**Exhibit13.3**

**The following is****MANAGEMENT’S DISCUSSION ANDANALYSIS****(“MD&A”)OF THE OPERATING RESULTS AND****THE FINANCIAL POSITION OF CASCADES INC.****(“CASCADES” OR “THE COMPANY”),WHICH SHOULD****BE READ IN CONJUNCTION WITH THE COMPANY’S****CONSOLIDATED FINANCIAL STATEMENTSAND****ACCOMPANYINGNOTES FOR THE YEARS ENDED****DECEMBER 31, 2006 AND 2005. FOR ADDITIONAL****INFORMATION, READERS AREREFERRED TO THE****COMPANY’S ANNUAL INFORMATION FORM (“AIF”),****WHICH IS PUBLISHEDSEPARATELY. INFORMATION****CONTAINED HEREIN INCLUDES ANY SIGNIFICANT****DEVELOPMENTS AS AT MARCH 2,2007, THE DATE****OF APPROVAL OF THE MD&A BY THE COMPANY’S****BOARD OF DIRECTORS.**

MD&A is intended toprovide readers with the informationthat management believes is required to gain an understanding of Cascades’ current results and to assessthe Company’s future prospects.Accordingly, certain statements in this MD&A, including statements regarding future resultsand performance, areforward-looking statements within the meaning of securities legislation based on current expectations.The accuracy of such statementsis subject to a number of risks, uncertainties and assumptions that may cause actual results todiffer materially from thoseprojected, including, but not limited to, the effect of general economic conditions, decreases indemand for the Company’sproducts, increases in the cost of raw materials, changes in the relative values of certaincurrencies, fluctuations inselling prices and adverse changes in general market and industry conditions. MD&A also includesprice indexes as well asvariance and sensitivity analyses that are intended to provide the reader with a better understanding of thetrends related to our businessactivities. These items are based on the best estimates available to the Company.

The financial informationcontained herein, includingtabularamounts, is expressed in Canadian dollars unless otherwise specified, and is prepared in accordance withgenerally accepted accountingprinciples in Canada (Canadian GAAP). Unless otherwise indicated or if required by the context, the terms “we,” “our” and “us” refer to CascadesInc. and all of its subsidiariesand joint ventures. The financial information included in this analysis also contains certain data that are not measures of performance under Canadian GAAP(“non-GAAP measures”). Forexample, the Company uses operating income before depreciation and amortization (“OIBD”) because it is the measure used by management to assess theoperating and financialperformance of the Company’s operating segments. Such information is reconciled to the most directly comparable financial measures, as set forth in the “Supplemental Information on non-GAAP measures”section.

1

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**The company**

**Established in 1964,****CASCADES IS THE PARENT COMPANY OF A NORTH AMERICAN****AND EUROPEAN GROUPOF COMPANIES THAT ARE MAINLY INVOLVED IN THE PRODUCTION AND CONVERSION OF****PACKAGING PRODUCTSAND TISSUE PAPERS MOSTLY MANUFACTURED FROM RECYCLED FIBERS. THE PACKAGING****SEGMENT INCLUDESTHREE GROUPS: THE BOXBOARD GROUP, NORAMPAC (CONTAINERBOARD) AND THE SPECIALTY****PRODUCTS GROUP.**

**IN 2006,THE FINE PAPERS GROUP AND OUR INTEREST IN METRO WASTE PAPER RECOVERY INC. WERERECLASSIFIED****WITHIN THE SPECIALTY PRODUCTS GROUP. FOR ADDITIONALINFORMATION, PLEASE REFER TO THE 2006 FINANCIAL****OVERVIEW ON PAGE 15.**
| **SALES per segment** (%)                            | **ASSETS  per segment** (%)                        |
|------------------------------------------------------|----------------------------------------------------|
| (before  inter-segment eliminations)                 | (year-end  assets, excluding corporate activities) |
|                                                      |
|                                                 |
| **OIBD(****1)****per segment**(%)                    | **Manufacturing capacity per segment**(%)          |
| (excluding specific items, and corporate activities) | (year-end capacity)                                |
|                                                      |

 

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(1)   Please refer to Additional Disclosure –Supplemental Information on non-GAAP measures.

2

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**Business model: The closed loop system**

 

Cascades’ business model hassignificantly evolved in recentyears. From a pure paper and board manufacturer, Cascades has emerged as the largest collector andprocessor of recycled papers inCanada as well as a major converter of corrugated packaging containers, folding cartons, tissue andseveral specialized products. Infact, Cascades is now integrated, both upstream and downstream. It can therefore offer a full range of converted and printed products as well as on-sitecollection to its clients. Thisis what we call the “Closed loop system”.

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(1)   Including the 6 manufacturing & convertingtissue papers mills, excluding our European sheeting carton plant.

**Geographicalbreakdown of operations**(%)

3

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**Overview ofour 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: 2.5

URB: 5.0             |       | **Virgin boxboard grades  and CRB**

·General folding cartons

·Food and beverage packaging

·Cosmetics and  pharmaceuticals packaging

·Cigarette packaging

·Quick-service restaurant  packaging

·Food and beverage packaging

·Cup stocks

**Uncoated recycled  boxboard**

·Industrial packaging

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

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

·Folding cartons gaining  market share over 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** 4.6 (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                                                                                                                                                                                                                                                                                                                                                       |       | ·Oversupply in recycled  boxboard due to diminishing overseas exports

·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)**  25.2

 

**Medium (virgin & recycled)**  10.9 |       | **Corrugated boxes**

·Food packaging, beverage and  agricultural products packaging

·Paper products packaging

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

·Manufacturing exports of  virgin grades

·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**

26.6                                                                       |       | **Corrugated boxes**

·Food packaging, beverage and  agricultural products packaging

·Paper products packaging

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

·More independent producers  than in North America                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Specialty  products**        |       | **North America**  |       | **Specialty paper and  board**

·Uncoated board for  industrial and papermill packaging

·Specialized kraft paper

·Backing for vinyl flooring

**Specialty and recycled  fine papers**

**Moulded pulp**

**De-inked pulp**

**Plastic products**

·Packaging for food industry

·Outdoor furnitures |       | N/A                                                                                            |       | **Specialty paper and  board**

·Uncoated board for  industrial and papermill packaging

·Roll headers and wrappers

·Honeycomb packaging  products

·Laminated boards

·Specialized kraft paper

·Butcher paper and envelopes

·Grease resistant paper

**Specialty and recycled  fine papers**

·Copy paper

·Envelopes and security  paper

**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 |       | **De-inked pulp**

·Growing demand and  consolidated market

**Specialty paper and  board**

·Uncoated board for  industrial and papermill packaging

·Consolidating mature market

·Growing demand for  honeycomb products

·Specialized kraft paper

·Stable market

**Specialty and recycled  fine papers**

·Growing demand for recycled  and niche products

**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**

9.0

                                                                  |       | ·Bath tissue

·Paper towels

·Paper hand towels

·Facial tissue

·Napkins                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | ·Balanced supply & demand

·Growing demand with  population growth

·Strong industry leaders

·Regional markets (limited  global trading)                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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(1)   2006 Manufacturing capacity in millions shorttons. Source: RISI (Paper Packaging Monitor, European Paper Packaging Monitor,World Tissue Capacity Report 2006 ) and Société Générale.

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**Cascades inbrief (****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)                                                                                                            |       | 12 (5)                   |       | 413                                                                                                 |       | No. 1 in Quick Service Restaurant (QSR) in North  America                                                                                                                                                                    |
| ** **                     | ** ** | ** **        | ** ** | **Others**                        |       | · Sawmill operations and pulpmill                                                                                                                                                        |       | 3 (6)                    |       | 90 (pulpmill only)                                                                                  |       | N/A                                                                                                                                                                                                                          |
| ** **                     | ** ** | **Europe**        | ** ** | **Manufacturing**                 |       | ·Coated virgin boxboard (GC)

· Coated recycled boxboard (GD)

· Recycled liner                                                                                                |       | 4                        |       | 573                                                                                                 |       | 6th overall

(3rd in coated recycled boxboard, 5 th in virgin  boxboard)                                                                                                                                      |
| **Containerboard  (Norampac)** | ** ** | **North America** | ** ** | **Manufacturing**                 |       | · Virgin and recycled linerboard and corrugating  medium

· White-top linerboard

· Gypsum paper                                                                               |       | 7 (7)                    |       | 1,361                                                                                               |       | One of two leading producers in Canada

7th largest containerboard producer in North  America                                                                                                                           |
|                                | ** ** | ** **        | ** ** | **Converting**                    |       | · Variety of corrugated packaging  containers

· Corrugated sheets

· Specialized packaging                                                                                    |       | 26                       |       | Shipments (2006) 13.598 bsf                                                                         |       | 7th largest corrugated box producer in North  America                                                                                                                                                                   |
|                                | ** ** | **Europe**        | ** ** | **Manufacturing**                 |       | · Virgin and recycled linerboard and corrugating  medium

· White-top linerboard                                                                                                    |       | 1                        |       | 140                                                                                                 |       | N/A                                                                                                                                                                                                                          |
| **Specialty products**         | ** ** | **North America** | ** ** | **Manufacturing**                 |       | · Specialty and recycled fine papers

· Specialty paper and board

· Uncoated board for industrial packaging

· Specialized kraft paper

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

· Plastic products

· Papermill packaging

· Roll headers and wrappers

· Honeycomb products

· Converting of fine papers              |       | 15                       |       | Moulded pulp 460 M units

Plastic 25.4 M kg

Papermill packaging 208

Honeycomb 25

Fine papers 110 |       | Major producer of egg trays and four-cup carriers

Largest meat processing packaging producer in Canada

Largest producer of papermill packaging in North  America

 

Largest producer of honeycomb products in Canada |
| ** **                     | ** ** | ** **        | ** ** | **Recovery**                      |       | · Recovery activities (thru Cascades Recovery and  Metro Waste)                                                                                                                          |       | 21                       |       | 1,455 (brokered and processed in 2006)                                                              |       | Largest recycled paper collector in Canada

9 th largest recycled paper collector in the  world                                                                                                                         |
| ** **                     | ** ** | ** **        | ** ** | **Others**                        |       | · De-inked pulp                                                                                                                                                                          |       | 2                        |       | 136                                                                                                 |       | N/A                                                                                                                                                                                                                          |
| ** **                     | ** ** | **Europe**        | ** ** | **Converting**                    |       | · Papermill packaging

