian GAAP). Unless otherwise indicated or if requiredby the context, the terms “we,” “our” and “us” refer to Cascades Inc. and allof its subsidiaries and joint ventures. The financial information included inthis analysis also contains certain data that are not measures of performanceunder Canadian GAAP (“non-GAAP measures”). For example, the Company usesoperating income before depreciation and amortization (OIBD) because it is themeasure used by management to assess the operating and financial performance ofthe Company’s operating segments. Such information is reconciled to the mostdirectly comparable financial measures, as set forth in the “SupplementalInformation on non-GAAP measures” section.

 

1

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Overviewof Cascades’ markets

 
| **Segments**                  | ** ** | **Region**        | ** ** | **Main  Manufacturing Markets/Products**                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Capacity(1)**                                                                                | ** ** | **Main  Converted   Markets/Products**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Key  Market Characteristics**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-------------------------------|------------|-------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **PACKAGING**                 | ** ** | ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **                                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Boxboard**                  | ** ** | **North America** |       | **Virgin  boxboard**

·     Solid bleached sulphate board (SBS)  

·     Solid unbleached sulphate  board (SUS) 

·     Coated natural kraft (CNK) 

**Recycled boxboard**

·     Coated recycled boxboard (CRB) 

·     Uncoated recycled boxboard (URB)                                                                                                           | ** ** | **Virgin** SBS 5.9 SUS & CNK 2.5 **Recycled**  CRB: 2.3 URB: 5.0                      |       | **Virgin boxboard grades and CRB**

·     General folding cartons 

·     Food and beverage packaging 

·     Cosmetics and pharmaceuticals packaging 

·     Quick-service restaurant packaging 

·     Food and beverage packaging 

·     Cup stocks 

**Uncoated recycled boxboard**

·     Industrial packaging 

·     Tubes, cores, cans and drums                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | ·     Healthier manufacturing  supply & demand balance following major capacity closures  in SBS and CRB markets in 2005-2006 

·     Strong export market for the virgin  grades 

·     Strong industry leaders in each manufacturing sub-category  (products) 

·     Overcapacity in the folding carton converting industry  

·     Folding cartons competing for market  shares with plastic packaging                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **                    | ** ** | **Europe**        |       | **Virgin boxboard**

·     Coated duplex (GC) 

·     Liquid packaging board (LPB) 

·     Solid unbleached sulphate  board (SUS) 

·     Solid bleached sulphate board (SBS)  

**Recycled boxboard**

·     White-lined chipboard duplex (GD) 

·     White-lined chipboard triplex (GT) 

·     Grayboard (GK) | ** ** | **Virgin** 2.8 **Recycled** 3.6  (excluding Grayboard)                                         |       | **Virgin boxboard grades and  White-lined chipboard**

·     Folding carton 

·     Food and liquid packaging 

·     Cup, plate, dish and tray stocks 

·     Cosmetics and pharmaceuticals packaging 

·     Cigarette packaging 

**Grayboard**

·     Industrial packaging 

·     Tubes, cores, cans and drums                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | ·     Competitive recycled boxboard market due  to diminishing overseas exports 

·     Pressure from imports due to the strong  euro 

·     Growing consumption in Eastern countries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **                    | ** ** | ** **        |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **                                                                                     |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Containerboard (Norampac)** | ** ** | **North America** |       | **Virgin board**

·     Unbleached kraft linerboard 

·     Semichemical medium 

·     White-top linerboard 

**Recycled board**

·     Recycled linerboard 

·     Recycled medium                                                                                                                                                                                          | ** ** | **Linerboard (virgin & recycled)** 25.8 **Medium  (virgin & recycled)** 10.5 |       | **Corrugated boxes**

·     Food packaging, beverage and agricultural products  packaging 

·     Paper products packaging 

·     Petroleum and derivative products  packaging                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | ·     Healthier manufacturing  supply & demand balance following major capacity closures  in 2005-2006 

·     Strong export market for virgin linerboard  

·     Overcapacity in the corrugated box  converting industry 

·     Packaging of non-durable goods represents  around 80% of final demand                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **                    | ** ** | **Europe**        |       | **Virgin  board**

·     Bleached and Unbleached kraftliner 

·     Semichemical (SC) fluting 

·     White-top liner 

**Recycled  board**

·     Testliner (1-4) 

·     Recycled fluting                                                                                                                                                                              | ** ** | **Containerboard** 30.0                                                                        |       | **Corrugated boxes**

·     Food packaging, beverage and agricultural products  packaging 

·     Paper products packaging 

·     Petroleum and derivative products  packaging                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | ·     Healthier manufacturing  supply & demand balance following major capacity closures  in 2006 

·     More independent producers than  in North America 

·     Pressure from North American imports  of virgin linerboard                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **                    | ** ** | ** **        |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                           |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Specialty products**        | ** ** | **North America** |       | **Industrial packaging**

·     Uncoated board for industrial  and papermill packaging 

**Specialty papers**

·     Fine papers 

·     Kraft paper 

·     Backing for vinyl flooring 

·     De-inked pulp 

**Consumer product packaging**

·     Moulded pulp 

·     Plastic products                            |       | N/A                                                                                            |       | **Industrial Packaging**

·     Papermill packaging (Roll headers and  wrappers) 

·     Honeycomb packaging products 

·     Laminated boards 

**Specialty papers**

·     Fine papers 

·     Copy paper 

·     Envelopes and security paper 

·     Kraft paper 

·     Butcher paper and envelopes 

·     Grease resistant paper 

**Consumer product packaging**

·     Moulded pulp products 

·     Cup trays 

·     Filler flats 

·     Plastic products 

·     Packaging for food industry (meat trays,  translucent containers, foam plates and bowls) 

·     Outdoor furnitures (deck board,  benches and tables) |       | **Industrial packaging**

·     Papermill packaging 

·     Consolidating mature market 

·     Honeycomb packaging products 

·     Growing demand 

**Specialty papers**

·     Fine papers 

·     Growing demand for recycled and  niche products 

·     Kraft paper 

·     Growing demand for recycled paper and  gaining market shares over plastic bags 

·     De-inked pulp

·     Growing demand and consolidated market 

**Consumer product packaging**

·     Moulded pulp products 

·     Overcapacity but growing demand 

·     Plastic products: packaging for food  industry 

·     Overcapacity but growing demand  for bio-compostable products |
| ** **                    | ** ** | ** **        |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                           |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **TISSUE PAPERS**             | ** ** | ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **                                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                          | ** ** | **North America** |       | Retail market  Away-from-home market (AfH) Parent Rolls                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Tissue papers** 9.2                                                                          |       | ·     Bath tissue 

·     Paper towels 

·     Paper hand towels 

·     Facial tissue 

·     Napkins                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | ·     Balanced supply & demand 

·     Growing demand with population growth 

·     Strong industry leaders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

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| Sources: RISI (Paper Packaging Monitor,  European Paper Packaging Monitor, World Tissue Capacity Report 2007). |
|----------------------------------------------------------------------------------------------------------------|
| (1) 2007 Manufacturing capacity in millions  short tons.                                                       |

 

2

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Cascades’position in its markets(1)

 
| **Segments**                  | ** ** | **Region**        | ** ** | **Type of operations**           | ** ** | **Main Markets /Products**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **Number   of Units (2)** | ** ** | **Capacity (3)**                                                                                                               | ** ** | **Position of Cascades in its Markets (4)**                                                                                                                                                                         |
|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **PACKAGING**                 | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | ** **                | ** ** | ** **                                                                                                                     | ** ** | ** **                                                                                                                                                                                                          |
| **Boxboard**                  | ** ** | **North America** | ** ** | **Manufacturing**                |       | ·     Coated recycled boxboard (CRB)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 4                         |       | 590                                                                                                                            |       | 2nd largest producer of (CRB)  in North America                                                                                                                                                           |
|                          | ** ** | ** **        |       | **Converting**                   |       | ·     General folding cartons 

·     Quick-service restaurant packaging  (Dopaco)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 11 (5)                    |       | 479                                                                                                                            |       | No. 1 in Quick Service Restaurant (QSR)  in North America                                                                                                                                                 |
|                          | ** ** | ** **        |       | **Others**                       |       | ·     Pulpmill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 1  (6)               |       | 90                                                                                                                             |       | N/A                                                                                                                                                                                                                 |
|                          | ** ** | **Europe**        | ** ** | **Manufacturing**                |       | ·     Coated virgin boxboard (GC)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 2 (7)                     |       | 209 (7)                                                                                                                        |       | 5th in  virgin boxboard                                                                                                                                                                                        |
| **Containerboard (Norampac)** | ** ** | **North America** | ** ** | **Manufacturing**                |       | ·     Virgin and recycled linerboard and  corrugating medium 

·     White-top linerboard 

·     Gypsum paper                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 6                         |       | 1,129                                                                                                                          |       | One of two leading producers in Canada 7th largest  containerboard producer in North America                                                                                                         |
|                          | ** ** | ** **        |       | **Converting**                   |       | ·     Variety of corrugated packaging  containers

·     Corrugated sheets 

·     Specialized packaging                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | 27                        |       | Shipments (2007) 13.378 bsf                                                                                               |       | 7th largest corrugated box producer in North  America                                                                                                                                                          |
|                          | ** ** | **Europe**        | ** ** | **Manufacturing**                |       | ·     Recycled linerboard and corrugating medium  

·     White-top linerboard                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 1                         |       | 152                                                                                                                            |       | N/A                                                                                                                                                                                                                 |
| **Specialty products**        | ** ** | **North America** | ** ** | **Manufacturing**                |       | **Industrial packaging**

·     Uncoated board for industrial and  papermill packaging 

**Specialty papers**

·     Fine papers 

·     Kraft paper

·     Backing for vinyl flooring                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 4                         |       | 417                                                                                                                            |       | One of the leading producers of recycled fine papers  in North America                                                                                                                                              |
|                          | ** ** | ** **        |       | **Converting**                   |       | **Industrial Packaging**

·     Papermill packaging (Roll headers and  wrappers) 

·     Honeycomb packaging products 

·     Laminated boards 

**Specialty papers**

·     Fine papers 

**Consumer product packaging**

·     Moulded pulp products 

·     Cup trays 

·     Filler flats 

·     Plastic products 

·     Packaging for food industry (meat trays,  translucent containers, foam plates and bowls) 

·     Outdoor furnitures (deck board, benches  and tables) | ** ** | 16                        |       | **Papermill packaging**

208 

**Honeycomb**

50 

**Fine papers**

110 

**Moulded pulp**

18.5 M kg 

**Plastic**

25.5 M kg |       | Largest producer of papermill packaging in North  America Largest producer of honeycomb products in Canada Major producer of  egg trays and four-cup carriers Largest meat processing packaging producer in  Canada |
|                          | ** ** | ** **        |       | **Recovery**                     |       | ·     Recovery activities (thru Cascades  Recovery and Metro Waste)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 21                        |       | 1,500 (brokered and processed in 2007)                                                                                         |       | Largest recycled paper collector in Canada 11 th largest  recycled paper collector in the world                                                                                                                |
|                          | ** ** | ** **        |       | **Others**                       |       | ·     De-inked pulp                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 2                         |       | 153                                                                                                                            |       | N/A                                                                                                                                                                                                                 |
|                          | ** ** | **Europe**        | ** ** | **Converting**                   |       | **Industrial Packaging**

·     Papermill packaging (Roll headers and  wrappers)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 2                         |       | 33                                                                                                                             |       | N/A                                                                                                                                                                                                                 |
|                          | ** ** | ** **        | ** ** | ** **                       |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                      |       |                                                                                                                           |       |                                                                                                                                                                                                                |
| **TISSUE PAPERS**             | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | ** **                | ** ** | ** **                                                                                                                     | ** ** | ** **                                                                                                                                                                                                          |
|                          | ** ** | **North America** | ** ** | **Manufacturing**                |       | ·     Parent rolls                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 3                         |       | 176 (8)                                                                                                                        |       | Important North American parent  rolls manufacturer                                                                                                                                                            |
|                          | ** ** |              |       | **Manufacturing and converting** |       | ·     Retail market and Away-from-home market 

·     Paper towels, paper hand towels,  bathroom tissue, facial tissue, paper napkins 

·     Parent rolls                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 6                         |       | 413 (8)                                                                                                                        |       | 4th largest North American tissue  papers producer                                                                                                                                                        |
|                          | ** ** | ** **        |       | **Converting**                   |       | ·     Retail market and Away-from-home market 

·     Paper towels, paper hand towels,  bathroom tissue, facial tissue, paper napkins 

·     Industrial wipes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 3                         |       | N/A                                                                                                                            |       | Strong expertise in the environmentally-friendly  products and in the private label segment of the retail market                                                                                               |
| **Total**                     |       |              |       |                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 109                       |       | 3,086 (manufacturing only)                                                                                                     |       |                                                                                                                                                                                                                |

 

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| (1) As at December 31, 2007. See the Annual Information  Form for additionnal information. 

(2) Production and sorting facilities units only; excluding sale  offices, distribution and transportation hubs, as well as corporate offices. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) Thousand short tons unless otherwise noted.                                                                                                                                                                                                       |
| (4) Based on manufacturing capacity. Sources: Risi, World Tissue  Capacity Report 2007, Moore and Associates.                                                                                                                                         |
| (5) Excluding the Bakersfield, California plant closed in Q1 2008.                                                                                                                                                                                    |
| (6) Excluding the sawmill operations which are classified as  discontinued operations. The pulpmill is indefinitely shut.                                                                                                                             |
| (7) Excluding the participation in Reno de Medici S.p.A..                                                                                                                                                                                             |
| (8) Theoretical capacity.                                                                                                                                                                                                                             |

 

3

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**Business model: the closed loop system**

 

Cascades’ business model has significantlyevolved in recent years. From a pure paper and board manufacturer, theCompany has emerged as the largest collector and processor of recycled papersin Canada as well as a major converter of corrugated packaging containers, foldingcartons, tissue and several specialized products. In fact,Cascades is now integrated, both upstream and downstream, in most of itsbusiness lines. It can therefore offer a full range of convertedand printed products, as well as on-site collection to itsclients. This is what we call the “closed-loop system”.

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(1)  Includingthe six manufacturing and converting tissue paper facilities.

 

 

4

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Twosignificant equity investments with strong potentiel

 

**BORALEX**

** **

Cascades owns a 34% equity investment inBoralex, a renewable energy producer publicly traded at the Toronto stockexchange (symbol: BLX). Boralex is one of Canada’s largest and most experiencedprivate-sector companies in the renewable power industry. It currently operates21 sites, with a total installed capacity of 351 MW. Its facilitiesare located in Québec, the northeastern United States and France, in threetypes of production: wind power, hydroelectric power and thermal power. Boralex’sgrowth strategy is built on diversification by segment and geographic location,and on maintaining state-of-the-art expertise in power station development,acquisition, operation and maintenance.

 

 

**RENO DE MEDICI S.p.A.**

 

In 2007, Cascades announced the merger of itsEuropean recycled cartonboard business with an Italian company publicly tradedat the Milan stock exchange, Reno De Medici S.p.A. (symbol: *RM*). In this transaction, effective March 1, 2008,Cascades contributed its two recycled boxboard manufacturing assets and itssheeting centre in exchange of a 31% equity investment in Reno de Medici. Thiscombination creates a new leader in the cartonboard industry with a capacity ofmore than one million tonnes per annum, and will result in an operationally andfinancially stronger company that will be better positioned to meet the demandsof global customers.

 

5

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Long-termobjectives

 

1.  Maximizeour return on assets

 

Cascades’ aim is to maximize its return onassets over the long term, by working mainly at two levels: increasing itsprofitability through revenue improvement and cost control measures, as well asoptimizing its asset base. In fact, Cascades announced several strategicinitiatives, including closures, divestitures and acquisitions, over the pastthree years, and will continue down that path in the future.

 

2.  Achievebetter financial results through sustainable development

 

Cascades has proven that economic interestscan blend perfectly with ecological principles, when they are combinedwith a clear vision as well as a management style that raises awareness andimproves active participation of all its employees. In fact, Cascades believesthat a better environmental performance will translate to a growing demand forits products, lower costs and less risk for its shareholders. The Companyfirmly intends to continue achieving its environmental objectives:increase the volume of recycled materials, reduce greenhouse gasemissions, reduce water consumption, recover waste from water treatment systemsfor beneficial use and maximize energy efficiency by reducing itsconsumption.

 

In the short term, the financial performanceof Cascades’ North American boxboard segment remains its top priority,given its low return on assets in comparison to the other segments. Inaddition, Cascades will continue to focus on certain specific factors in orderto improve the profitability of its tissue operations.

 
| ** **                            | ** ** | **2005**  | ** ** | **2006**  | ** ** | **2007**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Return on assets (%) (2)**          | ** ** | **Total** | ** ** | **Total** | ** ** | **Total** | ** ** |
| Packaging                             |       |      |       |      |       |      |       |
| Boxboard                              |       | 6         | %          | 5         | %          | **4**     | **%**      |
| Containerboard                        |       | 11        | %          | 15        | %          | **12**    | **%**      |
| Specialty products                    |       | 6         | %          | 11        | %          | **10**    | **%**      |
| Tissue papers                         |       | 18        | %          | 22        | %          | **12**    | **%**      |
| Consolidated return on assets (%) (2) |       | 8.4       | %          | 10.8      | %          | **8.9**   | **%**      |

 

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| (1) Last twelve month (LTM) operating  income before depreciation and amortization (OIBD) excluding specific items.                                                                                                |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) Return on assets is a non-GAAP measure,  defined as LTM OIBD excluding specific items / LTM average of total  quarterly assets. See “Supplemental information  on non-GAAP measures”. |

 

6

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7

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Strategy

 
| **Focus on  packaging and tissue**        |   | The focus on packaging and tissue is one of  the main characteristics that make Cascades unique in the industry in  North America. Effectively, through asset purchases and internal growth, we  have positioned ourselves in the packaging and tissue segments, which are  more consumer-oriented markets with healthy fundamentals. In these  businesses, we operate in different geographic locations and we are often  among the market leaders.                                                                                                                                                                                                                                                                                                              |
|-------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **Optimize  use of recycled fibre**       |   | Cascades produces the majority of its  products from recycled fibre. We manufactured approximately  3 million tons of packaging, tissue products and specialty papers  and boards last year. The overall purchase content of recycled fibre is  estimated to be close to 80%. We intend to continue to use recycled fibre as  our main source of raw materials. We benefit from more than 40 years of  experience with this type of raw material and the volume of our purchases  gives us a unique position in North America. Despite the strong current  demand for recycled fibre, we believe that the generation will also increase  over the years and that demand for recycled products will continue to  grow and selling prices to adjust. |
| ** **                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **Increase  converting integration rate** |   | By increasing our converting integration  rate, we expand the quantity of board and paper that we convert  into alue-added products. Also, a better integration rate presents three  main advantages: it brings us closer to the end-user; converting  operations are less capital intensive; and it improves the flow of production  at the mill.                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **Promote the entrepreneurial culture**   |   | We have a decentralized management  structure in which each of our units operates as a distinct  profit center. We believe in market price transfer as an important tool  to support and measure efficient capital allocation.  In addition, we have implemented a profit sharing plan that is linked to  the financial and operating performance of each individual facility.                                                                                                                                                                                                                                                                                                                                                                |

 

In line with its strategy, Cascades hasrecently reviewed its business mix, divesting most of its fine paper assets andgrowing its converting operations.

 

          

 

 

8

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Actionplan

 

Our action plan, which is linked to ourobjectives and strategy, focuses on improving our profitability as well as optimizingour asset portfolio.

 
| **Continuous  improvement program & product development** |   | ·    One of Cascades’ top priorities has  always been the improvement of processes, including  eliminating unnecessary activities. 

·    Through targets, tools and measures,  Cascades is dedicated to the development of new products,  to the improvement of the quality of its existing products,  lowering costs and inefficiencies, and optimizing customer service. 

·    Each year, we aim at reducing our  controllable costs and therefore offset the effect inflation on salaries,  furniture and maintenance expenses, chemical products as well as sales  and administration expenditures.                                                                                                              |
|--------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Focus on  less-performing assets**                               |   | ·    Through  our continuous improvement program, we closely monitor less-performing  assets, which  represent approximately 10 manufacturing and converting units out  of more than 100. 

·    Important  cost-cutting measures have been implemented in order to improve profitability  and several closures, divestitures  and transactions have been announced over the last three years. In 2008,  Cascades will continue to focus on its North American boxboard  activities. 

·    In  order to improve its competitiveness and miminize the impact of the Canadian  dollar, Cascades works at adjusting its asset base to lower its exports and  have the same fraction of assets and sales within a specific country. |
| ** **                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Divestiture  of non-core assets**                                |   | ·    In  our 2004 strategic plan,  we decided to focus on packaging and tissue. 

·    In  2005 and 2006, we  completed the divestiture of our tissue and fine papers distribution  activities. 

·    In  2006 and 2007, we sold  our interests in two non-core joint ventures, one non-integrated de-inked  pulp mill and two indefinitely shut mills.                                                                                                                                                                                                                                                                                                                                                                              |
| ** **                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Deleveraging  our balance sheet**                                |   | ·    We  intend to continue to deleverage our balance sheet in order to improve our  financial flexibility. 

·    Given  the recent acquisition of the remaining 50% of Norampac, we focus on  returning rapidly to pre-acquisition debt ratios. 

·    This  will be accomplished through a combination of cost-cutting measures,  asset-optimization, divestiture, and positive free cash flow  improvement.                                                                                                                                                                                                                                                                                                                       |
| ** **                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Selective  acquisitions in core segments**                       |   | ·    We  plan to continue pursuing  opportunistic and selective acquisitions, opportunities that will not  adversely affect progress toward deleveraging.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

Cascades closely monitors geographic salesand assets, in order to improve the competitiveness of its asset base andminimize the Canadian dollar’s impact on its financial results.

 

 

 

9

----

 

Actionplan milestones(1)

 
| Q1  2007 |   | ·    Launch  of BioxoTM, the first product line  of containers made from fully oxo-degradable polystyrene foam 

·    Announcement  of an investment for the construction of a wood-residue boiler and  co-generation plant at the Trenton containerboard mill 

·    Closure  of the Montréal, Québec boxboard conversion plant 

·    Sale  of our interest in GSD (a joint venture in our boxboard converting  operations) 

·    Announcement  of an investment in a new de-inking line at the Memphis,  Tennessee, tissue mill |
|---------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Q2  2007 |   | ·    Announcement  of a potential transaction between Cascades S.A.  (Cascades’ European boxboard operations) and Reno De Medici S.p.A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Q3  2007 |   | ·    Acquisition  of Honeycomb Products of Michigan (a honeycomb board plant) 

·    Announcement  of a partnership with Jamestown Container and Smurfit-Stone,  to build a new sheet plant (corrugated boxes  converting plant)                                                                                                                                                                                                                                                                                                                                                                     |
|          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Q4  2007 |   | ·    The  company entered into foreign exchange forward contracts to fix the  remaining portion of its U.S.-denominated debt 

·    Sale  of the Red Rock, Ontario containerboard mill (Norampac) 

·    Sale  of the Thunder Bay, Ontario fine papers mill (discontinued operations)                                                                                                                                                                                                                                                                                                                |
|          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Q1  2008 |   | ·    Sale  of the Greenfield, France, de-inked pulp mill 

·    Closing  of the transaction between Cascades S.A. and Reno De Medici S.p.A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

----

(1)  See “Business highlights”,page 23, for additional information.

 

 

10

----

 

Keyperformance indicators

 

In monitoring our action plan and in order toachieve our long-term objectives, we use several key performance indicators,including the following:

 

**Operationaland financial data**

** **
| ** **                                                                     | ** ** | **2005**   | ** ** | ** ** | ** ** | **2006**   | ** ** | ** ** | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                     | ** ** | **Total**  | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **Total** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| **OPERATIONAL**                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total shipments (in ‘000 of s.t.)**                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                      |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Boxboard                                                                       |       | 1,043      |       | 293        |       | 277        |       | 311        |       | 323        |       | 1,204 | ** ** | **301** | ** ** | **313** | ** ** | **296** | ** ** | **292** | ** ** | **1,202** | ** ** |
| Containerboard (1)                                                             |       | 746        |       | 188        |       | 190        |       | 186        |       | 178        |       | 742 | ** ** | **351** | ** ** | **366** | ** ** | **357** | ** ** | **338** | ** ** | **1,412** | ** ** |
| Specialty products (2)                                                         |       | 434        |       | 115        |       | 117        |       | 113        |       | 112        |       | 457 | ** ** | **115** | ** ** | **114** | ** ** | **111** | ** ** | **110** | ** ** | **450** | ** ** |
|                                                                           |       | 2,223      |       | 596        |       | 584        |       | 610        |       | 613        |       | 2,403 | ** ** | **767** | ** ** | **793** | ** ** | **764** | ** ** | **740** | ** ** | **3,064** | ** ** |
| Tissue papers                                                                  |       | 425        |       | 104        |       | 114        |       | 118        |       | 107        |       | 443 | ** ** | **109** | ** ** | **112** | ** ** | **115** | ** ** | **115** | ** ** | **451** | ** ** |
| Total                                                                          |       | 2,648      |       | 700        |       | 698        |       | 728        |       | 720        |       | 2,846 | ** ** | **876** | ** ** | **905** | ** ** | **879** | ** ** | **855** | ** ** | **3,515** | ** ** |
| **Integration rate – %**                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                      |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Boxboard (North America)                                                       |       | 40         | %          | 38         | %          | 38         | %          | 28         | %          | 27         | %          | 32 | % | **27** | **%** | **29** | **%** | **31** | **%** | **26** | **%** | **29** | **%** |
| Containerboard (North America)                                                 |       | 61         | %          | 60         | %          | 60         | %          | 65         | %          | 58         | %          | 61 | % | **58** | **%** | **59** | **%** | **63** | **%** | **64** | **%** | **61** | **%** |
| Specialty products (paper only)                                                |       | 10         | %          | 10         | %          | 9          | %          | 10         | %          | 10         | %          | 10 | % | **8** | **%** | **7** | **%** | **8** | **%** | **8** | **%** | **8** | **%** |
| Tissue papers                                                                  |       | 63         | %          | 60         | %          | 57         | %          | 56         | %          | 62         | %          | 59 | % | **60** | **%** | **59** | **%** | **53** | **%** | **52** | **%** | **56** | **%** |
|                                                                           |       | 52         | %          | 46         | %          | 46         | %          | 44         | %          | 42         | %          | 44 | % | **45** | **%** | **45** | **%** | **47** | **%** | **46** | **%** | **45** | **%** |
| **Capacity utilization rate********(3)**–**%**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                      |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Boxboard  (4)                                                                  |       | 92         | %          | 98         | %          | 95         | %          | 94         | %          | 94         | %          | 95 | % | **89** | **%** | **94** | **%** | **89** | **%** | **85** | **%** | **89** | **%** |
| Containerboard (5)                                                             |       | 94         | %          | 96         | %          | 96         | %          | 100        | %          | 103        | %          | 99 | % | **100** | **%** | **102** | **%** | **104** | **%** | **99** | **%** | **101** | **%** |
| Specialty products (paper only)                                                |       | 96         | %          | 89         | %          | 91         | %          | 86         | %          | 85         | %          | 88 | % | **89** | **%** | **88** | **%** | **85** | **%** | **84** | **%** | **86** | **%** |
| Tissue papers (6)                                                              |       | 97         | %          | 101        | %          | 103        | %          | 101        | %          | 100        | %          | 101 | % | **99** | **%** | **100** | **%** | **99** | **%** | **99** | **%** | **99** | **%** |
| Total                                                                          |       | 94         | %          | 96         | %          | 96         | %          | 96         | %          | 96         | %          | 96 | % | **95** | **%** | **97** | **%** | **95** | **%** | **92** | **%** | **95** | **%** |
| **Energy cons.********(7)–****GJ/ton**                                    |       | 10.83      |       | 11.04      |       | 10.32      |       | 9.63       |       | 10.56      |       | 10.33 | ** ** | **10.94** | ** ** | **9.46** | ** ** | **9.55** | ** ** | **10.29** | ** ** | **10.05** | ** ** |
| **Work accidents –  OSHA frequency rate**                            |       | 9.50       |       | 7.90       |       | 8.00       |       | 8.30       |       | 8.00       |       | 8.00 | ** ** | **7.00** | ** ** | **8.60** | ** ** | **8.80** | ** ** | **7.55** | ** ** | **7.97** | ** ** |
| **FINANCIAL**                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Return on assets (%)********(8)**                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                      |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Boxboard                                                                       |       | 6          | %          | 6          | %          | 6          | %          | 5          | %          | 5          | %          | 5 | % | **4** | **%** | **4** | **%** | **4** | **%** | **4** | **%** | **4** | **%** |
| Containerboard                                                                 |       | 11         | %          | 10         | %          | 10         | %          | 13         | %          | 15         | %          | 15 | % | **15** | **%** | **14** | **%** | **13** | **%** | **12** | **%** | **12** | **%** |
| Specialty products                                                             |       | 6          | %          | 7          | %          | 7          | %          | 8          | %          | 11         | %          | 11 | % | **12** | **%** | **11** | **%** | **10** | **%** | **10** | **%** | **10** | **%** |
| Tissue papers                                                                  |       | 18         | %          | 20         | %          | 21         | %          | 23         | %          | 22         | %          | 22 | % | **20** | **%** | **17** | **%** | **14** | **%** | **12** | **%** | **12** | **%** |
| Consolidated return on assets (%)                                              |       | 8.4        | %          | 8.8        | %          | 9.4        | %          | 10.1       | %          | 10.8       | %          | 10.8 | % | **10.5** | **%** | **9.8** | **%** | **9.5** | **%** | **8.9** | **%** | **8.9** | **%** |
| **Working capital********(9)**** ******In millions of $, at end of period |       | 594        |       | 570        |       | 584        |       | 566        |       | 598        |       | 598 | ** ** | **659** | ** ** | **685** | ** ** | **701** | ** ** | **616** | ** ** | **616** | ** ** |
| % of sales  (10)                                                               |       | 16.5       | %          | 16.5       | %          | 16.7       | %          | 16.1       | %          | 16.3       | %          | 16.3 | % | **16.0** | **%** | **15.8** | **%** | **16.0** | **%** | **16.5** | **%** | **16.5** | **%** |
|                                                                                |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1)  |  The  2005 containerboard converting shipments in short tons are estimated.  Also, 2007 numbers include 100% of Norampac.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Kraft paper, uncoated board,  specialty board, fine papers and papermill packaging shipments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (3)  | Defined as: Shipments/Practical  capacity. Paper manufacturing only.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (4)  | Starting in Q3 2006,  capacity numbers were adjusted to take into account that the Versailles mill  was acquired on July 21.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (5)  | Starting in Q4 2006,  capacity numbers were adjusted to take into account the indefinite closure of  the Red Rock mill (300,000 tons).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (6)  | Defined as: Manufacturing  internal and external shipments/Practical capacity. Tissue practical capacity  represents 80% of its theoretical capacity which was disclosed in the Annual  information form.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (7)  | Average energy consumption  for manufacturing mills only.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (8)  | Return on assets is a  non-GAAP measure and is defined as: LTM OIBD excluding specific items/LTM  Average of total quarterly assets. See the supplemental information on  non-GAAP measures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (9)  | Working capital includes  accounts receivable plus inventories less accounts payables. Starting in  2006, it excludes unpaid provision for closure and restructuring costs  in the amount of $47 million as at December 31, 2006 and $19 million  as at December 31, 2007. It also excludes the current portion of  derivatives financial instruments in the amount of $11 million and the  current portion of future taxes liability in the amount of  $1 million (asset of $40 million–2006). Sales of discontinued operations  are included in the 2005 figures as working capital items were  still on the balance sheet. |
| (10) | % of sales = LTM Working  Capital/LTM Sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

11

----

 

Keyfinancial drivers

 

As a Packaging and Tissue company, ourfinancial results are mainly driven by the following factors:

 
| **Sales**                                                                                                         | ** ** | **Costs**                                                                                                          |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|
| ·    Selling  prices                                                                          |       | ·    Fibre  (recycled, virgin and woodchips) prices, availability and production  recipes |
| ·    Demand  for packaging and tissue, mainly environmentally friendly and recycled  products |       | ·    Foreign  exchange rates (mainly CAN$/US$)                                                 |
| ·    Foreign  exchange rates (mainly CAN$/US$)                                                |       | ·    Energy  prices, mainly electricity and natural gas                                        |
| ·    Population  growth                                                                       |       | ·    Labour                                                                                    |
| ·    Industrial  production                                                                   |       | ·    Freight                                                                                   |
| ·    Demand  for durable and non-durable goods                                                |       | ·    Chemical  product prices                                                                  |
| ·    Product  mix, substitution and innovation                                                |       | ·    Capacity  utilization rates and production downtime                                       |

 

**Sensitivity analysis**

 

The following table provides a quantitativeestimate of the impact on Cascades’ annual operating income before depreciationand amortization (OIBD) of potential changes in the prices of our mainproducts, the costs of certain raw materials and energy, as well as theCAN$/US$ exchange rate, assuming, for each price change, that all other variablesremain constant. This is based on Cascades’ 2007 manufacturing andconverting external shipments and consumption numbers, adjusted for recentacquisitions or disposal, and operations that have been shut down.

 

However, Cascades’ hedging policies andportfolios (see “Risk management”, p.37 of Management’s Discussion and Analysisand 81, 82 and 83 of the Audited Consolidated Financial Statements for the yearended December 31, 2007) should also be considered in order to fullyanalyze the Company’s sensitivity to the highlighted factors. Moreover,Cascades’ US-dollar-denominated long-term debt acts as a natural hedge againstCAN$/US$ exchange rate fluctuations.

 

**Sensitivitytable****(1)**

 
| ** **                                                      | ** ** | **Shipments/Consumption   (‘000 tons, except for natural gas)** | ** ** | **Change**       | ** ** | **OIBD Impact  (In millions of CAN$)** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|------------------|------------|----------------------------------------|------------|
| **Selling prices (manufacturing and  converting) ****(2)** | ** ** | ** **                                                           | ** ** | ** **       | ** ** | ** **                             | ** ** |
| Boxboard                                                        |       | 814                                                                  |       | 25 US$/s.t. | ** ** | **20**                                 | ** ** |
| Containerboard                                                  |       | 1,412                                                                |       | 25 US$/s.t. | ** ** | **35**                                 | ** ** |
| Specialty Products (paper only)                                 |       | 450                                                                  |       | 25 US$/s.t. | ** ** | **11**                                 | ** ** |
| Tissue                                                          |       | 451                                                                  |       | 25 US$/s.t. | ** ** | **11**                                 | ** ** |
| **Input costs****(2)**                                          | ** ** | ** **                                                           | ** ** | ** **       | ** ** | ** **                             | ** ** |
| Recycled papers                                                 |       |                                                                 |       |             |       |                                   |       |
| Brown grades (OCC & others)                            |       | 1,258                                                                |       | 15 US$/s.t. | ** ** | **(19**                                | **)**      |
| Groundwood grades (ONP & others)                       |       | 197                                                                  |       | 15 US$/s.t. | ** ** | **(3**                                 | **)**      |
| White grades (SOP & others)                            |       | 728                                                                  |       | 15 US$/s.t. | ** ** | **(11**                                | **)**      |
| **Commercial pulp**                                             |       | 190                                                                  |       | 30 US$/s.t. | ** ** | **(6**                                 | **)**      |
| **Natural gas**                                                 |       | 12,700,000                                                           |       | 0.10S$/mmBtu     | ** ** | **(1**                                 | **)**      |
| **Foreign exchange****(3)**                                     | ** ** | ** **                                                           | ** ** | ** **       | ** ** | ** **                             | ** ** |
| Change of US$0.01 vs CAN$                                  |       |                                                                 |       |             |       |                                   |       |
| Sales less purchases in US$ from Canadian operations       | ** ** | ** **                                                           | ** ** | ** **       | ** ** | **(2**                                 | **)**      |
| Sales less purchases in Canada impacted by US$ effect      | ** ** | ** **                                                           | ** ** | ** **       | ** ** | **(4**                                 | **)**      |
| U.S. subsidiaries translation                                   | ** ** | ** **                                                           | ** ** | ** **       | ** ** | **(1**                                 | **)**      |
| **TOTAL foreign exchange**                                      | ** ** | ** **                                                           | ** ** | ** **       | ** ** | **(7**                                 | **)**      |

 

----

| (1) |   | Sensitivity calculated  according to 2007 volumes or consumption and with an exchange rate of  1.00 CAN$/US$, excluding hedging programs and excluding the impact of  related expenses such as discounts, commissions on sales and profit  sharing.                                                                                                                                                                                                                                                                               |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Based on 2007 external  manufacturing and converting shipments as well as 2007 fibre and pulp  consumption, and including the impact of all new acquisitions or disposal and  operations that have been shutdown. It excludes the shipments and the  fibre and pulp consumption of the two European mills that will  be transferred to Reno De Medici in 2008 as well as the shipments  and the fibre and pulp consumption of  one de-inked pulp mill in France sold at the beginning of 2008. |
| (3) |   | As an example, from  1.01 CAN$/US$ to 1.00 CAN$/US$.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

12

----

 

Relevanteconomic data

 

Cascades’ results are impacted by Canadian-dollarand Euro fluctuations against the U.S. dollar, and by energy prices. In 2007,the Canadian dollar appreciated 6% against the U.S. dollar, compared to thesame period last year. In the area of energy costs, natural gas pricesdecreased 5% while crude oil prices increased 8%.

 

The following graphs and table show thehistorical movement of the Canadian dollar against the U.S. dollar,the U.S. dollar against the Euro, and spot prices of natural gas(US$/mmBtu) and crude oil (US$/barrel).

 

        

 
| ** **                         | ** ** | **2005  Year** | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **2006  Year** | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **2007  Year** | ** ** | **Change  2006-2007** | ** ** |
|------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|-----------------------|------------|
| **Foreign exchange rates-average** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **            | ** ** |
| CAN$/US$                           |       | 1.211          |       | 1.155      |       | 1.122      |       | 1.121      |       | 1.139      |       | 1.134          | ** ** | **1.172**  | ** ** | **1.098**  | ** ** | **1.045**  | ** ** | **0.982**  | ** ** | **1.074**      |       | (5                    | %)         |
| US$/CAN$                           |       | 0.826          |       | 0.866      |       | 0.891      |       | 0.892      |       | 0.878      |       | 0.882          | ** ** | **0.854**  | ** ** | **0.911**  | ** ** | **0.957**  | ** ** | **1.019**  | ** ** | **0.931**      |       | 6                     | %          |
| US$/EURO                           |       | 1.239          |       | 1.207      |       | 1.274      |       | 1.275      |       | 1.290      |       | 1.262          | ** ** | **1.310**  | ** ** | **1.348**  | ** ** | **1.375**  | ** ** | **1.422**  | ** ** | **1.363**      |       | 8                     | %          |
|                               |       |           |       |       |       |       |       |       |       |       |       |           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     |       |                  |       |
| **Energy prices-average****(1)**   | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **            | ** ** |
| Natural gas Henry Hub (US$/mmBtu)  |       | 8.62           |       | 8.98       |       | 6.79       |       | 6.58       |       | 6.56       |       | 7.23           | ** ** | **6.77**   | ** ** | **7.55**   | ** ** | **6.16**   | ** ** | **6.97**   | ** ** | **6.86**       |       | (5                    | )%         |
| Crude oil WTI (US$/barrel)         |       | 55.34          |       | 62.48      |       | 67.25      |       | 71.55      |       | 57.70      |       | 64.74          | ** ** | **57.45**  | ** ** | **61.69**  | ** ** | **71.08**  | ** ** | **88.66**  | ** ** | **69.72**      |       | 8                     | %          |

 

----

Source: Bloomberg.
| (1)   Quarterly  average of monthly settlement prices. |
|------------------------------------------------------------------|

 

 

13

----

 

Pricing– Main products and raw materials

 

The following graphs and table show thehistorical movement of average benchmark list prices for some of our keyproducts, as well as for woodchips and some grades of recycled paper and virginpulp used in the manufacturing process. Recycled papers, virgin pulpand woodchips are the primary raw materials used in manufacturingour products, and represent the highest production cost. Selling andraw materials list prices fluctuate considerably and are heavilyinfluenced by economic conditions and foreign demand. These listprices could differ from the Company’s purchase cost and actualselling prices.