· Roll headers and wrappers                                                                                                                                  |       | 2                        |       | 22                                                                                                  |       | N/A                                                                                                                                                                                                                          |
| ** **                     | ** ** | ** **        | ** ** | **Others**                        |       | · De-inked pulp                                                                                                                                                                          |       | 1                        |       | 143                                                                                                 |       | Only dry de-inked pulp producer in Western Europe                                                                                                                                                                            |
| **TISSUE PAPERS**              | ** ** | ** **        | ** ** | ** **                        |       |                                                                                                                                                                                          |       |                     |       |                                                                                                |       |                                                                                                                                                                                                                         |
| ** **                     | ** ** | **North America** | ** ** | **Manufacturing**                 |       | · Parent rolls                                                                                                                                                                           |       | 3                        |       | 136(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                        |       | 453(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                         |       | 6                        |       | N/A                                                                                                 |       | Strong expertise in the private label segment of the  retail market                                                                                                                                                          |
| **TOTAL**                      | ** ** | ** **        | ** ** | ** **                        |       |                                                                                                                                                                                          |       | 117                      |       | 3,670 (manufacturing only)                                                                          |       |                                                                                                                                                                                                                         |

 

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| (1) | As at December 31, 2006. See the Annual Information  Form for additionnal information.                                                                              |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Production and paper recovery units only; excluding  sale offices, distribution and transportation hubs, our European sheeting  carton plant and corporate offices. |
| (3) | Thousand short tons unless otherwise noted.                                                                                                                         |
| (4) | Based on manufacturing capacity. Sources: RISI,  World Tissue Capacity Report 2006, Moore and Associates.                                                           |
| (5) | Excluding the Montréal carton plant which will be  shut in 2007.                                                                                               |
| (6) | Both the pulpmill and the sawmill operations are  indefinitely shut.                                                                                                |
| (7) | Including the Red Rock mill which is indefinitely  shut (capacity: 300,000 short tons).                                                                             |
| (8) | Theoretical capacity.                                                                                                                                               |

 

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**Keyfinancial drivers**

As a Packaging and Tissuecompany, our financial results are mainly driven by the following factors:

**SALES**

·      Sellingprices

·      Demandfor packaging and tissue, mainly environmentally friendly and recycled products

·      Foreignexchange rates (mainly CAN$/US$)

·      Populationgrowth

·      Industrialproduction

·      Demandfor durable and non-durable goods

·      Product mix, substitution and innovation

**COSTS**

·      Fiber(recycled, virgin and woodchips) prices, availability and production recipes

·      Foreignexchange rates (mainly CAN$/US$)

·      Energyprices, mainly electricity and natural gas

·      Labour

·      Freight

·      Chemicalproduct prices

·      Capacity utilization rates and productiondowntime

**Sensitivityanalysis**

The following table providesa quantitative estimate of theimpact on Cascades’ annual operating income before depreciation and amortization (OIBD) from possible changesin the price of our mainproducts, the cost of certain raw materials and energy, as well as the CAN$/US$ exchange rate. This is based on Cascades’ 2006 capacity and consumptionnumbers, adjusted for recentacquisitions (boxboard mill in Versailles) and operations that have been shutdown (Thunder Bay fine papers mill, Red Rock containerboard mill),assuming for each price changethat all other variables remain constant.

However, Cascades’ hedgingpolicies and portfolios (see Riskmanagement, p.32). should also be considered in order to fully analyze Cascades’ sensitivity to thehighlighted factors. Moreover,Cascades’ US dollar denominated long-term debt acts as a natural hedge against the CAN$/US$ exchange rate fluctuations.
| ** **                                       | ** ** | **Sensitivity table (1)**                                                         | ** ** | ** **     | ** ** | ** **                                                 | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------|------------|------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Capacity/Consumption  (‘000, except for natural gas)** | ** ** | **Change**     | ** ** | **OIBD Impact  (In millions of CAN$)** | ** ** |
| **Selling prices  (manufacturing)(2)**           |       |                                                                              |       |           |       |                                                       |       |
| Boxboard                                         |       | 1,163                                                                             |       | 25 US$/s.t.    |       | **34**                                                     | ** ** |
| Containerboard                                   |       | 1,201                                                                             | (2)        | 25 US$/s.t.    |       | **35**                                                     | ** ** |
| Specialty Products  (paper only)                 |       | 417                                                                               |       | 25 US$/s.t.    |       | **12**                                                     | ** ** |
| Tissue                                           |       | 470                                                                               | (3)        | 25 US$/s.t.    |       | **14**                                                     | ** ** |
| Input costs                                      |       |                                                                              |       |           |       | ** **                                                 | ** ** |
| Recycled papers                                  |       |                                                                              |       |           |       | ** **                                                 | ** ** |
| Brown grades  (OCC & others)                 |       | 1,250                                                                             |       | 15 US$/s.t.    |       | **22**                                                     | ** ** |
| Groundwood  grades (ONP & others)            |       | 545                                                                               |       | 15 US$/s.t.    |       | **9**                                                      | ** ** |
| White grades  (SOP & others)                 |       | 963                                                                               |       | 15 US$/s.t.    |       | **17**                                                     | ** ** |
| **Commercial pulp**                              |       | 50                                                                                |       | 30 US$/s.t.    |       | **2**                                                      | ** ** |
| **Natural gas**                                  |       | 11,020,000                                                                        |       | 0.10 US$/MMBtu |       | **1**                                                      | ** ** |
| **Foreign exchange(4)**                          |       |                                                                              |       |           |       | ** **                                                 | ** ** |
| Change of US$0.01 vs  CAN$                       |       |                                                                              |       |           |       | ** **                                                 | ** ** |
| Net sales in US$ from Canadian operations   |       |                                                                              |       |           |       | **(4**                                                     | **)**      |
| Net sales in  Canada impacted by US$ effect |       |                                                                              |       |           |       | **(3**                                                     | **)**      |
| U.S.  subsidiaries translation                   |       |                                                                              |       |           |       | **(1**                                                     | **)**      |
| **TOTAL foreign exchange**                       |       |                                                                              |       |           |       | **(8**                                                     | **)**      |

 

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| (1) | Sensitivity calculated according to 2006 volumes or  capacity (including 100% of Norampac) and with an exchange rate of 1.16 CAN$/US$,  excluding hedging programs and excluding the impact of related expenses such  as discounts, commissions on sales and profit sharing. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Based on 2006 capacity as per the Annual Information  Form and including the impact of all new acquisitons (boxboard mill in  Versailles) and operations that have been shutdown (Thunder Bay fine papers  mill, Red Rock containerboard mill).                                   |
| (3) | Practical capacity, 80% of theoretical capacity.                                                                                                                                                                                                                                  |
| (4) | As an example, from 1.17 CAN$/US$to 1.16 CAN$/US$.                                                                                                                                                                                                                                |

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**Relevanteconomic data**

As highlighted in theprevious table, Cascades’ results areimpacted by the fluctuations of the Canadian dollar and the Euro against the U.S. dollar and by energyprices. In 2006, the Canadian dollarincreased 7% against the U.S. dollar. Crude oil prices also increased (+20%) while natural gas prices decreased by approximately 16%.

The following graphs andtable show the historical movementof the Canadian dollar against the U.S. dollar, the U.S. dollar against the Euro, as well as the spot pricesof natural gas (US$/mmBtu) andcrude oil (US$/barrel).
| ** **                         | ** ** | **2004**   | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                         | ** ** | **Year**   | ** ** | **Q1**   | ** ** | **Q2**   | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Year** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Year** | ** ** |
| **Foreign exchange rates-average** |       |       |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CAN$/US$                           |       | **1.301**  |       | 1.227    |       | 1.244    |       | 1.201 |   | 1.173 |   | 1.211 | ** ** | **1.155** | ** ** | **1.122** | ** ** | **1.121** | ** ** | **1.139** | ** ** | **1.134** | ** ** |
| US$/CAN$                           |       | **0.769**  |       | 0.815    |       | 0.804    |       | 0.832 |   | 0.852 |   | 0.826 | ** ** | **0.866** | ** ** | **0.891** | ** ** | **0.892** | ** ** | **0.878** | ** ** | **0.882** | ** ** |
| US$/EURO                           |       | **1.249**  |       | 1.308    |       | 1.243    |       | 1.217 |   | 1.188 |   | 1.239 | ** ** | **1.207** | ** ** | **1.274** | ** ** | **1.275** | ** ** | **1.290** | ** ** | **1.262** | ** ** |
| **Energy prices-average**          |       | ** ** |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Natural gas Henry Hub  (US$/mmBtu) |       | **6.11**   |       | 6.27     |       | 6.73     |       | 8.49 |   | 12.97 |   | 8.62 | ** ** | **8.98** | ** ** | **6.79** | ** ** | **6.58** | ** ** | **6.56** | ** ** | **7.23** | ** ** |
| Crude oil WTI (US$/barrel)         |       | **40.69**  |       | 47.80    |       | 52.36    |       | 62.00 |   | 61.11 |   | 55.82 | ** ** | **63.46** | ** ** | **69.93** | ** ** | **72.86** | ** ** | **61.59** | ** ** | **66.96** | ** ** |

 

Source: Bloomberg.

7

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**Pricing – Main products and raw materials**

The following graphs andtable show the historical movementof average benchmark list prices for some of our key products as well as for woodchips and some grades ofrecycled paper and virgin pulpused in the manufacturing process. Recycled papers, virgin pulp and woodchips are the primary rawmaterials used in themanufacture of our products and represent the highest production cost. Selling and raw materialslist prices fluctuate considerablyand are heavily influenced by economic conditions and foreign demand. These list prices couldbe different from the Company’scost of purchase and actual selling 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  nonmanufacturing 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 fiber, 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 an 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,  East US and the Corrugating medium 26-lb. Semichemical, East US, 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 (list), the Unbleached kraft paper, Grocery bag 30-lb., and the uncoated  white 50lb. 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 fiber index  represents the average weighted cost paid for recycled papers in North  America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