 

 

 

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| (1)    | The Cascades North American selling prices  index represents an approximation of Cascades’ manufacturing (excluding  converted products) selling prices in North America. It is weighted according  to shipments. It takes into account some of the main Cascades products  for which prices are available in Pulp & Paper Week magazine and the  Cascades Tissue Index. This index should only be used as a trend  indicator as it may differ from our actual selling prices and our product  mix. The only non-manufacturing prices taken into account in the index are  the tissue prices. In fact, the tissue pricing indicator, which is blended in  the Cascades North American selling prices index, is the Cascades Tissue  paper selling prices index which represents a mix of primary and converted  products. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (2)    | The Cascades North American raw materials  index represents the average weighted cost paid for some of our manufacturing  raw materials namely, recycled fibre, virgin pulp and woodchips in  North America. It is weighted according to the volume of purchase (in tons)  of 2007. This index should only be used as a trend indicator and it may  differ from our actual manufacturing purchasing costs and our purchase mix.                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (3)    | The Cascades North American boxboard prices  index is based on the list price of Recycled boxboard -20 pt. Clay  coated news, published in Pulp & Paper Week.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (4)    | The Cascades North American containerboard  prices index is based on the list prices of the Linerboard 42-lb. Unbleached  kraft, Eastern U.S. and the Corrugating medium 26-lb. Semichemical,  East U.S., both published in Pulp & Paper Week.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (5)    | The Cascades North American specialty  products prices index is based on the prices of the Recycled boxboard  20 pt. Bending chip (transaction), the Unbleached kraft paper, Grocery  bag 30-lb., and the uncoated white 50-lb. Offset rolls, all published in  Pulp & Paper Week.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (6)    | The Cascades North American tissue papers  price index is based on the Cascades Tissue papers selling price index (see  following table). The only difference is the reference date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (7)    | The Cascades North American virgin pulp  prices index represents the average weighted cost paid for virgin pulp in  North America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (8)    | The Cascades North American woodchips index  represents the average weighted cost paid for woodchips in North America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (9)    | The Cascades North American recycled fibre  index represents the average weighted cost paid for recycled papers in North  America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

14

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| ** **                                                                                                                                                    | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | **Change**     | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| **These  indexes should only be used as  indicator of trends and they be different than our actual  selling prices or purchasing costs.** | ** ** | **2005  Average** | ** ** | **Average Q1** | ** ** | **Average Q2** | ** ** | **Average Q3** | ** ** | **Average Q4** | ** ** | **2006  Average** | ** ** | **Average Q1** | ** ** | **Average Q2** | ** ** | **Average Q3** | ** ** | **Average Q4** | ** ** | **2007  Average** | ** ** | **2006- 2007  (unit)** | ** ** | **2006-  2007  (%)** | ** ** |
| **Selling  prices Cascades North American US$ index (index 2003 = 1,000) (1)**                                                                      |       | 1,145             |       | 1,209          |       | 1,279          |       | 1,297          |       | 1,299 |   | 1,271 | ** ** | **1,314** | ** ** | **1,341** | ** ** | **1,382** | ** ** | **1,411** | ** ** | **1,362** |   | 91 |   | 7 | % |
| **PACKAGING  Boxboard**                                                                                                                                       | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **North  America (US$/ton)**                                                                                                                                  | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Recycled boxboard – 20pt.  clay coated news (transaction)                                                                                           |       | 585               |       | 610            |       | 617            |       | 648            |       | 665 |   | 635 | ** ** | **685** | ** ** | **733** | ** ** | **733** | ** ** | **733** | ** ** | **721** |   | 86 |   | 14 | % |
| **Europe (Euro/tonne)**                                                                                                                                       | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Recycled white-lined  chipboard (GD2) index (2)                                                                                                          |       | 650               |       | 659            |       | 667            |       | 687            |       | 690 |   | 676 | ** ** | **698** | ** ** | **695** | ** ** | **726** | ** ** | **717** | ** ** | **709** |   | 33 |   | 5 | % |
| Virgin coated duplex  boxboard (GC2) index (3)                                                                                                                |       | 1,014             |       | 1,012          |       | 1,012          |       | 1,015          |       | 1,018 |   | 1,014 | ** ** | **1,019** | ** ** | **1,020** | ** ** | **1,051** | ** ** | **1,040** | ** ** | **1,032** |   | 18 |   | 2 | % |
| **Containerboard  (US$/ton)**                                                                                                                                 | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Linerboard 42-lb.  unbleached kraft, East US (transaction)                                                                                                    |       | 428               |       | 465            |       | 515            |       | 515            |       | 515 |   | 503 | ** ** | **515** | ** ** | **515** | ** ** | **542** | ** ** | **555** | ** ** | **532** |   | 29 |   | 6 | % |
| Corrugating medium  26-lb. semichemical, East U.S. (transaction)                                                                                              |       | 397               |       | 435            |       | 488            |       | 495            |       | 495 |   | 478 | ** ** | **495** | ** ** | **495** | ** ** | **522** | ** ** | **535** | ** ** | **512** |   | 34 |   | 7 | % |
| **Specialty  products (US$/ton, tonne for deinked pulp)**                                                                                           | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Recycled boxboard – 20pt.  bending chip (transaction)                                                                                                    |       | 466               |       | 490            |       | 490            |       | 520            |       | 520 |   | 505 | ** ** | **530** | ** ** | **575** | ** ** | **575** | ** ** | **575** | ** ** | **564** |   | 59 |   | 12 | % |
| Deinked pulp (f.o.b;  U.S. air-dried & wet-lap, post-consumer) (5)                                                                                   |       | 580               |       | 585            |       | 592            |       | 610            |       | 620 |   | 602 | ** ** | **633** | ** ** | **640** | ** ** | **651** | ** ** | **675** | ** ** | **641** |   | 39 |   | 6 | % |
| Unbleached kraft paper,  grocery bag 30-lb.                                                                                                                   |       | 765               |       | 803            |       | 838            |       | 855            |       | 855 |   | 838 | ** ** | **862** | ** ** | **892** | ** ** | **905** | ** ** | **905** | ** ** | **891** |   | 53 |   | 6 | % |
| Uncoated white 50-lb.  offset, rolls                                                                                                                          |       | 726               |       | 765            |       | 840            |       | 848            |       | 838 |   | 823 | ** ** | **810** | ** ** | **810** | ** ** | **803** | ** ** | **847** | ** ** | **818** |   | (5 | ) | (1 | )% |
| **TISSUE  PAPERS**                                                                                                                                            | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cascades Tissue papers  (index 1999 = 1,000) (4)                                                                                                         |       | 1,320             |       | 1,382          |       | 1,423          |       | 1,435          |       | 1,421 |   | 1,414 | ** ** | **1,433** | ** ** | **1,456** | ** ** | **1,511** | ** ** | **1,573** | ** ** | **1,493** |   | 79 |   | 6 | % |
| **Raw  materials Cascades North American US$ index (index 2003 = 300)**(5)****                                                                      |       | 374               |       | 332            |       | 353            |       | 387            |       | 373 |   | 361 | ** ** | **438** | ** ** | **465** | ** ** | **497** | ** ** | **521** | ** ** | **480** |   | 119 |   | 33 | % |
| **RECYCLED  PAPER**                                                                                                                                           | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **North  America (US$/ton)**                                                                                                                                  | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corrugated containers,  no. 11 (OCC – Chicago & NY average)                                                                                     |       | 78                |       | 55             |       | 70             |       | 83             |       | 67 |   | 69 | ** ** | **105** | ** ** | **108** | ** ** | **120** | ** ** | **119** | ** ** | **113** |   | 44 |   | 64 | % |
| Special news, no.  6  (ONP – Chicago & NY average)                                                                                         |       | 56                |       | 46             |       | 49             |       | 53             |       | 50 |   | 49 | ** ** | **68** | ** ** | **75** | ** ** | **78** | ** ** | **76** | ** ** | **74** |   | 25 |   | 51 | % |
| Sorted office papers,  no. 37 (SOP – Chicago & NY average)                                                                                      |       | 95                |       | 92             |       | 98             |       | 115            |       | 120 |   | 106 | ** ** | **135** | ** ** | **151** | ** ** | **170** | ** ** | **184** | ** ** | **160** |   | 54 |   | 51 | % |
| **Europe (Euro/tonne)**                                                                                                                                       | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Recovered mixed  paper & board sorted index (6)                                                                                                 |       | 43                |       | 40             |       | 51             |       | 51             |       | 52 |   | 48 | ** ** | **60** | ** ** | **69** | ** ** | **80** | ** ** | **75** | ** ** | **71** |   | 23 |   | 48 | % |
| **VIRGIN  PULP (US$/tonne)**                                                                                                                                  | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bleached softwood kraft  Northern, East U.S.                                                                                                                  |       | 647               |       | 653            |       | 707            |       | 757            |       | 770 |   | 722 | ** ** | **790** | ** ** | **810** | ** ** | **837** | ** ** | **858** | ** ** | **824** |   | 102 |   | 14 | % |
| Bleached hardwood kraft  Northern mixed, East U.S.                                                                                                            |       | 604               |       | 615            |       | 638            |       | 669            |       | 680 |   | 651 | ** ** | **690** | ** ** | **697** | ** ** | **723** | ** ** | **766** | ** ** | **719** |   | 68 |   | 10 | % |
| **WOODCHIPS  – Conifer eastern Canada (US$/odmt)**                                                                                                       |       | 136               |       | 137            |       | 140            |       | 127            |       | 125 |   | 132 | ** ** | **118** | ** ** | **124** | ** ** | **131** | ** ** | **141** | ** ** | **129** |   | (4 | ) | (3 | )% |

 

15

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Sources:Pulp & Paper Week, PPI, Random Lengths and Cascades.

 
| (1) | The Cascades North American selling prices  index represents an approximation of Cascades’ manufacturing (excluding converted  products) selling prices in North America. It is weighted according  to shipments. It takes into account some of the main Cascades products  for which prices are available in Pulp & Paper Week magazine and the  Cascades Tissue Index. This index should only be used as a trend  indicator as it may differ from our actual selling prices and our product  mix. The only non-manufacturing prices taken into account in the index are  the tissue prices. In fact, the tissue pricing indicator, which is blended in  the Cascades North American selling prices index, is the Cascades Tissue  paper selling prices index which represents a mix of primary and converted  products. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The Cascades recycled white-lined chipboard  selling prices index represents an approximation of Cascades’ recycled grades  selling prices in Europe. It is weighted by country. For each country we  use an average of PPI and EUWID prices for white-lined chipboard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (3) | The Cascades virgin coated duplex boxboard  selling prices index represents an approximation of Cascades’ virgin grades  selling prices in Europe. It is weighted by country. For each country we use  an average of PPI and EUWID prices for the coated duplex boxboard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (4) | The Cascades Tissue paper selling prices  index represents a mix of primary and converted products, and is based on the  product mix at the end of 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (5) | The Cascades North American raw materials  index represents the average weighted cost paid for some of our manufacturing  raw materials namely, recycled fibre, virgin pulp and woodchips in North  America. It is weighted according to the volume of purchase (in tons). This  index should only be used as a trend indicator and it may differ from our  actual manufacturing purchasing costs and our purchase mix.                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (6) | The Cascades recovered mixed  paper & board sorted prices index represents an approximation of  Cascades’ recovered paper purchase prices in Europe. It is weighted by  country. For each country we use an average of PPI and EUWID prices for  the recovered mixed paper & board. This index should only be used as  a trend indicator and it may differ from our actual purchasing costs  and our purchase mix.                                                                                                                                                                                                                                                                                                                                                                                          |

 

16

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Industryreview – 2007

 

In 2007, the North American and Europeanpackaging and tissue paper industry continued to redefine itself overall. Inorder to improve the competitiveness of their asset base within the context ofa stronger currency and higher raw material costs, many producers againannounced rationalizing initiatives and transactions. Despite these challengingmarket conditions, the massive restructuring initiatives undertaken in2005 and 2006 led to a tighter supply/demand balance and ahealthier pricing environment in several markets.

 

 
| ** **                                      | ** ** | ** **                | ** ** | ** **                          | ** ** | **Pricing**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Industry  statictics & developments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------------------------------------------|------------|---------------------------|------------|-------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **MANUFACTURING & CONVERTING MARKETS** | ** ** | ** **                | ** ** | ** **                          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **                                      | ** ** | ** **                | ** ** | ** **                          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **PACKAGING**                                   | ** ** | **Boxboard**              | ** ** | **Manufacturing****North America**  |       | **Coated recycled boxboard (CRB)**

·     Price increases in the first half of the year 

·     Yearly average price up 86 US$/ton or 14%                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | **Coated recycled boxboard (CRB)**

·     Strong demand in the first half of the year but  slowed in the second half 

·     U.S. market’s production down 2.5% in 2007 

·     U.S. market’s operating rate averaged 98.9% in 2007  but decreased at the end of the year                                                                                                       |
| ** **                                      | ** ** | ** **                | ** ** | ** **                          |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **                                      | ** ** | ** **                |       | **Manufacturing****Europe**         |       | **Recycled boxboard**

·     Price increases of 30 euro/tonne implemented in  the second half of 2007 

·     Negociations underway for additional price increases 

**Virgin boxboard**

·     Stable prices in 2007 

·     Negociations underway for price increases                                                                                                                                                                                                                                      |       | ·     Strong demand in the first half of the year, especially  for the recycled grades, but slowed in the second half                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                      | ** ** | ** **                |       | ** **                          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **                                      | ** ** | **Containerboard**        | ** ** | **Manufacturing****North America**  |       | ·     Yearly average price up 29 US$/ton given a  40 US$/ton price increase in August 

·     Announced price increase of 50 US$/ton for  March 2008                                                                                                                                                                                                                                                                                                                                                                                                           |       | ·     U.S. industry operating rate averaged 95% to 99% in  2007                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **                                      | ** ** | ** **                | ** ** | ** **                          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **                                      | ** ** |                      |       | **Converting**                      |       | ·     Price increase (pass-through) in the U.S. following  the manufacturing price increase 

·     Partial price increase (pass-through) in Canada                                                                                                                                                                                                                                                                                                                                                                                                                                |       | ·     U.S. industry’s box shipments down 1.4% in 2007 

·     U.S. inventories at their lowest yearend level since  1994 (2.255 million tons) 

·     Canadian corrugated box shipments down 2.9% in 2007                                                                                                                                                                                                                    |
| ** **                                      | ** ** | ** **                |       |                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **                                      | ** ** | **Specialty****products** | ** ** | **Manufacturing**                   |       | **Industrial packaging**

·     Uncoated board: Price increases in the first half of  the year; Yearly average price up 59 US$/ton or 12% 

**Specialty papers**

·     Fine papers: prices decreased in the first half of  the year but rallied in the last quarter of 2007; price increases  announced for February 2008 on cut size and for March 2008 on 50-lb  rolls 

·     Kraft paper: price increases implemented in 2007                                                                                                    |       | **Industrial packaging**

·     Uncoated board: market’s operating rate down in  2007 following the slowdown in the housing market

**Specialty  papers**

·     Fine papers: North American demand for uncoated  freesheet down 5.6% in 2007; Good demand for recycled fine papers 

·     Kraft paper: Strong global demand but business  conditions for certain grades remained challenging                          |
| ** **                                      | ** ** | ** **                | ** ** | ** **                          |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **                                      | ** ** | ** **                |       | **Converting**                      |       | **Industrial Packaging**

·     Papermill packaging: mostly stable prices 

·     Honeycomb packaging products: price increases  implemented 

**Consumer product packaging**

·     Moulded pulp products: mostly stable prices 

·     Plastic products (Packaging for food industry):  price increases implemented in 2007                                                                                                                                                                                               |       | **Industrial Packaging**

·     Papermill packaging: challenging but Cascades gaining  market share in the U.S

·     Honeycomb packaging products: growing market 

**Consumer product packaging**

·     Moulded pulp products: healthy and stable market

·     Plastic products (Packaging for food industry):  growing demand in the U.S. and steady business conditions in Canada                  |
| ** **                                      | ** ** | ** **                |       | ** **                          |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **TISSUE PAPERS**                               | ** ** | ** **                |       | **Manufacturing****and converting** |       | **Parent rolls**

·     Two price increases implemented in 2007,  slightly higher for virgin pulp parent rolls 

**Converted products**

·     Canadian retail and away-from-home market: no  price increases successfully implemented in 2007 

·     U.S. Away-from-home market: implementation of price  increases in the the second half of the 2007 and additionnal price  increases announced for March 2008 

·     U.S. Retail market: announced price increases of 4-7%  for Q1 2008 |       | **Parent rolls**

·     Higher U.S. parent rolls production (+2%) and stable  U.S. industry operating rate (95%) in 2007 compared to last  year 

**Converted products**

·     Competitive Canadian retail and away-from-home market  in 2007 

·     1.4% yearly increase in shipments in the U.S. retail  market 

·     1% yearly increase in shipments in the U.S.  Away-from-home market |
| ** **                                      | ** ** | ** **                |       | ** **                          |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **RAW MATERIAL MARKETS**                        | ** ** | ** **                | ** ** | ** **                          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **                                      | ** ** | ** **                | ** ** | ** **                          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **RECYCLED PAPER**                              |       |                      |       |                                |       | **Old corrugated containers (OCC)**

·     Given a run-up in pricing the first quarter, US$ yearly average prices increased 44 US$/ton (or 64%) in 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | **Old corrugated containers (OCC)**

·     Strong Asian demand putting pressure on global fibre  markets                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **                                      |       | ** **                |       | ** **                          |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                            |       |                      |       |                                |       | **Sorted office papers (SOP)**

·     Prices improved every quarters for a total annual  increase of 54 US$/ton (or 51%) in 2007 

·     Prices continue to increase in the first months of  2008                                                                                                                                                                                                                                                                                                                                                                                  |       | **Sorted office papers (SOP)**

·     Solid demand from deinked pulp mills and tissue  producers 

·     Lower generation due to decreasing demand for  printing papers                                                                                                                                                                                                                                                                                         |
|                                            |       |                      |       |                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **VIRGIN PULP**                                 |       |                      |       |                                |       | **Softwood pulp (NBSK)**

·     US$ annual average market price increased  102 US$/ton in 2007 

·     Prices continued to rally in January 2008 to  880 US$/ton **Hardwood pulp (NBHK)**

·     US$ yearly average prices up 68 US$/ton in 2007 

·     Price differential with softwood pulp widened but  remains in-line with historical levels                                                                                                                                                      |       | ·     Healthy international demand, particularly strong in  China 

·     Tight supply and inventories resulting from operational  issues, strikes, lower regional fibre supply availability and  log shortages 

·     Global shipments up 3.4% in 2007 and inventories  at low historical level in December 2007                                                                                  |
| ** **                                      |       | ** **                |       | ** **                          |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **WOODCHIPS**                                   |       |                      |       |                                |       | **Conifer woodchips**

·     US$ prices relatively stable in Eastern Canada  compared to 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | ·     Lower lumber prices continuing to lead to sawmill  closures or low operating rates and a tighter woodchip supply                                                                                                                                                                                                                                                                                                                                                    |

 

Sources:RISI, American Forest Paper Association, Canadian Corrugated Case Association,Pulp & Paper Week.

 

17

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Financialoverview – 2007

 

**The financial figures included in this analysis for the yearsended December 31, 2007 and 2006 include the reclassificationof discontinued operations**–**see note4 of the Consolidated financial statements.**

 

In 2007, sales increased by $651 million, or 20%, to$3.9 billion, compared to $3.3 billion in 2006. Operating incomeincreased by $48 million, including specific items that substantiallyaffected results in 2007 and 2006. Excluding these specific items,which will be discussed in detail in each segment, operating income was down$12 million or 8%, to $142 million, compared to$154 million in 2006. Despite the additional contribution of Norampac,operating income decreased due to a substantial increase in raw materials costsduring the year and an additional depreciation and amortizationexpense resulting from the full consolidation of Norampac results in2007. The Company’s net earnings, including specific items, were$95 million or $0.95 per share, compared to $3 million or $0.04 pershare in 2006.

 

**Historical financialinformation**

 
| **(in millions of Canadian dollars,unless otherwise  noted) (Restated to conform with the presentation** | ** ** | **2005**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2006**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **of discontinued operations)**                                                                                                                  | ** ** | **Total**  | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **Total**  | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **Total**  | ** ** |
| **Sales**                                                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                                                                                                  |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Boxboard                                                                                                                                                   |       | 1,299      |       | 333        |       | 325        |       | 340        |       | 361        |       | 1,359      | ** ** | **344**    | ** ** | **352**    | ** ** | **332**    | ** ** | **315**    | ** ** | **1,343**  | ** ** |
| Containerboard                                                                                                                                             |       | 605        |       | 144        |       | 155        |       | 155        |       | 146        |       | 600        | ** ** | **294**    | ** ** | **307**    | ** ** | **310**    | ** ** | **282**    | ** ** | **1,193**  | ** ** |
| Specialty  products                                                                                                                                        |       | 688        |       | 170        |       | 175        |       | 172        |       | 174        |       | 691        | ** ** | **215**    | ** ** | **211**    | ** ** | **206**    | ** ** | **202**    | ** ** | **834**    | ** ** |
| Inter-segment  sales                                                                                                                                       |       | (68        | )          | (20        | )          | (20        | )          | (15        | )          | (13        | )          | (68        | )          | **(27**    | **)**      | **(29**    | **)**      | **(26**    | **)**      | **(26**    | **)**      | **(108**   | **)**      |
|                                                                                                                                                       |       | 2,524      |       | 627        |       | 635        |       | 652        |       | 668        |       | 2,582      |       | **826**    | ** ** | **841**    | ** ** | **822**    | ** ** | **773**    | ** ** | **3,262**  | ** ** |
| Tissue Papers                                                                                                                                              |       | 708        |       | 169        |       | 182        |       | 194        |       | 182        |       | 727        |       | **186**    | ** ** | **180**    | ** ** | **176**    | ** ** | **171**    | ** ** | **713**    | ** ** |
| Inter-segment  sales                                                                                                                                       |       | (31        | )          | (8         | )          | (7         | )          | (9         | )          | (7         | )          | (31        | )          | **(12**    | **)**      | **(13**    | **)**      | **(14**    | **)**      | **(7**     | **)**      | **(46**    | **)**      |
|                                                                                                                                                       |       | 3,201      |       | 788        |       | 810        |       | 837        |       | 843        |       | 3,278      |       | **1,000**  | ** ** | **1,008**  | ** ** | **984**    | ** ** | **937**    | ** ** | **3,929**  | ** ** |
| **Operating  income (loss) before depreciation and amortization ‘‘OIBD’’****(1)**                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                                                                                                  |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Boxboard                                                                                                                                                   |       | 28         |       | 18         |       | 15         |       | 14         |       | 10         |       | 57         |       | **33**     | ** ** | **12**     | ** ** | **15**     | ** ** | **9**      | ** ** | **69**     | ** ** |
| Containerboard                                                                                                                                             |       | 39         |       | 18         |       | 26         |       | 28         |       | (28        | )          | 44         |       | **39**     | ** ** | **37**     | ** ** | **46**     | ** ** | **30**     | ** ** | **152**    | ** ** |
| Specialty  products                                                                                                                                        |       | 28         |       | 10         |       | 14         |       | 4          |       | 17         |       | 45         |       | **18**     | ** ** | **11**     | ** ** | **15**     | ** ** | **15**     | ** ** | **59**     | ** ** |
|                                                                                                                                                       |       | 95         |       | 46         |       | 55         |       | 46         |       | (1         | )          | 146        |       | **90**     | ** ** | **60**     | ** ** | **76**     | ** ** | **54**     | ** ** | **280**    | ** ** |
| Tissue Papers                                                                                                                                              |       | 100        |       | 29         |       | 29         |       | 34         |       | 24         |       | 116        |       | **19**     | ** ** | **16**     | ** ** | **16**     | ** ** | **15**     | ** ** | **66**     | ** ** |
| Corporate activities                                                                                                                                       |       | 4          |       | (3         | )          | 1          |       | (3         | )          | —     |       | (5         | )          | **1**      | ** ** | **5**      | ** ** | **1**      | ** ** | **(1**     | **)**      | **6**      | ** ** |
|                                                                                                                                                       |       | 199        |       | 72         |       | 85         |       | 77         |       | 23         |       | 257        |       | **110**    | ** ** | **81**     | ** ** | **93**     | ** ** | **68**     | ** ** | **352**    | ** ** |
| **OIBD  excluding specific items****(1)**                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                                                                                                  |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Boxboard                                                                                                                                                   |       | 60         |       | 18         |       | 15         |       | 11         |       | 11         |       | 55         |       | **8**      | ** ** | **12**     | ** ** | **15**     | ** ** | **9**      | ** ** | **44**     | ** ** |
| Containerboard                                                                                                                                             |       | 65         |       | 13         |       | 25         |       | 28         |       | 25         |       | 91         |       | **40**     | ** ** | **44**     | ** ** | **48**     | ** ** | **44**     | ** ** | **176**    | ** ** |
| Specialty  products                                                                                                                                        |       | 38         |       | 13         |       | 14         |       | 14         |       | 17         |       | 58         |       | **18**     | ** ** | **11**     | ** ** | **15**     | ** ** | **16**     | ** ** | **60**     | ** ** |
|                                                                                                                                                       |       | 163        |       | 44         |       | 54         |       | 53         |       | 53         |       | 204        |       | **66**     | ** ** | **67**     | ** ** | **78**     | ** ** | **69**     | ** ** | **280**    | ** ** |
| Tissue Papers                                                                                                                                              |       | 102        |       | 29         |       | 29         |       | 34         |       | 24         |       | 116        |       | **19**     | ** ** | **15**     | ** ** | **16**     | ** ** | **15**     | ** ** | **65**     | ** ** |
| Corporate  activities                                                                                                                                      |       | (3         | )          | (3         | )          | 1          |       | (3         | )          | —     |       | (5         | )          | **1**      | ** ** | **5**      | ** ** | **1**      | ** ** | **(2**     | **)**      | **5**      | ** ** |
|                                                                                                                                                       |       | 262        |       | 70         |       | 84         |       | 84         |       | 77         |       | 315        | ** ** | **86**     | ** ** | **87**     | ** ** | **95**     | ** ** | **82**     | ** ** | **350**    | ** ** |

 

18

----

 

 
| **in millions of Canadian dollars,unless otherwise  noted) (Restated to conform with the presentation of** | ** ** | **2005**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2006**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **discontinued operations)**                                                                                                                            | ** ** | **Total**  | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **Total**  | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **Total**  | ** ** |
| **Operating  income (loss) from continuing operations**                                                                                                      |       | 29         |       | 32         |       | 45         |       | 36         |       | (17        | )          | 96         | ** ** | **57**     | ** ** | **30**     | ** ** | **38**     | ** ** | **19**     | ** ** | **144**    | ** ** |
| Excluding  specific items  (1)                                                                                                                               |       | 92         |       | 30         |       | 44         |       | 43         |       | 37         |       | 154        | ** ** | **33**     | ** ** | **36**     | ** ** | **40**     | ** ** | **33**     | ** ** | **142**    | ** ** |
| **Net  earnings (loss)**                                                                                                                                     |       | (97        | )          | 6          |       | 33         |       | 10         |       | (46        | )          | 3          | ** ** | **22**     | ** ** | **45**     | ** ** | **16**     | ** ** | **12**     | ** ** | **95**     | ** ** |
| Excluding specific  items (1)                                                                                                                                |       | 6          |       | 6          |       | 16         |       | 17         |       | 13         |       | 52         | ** ** | **5**      | ** ** | **7**      | ** ** | **9**      | ** ** | **1**      | ** ** | **22**     | ** ** |
| **Net  earnings (loss) per share (in dollars)**                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                                                                                        |       | $          | (1.19      | )          | $          | 0.07       |       | $          | 0.41       |       | $          | 0.12       |       | $          | (0.56      | )          | $          | 0.04       | ** ** | **$**      | **0.22**   | ** ** | **$**      | **0.45** | ** ** | **$** | **0.16** | ** ** | **$** | **0.12** | ** ** | **$** | **0.95** | ** ** |
| Basic, excluding  specific items  (1)                                                                                                                        |       | $          | 0.07       |       | $          | 0.07       |       | $          | 0.20       |       | $          | 0.21       |       | $          | 0.16       |       | $          | 0.64       | ** ** | **$**      | **0.05**   | ** ** | **$**      | **0.07** | ** ** | **$** | **0.09** | ** ** | **$** | **0.01** | ** ** | **$** | **0.22** | ** ** |
| **Cash  flow from operations (adjusted)**(1)****                                                                                                             |       | 159        |       | 39         |       | 56         |       | 56         |       | 32         |       | 183        | ** ** | **41**     | ** ** | **46**     | ** ** | **55**     | ** ** | **36**     | ** ** | **178**    | ** ** |
| Excluding  specific items                                                                                                                                    |       | 172        |       | 40         |       | 56         |       | 60         |       | 40         |       | 196        | ** ** | **49**     | ** ** | **48**     | ** ** | **56**     | ** ** | **49**     | ** ** | **202**    | ** ** |
| **Cash  flow from operations (adjusted) per share (in dollars)********(1)**                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                                                                                        |       | $          | 1.96       |       | $          | 0.48       |       | $          | 0.69       |       | $          | 0.70       |       | $          | 0.39       |       | $          | 2.26       | ** ** | **$**      | **0.41**   | ** ** | **$**      | **0.46** | ** ** | **$** | **0.56** | ** ** | **$** | **0.36** | ** ** | **$** | **1.79** | ** ** |
| Basic, excluding  specific items                                                                                                                             |       | $          | 2.12       |       | $          | 0.49       |       | $          | 0.69       |       | $          | 0.75       |       | $          | 0.49       |       | $          | 2.42       | ** ** | **$**      | **0.49**   | ** ** | **$**      | **0.48** | ** ** | **$** | **0.57** | ** ** | **$** | **0.49** | ** ** | **$** | **2.03** | ** ** |
| **Cascades  North American US$ selling price index (index 2002 = 1,000)********(2)**                                                               |       | 1,145      |       | 1,209      |       | 1,279      |       | 1,297      |       | 1,299      |       | 1,271      | ** ** | **1,314**  | ** ** | **1,341**  | ** ** | **1,382**  | ** ** | **1,411**  | ** ** | **1,362**  | ** ** |
| **Cascades  North American US$ raw materials index (index 2002 = 300)**(3)****                                                                     |       | 374        |       | 332        |       | 353        |       | 387        |       | 373        |       | 361        | ** ** | **438**    | ** ** | **465**    | ** ** | **497**    | ** ** | **521**    | ** ** | **480**    | ** ** |
| **US$/CAN$**                                                                                                                                                 | ** ** | $          | 0.83       |       | $          | 0.87       |       | $          | 0.89       |       | $          | 0.89       |       | $          | 0.88       |       | $          | 0.88       | ** ** | **$**      | **0.85**   | ** ** | **$**      | **0.91** | ** ** | **$** | **0.96** | ** ** | **$** | **1.02** | ** ** | **$** | **0.93** | ** ** |
| **Natural  Gas Henry Hub–US$/mmBtu**                                                                                                                    |       | $          | 8.62       |       | $          | 8.98       |       | $          | 6.79       |       | $          | 6.58       |       | $          | 6.56       |       | $          | 7.23       | ** ** | **$**      | **6.77**   | ** ** | **$**      | **7.55** | ** ** | **$** | **6.16** | ** ** | **$** | **6.97** | ** ** | **$** | **6.86** | ** ** |
| **Return  on assets (%)**(4)****                                                                                                                             |       | 8.4        | %          | 8.8        | %          | 9.4        | %          | 10.1       | %          | 10.8       | %          | 10.8       | %          | **10.5**   | **%**      | **9.8**    | **%**      | **9.5**    | **%**      | **8.9**    | **%**      | **8.9**    | **%**      |

 

----

(1)        See “Supplementalinformation on non-GAAP measures”.

 

(2)        The Cascades North Americanselling prices index represents an approximation of the Company’s’manufacturing (excluding converted products) selling prices in North America.It is weighted according to shipments, and includes some of the main Cascadesproducts for which prices are available in Pulp & Paper Week magazineand the Cascades Tissue Index. This index should only be used as a trendindicator, as it may differ from our actual selling prices and our product mix.The only non-manufacturing prices reflected in the index are those for tissue.In fact, the tissue pricing indicator, which is blended into the Cascades NorthAmerican selling prices index, is the Cascades tissue paper selling pricesindex, which represents a mix of primary and converted products.

 

(3)        The Cascades North Americanraw materials index represents the average weighted cost paid for some of ourmanufacturing raw materials, namely recycled fibre, virgin pulp and woodchips,in North America. It is weighted according to purchase volume (intons). This index should only be used as a trend indicator and may differ fromactual manufacturing purchasing costs and our purchase mix.

 

(4)        Return on assets is a non-GAAPmeasure and is defined as: LTM OIBD excluding specific items/LTM average oftotal quarterly assets.

 

Financialresults for the year ended December 31,****2007,compared to the year ended December 31,****2006

 

**Sales**

** **

Sales increased by $651 million, or 20%, to $3.929 billionversus $3.278 billion in 2006. Acquisition of the Versailles boxboardmill and the remaining interests in Norampac (50%) and Metro Waste in2006 accounted for $648 million in sales during the year. Net averageselling prices in U.S. dollars and Euros rose in all of our main segments.Including mill closures in 2006, shipments increased in most of our businesssegments in 2007, particularly in the European boxboard by 3% and in the NorthAmerican manufacturing Boxboard segment due to the acquisition of theVersailles mill. Shipments of boxboard folding cartons decreased by 13%, due tothe strong competition and weak operating rate prevailing in that sector. Thefirst quarter of 2007 was also affected by a 33-day shutdown at ourToronto boxboard mill, following a boiler failure that occurred at the end of2006.

 

**Operating income beforedepreciation and amortization**

** **

The Company generated $352 million in operating income beforedepreciation and amortization (OIBD), compared to $257 million in 2006.The OIBD margin increased for the year, to 8.9%, compared to 7.8% in 2006.Excluding specific items, the OIBD stood at $350 million, compared to$315 million in 2006, an increase of $35 million or 11%, which wasachieved despite higher raw materials costs and the strengthening of theCanadian dollar, both of which had an estimated $119 and $32 millionnegative impact. The Company was able to compensate for these negative effectsthrough increased selling prices, improved results from its lower-performingassets and the additional contribution of Norampac and Metro Waste.

 

19

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The main variances in operating income before depreciation andamortization, excluding specific items, are shown below. Selling priceincreases, combined with the additional contribution of our recentacquisitions, more than offset the negative impact of higher raw materialscosts and the Canadian dollar:

 

 

The operating income before depreciation and amortization varianceanalysis by segment is as follows:

 

**OIBD variance analysis**

 
| ** **                                                                     | ** ** | **Packaging** | ** ** | ** **         | ** ** | ** **              | ** ** | ** **           | ** ** |
|--------------------------------------------------------------------------------|------------|---------------|------------|--------------------|------------|-------------------------|------------|----------------------|------------|
| **(in millions of dollars)**                                    | ** ** | **Boxboard**  | ** ** | **Containerboard** | ** ** | **Specialty  Products** | ** ** | **Total  Packaging** | ** ** | **Tissue Papers** | ** ** | **Corporate  Activities** | ** ** | **Consolidated** | ** ** |
| **OIBD for  the year ended December 31, 2006 (excluding specific items)** |       | 55            |       | 91                 |       | 58                      |       | 204                  |       | 116 |   | (5 | ) | **315** | ** ** |
| **Positive  (negative) impact from:**                                          | ** ** | ** **    | ** ** | ** **         | ** ** | ** **              | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Volume (shipments)                                                             |       | (1            | )          | (6                 | )          | 3                       |       | (4                   | )          | (1 | ) | — | ** ** | **(5** | **)** |
| Selling price &  mix                                                  |       | 43            |       | 22                 |       | 20                      |       | 85                   |       | 25 |   | (5 | ) | **105** | ** ** |
| Raw materials (1)                                                              |       | (36           | )          | (14                | )          | (17                     | )          | (67                  | )          | (52 | ) | — | ** ** | **(119** | **)** |
| Energy price &  consumption                                           |       | (3            | )          | 3                  |       | 2                       |       | 2                    |       | 1 |   | — | ** ** | **3** | ** ** |
| Variation of the CAN$ (2)                                                      |       | (11           | )          | (12                | )          | (15                     | )          | (38                  | )          | (5 | ) | 11 | ** ** | **(32** | **)** |
| Other variable costs(3)                                                        |       | 2             |       | (1                 | )          | (2                      | )          | (1                   | )          | (4 | ) | (3 | ) | **(8** | **)** |
| Fixed costs and others (4)                                                     |       | 9             |       | —             |       | (2                      | )          | 7                    |       | (16 | ) | — | ** ** | **(9** | **)** |
| Other sectors (5)                                                              |       | (4            | )          | 5                  |       | —                  |       | 1                    |       | 1 |   | 7 | ** ** | **9** | ** ** |
| Business acquisitions  and disposals                                           |       | (10           | )          | 88                 |       | 13                      |       | 91                   |       | — |   | — | ** ** | **91** | ** ** |
| **Change  in OIBD for the year**                                               |       | (11           | )          | 85                 |       | 2                       |       | 76                   |       | (51 | ) | 10 | ** ** | **35** | ** ** |
| **OIBD  excluding specific items**                                             |       | 44            |       | 176                |       | 60                      |       | 280                  |       | 65 |   | 5 | ** ** | **350** | ** ** |
| Specific items                                                                 |       | 25            |       | (24                | )          | (1                      | )          | —               |       | 1 |   | 1 | ** ** | **2** | ** ** |
| **OIBD for  the year ended December 31, 2007**                            |       | 69            |       | 152                |       | 59                      |       | 280                  |       | 66 |   | 6 | ** ** | **352** | ** ** |

 

----

(1)   The impacts of theseestimated costs are based on production costs per unit, which are affected byyield, product mix changes and purchase and transfer prices. In addition tomarket pulp and recycled fibre, they include purchases ofexternal boards and parent rolls for the converting sectors and other rawmaterials such as plastics and woodchips.

(2)   The estimated impact ofexchange rate is based on the Company’s national and export sales lesspurchases that are impacted by the exchange rate changes, mainly the CAN$/US$variation. It also includes the impact of exchange rate on theCompany’s working capital items and cash position.

(3)   The impact of these estimatedvariable costs based on production costs per unit, which are affected bydowntimes, efficiencies and product mix changes.

(4)   Includes all other costssuch as repair and maintenance, selling and administration and profit sharing.

(5)   Includes change in OIBD ofoperating units that are not in the manufacturing or converting sectors.

(6)   Since the 2006 periodincludes 50% of the OIBD of Norampac, the variance items are include at 50%only as at the remaining 50% is included in business acquisition.

 

20

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Specificitems included in operating income before depreciation and amortization

 

The Company incurred some specific items in 2007 and2006 that adversely or positively affected its operating results. We believethat it is useful for readers to be aware of these items, as they provide ameasure of performance with which to compare the Company’s results betweenperiods notwithstanding these specific items.