8

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| **These indexes should only be used as indicator**                                                                | ** ** | **2004**    | ** ** | **2005**        | ** ** | **2006**        | ** ** | **Change**      | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| **of trends and they be different than our actual  selling prices or purchasing costs.** | ** ** | **Average** | ** ** | **Average  Q1** | ** ** | **Average  Q2** | ** ** | **Average  Q3** | ** ** | **Average  Q4** | ** ** | **Average** | ** ** | **Average  Q1** | ** ** | **Average  Q2** | ** ** | **Average  Q3** | ** ** | **Average  Q4** | ** ** | **Average** | ** ** | **2005-  2006 (%)** | ** ** |
| **Selling  prices**                                                                                                                                  |       |        |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cascades  North American US$ index (index 2002 = 1,000)(1)                                                                                      | **1,072**  |        | 1,151      |            | 1,150      |            | 1,118      |            | 1,147      |   | 1,141 |   | **1,201** |   | **1,264** |   | **1,287** |   | **1,298** |   | **1,263** |   | **11** | **%** |
| **Packaging**                                                                                                                                        |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| **Boxboard**                                                                                                                                         |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| North America (US$/ton)                                                                                                                              |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| Recycled boxboard - 20pt. Clay coated news (list)                                                                                                    |       | **686**     |       | 715             |       | 715             |       | 715             |       | 735 |   | 720 |   | **745** |   | **752** |   | **783** |   | **800** |   | **770** |   | **7** | **%** |
| Europe (Euro/tonne)                                                                                                                                  |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| Recycled white-lined chipboard (GD2) index(2)                                                                                                        |       | **679**     |       | 660             |       | 655             |       | 646             |       | 639 |   | 650 |   | **659** |   | **667** |   | **687** |   | **690** |   | **676** |   | **4** | **%** |
| Virgin coated duplex boxboard (GC2) index(3)                                                                                                         |       | **1,003**   |       | 1,013           |       | 1,015           |       | 1,014           |       | 1,015 |   | 1,014 |   | **1,012** |   | **1,012** |   | **1,015** |   | **1,018** |   | **1,014** |   | **0** | **%** |
| **Containerboard (US$/ton)**                                                                                                                         |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| Linerboard 42-lb. unbleached kraft, East US (list)                                                                                                   |       | **468**     |       | 500             |       | 490             |       | 448             |       | 475 |   | 478 |   | **515** |   | **565** |   | **565** |   | **565** |   | **553** |   | **16** | **%** |
| Corrugating medium 26-lb. Semichemical, East U.S.  (list)                                                                                            |       | **432**     |       | 470             |       | 453             |       | 418             |       | 445 |   | 447 |   | **485** |   | **538** |   | **545** |   | **545** |   | **528** |   | **18** | **%** |
| **Specialty products (US$/ton, tonne for deinked  pulp)**                                                                                            |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| Recycled boxboard - 20pt. Bending chip (list)                                                                                                        |       | **557**     |       | 590             |       | 590             |       | 605             |       | 617 |   | 600 |   | **625** |   | **625** |   | **655** |   | **655** |   | **640** |   | **7** | **%** |
| Deinked pulp (f.o.b; U.S. air-dried & wet-lap,  post-consumer)                                                                                   |       | **520**     |       | 568             |       | 587             |       | 583             |       | 584 |   | 580 |   | **585** |   | **592** |   | **610** |   | **620** |   | **602** |   | **4** | **%** |
| Unbleached kraft paper, Grocery bag 30-lb.                                                                                                           |       | **699**     |       | 760             |       | 760             |       | 760             |       | 780 |   | 765 |   | **803** |   | **838** |   | **855** |   | **855** |   | **838** |   | **10** | **%** |
| Uncoated white 50-lb. offset, rolls                                                                                                                  |       | **676**     |       | 733             |       | 753             |       | 713             |       | 703 |   | 726 |   | **765** |   | **840** |   | **848** |   | **838** |   | **823** |   | **13** | **%** |
| **Tissue papers**                                                                                                                                    |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| Cascades Tissue papers (index 1999 = 1,000)(4)                                                                                                       |       | **1,189**   |       | 1,287           |       | 1,339           |       | 1,362           |       | 1,346 |   | 1,335 |   | **1,377** |   | **1,389** |   | **1,422** |   | **1,455** |   | **1,411** |   | **6** | **%** |
| **Raw  materials**                                                                                                                                   |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| **Cascades North American US$ index (index 2002 =  300)(5)**                                                                                    |       | **375**     |       | 387             |       | 378             |       | 368             |       | 349 |   | 371 |   | **326** |   | **348** |   | **385** |   | **369** |   | **357** |   | **-4** | **%** |
| **Recycled  paper (US$/short ton)**                                                                                                                  |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| **North America (US$/ton)**                                                                                                                          |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| Corrugated containers, no. 11 (OCC - Chicago & NY  average)                                                                                      |       | **83**      |       | 88              |       | 87              |       | 75              |       | 61 |   | 78 |   | **55** |   | **70** |   | **83** |   | **67** |   | **69** |   | **-12** | **%** |
| Special news, de-inked quality, no. 6 (ONP - NY)                                                                                                     |       | **57**      |       | 60              |       | 63              |       | 53              |       | 51 |   | 57 |   | **43** |   | **45** |   | **53** |   | **48** |   | **47** |   | **-18** | **%** |
| Sorted office papers, no. 37 (SOP - NY)                                                                                                              |       | **122**     |       | 116             |       | 93              |       | 89              |       | 89 |   | 97 |   | **93** |   | **99** |   | **117** |   | **121** |   | **108** |   | **12** | **%** |
| **Europe (Euro/tonne)**                                                                                                                              |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| Recovered mixed paper & board sorted index(6)                                                                                                    |       | **46**      |       | 42              |       | 46              |       | 41              |       | 42 |   | 43 |   | **40** |   | **51** |   | **51** |   | **52** |   | **48** |   | **12** | **%** |
| **Virgin  Pulp (US$/tonne)**                                                                                                                         |       | ** **  |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| Bleached softwood kraft Northern, East U.S.                                                                                                          |       | **640**     |       | 670             |       | 653             |       | 625             |       | 638 |   | 647 |   | **653** |   | **707** |   | **757** |   | **770** |   | **722** |   | **12** | **%** |
| Bleached hardwood kraft Northern mixed, East U.S.                                                                                                    |       | **545**     |       | 588             |       | 623             |       | 610             |       | 617 |   | 610 |   | **618** |   | **649** |   | **675** |   | **685** |   | **657** |   | **8** | **%** |
| **Woodchips – Conifer eastern  Canada (US$/odmt)**                                                                                              |       | **121**     |       | 131             |       | 135             |       | 139             |       | 142 |   | 136 |   | **137** |   | **140** |   | **127** |   | **125** |   | **132** |   | **-3** | **%** |

 

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Source: Pulp&Paper Week, PPI, CIBC World Markets 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (5) | The Cascades North American raw materials index  represents the average weighted cost paid for some of our manufacturing raw  materials namely, recycled fiber, 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 an 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.                                                                                                                                                                                                                                                                                                                                                                                                     |

 

9

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**2006Industry review**

Overall in 2006, the NorthAmerican and European paper and packaging industry continued to redefineitself. Again, some producers had to shutdown capacity due to unfavorable exchangerates as well as high energy and raw material costs. However, a better demandand the massive restructuring initiatives which occurred in 2005 led to ahealthier pricing environment in several markets.

In addition, manytransactions were announced as companies are trying to focus on businesssegments where they possess cost advantages and market expertise. Moreover,some global producers invested or acquired participation in rapidly growingmarkets such as Russia, China and South America.

Recycled paper, virgin pulpand woodchips 

Recycled paper, virgin pulpand woodchips represent the main cost of our manufacturing operations. Theyaccounted for 70%, 13% and 17% respectively of our total raw materialconsumption in 2006. However, as a result of the announced indefinite closuresof its Fjordcell pulp mill and Red Rock containerboard mill, Cascades is nowmarginally, directly exposed to the woodchip market in Eastern Canada.

In the recycled fibermarket, the North American paper and packaging industry closures that occurredin 2005 resulted in a decrease in domestic demand for most of the brown gradesof recycled fiber in the first months of 2006, and in a relatively stabledomestic demand in the second half of the year. However, driven by higherChinese imports, up approximately 1 million tons in 2006 (source: RISI), theglobal market remained strong. Overall, in this environment, the annualdomestic U.S. dollar average price of two of the three main grades purchased byCascades, namely old corrugated containers (OCC) and old newspapers (ONP),decreased in 2006. As for North American white recycled fiber prices, likesorted office papers (SOP), they increased steadily in 2006 given strong demandfrom market de-inked pulp mills, substitution from virgin fiber consumers facingsignificant cost pressures, and growing exports to China. In Europe, most ofthe recycled fiber grade prices increased in 2006 due to bottlenecks in freightcapacity and healthy demand from export markets.

With regards to the virginpulp market, US$ softwood pulp prices continued to rally during the year givenhealthy international demand, which was particularly strong in China, and tightsupply resulting from closures of capacity in 2005 and 2006. In December,Northern bleached softwood kraft pulp (NBSK) US$ prices were at a 10-year high,up 12% in 2006, while global softwood market pulp inventories fell to 25 days ofsupply, down from 30 days one year earlier. As for hardwood pulp (NBHK), pricesimproved by 8% in 2006 as global hardwood market pulp inventories fell to 33days of supply in December, down from 35 days one year earlier. The price differentialbetween the two virgin pulp grades increased in 2006 given stronger marketfundamentals for softwood pulp and increasing supply of hardwood pulp fromSouth America.

Concerning the woodchip market,prices remained high in Eastern Canada in 2006 as the business environment inthe lumber industry continued to be very challenging. Lower lumber prices andthe reduction imposed by the Government of Québec (Canada) on the allowableprovincial harvest of softwood timber led to the closures of numerous sawmills.In the Pacific Northwest and British Columbia, woodchip prices increased whileseveral sawmills were also shut due to the softer lumber market.

Packaging

**BOXBOARD**

In North America, conditionsin the coated recycled boxboard (CRB) market improved in 2006. U.S. CRBproduction increased 3.9% in 2006 and the industry operating rate rose followingthe 2005 and 2006 closures of 10% of the North American capacity (source:RISI). The U.S. CRB market’s operating rate averaged 96.7% in 2006, compared to92.6% in the previous year (source: American Forest & Paper Assn.). Despitehigh operating rates, backlogs for U.S. CRB remained high in the second half of2006. These better fundamentals in the industry led to two price increases fora total of 55 US$/ton on the 20-pt clay coated news recycled board in 2006. Ona yearly average basis, US$ price increased 7% in 2006.

On the converting side,folding carton production reached 2.05 million tons in 2006, an increase of2.1% over the previous year (source: American Forest & Paper Assn.). Theyear-over-year growth was mostly in line with the higher U.S. industrialproduction of nondurable goods. As for the quick-service-restaurant business(QSR), demand remained relatively healthy throughout the year.

In Europe, in the coatedrecycled sector, the market continued to be challenging given pressure onexports and overcapacity. However, Western European consumption increasedapproximately 4% in 2006, after declining by 1.8% in 2005 (source: RISI). Threeprice increases were announced in 2006 as a result of increasing costpressures. These increases were only partially implemented during the course ofthe year. One mill suspended production definitively in July (De Eendrachtmill, production: 120,000 tonnes) but the largest European producer re-opened itsBulgarian mill (capacity: 80,000 tonnes) in the last quarter of the year.

In the European virginboxboard market, business conditions were challenging given that the cost pressuresfrom energy and raw materials were not counterbalanced by any price increasesin 2006.

10

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**CONTAINERBOARD**

In the North Americancontainerboard market, during 2006, production grew 2% on a year-over-yearbasis, pushing the U.S. industry operating rate to 97.5%, up from 94.8% in 2005(source: RISI). On the converting side, U.S. corrugated box shipments were alsohigher in 2006, up 1% compared to last year (source: RISI). Despite the highoperating rate at the mill level, inventories (at mills and box plants)remained around 2.5 million tons for most of 2006, representing 3.5 to 4.2weeks of supply. Furthermore, restructuring initiatives were implemented at theconverting level as several box plant closures were announced during the year(Smurfit Stone closed 17 box plants in 2006).