 

Gainsand losses on disposal and other

 

In 2007, the Company recorded the following gains and losses,totaling $17 million.

 
| · |   | In the first quarter of 2007, the Company  disposed of its investment in a joint venture (in the Boxboard segment) for a  consideration of $38 million (US$32 million). The Company realized  a gain of $25 million, before income taxes of $11 million. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| · |   | On May 1, 2007, the Company sold the  building of its Toronto (Pickering) tissue converting facility, which had  been closed in 2005, for an amount of $7 million. The Company realized  again of $1 million. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| · |   | In the second quarter of 2007, the Company  recorded a provision of $2 million as a settlement related to the  action filed by ServiceCore Inc.                                                                                                                                                                                                                                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · |   | In the fourth quarter of 2007, the Company  sold an investment in a privately-held company controlled by a related  director for a cash consideration and a gain of $3 million.                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · |   | In the fourth quarter of 2007, the Company  completed the sale of its Red Rock linerboard mill, located in Ontario, which  had been indefinitely shut down. As a result of this agreement, the  Company paid the purchaser $10 million in order to support the  facility’s start-up.                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · |   | In 2006, the Company disposed of its  investment in a joint venture (in the Boxboard segment) for a consideration  of $11 million (US$10 million), of which $9 million  (US$8 million) was received at closing and $2 million  (US$2 million) would be received over the next two years. The  Company realized a gain of $4 million, before income taxes of $2 million. |

 

Impairmentloss, closure and restructuring costs

 

An additional provision of $5 million was recorded in 2007,following the 2006 temporary closure of the Red Rock containerboard mill.The Company also recorded a $1 million severance provision, followinga restructuring program announced at its St-Jérôme, Québec, fine paper mill. Inaddition, the Company recorded a $3 million impairment charge for someproperty, plant and equipment not in service in the Containerboard Group.

 

In 2006, the Company announced the permanent shutdown of its SpecialtyProducts board mill in France and of its converting boxboard plant in Montréal,Québec. The Company also announced the temporary curtailment of the Red Rock,Ontario containerboard mill, and of the Boxboard Group’s Fjordcell pulp mill.An additional provision for closures and restructuring costs following the2005 announcement of production curtailment at the St-Jérôme operation wasalso recorded.

 

Financialinstruments

 

The Company did not record any unrealized losses or gains in 2007compared to a $5 million gain in 2006 on certain financial instrumentsthat were not designated as hedging instruments.

 

Inventoryadjustment resulting from the Norampac acquisition

 

As a consequence of the preliminary purchase price allocation completedat the end of 2006, operating results for the first quarter of 2007 werereduced by $6 million since the inventory acquired at the end of2006 was recognized at fair value and no profit was recorded on itssubsequent sale.

 

The following impairment charges and closure and restructuring costswere recorded in 2007 and 2006:

 
| ** **                                    | ** ** | **2007**         | ** ** | **2006**                                   | ** ** |
|-----------------------------------------------|------------|------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **Impairment**   | ** ** | **Closure and  restructuring  costs** | ** ** | **Impairment** | ** ** | **Closure and  Restructuring  costs** | ** ** |
| Boxboard – Montréal                 | ** ** | ** —** | ** ** | ** —**                           |       | ** —** |   | 1 |   |
| Boxboard – Fjordcell                     | ** ** | ** —** | ** ** | ** —**                           |       | ** —** |   | 1 |   |
| Containerboard – Red Rock                | ** ** | ** —** | ** ** | **5**                                      |       | 40 |   | 12 |   |
| Containerboard – others                  | ** ** | **3**            | ** ** | ** —**                           |       | ** —** |   | ** —** |   |
| Specialty Products – St-Jérôme | ** ** | ** —** | ** ** | **1**                                      |       | ** —** |   | 3 |   |
| Specialty Products – board mill          | ** ** | ** —** | ** ** | ** —**                           |       | 7 |   | 3 |   |
| ** **                                    | ** ** | **3**            | ** ** | **6**                                      |       | 47 |   | 20 |   |

 

21

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The following table shows the reconciliation of all closure andrestructuring cost provisions. The balance as at December 31, 2007 shouldbe paid in 2008. It includes the provisions presented in discontinuedoperations as at December 31, 2007 and 2006:

 
| ** **                                      | ** ** | **2007**         | ** ** | **2006**     | ** ** |
|-------------------------------------------------|------------|------------------|------------|--------------|------------|
| **Balance — Beginning of year**            | ** ** | **47**           |       | 55           |       |
| Additional provisions                           |       |             |       |         |       |
| Severance and pension liability                 | ** ** | **7**            |       | 26           |       |
| Writedown of inventories                        | ** ** | **4**            |       | (2           | )          |
| Others                                          | ** ** | **16**           |       |  — |       |
| Non-monetary items                              |       |             |       |         |       |
| Writedown of inventories                        | ** ** | **(4**           | )          | 2            |       |
| Pension liability adjustments and others        | ** ** | **(7**           | )          | (7           | )          |
| Liability assumed from the Norampac acquisition | ** ** | ** —** |       | 8            |       |
| Payments                                        | ** ** | **(44**          | )          | (35          | )          |
| **Balance – End of year**                  | ** ** | **19**           |       | 47           |       |

 

Businesshighlights

 

Over the past two years, the Company finalized several transactions(closure or sale of certain operating units) in order to optimize its assetbase or streamline its cost structure.

 

The following transactions that occurred in 2006 and2007 should be taken into consideration when reviewing the overall orsegmented analysis of the Company’s results:

 

Closure,restructuring and disposal

 

**Boxboard Group**

** **

1) On June 29, 2006, the Company announced that it was closingoperations at its FjordCell pulp mill for an indefinite period of time.

 

2) On October 6, 2006, the Company announced the temporaryshutdown of its Scierie Lemay sawmill. This activity is presentedas a discontinued operation.

 

3) On December 11, 2006, the Company also announced thepermanent closure, effective March 2007, of its Montréal convertingboxboard operations.

 

4) On September 7, 2006, the Company disposed of its interest ina joint venture. In the first quarter of 2007, the Company disposedof another investment in a joint venture.

 

**Containerboard Group**

** **

5) On August 30, 2006, the Company announced that it had ceasedoperations at its Red Rock, Ontario containerboard mill for an indefiniteperiod of time. The mill was sold to a third party in December 2007.

 

**Specialty Products Group**

** **

6) On August 24, 2006, the Company announced the permanent shutdownof one of its specialty board mills, located in France.

 

7) In 2007, the Company decided to dispose of its Greenfield SASpulp mill, located in France. The transaction was completed on January 7, 2008.This activity is presented as a discontinued operation.

 

Businessacquisitions

 

**Boxboard Group**

** **

8) On April 25, 2006, the Company’s Boxboard Group announced thatit had acquired certain assets from the paperboard division of SimkinsIndustries, located in Ridgefield, New Jersey andNew Haven, Connecticut.

 

9) On July 19 and August 7, 2006, the Company completedits acquisition of assets from the Caraustar Industries coated recycledboxboard mills located in Sprague, Connecticut, and of certain assets from thiscompany’s coated recycled boxboard mills in Rittman, Ohio. The Spraguemill now operates under the name “Versailles”.

 

**Containerboard Group**

** **

10) On December 29, 2006, the Company acquired the remaining ofoutstanding common shares (50%) in Norampac Inc. from Domtar Inc., for atotal purchase price of $561 million. The Company’s financial statementssince that date include 100% of Norampac’s balance sheet items, results andcash flows, while 50% of results and cash flows for 2006 are included,since they were proportionally consolidated prior to the acquisition. Thisacquisition also resulted in full consolidation of Metro Waste since that date,with a 23% non-controlling interest.

 

22

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Transactionwith Reno De Medici S.p.A. (“RdM”)

 

On June 20, 2007, Reno De Medici S.p.A., a public company based inMilan, Italy, announced, along with the Company, the signature of a Letter ofIntent for the negotiation of terms and conditions pertaining to a potentialcombination of RdM and Cascades S.A.’s European recycled cartonboard business.Concurrently with the proposed merger, Cascades S.A. and a group ofpresent RdM shareholders were expected to enter into a three-year shareholders’agreement covering matters relating to corporate governance (where CascadesS.A. and a group of current RdM shareholders would be equally represented onthe RdM board of directors). The agreement also provided for an 18-monthlock-up, followed by reciprocal first-refusal and tag-along rights.

 

On September 14, 2007, the Company announced that thedefinitive combination agreement and shareholders’ agreement had beensigned. The combination was subject to certain conditions, including approvalby appropriate regulatory authorities as well as by RdM shareholders ata special meeting. On October 29, 2007, the combination was approved byRdM shareholders. The transaction was declared effective March 1, 2008,and all conditions pertaining to the merger have been met.

 

As a result of this transaction, the Company contributed itsrecycled boxboard manufacturing assets, located in Blendecques, France,and Arnsberg, Germany, as well as its sheeting centre in Wednesbury, U.K., fora consideration of 115.6 million or 30.6% of outstanding shares inRdM. Cascades’ investment in RdM will be proportionally consolidated in2008, since the Company and a group of current shareholders have jointcontrol of RdM.

 

This combination will create a new leader in the recycled cartonboardmarket. In addition to significantly increasing RdM’s current productioncapacity, making it a major player in the world recycled cartonboard marketwith more than one million tonnes per annum, this compelling strategic fit willresult in an operationally and financially stronger company that will be betterpositioned to meet the demands of global customers. This transaction alsorepresents new opportunities for Cascades’ shareholders, by combining theCompany’s ability to create value through joint ventures and RdM’s provenexpertise in this industry.

 

23

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Discontinuedoperations

 

During the fourth quarter of 2004, theCompany decided to initiate a divestiture plan for its Fine papers andTissue distribution activities. These divestitures were completed in February 2006 andMarch 2005 respectively. The Company also ceased operations at itsFine papers mill in Thunder Bay, Ontario, on January 21, 2006. In 2007,the Company decided to dispose of its Greenfield SAS pulp mill,located in France, and of its Scierie Lemay sawmill in Québec. The assets,liabilities, earnings and cash flows associated with these activities forthe current period and for all comparative periods aretherefore classified as discontinued operations.

 

In 2007, the Company recorded a gain of$6 million in relation to the settlement of the pension plan at theThunder Bay coated fine paper mill, which had been closed in January 2006.Severance and inventory writedown provisions in the amount of $5 million,and a $4 million impairment charge were recorded, bringing the net bookvalue of the Scierie Lemay (Boxboard Group) property, plant and equipment andother assets to its fair value. This sawmill was temporarily shut down in 2006.

 

The Company also recorded a provision of$1 million related to the settlement of the class actions that had beenfiled following infractions in 2006 of the Competition Act, relating tothe sale of carbonless paper sheets by the Cascades Fine Papers Group, Inc.

 

In December 2007, Cascades sold itscoated Fine paper mill located in Thunder Bay, Ontario, which resulted in a disbursementof $5 million.

 

The comparative financial information for2006 and 2005 has been restated to reflectthis change. Condensed statements of earnings and cashflows relating to these discontinued operations is presented in the tablebelow. Condensed balance sheet is presented in note 4 of the consolidatedfinancial statements.

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| **Condensed statement of earnings**             |       |     | ** ** |     |       |
| Sales                                           | ** ** | **104**  | ** ** | 200      |       |
| Depreciation and amortization                   | ** ** | **1**    | ** ** | 2        |       |
| Operating loss (1)                              | ** ** | **(20**  | **)**      | (21      | )          |
| Interest expense                                | ** ** | **4**    | ** ** | 4        |       |
| Recovery of income taxes                        | ** ** | **(5**   | **)**      | (9       | )          |
| Net loss from discontinued operations           | ** ** | **(19**  | **)**      | (16      | )          |
| Net loss per share from discontinued operations | ** ** | **$**    | **(0.19**  | **)**    | $          | (0.19 | ) |
| **Condensed statement of cash flows**           |       |     | ** ** |     |       |
| Operating activities                            | ** ** | **(36**  | **)**      | (27      | )          |
| Investing activities                            | ** ** | **(2**   | **)**      | 84       |       |
| Financing activities                            | ** ** | **(2**   | **)**      | (1       | )          |
|                                                 |            |          |            |          |            |  |  |

 

1.     Operatingloss includes the following items

 
| ** **                                                      | ** ** | **2007**   | ** ** | **2006**     | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|--------------|------------|
| Closure and restructuring costs                                 | ** ** | **1**      | ** ** | (2           | )          |
| Provision on disposal of the fine paper distribution activities | ** ** | **—** | ** ** | (1           | )          |
| Legal settlement                                                | ** ** | **(1**     | **)**      | (1           | )          |
| Impairment of property, plant and equipment and other assets    | ** ** | **(4**     | **)**      | (14          | )          |
| Loss on disposal of Thunder Bay assets                          | ** ** | **(5**     | **)**      |  — |       |
| **Total**                                                       | ** ** | **(9**     | **)**      | (18          | )          |

 

24

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Businesssegment review (refer also to the Industry review on page 18)

 

Packagingproducts

 
| ** **                         | ** ** | **Sales  (in millions  of dollars)** | ** ** | **OIBD  (in millions  of dollars)** | ** ** | **Shipments(1)(in thousands  short tons)** | ** ** | **Average  selling price  (in Canadian  dollars/unit)** | ** ** | **Average  selling price  (in U.S. dollars or  euros/unit)** | ** ** | **Price reference  (in U.S. dollars  or euros/unit** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                       | ** ** | **2006**                                      | ** ** | **2007**                                             | ** ** | **2006**                                                          | ** ** | **2007**                                                                         | ** ** | **2006**                                                                 | ** ** | **2007** | ** ** | **2006** |   | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Boxboard                           |       |                                           |       |                                          |       |                                                 | ** ** |                                                              |       |                                                                             |       |                                                                     |       |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Manufacturing–North  America  | ** ** | **317**                                        | ** ** | 301                                           |       | **(12**                                              | **)**      | (1                                                                | )          | **459**                                                                          | ** ** | 445                                                                      |       | **691** | ** ** | 677 |   | **643** | ** ** | 597 | ** ** | **721** | ** ** | 635 |   |
| Manufacturing–Europe          | ** ** | **463**                                        | ** ** | 426                                           |       | **9**                                                | ** ** | 2                                                                 |       | **580**                                                                          | ** ** | 562                                                                      |       | **806** | ** ** | 757 |   | **€** | **549** | ** ** | € | 531 | ** ** | **€** | **816** | ** ** | € | 786 |   |
| Converting                         | ** ** | **671**                                        | ** ** | 748                                           |       | **76**                                               | ** ** | 62                                                                |       | **295**                                                                          | ** ** | 338                                                                      |       | **2,275** | ** ** | 2,213 |   | **2,118** | ** ** | 1,951 | ** ** | **n/a** | ** ** | n/a |   |
| Others and  eliminations           | ** ** | **(108**                                       | **)**      | (116                                          | )          | **(4**                                               | **)**      | (6                                                                | )          | **(132**                                                                         | **)**      | (141                                                                     | )          |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| ** **                         |       | **1,343**                                      | ** ** | 1,359                                         |       | **69**                                               | ** ** | 57                                                                |       | **1,202**                                                                        | ** ** | 1,204                                                                    |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Containerboard (2)                 |       |                                           | ** ** |                                          |       |                                                 | ** ** |                                                              |       |                                                                             | ** ** |                                                                     |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Manufacturing                      | ** ** | **599**                                        | ** ** | 333                                           |       | **59**                                               | ** ** | (8                                                                | )          | **1,217**                                                                        | ** ** | 691                                                                      |       | **493** | ** ** | 481 |   | **459** | ** ** | 424 | ** ** | **532** | ** ** | 503 |   |
| Converting                         | ** ** | **984**                                        | ** ** | 506                                           |       | **76**                                               | ** ** | 45                                                                |       | **844**                                                                          | **(3)**    | 432                                                                      | (3)        | **1,166** | **(3)** | 1,172 | (3) | **1,085** | **(3)** | 1,033 | (3) | **n/a** | ** ** | n/a |   |
| Others and  eliminations           | ** ** | **(390**                                       | **)**      | (239                                          | )          | **17**                                               | ** ** | 7                                                                 |       | **(649**                                                                         | **)**      | (381                                                                     | )          |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| ** **                         |       | **1,193**                                      | ** ** | 600                                           |       | **152**                                              | ** ** | 44                                                                |       | **1,412**                                                                        | ** ** | 742                                                                      |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Specialty  products                |       |                                           | ** ** |                                          |       |                                                 | ** ** |                                                              |       |                                                                             | ** ** |                                                                     |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Manufacturing                      | ** ** | **318**                                        | ** ** | 333                                           |       | **6**                                                | ** ** | 1                                                                 |       | **360**                                                                          | ** ** | 367                                                                      |       | **887** | ** ** | 886 |   | **826** | ** ** | 781 | ** ** | **767** | ** ** | 739 |   |
| Converting                         | ** ** | **232**                                        | ** ** | 226                                           |       | **26**                                               | ** ** | 30                                                                |       | **104**                                                                          | ** ** | 106                                                                      |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Recovery, deinked  pulp and others | ** ** | **284**                                        | ** ** | 132                                           |       | **27**                                               | ** ** | 14                                                                |       | **(14**                                                                          | **)**      | (16                                                                      | )          |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| ** **                         |       | **834**                                        | ** ** | 691                                           |       | **59**                                               | ** ** | 45                                                                |       | **450**                                                                          | ** ** | 457                                                                      |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Eliminations                       | ** ** | **(108**                                       | **)**      | (68                                           | )          | **—**                                           | ** ** | —                                                            |       | **—**                                                                       | ** ** | —                                                                   |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Total                              | ** ** | **3,262**                                      | ** ** | 2,582                                         |       | **280**                                              | ** ** | 146                                                               |       | **3,064**                                                                        | ** ** | 2,403                                                                    |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Total excluding  specific items    |       |                                           |       |                                          |       | ** **                                           | ** ** |                                                              |       |                                                                             | ** ** |                                                                     |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Boxboard                           |       |                                           |       |                                          |       | **44**                                               | ** ** | 55                                                                |       |                                                                             | ** ** |                                                                     |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Containerboard (2)                 |       |                                           |       |                                          |       | **176**                                              | ** ** | 91                                                                |       |                                                                             | ** ** |                                                                     |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Specialty  products                |       |                                           |       |                                          |       | **60**                                               | ** ** | 58                                                                |       |                                                                             | ** ** |                                                                     |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Excluding  specific items          |       |                                           |       |                                          |       | **280**                                              | ** ** | 204                                                               |       |                                                                             | ** ** |                                                                     |       |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
|                                    |            |                                                |            |                                               |            |                                                      |            |                                                                   |            |                                                                                  |            |                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)        Total shipments do not takeinto account the elimination of business sector intercompany shipments

(2)        2006 numbers include50% of Norampac while 2007 numbers include 100%

(3)        Isequal to 13,378 million square feet (msf), 74 CAN$/msf,68 US$/msf in 2007, and to 6,799 million msf,74 CAN$/msf, 66 US$/msf in 2006.

 

Sales in the Packaging Products segmentincreased by $680 million or 26%, to $3.262 billion versus$2.582 billion in 2006, due to the Norampac, Metro Waste and Versaillesacquisitions.

 

The Packaging Products segment’s operatingincome before depreciation and amortization (OIBD) stood at $280 millionfor the year, compared to $146 million in 2006. This includes a gain of$25 million resulting from the divestiture of a joint-venture interest inthe Boxboard Group and additional closure costs, loss on disposal and an impairmentof assets provision in the amount of $19 million. This also includes a$6 million loss related to inventory adjustment following the Norampacacquisition. Excluding specific items, the OIBD jumped by 37% to$280 million compared to $204 million in 2006, despite the increasein raw materials costs and the strengthening of the Canadian dollar, bothof which factors were offset by higher selling prices, additional contributionsby the Norampac and Metro Waste acquisitions, and the action plan to improveprofitability in some underperforming assets.

 

Boxboard

 

Sales for the Boxboard Group totaled$1.343 billion in 2007, compared to $1.359 billion in 2006. Over thecourse of this period, shipments by primary mills rose 3% in North America, dueprimarily to the Versailles acquisition. This increase was partly offset by adecrease in shipments from the Toronto mill, due to a boiler failure at the endof 2006, which caused a 33-day shutdown in the first quarter of 2007, as wellas maintenance downtime at our Jonquière and Versailles mills in the fourthquarter of 2007. In North America, average selling prices for primary boxboardrose by US$46 per ton over 2006 figures; however, that increase waspartly offset by the stronger Canadian dollar. On the converting side,increased selling prices in the QSR sector and the general folding cartonsector for the year were partly offset by a stronger Canadian dollar and ahighly competitive market.

 

European volumes increased by 3% over 2006, thanks to improvingbusiness conditions and a strong backlog in the recycled boxboard market. Inthe virgin boxboard segment, the LaRochette mill continued to gain additionalvolumes after the second quarter of 2007. Recent price increases implemented inthe second and third quarters, as well as a better geographic sales mix,improved recycled board selling prices by 3%, while the market priceenvironment remains challenging for virgin mills.

 

 

25

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Operating income before depreciation andamortization, excluding specific items, decreased by 20%, or $11 million,to $44 million versus $55 million in 2006. Operating results werenegatively impacted (approximately $36 million) by higher raw materialscosts in both North America and Europe following significant increases in recycledpaper and pulp prices on the mill side and, in part, by external boardpurchases carried out by our converting operations. The boiler failure at theToronto mill also adversely affected OIBD in the first quarter of 2007,by approximately $8 million.

 

These negative impacts were offset byimproved average selling prices and improved manufacturing performance andfixed costs. However, the strengthening of the Canadian dollar had an adverseimpact of $11 million.

 

The Versailles mill, acquired in July 2006,also affected OIBD negatively, by $10 million in 2007. Several unplanneddowntimes were caused by inefficiencies in the boiler operation, as well assome quality issues. An action plan has been drawn up and capital investmentsmade that have already started to show improvement, which should have apositive impact in 2008.

 

The disposal of two joint venture interestsin the QSR business – one in the third quarter of 2006 and the second atthe beginning of 2007 – reduced OIBD by $5 million. This Group recorded a$25-million gain on disposal of its interest in GSD, a joint venture company inits QSR converting business, for a cash consideration of $38 million(US$ 32 million).

 

The 2006 temporary closure of theFjordcell pulp mill yielded a positive contribution, in the amount of$3.5 million, to OIBD for the year compared to 2006.

 

Containerboard

 

**For comparative analysis purposes, the2006 numbers are presented on a proforma basis to reflect 100% of the Containerboard(Norampac) operations, although its results were proportionally consolidatedat 50% in 2006.**

 

The Containerboard Group’s sales decreased by$7 million to $1.193 billion in 2007, compared to $1.200 billion(on a proforma basis) in 2006. Manufacturing shipments dropped as a result ofthe indefinite closure of our Red Rock, Ontario manufacturing mill in October 2006.Shipments from this mill totaled 220,000 short tons or 16% of totalshipments in 2006. Excluding this closure shipments increased by 5%. Convertingshipments also fell in 2007, when compared to 2006, due to a continued declinein demand in the Canadian and U.S. corrugated markets, particularly in theNortheastern U.S. region. In the U.S., industry box shipments were down by1.4%.

 

In spite of better US$ pricing levels for theyear compared to 2006, sales figures for both the manufacturing and convertingsectors declined due to fewer shipments. Transaction prices overall formanufacturing products’ in 2007 were 8% higher on average than in 2006.Our operating rate was close to 100% and the U.S. industry’s combined mill andbox plant inventories were at approximately 3.5 weeks of supply level atthe end of December 2007.

 

Operating income before depreciation andamortization, excluding specific items, decreased, by $6 million (whencompared to proforma basis) to $176 million due to a significant increasein recycled paper costs that had a negative impact of approximately$28 million when taking into account our hedging portfolio. Thestrengthening of the Canadian dollar also negatively impacted the results, by$24 million. Those negative impacts were partly offset by better sellingprices in both the manufacturing and converting sectors, lower energy costs andthe shutdown of the Red Rock mill in 2006.

 

The Containerboard group incurred closingcosts and a loss on disposal of $15 million, resulting from prior-year closuresand the sale of the Red Rock mill. This group also recorded an impairmentcharge of $3 million on some unused assets. Due to the preliminarypurchase price allocation done at the end of 2006, first-quarter operatingresults were reduced by $6 million since the inventories acquired at theend of 2006 were recognized at fair value and no profit was recorded on theirsubsequent sale.

 

Specialtyproducts

 

Sales for the Specialty Products Groupincreased by $143 million, to $834 million compared to$691 million in 2006. Of this increase, $127 million is related tothe full consolidation of Metro Waste results, compared to 50% in 2006. Salesfrom recovery activities were up by $36 million, resulting mostly from thehigher waste paper market prices versus 2006. Declining North American demandfor vinyl flooring backing, coupled with the permanent closure of our Ste-Mariemill (France) in 2006, resulted in a $12 million drop in sales for thisdivision. Despite difficult market conditions for our papermill packagingbusiness, market share increases in the United States and Europe compensatedfor lower demand in Canada. Sales for our honeycomb sector increased by 25%compared to 2006, due mainly to a U.S. acquisition in 2007 and increaseddemand for our Canadian divisions’ products. Stronger market demand forrecycled content in North America resulted in improved sales for de-inked pulpbusiness, in terms of shipments and pricing.

 

Operating income before depreciation andamortization (OIBD), excluding specific items, increased slightly to$60 million versus $58 million in 2006. The inclusion of Metro Wasteat 100% accounted for a positive contribution. Higher waste paper marketprices, combined with improved efficiencies, resulted in a positivecontribution for recovery activities when compared to 2006. The continuation ofcost-saving measures previously implemented and a realignment toward high-valueand recycled sales products enabled the fine paper sector to maintain a stablecontribution compared to 2006, despite higher pulp prices. This Group’s OIBDwas impacted by higher raw materials prices and lower market demand for vinylflooring backing in North America. The strengthening of the Canadiandollar negatively impacted on OIBD, by $15 million in 2007.

 

26

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Tissue papers

 
| ** **                          | ** ** | **Sales (in millions of dollars)** | ** ** | **OIBD (in millions of dollars)** | ** ** | **Shipments (in thousands short tons)** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                               | ** ** | **2006**                                              | ** ** | **2007**                                                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Manufacturing & converting | ** ** | **713**                                                |       | 727                                                   | ** ** | **66**                                                      |       | 116 | ** ** | **451** |   | 443 |   |
| Excluding specific items            | ** ** | ** **                                             |       |                                                  |       | **65**                                                      |       | 116 |   |   |   |   |   |

 
| ** **                          | ** ** | **Average selling price  (in Canadian dollars/unit)** | ** ** | **Average selling price  (in U.S. dollars/unit)** | ** ** | **Price reference  (in U.S. dollars/unit)** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                                                  | ** ** | **2006**                                                              | ** ** | **2007**                                                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Manufacturing & converting | ** ** | **1,547**                                                                 |       | 1,607                                                                 | ** ** | **1,440**                                                  |       | 1,417 | ** ** | **1,493** |   | 1,414 |   |

 

Tissue Group sales decreased by 2%, to$713 million in 2007 compared to $727 million in 2006. Averagenet realized prices in US$ were 1.6% higher in 2007 versus 2006, as aresult of price increases implemented over 2006 and 2007 in parentrolls, in the U.S. commercial and industrial markets and in the US retailmarkets. Total shipments increased by 2% compared to 2006, but our integrationrate decreased by 3%.

 

The Tissue Group’s operating income beforedepreciation and amortization, excluding specific items, stood at$65 million in 2007, compared to $116 million in 2006. This Group wasnegatively affected by the increase in raw materials production costs for$52 million, which were partly offset by an increase in the averagerealized U.S.-dollar selling price of converted products and parent rolls. Thenegative impact of foreign exchange accounted for $5 million. Sellingcosts were up due to an expanded sales force and higher advertising costs forsome products.

 

On May 1, 2007, this Group sold thebuilding of its Toronto (Pickering) converting facility, which had been closedin 2005, for an amount of $7 million, realizing a gain of $1 million.In June 2007, this Group changed the vocation of its western Canadianfacility. The converting line located in Calgary was shut down and became adistribution centre for Western Canadian customers. This change didnot have any impact on its operating results.

 

Corporateactivities

 

Corporate activities include OIBD from theCompany’s Engineering division, which has been involved in a constructionproject in Western Canada for a third party since late 2006. This project isexpected to last until the second quarter of 2008. It is impossible atthis point to determine if this type of activity will continue in the future.The 2007 results of the corporate activities include an exchange gain on itsU.S. centralized bank accounts and a gain of approximately $5 million on itsforward exchange contracts. In 2007, the Company recorded a provision of$2 million related to the action filed by ServiceCore Inc. as well as a$3 million gain following the disposal of an investment in aprivately-held company controlled by a related director for proceeds of$3 million.

 

Otheritems analysis

 

Depreciationand amortization

 

Depreciation and amortization increased to$208 million in 2007, from $161 million in 2006, primarily as aresult of the Norampac acquisition at the end of 2006 and the additionaldepreciation required by the purchase price allocation following thisacquisition. The amorti-zation expense of the fourth quarter decreased by$5 million, after finalization of the purchase price allocation of the remaining50% share in Norampac in late 2006.

 

Operatingincome

 

As a result of the above, operating incomeincreased by $48 million, to $144 million versus$96 million in 2006. Operating margins jumped from 2.9% in2006 to 3.6% in 2007.

 

Excluding specific items, operating incomefor the year stood at $142 million, compared to $154 million in 2006.Operating margins decreased from 4.7% in 2006 to 3.6% in 2007.

 

Interestexpense

 

The interest expense rose to$102 million, versus $79 million in 2006. Debt level increased followingthe acquisition of Norampac on December 29, 2006 and from the workingcapital requirements for 2007. Interest on the Company’s U.S.-denominated debtswas reduced due to the strengthening of the Canadian dollar.

 

Foreignexchange gain on long-term debt

 

In 2007, the Company recorded a foreignexchange gain of $59 million on its U.S.-denominated debts, as theCanadian dollar rose to US$1.012 against the U.S. dollar as at December 31,2007 compared to US$0.858 as at December 31, 2006. This comparesto a zero foreign exchange gain or loss on the Company’s U.S.-denominated debtsin 2006, since the Canadian dollar remained stable at US$0.858 againstthe U.S. dollar as at December 31, 2005 and 2006. These gainshave no impact on the Company’s liquidities.

 

In 2007, the Company entered into derivativesinstruments to fix US$900 million of its U.S.-denominated debt at anaverage exchange rate of CAN$0.981 (US$1.019). These instruments arerecorded at fair value on the balance sheet with fluctuation in earnings, and theresulting gain or loss is included in the gain described above.As a result of these transactions, the Company was able to fixthe cumulative foreign exchange gain on its U.S.-denominated debts at approximately$393 million, which has already been recorded in previous years’earnings.

 

27

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Provisionfor income taxes

 

The 2007 provision for income tax was$11 million, for an effective rate of 11% including the impact of allspecific items and the change in the enacted tax rate. Excluding thesespecific items, the effective tax rate is approximately 43% including anadjustment to the 2006 provision. The Company recorded a positiveadjustment to its future tax in the amount of $16 million, followingtwo reductions of the federal tax rate in Canada and one in Germany.

 

The effective tax rate and current incometaxes are affected by the results of certain subsidiaries located in countrieswhere the income tax rate is higher than in Canada, notably Germany and theUnited States.

 

Shareof results of significantly influenced companies and dilution gain

 

The share of results of significantlyinfluenced companies is mainly represented by our 34% interest in Boralex Inc.,a Canadian public company that produces green and renewable energy, withoperations in the northeastern United States, Canada and France.

 

The share of results includes a net dilutiongain of $15 million, stemming from the Company’s reduced participation inBoralex Inc. from 43% to 34% following a public equity offering of7.3 million common shares issued by Boralex at a price of $15.00 pershare.

 

Netearnings

 

As a result of the foregoing factors, theCompany posted net earnings of $95 million, or $0.95 per share in2007, compared to $3 million or $0.04 per share in 2006. Whenexcluding certain specific items, however, net earnings stood at$22 million or $0.22 per share compared to $52 million or$0.64 per share in 2006.

 

Liquidity and capital resources

 

Cashflows from operating activities

 

Operating activities generated$89 million in liquidity in 2007, compared to $218 million in 2006.Changes in non-cash working capital components required $89 million infunds, compared to a cash inflow of $35 million in 2006. The 2007 cashoutflow is mainly attributable to increased inventories due to businessseasonality, lower demand and inventory build-up for customer promotionalactivities. In addition, the Company paid $44 million on the closing andrestructuring cost provisions recorded in previous periods, of which $20million is presented as cash requirements for discontinued operations. Higherselling prices also increase our level of accounts receivable. As at December 31,2007, our involvement in a construction project for a third party (corporateactivities) required approximately $35 million in funds resulting fromhigh accounts receivable at the end of the year. This use of funds shoulddecrease in 2008, as completion of this project is expected in the secondquarter.

 

Cash flow from operating activities,excluding the change in non-cash working-capital components, stood at$178 million for 2007 compared to $183 million in 2006. Specificamounts of $16 million related to the loss on disposal of theRed Rock mill and closure and restructuring charges, $6 million foran inventory adjustment resulting from the Norampac acquisition and$2 million for a legal settlement – reduced cash flow from operatingactivities in 2007 versus $13 million in 2006. This cash flowmeasure is important, since it places the Company in a position to pursue itscapital expenditures program and reduce its indebtedness.

 

Investingactivities

 

Investment activities in 2007 requiredtotal cash resources of $136 million, including the proceeds of the GSD disposal,mainly for capital expenditure projects.

 

The most important capital projects were:

 

**Boxboard ($59 million)**

 

·                  $17 million to add convertingequipment for QSR business

·                  $4 million to install a newpress in the Cobourg, Ontario converting plant

·                  $4 million to improve boilerefficiency at the Versailles mill

·                  $3 million to improve quality atthe Blendecques, France mill.

 

**Containerboard ($30 million)**

 

·                  $9 million on various projectsto improve efficiencies in papermill manufacturing

·                  $3 million to add convertingequipment.

 

**Specialty Products ($26 million)**

 

·                  $4 million for equipmentoptimization in the three papermills

·                  $3 million in new equipment atthe Kingsey Falls and Birmingham papermill packaging plants

·                  $3 million for sorting equipmentin the recycling paper segments.

 

**Tissue ($52 million)**

 

·      $22 million on the new de-inking unit project in Memphis,Tennessee

·                  $5 million for paper machineupgrades in the Kingsey Falls and Mechanicville, New York mills

·                  $6 million for the automation ofsome converting equipment.

 

**Corporate activities ($7 million)**

 

·                  Investments aimed at energyconsumption reduction.

 

On May 1, 2007, the Company sold thebuilding of its Toronto (Pickering) tissue converting facility, which had beenclosed in 2005, for $7 million.

 

On August 1, 2007, the Company’sSpecialty Products Group acquired the assets of Honeycomb Products of MichiganInc., a honeycomb board mill located in Grand Rapids, Michigan, for a purchaseprice of $11 million (US$10.4 million).

 

On January 25, 2007, the Companyannounced the sale of its 40% interest in GSD Packaging, LLC, a U.S.-based foodpail manufacturing concern owned by the Boxboard Group through a joint venture,to Rock-Tenn Company for a cash consideration of $38 million(US$32 million). For the year ended December 31, 2006, this jointventure contributed $25 million in sales and $5 million in operatingincome before depreciation and amortization.

 

28

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Financingactivities

 

In 2007, the Company borrowed$100 million on its revolving facilities to finance the investments andmeet the working capital requirements discussed above.

 

The Company also redeemed 492,700 of itscommon shares on the open market, pursuant to a normal-course issuer bid, foran amount of $5 million. Including these transactions and the$16 million in dividends paid out during 2007, financing activitiesprovided $79 million in liquidity.

 

Liquidityfrom discontinued operations

 

In 2006, the Company sold its fine papersdistribution activities and closed its Thunder Bay fine papers mill. In 2007,the Company sold its Thunder Bay mill and reclassified the Scierie Lemay(sawmill) and Greenfield SAS (pulp mill) activities as discontinued operations.These businesses required $40 million for their operating activities andclosure and restructuring cost payments in 2007.

 

Debtrefinancing

 

On December 29, 2006, in connection withthe acquisition of the remaining outstanding common shares of Norampac, theCompany completed the refinancing of its $875 million (including$325 million of Norampac) credit facility to provide for new$850 million credit facilities consisting of a $750 million securedrevolving credit facility maturing in December 2011 and a$100 million secured term facility maturing in October 2012. The termfacility can be reimbursed without penalty at the Company’s discretion, anytimeprior to maturity. The Company’s obligations under the revolving creditfacility and the term facility are secured by all of the Company’s inventoryand receivables, as well as those of its subsidiaries located in North America,and by the property, plant and equipment of five of its mills.

 

On June 27, 2007, the Company amendedits credit facility to add a new 12-month unsecured revolving credit in theamount of $100 million, the objective of which was to ensure additionalavailability of funds.

 

Consolidatedfinancial position as at December 31, 2007 and December 31, 2006

 

Following are the Company’s financialposition and ratios:

 
| **(in millions of Canadian dollars)** | ** ** | **2007**  | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------|------------|-----------|------------|------------|------------|
| Working capital (1)                                       | ** ** | **616**   | ** ** | 598        |       |
| % of sales  (2)                                           | ** ** | **16.5**  | **%**      | 16.3       | %          |
| Bank loan and advances                                    | ** ** | **47**    | ** ** | 42         |       |
| Current portion of long-term debt                         | ** ** | **4**     | ** ** | 9          |       |
| Long-term debt                                            | ** ** | **1,570** | ** ** | 1,657      |       |
| Total debt                                                | ** ** | **1,621** | ** ** | 1,708      |       |
| Shareholders’ equity                                 | ** ** | **1,199** | ** ** | 1,157      |       |
| Total equity and debt                                     | ** ** | **2,820** | ** ** | 2,865      |       |
| Ratio of debt/total equity and debt                       | ** ** | **57.5**  | **%**      | 59.6       | %          |
| Shareholders’ equity per share                       | ** ** | **$**     | **12.09**  | ** ** | $          | 11.62 |   |
|                                                           |            |           |            |            |            |  |  |

 

----

(1)        Workingcapital includes accounts receivable plus inventories less accounts payables.It excludes unpaid provision for closure and restructuring costs inthe amount of $47 million as at December 31, 2006 and$19 million as at December 31, 2007. It also excludes the currentportion of derivatives financial instruments in the amount of$11 million and the current portion of future taxes liability inthe amount of $1 million (assets of $40 million-2006).

 

(2)        2.%of sales = LTM Working Capital/LTM Sales.

 

Liquidity available via the Company’s creditfacilities, along with the cash flow generated by its operating activities,will provide the Company with sufficient funds to meet its financialobligations and fulfill its capital expenditure program. At the end of 2007,the Company had $293 million (net of a credit letter in the amount of$34 million) available under its $850 million revolving creditfacility, its $100-million unsecured facility and other joint-venture creditagreements. The Company did not use its new $100 million 12-monthunsecured revolving-credit facility maturing in June 2008.

 

29

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**Commentson the fourth quarter of 2007**

 

Net earnings for the fourthquarter ended December 31, 2007 amounted to $12 million($0.12 per share) compared to a net loss of $46 million($0.56 per share) for the fourth quarter ended December 31, 2006.When excluding specific items, net earnings for the fourth quarter of2007 amounted to $1 million ($0.01 per share), compared with netearnings of $13 million ($0.16 per share) for the same quarter in2006.

 

As a result of recent businessacquisitions and better selling prices, sales increased by 11% during thefourth quarter of 2007, amounting to $937 million compared with$843 million last year. Operating income amounted to $19 million forthe period compared to an operating loss of $17 million for the samequarter last year.

 

The activities of the Company’sGreenfield SAS pulp mill located in France and Scierie Lemay sawmill located inQuébec were reclassified as discontinued operations during the fourth quarterof 2007. Consequently, the comparative financial information of 2006 hasbeen restated to reflect this change.

 

Operating income excludingspecific items amounted to $33 million and excludes the followingitems: $2 million impairment charge on certain assets of theContainerboard Group, $3 million closure and restructuring costs. It alsoincludes a $10 million loss on disposal related to the sale of the RedRock containerboard mill during the fourth quarter and a $3 million gainon the disposal of a non-core investment. The Company also recorded a$2 million unrealized loss of financial instruments.

 

Operating income beforedepreciation and amortization amounted to $68 million compared with$23 million in the fourth quarter of 2006. Excluding the specific items,the operating income before depreciation and amortization stood at$82 million compared with $77 million in 2006, a 6% increase.