In this context, transactionprices increased by US$40/ton (9%) in the first quarter of 2006 and anotherUS$50/ton (11%) in April. On a yearly average basis, the price of linerboardmoved up 16% in 2006. Following these manufacturing price increases, corrugatedbox prices also improved as the pass-throughs were fully implemented over theyear.

**SPECIALTY PRODUCTS**

In 2006, industry conditionsin the moulded pulp market remained fairly stable. In the honeycomb sector,business conditions were relatively good and prices improved. In the de-inkedpulp market, despite the sustained demand for recycled products and some priceimprovement, the business environment was more challenging in the second halfof the year as the recovered paper price increased and more than offset theselling price advance. In the plastic products sector, demand was relativelyhealthy in 2006 but resin costs were volatile. In the specialty paper &board market, US$ prices of kraft paper and uncoated board grades increased.

In the North Americanuncoated freesheet fine papers market, the supply contraction continued in 2006as a further 3% of the North American capacity was removed, following areduction of approximately 6% in 2005 (source: RISI). In the first quarter ofthe year, demand strengthened as customers began to rebuild inventories. Withthis tightening of supply and demand, producers implemented US$ price increasesin March, April and July. However, demand softened in the second half of 2006and prices dropped US$40/short ton from August 2006 to January 2007. In fact,U.S. demand for uncoated freesheet was down by 1% in 2006 (source: RISI).

**TISSUE PAPERS**

In 2006, demand for tissuepaper products remained healthy in the U.S. although lower than the consumptiontrend annual growth rate of 2.2% (source: RISI). However, U.S. tissue productionand capacity increased in line with consumption thus preventing marketimbalance (source: RISI). In Canada, business conditions in the retail marketwere more challenging as national brands competition intensified. Givenescalating cost pressures, price increases were implemented in 2006 in all sectors:U.S. and Canadian retail and away-from-home markets as well as on parent rolls.

**Long-termobjectives**

Maximize our return onassets

11

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Financial results withinsustainable development

**Environmentalperformance**

Despite the numerous changesin the paper and packaging industry, Cascades firmly intends to remain a leaderby maintaining its environmental objectives: increase the volume of recycledmaterials, reduce greenhouse gas emissions, reduce water consumption, recoverwaste from water treatment systems for beneficial use and maximize energyefficiency by reducing its consumption.

**The human element**

Our employees are the drivingforce behind Cascades’ success. They have a voice in the way we run ourbusiness. We constantly strive to meet the expectations of our employees and tofind new and beneficial ways in which we can all work together for the benefitof our shareholders.

**Economic environment**

Sustainable development isnot only rooted in our deepest value, respect, but is also aimed at constantlyachieving better financial performances. For more than 40 years, Cascades hasused tools, such as profit sharing, based on cash flows, to optimize the valueof its assets in order to increase its return on assets.

**Strategy**

**Focus onpackaging and tissue**

The focus on packaging andtissue is one of the main characteristics that make Cascades unique in theindustry in North America. Effectively, through asset purchases and internalgrowth, we have positioned ourselves in the packaging and tissue segments,which are more consumer-oriented markets. In these businesses, we operate indifferent geographic locations and we are often among the market leaders.

**Optimizeuse of recycled fiber**

Cascades produces themajority of its products from recycled fiber. We manufactured approximately 2.5million tons of packaging, tissue products and specialty papers last year. Theoverall purchase content of recycled fiber is estimated to be close to 70%. Weintend to continue to use recycled fiber as our main source of raw materials.We benefit from more than 40 years of experience with this type of raw materialand the volume of our purchases gives us a unique position in Canada.Furthermore, we firmly believe that the demand for recycled products will growin the future.

**Increaseconverting integration rate**

By increasing our convertingintegration rate, we expand the quantity of board and paper that we convertinto value-added products. Also, a better integration rate presents three mainadvantages: it brings us closer to the end-user; converting operations are lesscapital intensive; and it improves stability at the mill.

**Promote theentrepreneurial culture**

We have a decentralizedmanagement structure in which each of our units operates as a distinct profitcenter. We believe in market price transfer as an important tool to support andmeasure efficient capital allocation. In addition, we have implemented a profitsharing plan that is linked to the financial and operating performance of eachindividual facility. Our work force is young and we believe that our corporateculture and our employees are the best assets we have for adapting to anever-changing environment.

12

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**Action plan**

Linked to our strategy, ouraction plan focuses on improving our profitability as well as optimizing ourportfolio of assets.

**Continuous improvementprogram & product development**

·                  One of Cascades’ top priorities has alwaysbeen the improvement of processes, including eliminating unnecessaryactivities.

·                  Through targets, tools and measures, Cascadesis dedicated to the development of new products, to the improvement of thequality of its existing products, lowering costs and inefficiencies, andoptimizing customer service.

**Focus on less-performingassets**

·                  Through our continuous improvement program, weclosely monitor less-performing assets, which represent approximately 10manufacturing and converting units out of more than 100.

·                  Important cost-cutting measures have beenimplemented in order to improve profitability and difficult decisions were takenin 2005 and 2006. Currently, we are mainly focusing on our boxboard activities,both in Europe and North America.

**Divestitureof non-core assets**

·                  In our 2004 strategic plan, we decided tofocus on packaging and tissue.

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

·                  In 2006 and beginning of 2007, we sold ourinterests in two non-core joint ventures.

**Deleveragingour balance sheet**

·                  We intend to continue to deleverage ourbalance sheet in order to improve our financial flexibility.

·                  Given the recent acquisition of the remaining50% of Norampac, we will focus on returning rapidly to pre-acquisition debtratios.

·                  This will be accomplished through acombination of cost-cutting measures, asset-optimization, divestiture, andpositive free cash flow improvement.

**Selective acquisitionsin core segments**

·                  We plan to continue pursuing opportunistic andselective acquisitions, opportunities that will not adversely affect progress towarddeleveraging.

13

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**2006 Actionplan milestones(****1)**

In 2006, we took thefollowing steps in order to deliver our action plan:
| ** **                                                    | ** ** | **1**st Quarter                                                                                                                                                                                                                                                                                                                       | ** **                                                                                 | **2**nd Quarter                                                            | ** ** | **3**rd Quarter                                                                                                                                                                                                                                                                                                                                 | ** ** | **4**th Quarter                                                                                                                                                                                                                                                                                                                                   |
|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Continuous  improvement program & product development** |       | ·  Redeployment of converting equipment of the  Pickering, Ontario tissue plant 

·  Launch of a recyclable moulded pulp mat for  the farming industry 

·  Launch of Cascades’ 100% recycled tissue  product line in Western Canada                                                               |                 |                                                                       |       | ·  Djupafors, Sweden virgin boxboard mill  becomes the frst European board mill to hold both the PEFC (Program of  Endorsement for Forest Certification) and FSC (Forest Stewardship Council)  forest management certifications 

·  Increase in the post- consumer content for  some specialty fine papers from 20% to 30% |       | ·  La Rochette, France virgin boxboard mill  obtaines the PEFC certification (Program of Endorsement for Forest  Certification) 

·  Announced redeployment of customers and  equipment of the Montréal, Québec boxboard plant                                                                                      |
| ** **                                                    |       |                                                                                                                                                                                                                                                                                                                                  |                                                                                       |                                                                       |       |                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                              |
| **Focus  on less-performing assets**                          |       | ·  Definitive closure of the Thunder Bay,  Ontario fine papers mill

·  Definitive closure of one machine and  implementation of several restructuring measures at the St-Jérôme, Quebec  fine papers mill 

·  Optimization initiatives in Blendecques,  France’ recycled boxboard mill |                                                                                       |                                                                       |       | ·  Closure of the Fjordcell, Quebec pulp mill  for an indefinite period 

·  Definitive closure of the Sainte-Marie,  France specialty board mill                                                                                                                                                                           |       | ·  Closure of the Red Rock, Ontario  containerboard mill (Norampac) for an indefinite period 

·  Closure of the Scierie Lemay, Québec sawmill  for an indefinite period                                                                                                                                                 |
| ** **                                                    |       |                                                                                                                                                                                                                                                                                                                                  |                                                                                       |                                                                       |       |                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                              |
| **Divestiture  of non-core assets**                           |       | ·  Closing of the sale of our fine papers  distribution assets                                                                                                                                                                                                                                                              |                                                                                       |                                                                       |       |                                                                                                                                                                                                                                                                                                                                            |       | ·  Sale of our participation in D&D (a  joint-venture in our converting boxbard operations) 

·  In 2007, sale of our interest in GSD (a  joint-venture in our converting boxboard operations)                                                                                                                            |
|                                                          |       |                                                                                                                                                                                                                                                                                                                                  |                                                                                       |                                                                       |       |                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                              |
| **Deleveraging  our balance sheet**                           |       | ·  $77 CAN million debt reduction through the  sale of our fine papers distribution assets                                                                                                                                                                                                                                  |                                                                                       | ·  Best quarterly operating income in three  years               |       |                                                                                                                                                                                                                                                                                                                                            |       | ·  Best annual cash flow from operations in  three years 

·  Capital investment limited to $110 million  in 2006 

·  Public and private equity placements for a  gross proceed of $250 million 

·  Net debt-to-equity ratio limited at 59.1%  despite the acquisition of the remaining 50% of Norampac |
| ** **                                                    |       |                                                                                                                                                                                                                                                                                                                                  |                                                                                       |                                                                       |       |                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                              |
| **Selective  acquisitions in core segments**                  |       |                                                                                                                                                                                                                                                                                                                                  |                                                                                       | ·  Acquisition of certain recycled boxboard  assets from Simkins |       | ·  Closing of the acquisition of the  Versailles, Connecticut recycled boxboard mill from Caraustar 

·  Acquisition of certain assets of the  Rittman, Ohio recycled boxboard mill from Caraustar 

·  Acquisition of the de-inked pulp manufacturing  assets of Newstech located in Hagerstown, Maryland        |       | ·  Cascades acquires Domtar’s 50% stake in  Norampac                                                                                                                                                                                                                                                                               |

 

14

----

**Key performance indicators**

To monitor our action plan, we use some key performance indicators,including the following:

**Operational and financial data**
|                                                     | ** ** | **2004**  | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| ** **                                          | ** ** | **Total** | ** ** | **Q1**   | ** ** | **Q2**   | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| **Operational**                                     |       |      |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Manufacturing shipments (In  ‘000 of s.t.)** |       |      |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Packaging                                           |       |      |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Boxboard                                            |       | 857       |       | 213      |       | 223      |       | 224 |   | 229 |   | 889 |   | **240** | ** ** | **232** | ** ** | **263** | ** ** | **272** | ** ** | **1,007** | ** ** |
| Containerboard                                      |       | 718       |       | 179      |       | 184      |       | 178 |   | 174 |   | 715 |   | **180** | ** ** | **180** | ** ** | **176** | ** ** | **155** | ** ** | **691** | ** ** |
| Specialty  products (paper only)                    |       | 365       |       | 85       |       | 91       |       | 89 |   | 89 |   | 354 |   | **93** | ** ** | **95** | ** ** | **90** | ** ** | **89** | ** ** | **367** | ** ** |
|                                                |       | 1,940     |       | 477      |       | 498      |       | 491 |   | 492 |   | 1,958 |   | **513** | ** ** | **507** | ** ** | **529** | ** ** | **516** | ** ** | **2,065** | ** ** |
| Tissue papers(1)                                    |       | 399       |       | 99       |       | 104      |       | 111 |   | 111 |   | 425 |   | **104** | ** ** | **114** | ** ** | **118** | ** ** | **107** | ** ** | **443** | ** ** |
| Total                                               |       | 2,339     |       | 576      |       | 602      |       | 602 |   | 603 |   | 2,383 |   | **617** | ** ** | **621** | ** ** | **647** | ** ** | **623** | ** ** | **2,508** | ** ** |
| **Integration rate –%**                        |       |      |       |     |       |     |       |   |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                           |       |      |       |     |       |     |       |   |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard (North  America)                           |       | 44        | %          | 41       | %          | 40       | %          | 40 | % | 38 | % | 40 | % | **38** | **%** | **38** | **%** | **28** | **%** | **27** | **%** | **32** | **%** |
| Containerboard  (North America)                     |       | 65        | %          | 59       | %          | 63       | %          | 59 | % | 62 | % | 61 | % | **60** | **%** | **60** | **%** | **65** | **%** | **58** | **%** | **61** | **%** |
| Specialty  products (paper only)                    |       | 10        | %          | 19       | %          | 18       | %          | 18 | % | 16 | % | 10 | % | **10** | **%** | **9** | **%** | **10** | **%** | **10** | **%** | **10** | **%** |
| Tissue  papers                                      |       | 64        | %          | 66       | %          | 64       | %          | 60 | % | 61 | % | 63 | % | **60** | **%** | **57** | **%** | **56** | **%** | **62** | **%** | **59** | **%** |
|                                                |       | 62        | %          | 53       | %          | 53       | %          | 50 | % | 51 | % | 52 | % | **46** | **%** | **46** | **%** | **44** | **%** | **42** | **%** | **44** | **%** |
| **Capacity utilization rate(2) –%**            |       |      |       |     |       |     |       |   |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                           |       |      |       |     |       |     |       |   |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard(3)                                         |       | 89        | %          | 88       | %          | 92       | %          | 93 | % | 95 | % | 92 | % | **98** | **%** | **95** | **%** | **94** | **%** | **94** | **%** | **95** | **%** |
| Containerboard                                      |       | 89        | %          | 95       | %          | 97       | %          | 94 | % | 92 | % | 94 | % | **96** | **%** | **96** | **%** | **100** | **%** | **103** | **%** | **99** | **%** |
| Specialty  products                                 |       | 97        | %          | 92       | %          | 98       | %          | 96 | % | 96 | % | 96 | % | **89** | **%** | **91** | **%** | **86** | **%** | **85** | **%** | **88** | **%** |
| Tissue papers(4)                                    |       | 91        | %          | 96       | %          | 98       | %          | 94 | % | 99 | % | 97 | % | **101** | **%** | **103** | **%** | **101** | **%** | **100** | **%** | **101** | **%** |
| Total                                               |       | 91        | %          | 92       | %          | 96       | %          | 94 | % | 95 | % | 94 | % | **96** | **%** | **96** | **%** | **96** | **%** | **96** | **%** | **96** | **%** |
| **Energy cons(5) – GJ/ton**                    |       | 11.15     |       | 11.68    |       | 10.56    |       | 10.83 |   | 11.40 |   | 10.83 |   | **11.04** | ** ** | **10.32** | ** ** | **9.63** | ** ** | **10.56** | ** ** | **10.33** | ** ** |
| **Work accidents – OSHA frequency  rate**      |       | 10.6      |       | 10.7     |       | 9.5      |       | 10.0 |   | 9.5 |   | 9.5 |   | **7.9** | ** ** | **8.0** | ** ** | **8.3** | ** ** | **8.0** | ** ** | **8.0** | ** ** |
| **Financial**                                       |       |      |       |     |       |     |       |   |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Return on assets (%)(6)**                         |       |      |       |     |       |     |       |   |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                           |       |      |       |     |       |     |       |   |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard                                            |       | 7         | %          | 7        | %          | 6        | %          | 6 | % | 6 | % | 6 | % | **6** | **%** | **6** | **%** | **5** | **%** | **5** | **%** | **5** | **%** |
| Containerboard                                      |       | 13        | %          | 13       | %          | 14       | %          | 12 | % | 11 | % | 11 | % | **10** | **%** | **10** | **%** | **13** | **%** | **15** | **%** | **15** | **%** |
| Specialty products                                  |       | 8         | %          | 8        | %          | 8        | %          | 8 | % | 6 | % | 6 | % | **7** | **%** | **7** | **%** | **8** | **%** | **11** | **%** | **11** | **%** |
| Tissue papers                                       |       | 13        | %          | 14       | %          | 15       | %          | 17 | % | 18 | % | 18 | % | **20** | **%** | **21** | **%** | **23** | **%** | **22** | **%** | **22** | **%** |
| Consolidated  return on assets (%)                  |       | 8.5       | %          | 8.6      | %          | 8.6      | %          | 8.3 | % | 8.4 | % | 8.4 | % | **8.8** | **%** | **9.4** | **%** | **10.1** | **%** | **10.8** | **%** | **10.8** | **%** |
| **Working capital(7)**                              |       |      |       |     |       |     |       |   |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| In millions of $                                    |       | 577       |       | 655      |       | 659      |       | 634 |   | 594 |   | 594 |   | **570** | ** ** | **584** | ** ** | **566** | ** ** | **504** | ** ** | **504** | ** ** |
| % of sales (8)                                      |       | 15.9      | %          | 16.1     | %          | 16.2     | %          | 16.4 | % | 16.5 | % | 16.5 | % | **16.5** | **%** | **16.7** | **%** | **16.1** | **%** | **16.3** | **%** | **16.3** | **%** |

 

----

| (1) | Defined as: External manufacturing and converting  shipments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Defined as: Shipments/Practical capacity. Paper  manufacturing only.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (3) | Starting in Q3 2006, capacity numbers were adjusted  to take into account that the Versailles mill was acquired on July 21.                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (4) | 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.                                                                                                                                                                                                                                                                                                                                                         |
| (5) | Average energy consumption for manufacturing mills  only.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (6) | 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.                                                                                                                                                                                                                                                                                                                                                                      |
| (7) | Working capital includes accounts receivable plus  inventories less accounts payables. Starting in 2006, it excludes  discontinued operations and excludes unpaid provision for closure and  restructuring costs in the amount of $47 million as at December 31, 2006 and  $55 million as at December 31, 2005. It also exclude the working capital  acquired from Norampac as of December 29, 2006, and the current future taxes.  Sales of discontinued operations are included in the 2005 figures as working  capital items were still on the balance sheet. |
| (8) | % of sales = LTM Working Capital/LTM Sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

**2006 Financial overview**

In2006, sales increased by $95 million, or 3% to $3.4 billion compared to $3.3billion in 2005. Operating income increased by $54 million including specificitems which substantially affected the results during the years 2006 and 2005.Excluding these specific items which will be discussed in detail in each of thesegments, operating income was up $63 million or 70%, at $153 million, comparedto $90 million in 2005. Even with the 6.8% strengthening of the Canadian dollaragainst the U.S. dollar compared to 2005, and the increase in raw materialsduring the year, these results highlight the positive impact of the Company’sdiversification of business lines, the improvement of selling prices in themajority of our products and the positive impacts of management’s focus onless-performing assets. The Company’s net earnings were $3 million or $0.04 pershare compared with a net loss of $97 million or $1.19 per share in 2005.

15

----

Atthe end of 2006, the segmented information presentation was changed to reflect the actual way the Companyanalyses the performance of itsoperating segments. The following changes were made and the comparative figures have been restated: Thecontinuing operations of the Fine Papers activities are included in the Specialty Products group segment; The results of Metro Waste Paper Recovery which wereproportionally consolidated (23% inthe Boxboard segment and 27% in the Containerboard segment, before theacquisition of the remain­ing 50% inNorampac) have been reclassified in the Specialty Products group segment; Thecorporate revenues and expenses of the Specialty Products group are nowpresented in this group as they werepresented in the Corporate segment in the past.

**Historicalfinancial information**
| ** **                                                                                       | ** ** | **2004**   | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **(In millions of Canadian dollars, unless otherwise noted)** | ** ** | **Total**  | ** ** | **Q1**   | ** ** | **Q2**   | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| **Sales**                                                                                        |       |       |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Packaging                                                                                        |       |       |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Boxboard                                                                                         |       | **1,190**  | ** ** | 327      |       | 350      |       | 330 |   | 332 |   | **1,339** | ** ** | **344** | ** ** | **337** | ** ** | **350** | ** ** | **370** | ** ** | **1,401** | ** ** |
| Containerboard                                                                                   |       | **600**    | ** ** | 152      |       | 162      |       | 150 |   | 141 |   | **605** | ** ** | **144** | ** ** | **155** | ** ** | **155** | ** ** | **146** | ** ** | **600** | ** ** |
| Specialty  products                                                                              |       | **766**    | ** ** | 186      |       | 199      |       | 192 |   | 179 |   | **756** | ** ** | **189** | ** ** | **195** | ** ** | **193** | ** ** | **196** | ** ** | **773** | ** ** |
| Inter-segment  sales                                                                             |       | **(81**    | **)**      | (14      | )          | (20      | )          | (16 | ) | (19 | ) | **(69** | **)** | **(20** | **)** | **(21** | **)** | **(15** | **)** | **(14** | **)** | **(70** | **)** |
|                                                                                             |       | **2,475**  | ** ** | 651      |       | 691      |       | 656 |   | 633 |   | **2,631** | ** ** | **657** | ** ** | **666** | ** ** | **683** | ** ** | **698** | ** ** | **2,704** | ** ** |
| Tissue Papers                                                                                    |       | **653**    | ** ** | 164      |       | 178      |       | 187 |   | 179 |   | **708** | ** ** | **169** | ** ** | **182** | ** ** | **194** | ** ** | **182** | ** ** | **727** | ** ** |
| Inter-segment  sales and others                                                                  |       | **(32**    | **)**      | (13      | )          | (7       | )          | (9 | ) | (2 | ) | **(31** | **)** | **(8** | **)** | **(7** | **)** | **(9** | **)** | **(4** | **)** | **(28** | **)** |
|                                                                                             |       | **3,096**  | ** ** | 802      |       | 862      |       | 834 |   | 810 |   | **3,308** | ** ** | **818** | ** ** | **841** | ** ** | **868** | ** ** | **876** | ** ** | **3,403** | ** ** |
| **Operating income (loss) before  depreciation and amortization “OIBD’’(1)**      |       | ** ** | ** ** |     |       |     |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                                        |       | ** ** | ** ** |     |       |     |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard                                                                                         |       | **63**     | ** ** | 19       |       | 11       |       | 14 |   | (15 | ) | **29** | ** ** | **17** | ** ** | **14** | ** ** | **11** | ** ** | **(1** | **)** | **41** | ** ** |
| Containerboard                                                                                   |       | **83**     | ** ** | 21       |       | 17       |       | (1 | ) | 2 |   | **39** | ** ** | **18** | ** ** | **26** | ** ** | **28** | ** ** | **(28** | **)** | **44** | ** ** |
| Specialty  products                                                                              |       | **34**     | ** ** | 9        |       | 16       |       | 9 |   | (7 | ) | **27** | ** ** | **10** | ** ** | **15** | ** ** | **5** | ** ** | **18** | ** ** | **48** | ** ** |
|                                                                                             |       | **180**    | ** ** | 49       |       | 44       |       | 22 |   | (20 | ) | **95** | ** ** | **45** | ** ** | **55** | ** ** | **44** | ** ** | **(11** | **)** | **133** | ** ** |
| Tissue Papers                                                                                    |       | **76**     | ** ** | 19       |       | 28       |       | 27 |   | 26 |   | **100** | ** ** | **29** | ** ** | **29** | ** ** | **34** | ** ** | **24** | ** ** | **116** | ** ** |
| Corporate  activities                                                                            |       | **(8**     | **)**      | (5       | )          | 5        |       | 3 |   | 1 |   | **4** | ** ** | **(3** | **)** | **1** | ** ** | **(3** | **)** | **—** | ** ** | **(5** | **)** |
|                                                                                             |       | **248**    | ** ** | 63       |       | 77       |       | 52 |   | 7 |   | **199** | ** ** | **71** | ** ** | **85** | ** ** | **75** | ** ** | **13** | ** ** | **244** | ** ** |
| **OIBD excluding specific  items(1)**                                                            |       | ** ** | ** ** |     |       |     |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                                        |       | ** ** | ** ** |     |       |     |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard                                                                                         |       | **63**     | ** ** | 19       |       | 11       |       | 14 |   | 17 |   | **61** | ** ** | **17** | ** ** | **14** | ** ** | **8** | ** ** | **14** | ** ** | **53** | ** ** |
| Containerboard                                                                                   |       | **81**     | ** ** | 19       |       | 20       |       | 14 |   | 12 |   | **65** | ** ** | **13** | ** ** | **25** | ** ** | **28** | ** ** | **25** | ** ** | **91** | ** ** |
| Specialty  products                                                                              |       | **48**     | ** ** | 9        |       | 16       |       | 9 |   | 3 |   | **37** | ** ** | **13** | ** ** | **15** | ** ** | **15** | ** ** | **18** | ** ** | **61** | ** ** |
|                                                                                             |       | **192**    | ** ** | 47       |       | 47       |       | 37 |   | 32 |   | **163** | ** ** | **43** | ** ** | **54** | ** ** | **51** | ** ** | **57** | ** ** | **205** | ** ** |
| Tissue Papers                                                                                    |       | **76**     | ** ** | 19       |       | 28       |       | 27 |   | 28 |   | **102** | ** ** | **29** | ** ** | **29** | ** ** | **34** | ** ** | **24** | ** ** | **116** | ** ** |
| Corporate  activities                                                                            |       | **(8**     | **)**      | (5       | )          | (2       | )          | 3 |   | 1 |   | **(3** | **)** | **(3** | **)** | **1** | ** ** | **(3** | **)** | **—** | ** ** | **(5** | **)** |
|                                                                                             |       | **260**    | ** ** | 61       |       | 73       |       | 67 |   | 61 |   | **262** | ** ** | **69** | ** ** | **84** | ** ** | **82** | ** ** | **81** | ** ** | **316** | ** ** |
| **Operating income (loss) from  continuing operations**                                          |       | **91**     | ** ** | 20       |       | 33       |       | 8 |   | (34 | ) | **27** | ** ** | **31** | ** ** | **44** | ** ** | **34** | ** ** | **(28** | **)** | **81** | ** ** |
| Excluding  specific items(1)                                                                     |       | **103**    | ** ** | 18       |       | 29       |       | 23 |   | 20 |   | **90** | ** ** | **29** | ** ** | **43** | ** ** | **41** | ** ** | **40** | ** ** | **153** | ** ** |
| **Net earnings (loss)**                                                                          |       | **23**     | ** ** | —   |       | 4        |       | 3 |   | (104 | ) | **(97** | **)** | **6** | ** ** | **33** | ** ** | **10** | ** ** | **(46** | **)** | **3** | ** ** |
| Excluding  specific items (1)                                                                    |       | **16**     | ** ** | (1       | )          | 4        |       | 2 |   | 1 |   | **6** | ** ** | **6** | ** ** | **16** | ** ** | **17** | ** ** | **13** | ** ** | **52** | ** ** |
| **Net earnings (loss) per share  (in dollars)**                                                  |       | ** ** | ** ** |     |       |     |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                            |       | **0.28**   | ** ** | —   |       | 0.05     |       | 0.04 |   | (1.28 | ) | **(1.19** | **)** | **0.07** | ** ** | **0.41** | ** ** | **0.12** | ** ** | **(0.56** | **)** | **0.04** | ** ** |
| Basic, excluding  specific items(1)                                                              |       | **0.20**   | ** ** | (0.01    | )          | 0.05     |       | 0.02 |   | 0.01 |   | **0.07** | ** ** | **0.07** | ** ** | **0.20** | ** ** | **0.21** | ** ** | **0.16** | ** ** | **0.64** | ** ** |
| **Cash flow from operations(1)**                                                                 |       | **172**    | ** ** | 35       |       | 44       |       | 43 |   | 34 |   | **156** | ** ** | **38** | ** ** | **56** | ** ** | **53** | ** ** | **35** | ** ** | **182** | ** ** |
| Excluding  specific items                                                                        |       | **172**    | ** ** | 35       |       | 44       |       | 48 |   | 42 |   | **169** | ** ** | **39** | ** ** | **56** | ** ** | **57** | ** ** | **43** | ** ** | **195** | ** ** |
| **Cash flow from operations per  share (in dollars)(1)**                                         |       | ** ** | ** ** |     |       |     |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                            |       | **2.11**   | ** ** | 0.43     |       | 0.54     |       | 0.53 |   | 0.42 |   | **1.92** | ** ** | **0.47** | ** ** | **0.69** | ** ** | **0.66** | ** ** | **0.43** | ** ** | **2.25** | ** ** |
| Basic, excluding  specific items                                                                 |       | **2.11**   | ** ** | 0.43     |       | 0.54     |       | 0.59 |   | 0.52 |   | **2.08** | ** ** | **0.48** | ** ** | **0.69** | ** ** | **0.71** | ** ** | **0.53** | ** ** | **2.41** | ** ** |
| **Cascades North American US$ selling price index (index 2002 = 1,000)(2)**                 |       | **1,072**  | ** ** | 1,151    |       | 1,150    |       | 1,118 |   | 1,147 |   | **1,141** | ** ** | **1,201** | ** ** | **1,264** | ** ** | **1,287** | ** ** | **1,298** | ** ** | **1,263** | ** ** |
| **Cascades North American US$ raw  materials index (index 2002 = 300)(3)**                  |       | **375**    | ** ** | 387      |       | 378      |       | 368 |   | 349 |   | **371** | ** ** | **326** | ** ** | **348** | ** ** | **385** | ** ** | **369** | ** ** | **357** | ** ** |
| **US$/CAN$**                                                                                     |       | **0.77**   | ** ** | 0.82     | ** ** | 0.80     |       | 0.83 |   | 0.85 |   | **0.83** |   | **0.87** | ** ** | **0.89** | ** ** | **0.89** | ** ** | **0.88** | ** ** | **0.88** | ** ** |
| **Natural Gas Henry Hub -  US$/mmBtu**                                                           |       | **6.11**   | ** ** | 6.27     |       | 6.73     |       | 8.49 |   | 12.97 |   | **8.62** | ** ** | **8.98** | ** ** | **6.79** | ** ** | **6.58** | ** ** | **6.56** | ** ** | **7.23** | ** ** |
| **Return on assets (%)(4)**                                                                      |       | **8.5**    | **%**      | 8.6      | %          | 8.6      | %          | 8.3 | % | 8.4 | % | **8.4** | **%** | **8.8** | **%** | **9.4** | **%** | **10.1** | **%** | **10.8** | **%** | **10.8** | **%** |

 

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| (1) |   | See the supplemental information on non-GAAP  measures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | 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. |
| (3) |   | The Cascades North American  raw materials index represents the average weighted cost paid for some of our  manufacturing raw materials namely, recycled fiber, 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 may differ from actual manufacturing  purchasing costs and our purchase mix.                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (4) |   | Return on assets is a non-GAAP measure and is defined  as: LTM OIBD excluding specific items/LTM Average of total quarterly assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

16

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Financialresults for the year ended December 31, 2006 compared with the year ended December31, 2005

**SALES**

Salesincreased by $95 million, or 3%, to $3.4 billion in 2006, versus $3.3 billionin 2005. The acquisition of Standard Paper Box (SPB) by the Containerboardsegment in 2005 and the Versailles boxboard mill in the third quarter of 2006accounted for $85 million in sales during the year. Because of the increase ininput costs during the last two years, net average selling prices in U.S.dollars increased in all of our main segments except in the European boxboardmarket. However, these rising prices have been offset by the 6.8% strengtheningof the Canadian dollar versus the U.S. dollar, compared with 2005. In fact, thefluctuation of the Canadian dollar had a direct impact on export prices. Inaddition, it contributed to downward trending prices in Canadian dollars on thedomestic market because several of the Company’s product lines are priced inU.S. dollars. 

Shipments increased in mostof our business segments, particularly in the Tissue sector and in the NorthAmerican manufacturing Boxboard segment (excluding Versailles), where shipmentsincreased respectively by 4% and 11% due to a better demand for jumbo rolls intissue and capacity rationalization in the boxboard industry. On the otherhand, the manufacturing shipments of the Containerboard segment slightlydecreased by 3%.

**OPERATINGINCOME BEFORE DEPRECIATION AND AMORTIZATION**

TheCompany generated operating income before depreciation and amortization of $244million in 2006, compared with $199 million for 2005. The operating incomebefore depreciation and amortization margin increased by 20% for the year, to7.2% as compared with 6.0% in 2005. Excluding specific items, the operatingincome before depreciation and amortization stood at $316 million compared with$262 million in 2005, an increase of $54 million or 21%, achieved despite thestrengthening of the Canadian dollar, which had an estimated $61 millionimpact, and higher raw materials costs. The Company was able to compensate forthese negative effects through increased volumes and selling prices, with costreduction initiatives by improving the results of the less-performing assetsand through the positive results of the acquisition of SPB and Versailles.