 

Higher selling prices and theacquisition of the remaining 50% of Norampac, at the end of 2006, offset theimpact of the stronger Canadian dollar and higher raw materials costs whichimpacted the fourth quarter of 2007 by $25 million and$36 million respectively. The Company’s actions regarding less-performingassets also contributed to the increased profitability in the fourth quarter of2007.

 

The Company recorded a gain of$16 million on its long-term denominated debt in $U.S. and an additionalclosure and restructuring charge of $2 million on its Scierie Lemaysawmill. In the fourth quarter of 2007, the Company sold its coated Fine papermill located in Thunder Bay, Ontario. The Company paid $5 million to thepurchaser in order to support the start-up of the plant. The last two amountsare presented in discontinued operations. Following the change in the Canadianfederal tax rate, the Company recorded a gain of $10 million in the fourthquarter.

 

 

30

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The main variances in operatingincome before depreciation and amortization, excluding specific items, areshown below. Selling price increases, combined with the additional contributionof our recent acquisitions, more than offset the negative impact of higher rawmaterials costs and the Canadian dollar:

 

 

The operating income beforedepreciation and amortization variance analysis by segment is as follows:

 

**OIBD variance analysis**

 
| ** **                                                                               | ** ** | **Packaging** | ** ** | ** **         | ** ** | ** **              |       | ** **           | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------|------------|--------------------|------------|-------------------------|------------|----------------------|------------|
| **(in millions of dollars)**                                              | ** ** | **Boxboard**  | ** ** | **Containerboard** | ** ** | **Specialty  Products** | ** ** | **Total  Packaging** | ** ** | **Tissue Papers** | ** ** | **Corporate  Activities** |   | **Consolidated** | ** ** |
| **OIBD for the 3-month period ended  December 31, 2006 (excluding specific items)** |       | 11            |       | 25                 |       | 17                      |       | 53                   |       | 24 |   | — |   | **77** | ** ** |
| **Positive (negative) impact from:**                                                     | ** ** | ** **    | ** ** | ** **         | ** ** | ** **              | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |
| Volume (shipments)                                                                       |       | (3            | )          | (3                 | )          | 1                       |       | (5                   | )          | (1 | ) | — |   | **(6** | **)** |
| Selling price & mix                                                             |       | 15            |       | 12                 |       | 6                       |       | 33                   |       | 12 |   | (3 | ) | **42** | ** ** |
| Raw materials (1)                                                                        |       | (11           | )          | (9                 | )          | (4                      | )          | (24                  | )          | (12 | ) | — |   | **(36** | **)** |
| Energy price & consumption                                                      |       | (2            | )          | —             |       | —                  |       | (2                   | )          | — |   | — |   | **(2** | **)** |
| Variation of the CAN$ (2)                                                                |       | (6            | )          | (6                 | )          | (9                      | )          | (21                  | )          | (6 | ) | 2 |   | **(25** | **)** |
| Other variable costs (3)                                                                 |       | 1             |       | (1                 | )          | —                  |       | —               |       | (2 | ) | (1 | ) | **(3** | **)** |
| Fixed costs and others (4)                                                               |       | 6             |       | 5                  |       | 2                       |       | 13                   |       | — |   | (1 | ) | **12** | ** ** |
| Other sectors (5)                                                                        |       | (2            | )          | (1                 | )          | —                  |       | (3                   | )          | — |   | 1 |   | **(2** | **)** |
| Business acquisitions and disposals                                                      |       | —        |       | 22                 |       | 3                       |       | 25                   |       | — |   | — |   | **25** | ** ** |
| **Change in OIBD for the year**                                                          |       | (2            | )          | 19                 |       | (1                      | )          | 16                   |       | (9 | ) | (2 | ) | **5** | ** ** |
| **OIBD excluding specific items**                                                        |       | 9             |       | 44                 |       | 16                      |       | 69                   |       | 15 |   | (2 | ) | **82** | ** ** |
| Specific items                                                                           |       | —        |       | (14                | )          | (1                      | )          | (15                  | )          | — |   | 1 |   | **(14** | **)** |
| **OIBD for the 3-month period ended  December 31, 2007**                            |       | 9             |       | 30                 |       | 15                      |       | 54                   |       | 15 |   | (1 | ) | **68** | ** ** |

 

----

(1)     The impacts of theseestimated costs are based on production costs per unit, which are affected byyield, product mix changes and purchase and transfer prices. In additionto market pulp and recycled fibre, they include purchases of externalparent rolls for the converting sectors and other raw materials such asplastics and woodchips.

(2)     The estimated impact ofexchange rate is based on the Company’s national and export sales lesspurchases that are impacted by the exchange rate changes, mainly the CAN$/US$variation. It also includes the impact of exchange rate on the Company’sworking capital items and cash position.

(3)     The impact of theseestimated variable costs based on production costs per unit, which are affectedby downtimes, efficiencies and product mix changes.

(4)     Includes all other costssuch as repair and maintenance, selling and administration and profit sharing.

(5)     Includes change in OIBD ofoperating units that are not in the manufacturing or converting sectors.

 

 

31

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**Outlook**

 

| **CASCADES   2008 Issues and   potential developments**                           | Overall, we  expect business conditions will continue to be challenging in the first half  of the year as a result of high fiber costs and the uncertain economic  environment. We will however maintain and strengthen initiatives aimed at  improving profitability through         |
|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·                                                                                      | Continuous  optimization   of asset base                                                                                                                                                                                                                                    | increased  operational efficiency and enhanced product offering. Also, we will continue  to focus on less performing assets, particularly our North American boxboard  and tissue paper operations, with the goal of reaching an acceptable level of  profitability within a reasonable time frame. As we have done in the last  three years, we will continue to act proactively and |
| ·                                                                                      | Continuous  effort on marketing   and product innovation                                                                                                                                                                                                                         |
| ·                                                                                      | Deleveraging  of balance sheet                                                                                                                                                                                                                                                        | follow a  disciplined and targeted approach in regards to capital expenditures. |
|                                                                                        |                                                                                                                                                                                                                                                                                  |   |
|                                                                                        |                                                                                                                                                                                                                                                                                  |   |
| **PACKAGING Boxboard   2008 Issues and   potential developments**                 | In North  America, in 2008, the Boxboard Group expects to benefit from its equipment  upgrades completed in the past year. The Group will also carefully monitor  business conditions in order to complete the implementation of the announced  a price increase for                  |
| ·                                                                                      | Optimization  of manufacturing assets                                                                                                                                                                                                                                            | March 2008 and  maintain the right balance between production and inventory levels. In  addition, the Group could take further actions in regards to its indefinitely  shut pulpmill and |
| ·                                                                                      | Selling  price increase implementation                                                                                                                                                                                                                                                | sawmill. In  Europe, the Group will continue to focus on its less performing mill located  in La Rochette, France, and on the execution of the transaction with  Reno de Medici. |
| ·                                                                                      | Status of  the indefinitely shut   pulpmill and sawmill operations                                                                                                                                                                                                                    |   |
|                                                                                        |                                                                                                                                                                                                                                                                                  |   |
|                                                                                        |                                                                                                                                                                                                                                                                                  |   |
| **PACKAGING Containerboard  (Norampac) 2008 Issues and   potential developments** | In 2008, the  Containerboard Group will carefully monitor business conditions to complete  the implementation of the announced a price increase for  March 2008 and maintain the right balance between production and  inventory levels. In Canada, the Group anticipates a |
| ·                                                                                      | Market  management of  supply/demand balance   (level of inventories)                                                                                                                                                                                                  | continuously  strong competition in its box plant operations and it will continue to  optimize its plant production system. On the cost side, it expects to be  negatively impacted by increasing OCC prices (old corrugated containers)  during the first months of 2008. At the |
| ·                                                                                      | Selling  price increase                                                                                                                                                                                                                                                               | strategic  level, the Group continue to explore selective growth opportunities. |
|                                                                                        | implementation                                                                                                                                                                                                                                                                        |   |
| ·                                                                                      | OCC pricing                                                                                                                                                                                                                                                                           |   |
|                                                                                        |                                                                                                                                                                                                                                                                                  |   |
|                                                                                        |                                                                                                                                                                                                                                                                                  |   |
| **PACKAGING Specialty Products   2008 Issues and   potential developments**       | The Speciality  Products Group intends to continue to take advantage of its favourable  positioning in niche markets while increasing its integration with other  business segments of Cascades. It will continue its research and development  efforts and is committed to new       |
| ·                                                                                      | Continue  refocusing of activities                                                                                                                                                                                                                                                    | product  development while bringing to market new innovative and cost-effective  packaging |
| ·                                                                                      | Implementation  of restructuring   measures                                                                                                                                                                                                                                           | solutions.  The Group will also continue to implement its cost reduction program at the  St-Jérôme and the East Angus mills while expanding and promoting its line of  environmentally |
| ·                                                                                      | Growth in  recovery activities                                                                                                                                                                                                                                                        | friendly  recycled-content specialty papers. Finally, the Specialty Products group will  seek to expand its waste paper recovery and processing activities. |
|                                                                                        |                                                                                                                                                                                                                                                                                  |   |
|                                                                                        |                                                                                                                                                                                                                                                                                  |   |
| **TISSUE   2008 Issues and   potential developments**                             | Overall, the  Tissue Group anticipates that market conditions will remain relatively  favourable as the new capacities in the US should be well absorbed by the  growing demand. In fact, the Group’s operations are expected to benefit from  an upward selling pricing    |
| ·                                                                                      | Level of  competition in the   Canadian market                                                                                                                                                                                                                                        | environment  in the US and for parents rolls as price hikes are currently announced or  being implemented. On the cost side, the Group acknowledges upward pricing  pressures for virgin |
| ·                                                                                      | Continuous  effort on the   marketing of the Cascades brand                                                                                                                                                                                                                           | pulp and  sorted office papers. Strategically, the Group will continue to mainly invest  in its converting operations and in marketing to leverage the favourable  market positioning of its |
| ·                                                                                      | Virgin pulp  and SOP pricing                                                                                                                                                                                                                                                          | environmentally  friendly products. Finally, this Group analyzes different alternatives to  improve its equipments for the processing of lower quality recycled fibre. |
| ·                                                                                      | Optimization  of converting                                                                                                                                                                                                                                                           |
|                                                                                        | operations                                                                                                                                                                                                                                                                            |   |

 

 

32

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**Evolution of credit ratings**

 

Cascades’ outstanding SeniorNotes have been rated by Moody’s Investors Service (“Moody’s”) and Standard &Poor’s (“S&P”).

 

The following table reflectsthe Company’s Secured debt rating/Corporate rating/Unsecured debt rating at thedate on which this MD&A was approved by the Board of Directors, and theevolution of these ratings compared to past years:

 
| **Credit Rating** | ** ** | **Moody’s**               | ** ** | **Standard & Poor’s** |
|------------------------|------------|--------------------------------|------------|------------------------------------------|
| 2004                   |       | Ba1/Ba2/Ba3 (stable)      |       | BBB-/BB+/BB+ (negative)             |
| 2006                   |       | Ba1/Ba2/Ba3 (stable)      |       | BB+/BB/BB-  (negative)                   |
| **2007**               | ** ** | **Baa3/Ba2/Ba3 (stable)** | ** ** | **BB+/BB/BB- (stable)**                  |

 

**Industry classification**

 

On November 30, 2007,Cascades was reclassified by S&P/TSX and Morgan Stanley CapitalInternational (“MSCI”) to the Paper Packaging sub-industry after market close.More specifically, Cascades was reclassified from the Paper & ForestProducts industry to the Containers & Packaging industry; however, itremains in the Materials Sector.

 

As a result of the divestitureof Cascades’ paper distribution activities, the closure of our coated finepaper operations and the acquisition of Norampac and other packaging assets,the Company’s profile has changed dramatically over the past two years. Thisreclassification better recognizes the fact that Cascades is not a forestcompany, but rather a manufacturer and converter of tissue and packagingproducts made with recycled fibres.

 

**Capital stock information**

 

As at December 31, 2007,issued and outstanding capital stock consisted of 99,144,351 common shares(99,533,654 as at December 31, 2006), and 2,459,056 stockoptions were issued and outstanding (2,315,391 as at December 31,2006). During the period, 103,397 options were exercised and175,006 forfeited, and the Company issued 422,068 stock options at anexercise price of $11.83.

 

As at March 14, 2008issued and outstanding capital stock consisted of 98,930,351 common shares and2,459,056 stock options.

 

**Contractual obligations and other commitments**

 

The Company’s principalcontractual obligations and commercial commitments relate to outstanding debt,operating leases, capital leases and purchase obligations for its normalbusiness operations. The following table summarizes these obligations as at December 31,2007:

 

**Contractual obligations**

 
| **Payment due by period (in millions of dollars)** | ** ** | **Total** | ** ** | **Year 2008** | ** ** | **Years 2009 and 2010** | ** ** | **Years 2011 and 2012** | ** ** | **Thereafter** | ** ** |
|----------------------------------------------------|------------|-----------|------------|---------------|------------|-------------------------|------------|------------------------------|------------|----------------|------------|
| Long-term debt                                     |       | 1,578     |       | 2             |       | 4                       |       | 654                          |       | 918            |       |
| Capital  lease                                     |       | 2         |       | 2             |       |  —            |       |  —                 |       |  —   |       |
| Operating lease                                    |       | 192       |       | 42            |       | 65                      |       | 43                           |       | 42             |       |
| Purchase obligations                               |       | 397       |       | 154           |       | 127                     |       | 67                           |       | 49             |       |
| Legal settlement                                   |       | 12        |       | 2             |       | 5                       |       | 5                            |       | —         |       |
| **Total contractual obligations**                  |       | 2,181     |       | 202           |       | 201                     |       | 769                          |       | 1,009          |       |

 

**Transactions with related parties**

 

The Company has also enteredinto various agreements with its joint-venture partners, significantlyinfluenced companies and entities that are controlled by one or more of itsdirectors, for the supply of raw materials, including recycled paper, virginpulp and energy; the supply of unconverted and converted products; and otheragreements entered into in the normal course of business. Aggregate sales bythe Company to its joint-venture partners and other affiliates totaled$83 million and $60 million for 2006 and 2007 respectively.Aggregate sales to the Company from its joint-venture partners and otheraffiliates came to $60 million and $11 million for 2006 and2007 respectively. Aggregate sales to the Company from entities controlledby one or more of its directors totaled $7 million and $5 million for2006 and 2007 respectively. Previous-year figures include 100% of thejoint ventures’ interest.

 

**Off-balance-sheet arrangements**

 

In the normal course ofbusiness, Cascades finances some of its activities off-balance sheet throughleases. The Company enters into operating leases for buildings and equipment.Minimum future rental payments under these operating leases, determined as at December 31,2007, are included in the contractual obligations table above.

 

33

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**Critical accounting policies**

 

Some of the Company’saccounting policies require significant estimates and assumptions about futureevents that affect the amounts reported in the financial statements and theaccompanying notes. Future events and their effects cannot be determined withabsolute certainty. Therefore, the determination of estimates requires theexercise of management’s judgment. Actual results could differ from thoseestimates, and any such differences may be material to the Company’s financialstatements.

 

**Impairment of tangible assets**

 

At least annually, we assesswhether or not a permanent impairment in the value of assets has occurred. Thisis accomplished by determining if projected undiscounted future cash flows fromoperations exceed the net carrying amount of the asset as of the assessmentdate. Estimates of future cash flows and fair values require judgment and maychange.

 

**Valuation of identifiableintangible assets and goodwill**

 

Business acquisitions areaccounted for under the purchase method of accounting. The total cost ofan acquisition is allocated to the underlying net assets, based on theirrespective estimated fair values. As part of this allocation process, theCompany must identify and attribute values and estimated lives to theintangible assets acquired. While an expert may be employed to assist theCompany with these matters, these types of determinations involve considerablejudgment and often require the use of estimates and assumptions, includingthose with respect to future cash inflows and outflows, discount rates andasset lives. These determinations affect the amortization expense amountrecognized in future periods. The Company reviews the carrying values of allidentifiable intangible assets and goodwill when certain conditions arise, todetermine whether or not any impairment has occurred.

 

**Income taxes**

 

The Company is required toestimate income taxes in each of the jurisdictions in which it operates. Thisincludes estimating a value for existing net operating losses, based on theCompany’s assessment of its ability to utilize them to offset futuretaxable income before they expire. If the Company’s assessment of its abilityto use the net operating losses proves inaccurate in the future, more or fewerof these losses might be recognized as assets, which would increase or decreasethe income tax expense, and consequently affect the Company’s net earningsin the relevant year.

 

**Pension and post-retirement benefitcosts**

 

Pension and post-retirementbenefit costs are developed from actuarial valuations. Inherent in thesevaluations are key assumptions provided by the Company to actuaries, includingdiscount rates, expected returns on plan assets, rates of compensationincreases and medical cost inflation. In selecting the rates and returns, theCompany is required to consider current market conditions, including changes ininterest rates. Material changes in pension and post-retirement benefit costsmay occur in the future, as a result of fluctuations in headcount as well aschanges in the assumptions.

 

**Environmental clean-up costs**

 

The Company expensesenvironmental disbursements related to existing conditions caused by past orcurrent operations, from which no future benefit is discernible. The Company’sestimated environmental remediation costs are based upon an evaluation ofcurrently available facts pertaining to each individual site, including theresults of environmental studies and testing, and taking into considerationexisting technology, applicable laws and regulations, and priorexperience in contaminated site remediation. Expenditures that extend thelife of the related property, or mitigate or prevent future environmentalcontamination, are capitalized. The Company determines its liability on asite-by-site basis and records a liability when one is probable and can bereasonably estimated. The contingencies take into account theanticipated participation of other potentially responsible parties, whenit is probable that such parties are legally responsible and financiallycapable of paying their respective shares of the relevant costs.Actual costs to be incurred in future periods at the identified sites may varyfrom the estimates, given the inherent uncertainties in evaluatingenvironmental exposures. Future information and developments may requirethe Company to reassess the expected impact of these environmentalmatters.

 

**Collectibility of accountsreceivable**

 

In order to record its accountsreceivable at their net realizable value, the Company must assess their “collectibility”.A considerable amount of judgment is required in making this assessment,including a review of its receivables’ aging and the each customer’s currentcreditworthiness. The Company has recorded allowances for receivables that itfeels are uncollectible. However, if the financial condition of the Company’scustomers were to deteriorate, their ability to make required payments maybecome further impaired and increases in these allowances would berequired.

 

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**Introduction of new accounting standards in 2007**

 

**Comprehensive income**

 

On January 1, 2007, theCompany adopted the Canadian Institute of Chartered Accountants (“CICA”)Handbook Section 1530, “Comprehensive Income”. This section describesreporting and disclosure recommendations for comprehensive income and itscomponents. Comprehensive income represents changes in net assets arising fromtransactions, events and circumstances not related to shareholders.

 

**Equity**

 

On January 1, 2007, theCompany adopted CICA Handbook Section 3251, “Equity”, which describesstandards for presentation of changes in equity. As a result of the adoption ofSections 3251 and 1530, the Company is now presenting a consolidatedstatement of shareholders’ equity, which includes information aboutcomprehensive income and accumulated other comprehensive income. Thecomparative consolidated financial statements were restated to reclassify thecumulative translation adjustments, which amounted to $9 million as at December 31,2006 (2005 – $36 million) to the accumulated other comprehensive income.

 

**Financial instruments – recognitionand measurement**

 

On January 1, 2007, theCompany adopted CICA Handbook Section 3855, “Financial Instruments – Recognitionand Measurement”. It describes the standards for recognizing and measuringfinancial instruments in the financial statements, financial assets availablefor sale, assets and liabilities held for trading, and derivative financialinstruments, whether or not these are part of a hedging relationship, aremeasured and accounted for at fair value. Certain derivatives embedded in othercontracts are also measured and accounted for at fair value. The Companyselected January 1, 2003 as its transition date for embeddedderivatives.

 

This Section was appliedretroactively, without restating the comparative figures, and resulted in anincrease of $1 million in retained earnings and $1 million inaccumulated other comprehensive income respectively as of January 1,2007.