Higher production combinedwith cost reduction initiatives mainly at the fine papers St-Jérôme millcontributed to the overall profitability improvement. In addition, the Companyrecorded, in 2006, revenues in the amount of $3 million following a curtailmentof one of its post-retirement program, prior years’ manufacturing sales taxcredits that were claimed in the U.S. in the amount of $1.5 million and arefund of countervailing and anti-dumping duties paid in prior years in theamount of $3 million.

The main variances inoperating income before depreciation are shown below. Volume and selling priceincreases more than offset the impact of the strengthening of the Canadiandollar and the control of our operating cost allowed the Company to mitigatethe effect of inflation:

17

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Theoperating income before depreciation variance analysis by segment is as follow:

**OIBDvariance analysis**
| ** **                                                                | ** ** | ** **   | ** ** | **Container-** | ** ** | **Specialty** | ** ** | ** **    | ** ** | **Tissue** | ** ** | ** **    | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|---------------|------------|---------------|------------|------------|------------|---------------|------------|------------------|------------|
| **(in millions of dollars)**                               | ** ** | **Boxboard** | ** ** | **board**      | ** ** | **products**  | ** ** | **Packaging** | ** ** | **Papers** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **OIBD for the year ended  December 31, 2005 (excluding specific items)** |       | 61           |       | 65             |       | 37            |       | 163           |       | 102        |       | (3            | )          | **262**          | ** ** |
| **Positive (negative) impact from:**                                      |       |         |       |           |       |          |       |          |       |       |       |          |       | ** **       | ** ** |
| Volume  (shipments)                                                       |       | 23           |       | (13            | )          | 3             |       | 13            |       | 6          |       | —        |       | **19**           | ** ** |
| Selling  price & mix                                                  |       | —       |       | 27             |       | 26            |       | 53            |       | 43         |       | (4            | )          | **92**           | ** ** |
| Raw  materials(1)                                                         |       | (8           | )          | 7              |       | (6            | )          | (7            | )          | (6         | )          | —        |       | **(13**          | **)**      |
| Energy  price & consumption                                           |       | (1           | )          | 5              |       | 4             |       | 8             |       | (1         | )          | —        |       | **7**            | ** ** |
| Variation  of the CAN$(2)                                                 |       | (21          | )          | (13            | )          | (20           | )          | (54           | )          | (11        | )          | 4             |       | **(61**          | **)**      |
| Other  variable costs(3)                                                  |       | 6            |       | 2              |       | 9             |       | 17            |       | (7         | )          | —        |       | **10**           | ** ** |
| Fixed  costs and others(4)                                                |       | (8           | )          | 8              |       | 5             |       | 5             |       | (11        | )          | (2            | )          | **(8**           | **)**      |
| Other  sectors(5)                                                         |       | —       |       | 1              |       | 3             |       | 4             |       | 1          |       | —        |       | **5**            | ** ** |
| Business  acquisitions                                                    |       | 1            |       | 2              |       | —        |       | 3             |       | —     |       | —        |       | **3**            | ** ** |
| **Change in OIBD for the year**                                           |       | (8           | )          | 26             |       | 24            |       | 42            |       | 14         |       | (2            | )          | **54**           | ** ** |
| **OIBD excluding specific items**                                         |       | 53           |       | 91             |       | 61            |       | 205           |       | 116        |       | (5            | )          | **316**          | ** ** |
| Specific  items                                                           |       | (12          | )          | (47            | )          | (13           | )          | (72           | )          | —     |       | —        |       | **(72**          | **)**      |
| **OIBD for the year ended December 31, 2006**                             |       | 41           |       | 44             |       | 48            |       | 133           |       | 116        |       | (5            | )          | **244**          | ** ** |

 

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| (1) | The impacts of these estimated costs are based on  production costs per unit, which are affected by yield, product mix changes  and purchase and transfer prices. In addition to market pulp and recycled  fiber, they include purchases of external parent rolls for the converting  sectors and other raw materials such as plastics and woodchips. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The estimated impact of exchange rate is based on  the Company’s national and export sales less purchases that are impacted by  the exchange rate changes, mainly the CAN$/US$ variation.                                                                                                                                                   |
| (3) | The impact of these estimated variable costs are  based on production costs per unit, which are affected by downtimes,  efficiencies and product mix changes.                                                                                                                                                                                         |
| (4) | Includes all other costs such as repair and  maintenance, selling and administration and profit sharing.                                                                                                                                                                                                                                              |
| (5) | Includes change in OIBD of operating units that are  not in the manufacturing or converting sectors and profits from inventory  elimination.                                                                                                                                                                                                          |

 

Specifc items included in operating income before depreciation and amortization

The Company incurred in2006 and 2005 some specifc items that adversely or positively affected itsoperating results. The Company believes that it is useful for the readers to beaware of these items and that they provide a measure of performance with whichto compare its results between periods without regard to these specifc items.

**A) UNUSUAL GAINS**

In 2006, the Companydisposed of its investment in a joint venture of its Boxboard segment for aconsideration of $11 million (US$10 million) of which $9 million (US$8 million)was received at closing and $2 million (US$2 million) will be received over thenext two years. The Company realized a gain of $4 million before income taxesof $2 million.

In 2005, the Company recorded the following unusualgains amounting to $10 million:

·                  a gain of $4 million onthe disposal of a building in the Containerboardsegment;

·                  a gain of $7 millionfollowing the sale by the Company of a warehouse in the corporate sectorresulting in a gain of $11 million. The remaining portion of the gain has beendeferred and will be amortized over the term of a 2-year lease agreement enteredinto with the buyer;

·                  an impairment loss of $1million on an investment in a significantly influenced company in the Containerboard segment.

**B) IMPAIRMENT LOSS AND CLOSUREAND RESTRUCTURING COSTS**

In 2006, the Companyannounced the permanent shutdown of its Specialty Products board mill in Franceand of its converting boxboard plant in Montréal, Quebec. The Company alsoannounced the temporary curtailment of the Red Rock, Ontario containerboardmill, and of the Fjordcell pulp mill and Scierie Lemay sawmill, both of theBoxboard Group.

In 2005, the Company announced the permanent shutdownof its Fine Papers Thunder Bay, Ontario mill and the permanent shutdown of onemachine at its Red Rock mill in Ontario. The company closed three corrugatedproducts converting units: in Montréal (Québec), Concord (Ontario) and Buffalo(New York). The company also announced the closure of certain equipment at itsSt-Jérôme Fine Papers mill and at its Montréal boxboard converting plant aswell as the reloca-tion of certain equipment from its Toronto (Pickering)Tissue converting unit. The Company also reduced the value of some fixed assetsto their net realizable value. After performing asset impairment tests on someof its units, the Company recorded an impairment charge of €20 million ($28million or $19 million after-tax) against its Blendecques, France boxboardmill.

**C) LOSS (GAIN) ON DERIVATIVEFINANCIAL COMMODITY INSTRUMENTS**

In 2006, the Company recorded an unrealized gain on certain commodityswap contracts that were not designated as hedging

instruments in the net amount of $5 million. This compares with a lossof $8 million in 2005.

18

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The following impairmentcharges and closure and restructuring costs were recorded in 2006 and 2005:
| ** **                                                | ** ** | **2006**       | ** ** | **2005**                     | ** ** |
|-----------------------------------------------------------|------------|----------------|------------|------------------------------|------------|
| ** **                                                | ** ** | ** **     | ** ** | **Closure and**         | ** ** | ** ** | ** ** | **Closure and** | ** ** |
| ** **                                                | ** ** | **Impairment** | ** ** | **restructuring costs** | ** ** | **Impairment** | ** ** | **restructuring costs** | ** ** |
| Boxboard –  Montréal                            |       | **—**     | ** ** | **1**                        | ** ** | — |   | 2 |   |
| Boxboard –  Blendecques                              |       | **—**     | ** ** | **—**                   | ** ** | 28 |   | — |   |
| Boxboard –  Fjordcell                                |       | **—**     | ** ** | **1**                        | ** ** | — |   | — |   |
| Boxboard –  Scierie Lemay                            |       | **14**         | ** ** | **—**                   | ** ** | — |   | — |   |
| Containerboard –  Red Rock                           |       | **40**         | ** ** | **12**                       | ** ** | 7 |   | 4 |   |
| Containerboard –  Montréal, Concord and Buffalo |       | **—**     | ** ** | **—**                   | ** ** | 2 |   | 4 |   |
| Specialty  Products – St-Jérôme            |       | **—**     | ** ** | **3**                        | ** ** | 2 |   | 6 |   |
| Specialty  Products – board mill                     |       | **7**          | ** ** | **3**                        | ** ** | — |   | — |   |
| Tissue – Toronto                                     |       | **—**     | ** ** | **—**                   | ** ** | — |   | 2 |   |
| Others                                                    |       | **—**     | ** ** | **—**                   | ** ** | 8 |   | — |   |
|                                                      |       | **61**         | ** ** | **20**                       | ** ** | 47 |   | 18 |   |

 

The following table showsthe conciliation of all closure and restructuring cost provisions as at December31, 2006 and 2005:
| ** **                                       | ** ** | **2006**   | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------|------------|
| **Balance  – Beginning of year**            |       | **55**     | ** ** | —   |       |
| Additional  provisions                           |       | ** ** | ** ** |     |       |
| Severance and pension liability                  |       | **26**     | ** ** | 57       |       |
| Write-down of inventories                        |       | **(2**     | **)**      | 13       |       |
| Others                                           |       | **—** | ** ** | 6        |       |
| Non-monetary  items                              |       | ** ** | ** ** |     |       |
| Write-down of inventories                        |       | **2**      | ** ** | (13      | )          |
| Pension liability adjustments and others         |       | **(7**     | **)**      | (3       | )          |
| Liability  assumed from the Norampac acquisition |       | **8**      | ** ** | —   |       |
| Payments                                         |       | **(35**    | **)**      | (5       | )          |
| **Balance - End of year**                        |       | **47**     | ** ** | 55       |       |

 

**Businesshighlights**

During the past twoyears, the Company completed several transactions to optimize its assets baseor to streamline its cost structure by closing or selling certain operatingunits.

Thefollowing transactions that occurred in 2006 should be taken into considerationin order to understand the overall or segmented analysis of the Company’sresults:

Closure,restructuring and disposal 

**BOXBOARD GROUP**

1) On June 29, 2006, the Company announced that itceased operations at its FjordCell pulp mill of the Boxboard group for anindefnite period of time. The business environment which has been marked by astrong appreciation of the Canadian dollar compared to the US dollar as well ashigh wood and energy costs dictate this course of action. The Company ismonitoring the situation closely and is committed to re-evaluating the situationshould conditions affecting operating costs, the exchange rate and the sellingprice improve.

2) On October 6, 2006, the Company announced thetemporary shutdown of the Scierie Lemay sawmill of the Boxboard Group due tothe conditions prevailing in the lumber market. In 2006, an impairment chargein the amount of $14 million was recorded to bring the net book value of theproperty, plant and equipment and other assets to their estimated netrealizable value.