 

**Hedges**

 

On January 1, 2007, theCompany adopted CICA Handbook Section 3865, “Hedges”. This section, whichexpands on the guidelines required by Accounting Guideline 13 (“AcG-13”), “HedgingRelationships”, describes when and how hedge accounting can be applied, as wellas the associated disclosure requirements. Hedge accounting enables therecording of gains, losses, revenues and expenses from the derivative financialinstruments in the same period as that used for reporting these activities forthe hedged item. However, any ineffective portion of a hedging relationship isrecorded directly to earnings.

 

**Accounting changes**

 

As at January 1, 2007, theCompany adopted CICA Handbook Section 1506, “Accounting changes”. This Section establishescriteria to be met, together with the accounting treatment and disclosurerequired when there is a change in accounting policies, estimates andcorrection of errors. The adoption of this Section had no impact on theCompany’s consolidated financial position or the results of itsoperations.

 

**Capital disclosures**

 

In December 2006, the CICApublished Section 1535, “Capital Disclosures”. This new standardestablished disclosure requirements concerning capital, such as: qualitative informationabout its objectives, policies and processes for managing capital; quantitativedata about what it regards as capital; whether or not it has complied withany externally imposed capital requirements; and, if not, the consequencesof such non-compliance. The Company elected to early adopt this newdisclosure standard in 2007.

 

**Financial instruments – disclosuresand presentation**

 

In December 2006, the CICApublished two new standards: Section 3862, “Financial Instruments – Disclosures”,and Section 3863, “Financial Instruments – Presentation”. These newstandards replace Section 3861, “Financial Instruments – Disclosure andPresentation”, while at the same time revising and enhancing itsdisclosure requirements, and carrying its presentation requirementsforward unchanged. The Company elected to early adopt these newstandards in 2007.

 

**New accounting standards not yet adopted**

 

**Inventories**

 

In June 2007, the CICApublished Section 3031, “Inventories”. This new standard establishesmeasurement and disclosure requirements concerning inventories. The newrequirements will be effective January 1, 2008. The application of thisnew standard by the Company will decrease inventories by approximately$1 million, increase property, plant and equipment by $7 million,increase future income taxes by $2 million and increase retained earningsby $4 million.

 

**Goodwill and intangible assets**

 

In February 2008, the CICApublished Section 3064, “Goodwill and Intangible Assets”. This newstandard establishes standards for the recognition, measurement, presentationand disclosure of goodwill and intangible assets. The requirements will beeffective for interim period and annual financial statements starting October 1,2008. The Company is presently evaluating the impact of this new standard.

 

**International Financial ReportingStandards**

 

In 2006, Canada’s AccountingStandards Board ratified a strategic plan that will result in the evolution andconvergence with International Financial Reporting Standards (“IFRS”) ofCanadian GAAP, as used by public companies, over a transitional periodcurrently expected to end by 2011. The precise timing of convergence willdepend on an Accounting Standards Board “progress review”, to be undertaken andreleased by March 31, 2008. Canadian GAAP will be converged with IFRSthrough a combination of two methods: as current joint-convergence projects ofthe United States’ Financial Accounting Standards Board and the InternationalAccounting Standards Board are agreed upon, they are expected to be adopted byCanada’s Accounting Standards Board and may be introduced in Canada before thecomplete changeover to IFRS; standards not subject to a joint-convergenceproject will be revealed in an omnibus manner for introduction at the time ofthe complete changeover to IFRS. The Company will convert to these newstandards based on the timetable accompanying these new rules. The Company willclosely monitor changes arising from this convergence.

 

35

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**Environmental issues**

 

The Company is subject toenvironmental laws and regulations imposed by the various government andregulatory authorities in all countries in which it operates. The Company isalso subject to the U.S. Federal Comprehensive Environmental Response,Compensation and Liability Act, (“CERCLA”), as well as to other applicablelegislation in the United States, Canada and Europe that holds companiesaccountable for the investigation and remediation of hazardous substances.

 

The Company is in compliance, inall material respects, with all applicable environmental legislation orregulations. However, we expect to incur ongoing capital and operating expensesin order to achieve and maintain compliance with applicable environmentalrequirements.

 

The Company’s Europeansubsidiaries are also subject to the Pre-Kyoto protocol, in order to reduceworldwide CO2 emissions. Each unit has been allocated emission rightsbased on its 2002 emission level (“CO2 quota”). On acalendar-year basis, the Company must buy the necessary credits to cover itsdeficit, on the open market, if its emissions are higher than quota. However,if the Company has a credit surplus, we can sell it on the open market for acash settlement. The Company is still focusing on reducing its CO2 emissions.Furthermore, some of its European subsidiaries were in a surplus creditposition in 2007 and 2006, and sold 56,500 tonnes of CO2 creditson the open market in 2006, for €0.8 million. This amount was recorded inearnings. No excess quotas were sold in 2007, since the market price was zeroat the end of that year. Our European units’ new quota levels for the years2008-2012 were confirmed, and we expect to meet these requirements.

 

**Disclosure controls and procedures**

 

The Company has established disclosurecontrols and procedures that are designed to provide reasonable assurance thatall relevant information is gathered and reported to senior management,including the President and Chief Executive Officer (CEO), and theVice-President and Chief Financial Officer, on a timely basis so thatappropriate decisions can be made regarding public disclosure.

 

An evaluation of theeffectiveness of the Company’s disclosure controls and procedures was carriedout as at December 31, 2007 under the supervision of and with theparticipation of the Company’s management, including the CEO and the CFO. Basedon that evaluation, the CEO and the CFO concluded that the design and operationof these disclosure controls and procedures were effective as at December 31, 2007.

 

**Internal control over financial reporting**

 

Management is responsible for establishingand maintaining adequate internal control over financial reporting to providereasonable assurance regarding the reliability of the Company’s financialreporting and the preparation of its financial statements in accordance withCanadian generally accepted accounting principles, including reconciliation toUnited States generally accepted accounting principles.

 

The President and ChiefExecutive Officer (CEO) and the Vice President and Chief Financial Officer(CFO) have evaluated the effectiveness of the Company’s internal control overfinancial reporting as at December 31, 2007, and based on that assessmenthave concluded that internal control over financial reporting was effective.See Management’s Report on Internal Control over Financial Reporting on page 42.

 

No changes were made in theCompany’s internal control over financial reporting during the year ended December 31,2007 that have materially affected or are reasonably likely to materiallyaffect its internal control over financial reporting.

 

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**Risk management**

 

As part of its ongoing businessoperations, the Company is exposed to certain market risks, including risksensuing from changes in selling prices for its principal products, costs of rawmaterials, interest rates and foreign currency exchange rates, all of whichimpact on the Company’s financial position, results of operations and cashflows. The Company manages its exposure to these and other market risks throughregular operating and financing activities and, on a limited basis, through theuse of derivative financial instruments. We use these derivative financialinstruments as risk management tools, not for speculative investmentpurposes.

 

**Market risk**

 

**(a) Currencyrisk**

** **

The Company operatesinternationally and is exposed to foreign exchange risks arising from variouscurrencies as a result of its export of goods produced in Canada, the UnitedStates, France, Germany, Sweden and England. These risks are partially coveredby purchases, debt and forward-exchange contracts. Foreign-exchange risk arisesfrom future commercial transactions, recognized assets and liabilities, and netinvestments in foreign operations.

 

Management has implemented apolicy for managing foreign exchange risk against the relevant functionalcurrency. The Company manages the foreign exchange exposure by entering intovarious foreign-exchange forward contracts.

 

**(b) Pricerisk**

** **

The Company is exposed tocommodity price risk and has entered into various derivative financialinstrument transactions, whereby it sets the price for notional quantities ofold corrugated containers, electricity and natural gas. In 2006 and 2007,gains and losses arising from electricity and natural gas contracts wereapplied to earnings only when they were realized, whereas all other types ofcontracts were recorded at fair value. The Company uses these commoditycontracts to help manage its production costs.

 

Additional information on ourNorth American natural gas and electricity hedging programs, which takes intoaccount recent acquisitions and closures, is set out below:

 

**North American natural gas hedging**

 
| ** **                      | ** ** | **United States** | ** ** | **Canada** | ** ** |
|---------------------------------|------------|------------------------|------------|------------|------------|
| Natural gas  consumption        |       | 39                     | %          | 61         | %          |
| % of consumption hedged         |       | 38                     | %          | 58         | %          |
| Average price – hedge book |       | US$8.10/mmBt           |       | $          | 6.55/GJ    |   |
|                                 |            |                        |            |            |            |  |

 

**North American electricity hedging**

 
| ** **                                          | ** ** | **United States** | ** ** | **Canada** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|------------|------------|
| Electricity consumption                             |       | 29                     | %          | 71         | %          |
| Electricity consumption in a regulated  market |       | 52                     | %          | 75         | %          |
| % of consumption hedged in a deregulated  market    |       | 9                      | %          | 14         | %          |
| Average price – hedge book                     |       | US$0.074/KWh           |       | $          | 0.056/KWh  |   |
|                                                     |            |                        |            |            |            |  |

 

**(c) Cash-flowand fair-value interest rate risks**

 

As the Company has nosignificant interest-bearing assets, its earnings and operating cash flows aresubstantially independent of changes in market interest rates.

 

The Company’s interest raterisk arises from long-term borrowings. Borrowings issued at variable ratesexpose the Company to a cash-flow interest rate risk. Borrowings issued at afixed rate expose the Company to a fair-value interest rate risk.

 

**Credit risk**

 

Credit risk arises from cashand cash equivalents, derivative financial instruments and deposits with banksand financial institutions. The Company reduces this risk by dealing withcreditworthy financial institutions.

 

The Company is exposed tocredit risk on accounts receivable from its customers. In order to reduce thisrisk, the Company’s credit policies include the analysis of a customer’sfinancial position and a regular review of their credit limits. The Companyalso believes that no particular concentration of credit risks exists, due tothe geographic diversity of its customers and the procedures in place formanaging commercial risks. Derivative financial instruments include an elementof credit risk, should the counterparty be unable to meet its obligations.

 

37

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**Supplemental information on non-GAAP measures**

 

None of the following items isa measure of performance under Canadian GAAP: operating income before depreciationand amortization (OIBD), operating income, cash flow from operations and cashflow from operations per share. The Company includes OIBD, operating income,cash flow from operations and cash flow from operations per share because theseelements are measures used by management to assess the operating and financialperformance of the Company’s operating segments. Moreover, the Company believesthat these items provide additional measures often used by investors to assessa company’s operating performance and its ability to meet debt servicerequirements. However, these measures do not represent, and should not be usedas, a substitute for net earnings or cash flows from operating activities asdetermined in accordance with Canadian GAAP, nor are they necessarily anindication of whether or not cash flow will be sufficient to fund our cashrequirements. In addition, our definition of OIBD, operating income, cash flowfrom operations (adjusted) and cash flow from operations (adjusted) per sharemay differ from those of other companies. “Cash flow from operations (adjusted)”is defined as cash flow from operating activities as determined in accordancewith Canadian GAAP, excluding the change in working capital components, andcash flow from operations (adjusted) per share is determined by dividing cashflow from operations by the weighted average number of common shares for theperiod in question.

 

Operating income beforedepreciation and amortization excluding specific items, operating incomeexcluding specific items, net earnings excluding specific items, net earningsper common share excluding specific items, cash flow from operations (adjusted)excluding specific items and cash flow from operations (adjusted) per shareexcluding specific items are non-GAAP measures. The Company believes that it isuseful for investors to be aware of specific items that adversely or positivelyaffected its GAAP measures, and that the above-mentioned non-GAAP measuresprovide investors with a measure of performance that can be used to compare itsresults between periods without regard to these specific items. The Company’smeasures excluding specific items have no standardized meaning prescribed byGAAP, nor are they necessarily comparable to similar measures presented byother companies and therefore should not be considered in isolation.

 

Specific items include chargesfor impairment of assets, charges for facility or machine closures, debtrestructuring charges, gain or loss on sale of business units, unrealizedgain or loss on financial instruments that do not qualify for hedgeaccounting, foreign exchange gain or loss on long-term debt and othersignificant items of an unusual or non-recurring nature.

 

Net earnings, a performancemeasure defined by Canadian GAAP, is reconciled below with operating income,operating income excluding specific items and operating income beforedepreciation and amortization excluding specific items:

 
| ** **                                                                               | ** ** | **For the year ended December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **(in millions of Canadian dollars)**                                | ** ** | **2007**                                                    | ** ** | **2006** | ** ** |
| **Net earnings**                                                                         | ** ** | **95**                                                      | ** ** | 3 |   |
| Net loss from discontinued operations                                                    | ** ** | **19**                                                      | ** ** | 16 |   |
| Non-controlling interest                                                                 | ** ** | **3**                                                       | ** ** | — |   |
| Share of results of significantly  influenced companies and dilution gain                | ** ** | **(27**                                                     | **)**      | (8 | ) |
| Provision for income taxes                                                               | ** ** | **11**                                                      | ** ** | 6 |   |
| Foreign exchange gain on long-term debt                                                  | ** ** | **(59**                                                     | **)**      | — |   |
| Interest expense                                                                         | ** ** | **102**                                                     | ** ** | 79 |   |
| **Operating income**                                                                     | ** ** | **144**                                                     | ** ** | 96 |   |
| Specific items:                                                                          |       |                                                        | ** ** |   |   |
| Inventory adjustment resulting from the  Norampac acquisition                            | ** ** | **6**                                                       | ** ** | — |   |
| Gains on disposal and other                                                              | ** ** | **(17**                                                     | **)**      | (4 | ) |
| Impairment loss on property, plant and  equipment                                        | ** ** | **3**                                                       | ** ** | 47 |   |
| Closure and restructuring costs                                                          | ** ** | **6**                                                       | ** ** | 20 |   |
| Unrealized gain on financial instruments                                                 | ** ** | **—**                                                  | ** ** | (5 | ) |
| ** **                                                                               |       | **(2**                                                      | **)**      | 58 |   |
| **Operating income–excluding specific items**                                       | ** ** | **142**                                                     | ** ** | 154 |   |
| Depreciation and amortization                                                            | ** ** | **208**                                                     | ** ** | 161 |   |
| **Operating income before depreciation and  amortization–excluding specific items** | ** ** | **350**                                                     | ** ** | 315 |   |

 

 

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The following table reconcilesnet earnings and net earnings per share with net earnings excluding specificitems and net earnings per share excluding specific items:

 
| **For the year ended December 31 (in millions of Canadian dollars,** | ** ** | **Net earnings** |       | **Net earnings per share (1)** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------------------------|------------|
| **except amount per share)**                                                                            | ** ** | **2007**              | ** ** | **2006**                                           |       | **2007** | ** ** | **2006** | ** ** |
| **As per GAAP**                                                                                                        | ** ** | **95**                | ** ** | 3                                                  |       | **$** | **0.95** | ** ** | $ | 0.04 |   |
| Specific items:                                                                                                        |       |                  | ** ** |                                               |       |   | ** ** |   |   |
| Inventory adjustment resulting from the  Norampac acquisition                                                          | ** ** | **6**                 | ** ** | —                                             |       | **$** | **0.04** | ** ** | — |   |
| Impairment loss on property, plant and  equipment                                                                      | ** ** | **3**                 | ** ** | 47                                                 |       | **$** | **0.02** | ** ** | $ | 0.42 |   |
| Closure and restructuring costs                                                                                        | ** ** | **6**                 | ** ** | 20                                                 |       | **$** | **0.04** | ** ** | $ | 0.18 |   |
| Gains on disposal and other                                                                                            | ** ** | **(17**               | **)**      | (4                                                 | )          | **$** | **(0.09** | **)** | $ | (0.02 | ) |
| Unrealized gain on financial instruments                                                                               | ** ** | **—**            | ** ** | (5                                                 | )          | **—** | ** ** | $ | (0.05 | ) |
| Foreign exchange gain on long-term debt                                                                                | ** ** | **(59**               | **)**      | —                                             |       | **$** | **(0.49** | **)** | $ | (0.02 | ) |
| Share of results of significantly  influenced companies and dilution gain                                              | ** ** | **(15**               | **)**      | —                                             |       | **$** | **(0.15** | **)** | — |   |
| Included in discontinued operations                                                                                    | ** ** | **9**                 | ** ** | 18                                                 |       | **$** | **0.06** | ** ** | $ | 0.15 |   |
| Adjustment of statutory tax rate                                                                                       | ** ** | **(16**               | **)**      | (5                                                 | )          | **$** | **(0.16** | **)** | $ | (0.06 | ) |
| Tax effect on specific items                                                                                           | ** ** | **10**                | ** ** | (22                                                | )          |   | ** ** |   |   |
| ** **                                                                                                             |       | **(73**               | **)**      | 49                                                 |       | **$** | **(0.73** | **)** | $ | 0.60 |   |
| **Excluding specific items**                                                                                           | ** ** | **22**                | ** ** | 52                                                 |       | **$** | **0.22** | ** ** | $ | 0.64 |   |

 

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(1) Specific amounts per share arecalculated on an after-tax basis.

 

The following table reconcilescash flow from operations (adjusted) and cash flow from operations (adjusted)per share with cash flow from operations (adjusted) excludingspecific items and cash flow from operations (adjusted) per shareexcluding specific items:

 
| ** **                                                                                                                                             | ** ** | **Cash flow from  operations  (adjusted)** | ** ** | **Cash flow from  operations  (adjusted)  per share** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **For the year ended December 31 (in millions of dollars, except amounts per share)** | ** ** | **2007**                                             | ** ** | **2006**                                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash flow provided by operating activities  as per GAAP**                                                                                            | ** ** | **89**                                               |       | 218                                                                  |       |   |   |   |   |
| Changes in non-cash working capital  components                                                                                                        | ** ** | **89**                                               |       | (35                                                                  | )          |   |   |   |   |
| **Cash flow from operations (adjusted)**                                                                                                               | ** ** | **178**                                              |       | 183                                                                  | ** ** | **$** | **1.79** |   | $ | 2.26 |   |
| Specific items:                                                                                                                                        |       |                                                 |       |                                                                 |       |   |   |   |   |
| Inventory adjustment resulting from the  Norampac acquisition                                                                                          | ** ** | **6**                                                |       | —                                                               | ** ** | **$** | **0.06** |   | — |   |
| Gains on disposal and other                                                                                                                            | ** ** | **12**                                               |       | —                                                               | ** ** | **$** | **0.12** |   | — |   |
| Closure and restructuring costs, net of  current income tax                                                                                            | ** ** | **6**                                                |       | 13                                                                   | ** ** | **$** | **0.06** |   | $ | 0.16 |   |
| **Excluding specific items**                                                                                                                           | ** ** | **202**                                              |       | 196                                                                  | ** ** | **$** | **2.03** |   | $ | 2.42 |   |

 

 

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The following table reconcilescash flow provided by operating activities with operating income and operatingincome before depreciation and amortization:

 
| **For the year ended December 31 (in millions of dollars)**              | ** ** | **2007**   | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Cash flow provided by operating activities  as per GAAP**                                                           | ** ** | **89**     | ** ** | 218      |       |
| Changes in non-cash working capital  components                                                                       | ** ** | **89**     | ** ** | (35      | )          |
| Depreciation and amortization                                                                                         | ** ** | **(208**   | **)**      | (161     | )          |
| Current income taxes                                                                                                  | ** ** | **33**     | ** ** | 34       |       |
| Interest expense (includes interest on long-term  debt, other interest less interest income and capitalized interest) | ** ** | **102**    | ** ** | 79       |       |
| Gains on disposal and other                                                                                           | ** ** | **29**     | ** ** | 4        |       |
| Impairment loss on property, plant and  equipment                                                                     | ** ** | **(3**     | **)**      | (47      | )          |
| Closure and restructuring costs                                                                                       | ** ** | **—** | ** ** | (3       | )          |
| Unrealized gain on financial instruments                                                                              | ** ** | **—** | ** ** | 5        |       |
| Other non-cash adjustments                                                                                            | ** ** | **13**     | ** ** | 2        |       |
| Operating income from continuing operations                                                                           | ** ** | **144**    | ** ** | 96       |       |
| Depreciation and amortization                                                                                         | ** ** | **208**    | ** ** | 161      |       |
| Operating income before depreciation and  amortization                                                                | ** ** | **352**    | ** ** | 257      |       |

 

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