3) On December 11, 2006 the Company also announcedthe permanent closure of its Montréal converting boxboard operations for March2007.

4) On September 7, 2006, the Company disposed ofits interest in a joint-venture of its Boxboard Group for a consideration of$11 million (US$10 million) of which $9 million (US$8 million) was received atclosing and $2 million (US$2 million) will be received over the next two years.

19

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**CONTAINERBOARDGROUP**

5) On August30, 2006, the Company announced that it hadceased operations at its Red Rock, Ontariocontainerboard mill for anindefinite period of time due to unfavourable economic factors such as high fiber, energy and labourcosts and the strongappreciation of the Canadian dollar compared to the US dollar. Production ceased on October 3,2006. In 2006, closure andrestructuring cost in the amount of $12 million and an impairment charge of $40 million were recorded following the impairment test performed after theacquisition of the 50% stake inNorampac.

**SPECIALTYPRODUCTS GROUP**

6) On August24, 2006, the Company announced the permanentshutdown of one of its specialty board millslocated in France, of theSpecialty Products Group. The Company thus recorded an impairment loss on property, plant and equipment of $7 million and closure and restructuringcosts of $3 million.

7) In 2005, theCompany announced that it had reached anagreement for the sale of its paper merchant division known as Cascades Resources (Fine Papersdistribution activities) toCoast Paper Limited, a subsidiary of PaperlinX Limited. On February 28, 2006, the Company completedthe transaction for a totalestimated consideration of $86 million. In addition, as announced in 2005, the Company ceased its operations at its Fine Papers Thunder Bay,Ontario mill on January 21,2006. Consequently, the results and cash flows from these activities for the current and comparative years are classified as discontinued operations.

Businessacquisitions

**BOXBOARDGROUP**

8) On April 25,2006 the Company’s Boxboard group announcedthat it had acquired certain assets from thepaperboard division of SimkinsIndustries located in Ridgefield, New Jersey and in New Haven, Connecticut, for $14 million(US$12.5 million).

9) On July 19and August 7, 2006, the Company completedthe acquisition of the assets of the Caraustar Industries coated recycled boxboard mills located inSprague, Connecticut and certainassets from Caraustar Industries coated recycled boxboard mills located in Rittman, Ohio, for a totalpurchase price of $18 million(US$15 million). The Sprague mill will now operate under the name of Versailles.  

The Simkins and Rittmanmills have been closed bySimkinsand Caraustar. These transactions represent a further step towards our stated goal of improving theperformance of our BoxboardGroup. As it was the case with previous transactions realized by this group in 2005, these acquisitions should allow the Company to increaseproductivity at all of its boardmills while improving profitability through an improved product and customer mix. Moreover, theacquisition of the Versaillesmill will enable this group to move its board manufacturing closer to its customer base while increasing its presence in the United States, therebyfurther reducing its exposure tofluctuations in the exchange rate.

**CONTAINERBOARDGROUP**

10) OnDecember 29, 2006, the Company acquired fromDomtar Inc. the remaining outstanding commonshares (50%) of Norampac Inc.for a total purchase price of $561million (including $1 million of transaction costs). Norampac is a manufacturer of containerboard andcorrugated products principallyin North America. The balance sheet items of Norampac are included at 100% in the Company’s 2006 balance sheet while the results and cashflows are included at 50% asthey were proportionally consolidated prior to the acquisition. In 2007, the results and cash flows will be fully consolidated in the Company’sfinancial statements. Thistransaction also resulted in Metro Waste Paper Recovery becoming a 73% owned subsidiary and thus having its balance sheet fully consolidated as atDecember 31, 2006. Thistransaction was financed by means of a $250 million common share public offering combined with anew bank credit facility.

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**Discontinuedoperations**

During the fourth quarter of2004, the Company decided toinitiate a divestiture plan for its Fine Papers and Tissue distribution activities. These divestitures wererealized in February 2006 andMarch 2005 respectively. In addition, the Company ceased its operations at its Fine PapersThunder Bay, Ontario mill onJanuary 21, 2006. Consequently, the assets, liabilities, earnings and cash flows from these activitiesfor the current year and for allcomparative years are classified as discontinued operations. Financial information relating to these discontinued operations is as follows:
| ** **                                       | ** ** | **2006**         | ** ** | **2005**     | ** ** |
|--------------------------------------------------|------------|------------------|------------|--------------|------------|
| **Condensed statement of earnings**              |       | ** **       | ** ** |         |       |
| Sales                                            |       | **78**           | ** ** | 554          |       |
| Depreciation and  amortization                   |       | **—**       | ** ** | 2            |       |
| Operating loss (1)                               |       | **(6**           | **)**      | (98          | )          |
| Interest expense                                 |       | **1**            | ** ** | 7            |       |
| Recovery of  income taxes                        |       | **(2**           | **)**      | (31          | )          |
| Net loss from  discontinued operations           |       | **(5**           | **)**      | (74          | )          |
| Net loss per  share from discontinued operations |       | **$ (0.06** | **)**      | $ (0.91 | )          |
| **Condensed statement of cash  flows**           |       | ** **       | ** ** |         |       |
| Operating  activities                            |       | **(24**          | **)**      | (24          | )          |
| Investing  activities                            |       | **86**           | ** ** | 13           |       |
| Financing activities                             |       | **—**       | ** ** | (1           | )          |

 

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(1) Operating loss includesthe following items:
|                                                                                   | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Gain on disposal of the distribution activities of  the Tissue papers segment     | ** ** | —     | ** ** | 1        | ** ** |
| Provision on disposal of the distribution activities  of the Fine Papers business | ** ** | **(1**     | **)**      | (9       | )          |
| Legal settlement                                                                  | ** ** | **(1**     | **)**      | (10      | )          |
| Impairment of property, plant and equipment                                       | ** ** | **—** |       | (20      | )          |
| Closure and restructuring costs                                                   | ** ** | **(2**     | **)**      | (58      | )          |
|                                                                              | ** ** | **(4**     | **)**      | (96      | )          |

21

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Packagingproducts
| ** **                         | ** ** | **Sales**                                   | ** ** | **OIBD**                                    | ** ** | **Assets (2)**                         | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **(in millions of dollars)** | ** ** | **(in millions of dollars)** | ** ** | **(in millions of dollars)** | ** ** |
| ** **                         | ** ** | **2006**                                    | ** ** | **2005**                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Boxboard                           |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |
| Manufacturing -  North America     |       | **301**                                     | ** ** | 237                                         |       | **(1**                                      | **)**      | (1 | ) | ** ** |   |   |   |
| Manufacturing -  Europe            |       | **426**                                     | ** ** | 447                                         |       | **2**                                       | ** ** | (16 | ) | ** ** |   |   |   |
| Converting                         |       | **748**                                     | ** ** | 717                                         |       | **62**                                      | ** ** | 56 |   | ** ** |   |   |   |
| Others and  eliminations           |       | **(74**                                     | **)**      | (62                                         | )          | **(22**                                     | **)**      | (10 | ) | **1,055** |   | 1,087 |   |
|                               |       | **1,401**                                   | ** ** | 1,339                                       |       | **41**                                      | ** ** | 29 |   | ** ** |   |   |   |
| Containerboard (1)                 |       | ** **                                  | ** ** |                                        |       | ** **                                  | ** ** |   |   | ** ** |   |   |   |
| Manufacturing                      |       | **333**                                     | ** ** | 331                                         |       | **(8**                                      | **)**      | (14 | ) | ** ** |   |   |   |
| Converting                         |       | **506**                                     | ** ** | 494                                         |       | **45**                                      | ** ** | 46 |   | ** ** |   |   |   |
| Others and  eliminations           |       | **(239**                                    | **)**      | (220                                        | )          | **7**                                       | ** ** | 7 |   | **618** |   | 619 |   |
|                               |       | **600**                                     | ** ** | 605                                         |       | **44**                                      | ** ** | 39 |   | ** ** |   |   |   |
| Specialty products                 |       | ** **                                  | ** ** |                                        |       | ** **                                  | ** ** |   |   | ** ** |   |   |   |
| Manufacturing                      |       | **333**                                     | ** ** | 327                                         |       | **1**                                       | ** ** | (6 | ) | ** ** |   |   |   |
| Converting                         |       | **226**                                     | ** ** | 224                                         |       | **30**                                      | ** ** | 24 |   | ** ** |   |   |   |
| Recovery,  deinked pulp and others |       | **214**                                     | ** ** | 205                                         |       | **17**                                      | ** ** | 9 |   | **557** |   | 591 |   |
|                               |       | **773**                                     | ** ** | 756                                         |       | **48**                                      | ** ** | 27 |   | ** ** |   |   |   |
| Eliminations                       |       | **(70**                                     | **)**      | (69                                         | )          | ** **                                  | ** ** |   |   | ** ** |   |   |   |
| Total excluding  specific items    |       | **2,704**                                   | ** ** | 2,631                                       |       | **133**                                     | ** ** | 95 |   | **2,230** |   | 2,297 |   |
| Boxboard                           |       | ** **                                  | ** ** |                                        |       | **53**                                      | ** ** | 61 |   | ** ** |   |   |   |
| Containerboard (1)                 |       | ** **                                  | ** ** |                                        |       | **91**                                      | ** ** | 65 |   | ** ** |   |   |   |
| Specialty products                 |       | ** **                                  | ** ** |                                        |       | **61**                                      | ** ** | 37 |   | ** ** |   |   |   |
| Excluding specific items           |       | ** **                                  | ** ** |                                        |       | **205**                                     | ** ** | 163 |   | ** ** |   |   |   |

 

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(1)    The Company’s containerboard business consistsentirely of its 50% share of the results of Norampac Inc., a joint ventureuntil December 29, 2006.

(2)    Average quartely total assets. For Norampac,it includes only 50% of average quartely assets.

(3)    Uncoated board, kraft paper and fine papersshipments only.

**Businesssegment review**

Sales of the PackagingProducts segment increased by $73 millionor 3% at $2.704 billion compared with $2.631 billion in 2005. Despite shipments and US$ selling priceincreases, the strengthening ofthe Canadian dollar had a notable negative impact on sales in CAN$.

The Packaging Productssegment operating income beforedepreciation and amortization stood at $133 million for the year compared with $95 million in 2005,representing a 40% increase.Excluding specific items, the operating income before depreciation and amortization increased by 26% at $205 million compared to $163 million in 2005following a strong performance byour Containerboard Group which offset the decrease in the Boxboard Group’s European, kraft pulp and sawmill units. The strengthening of theCanadian dollar and the increasein raw materials costs were compensated by the increase in selling prices and shipments and also by cost reduction initiatives in all segments.

Boxboard

Sales for the Boxboard Groupamounted to $1.401 billion in2006 as compared to $1.339 billion in 2005. Over the course of this period, shipments by primary millsincreased by 32% in North Americadue to the Versailles acquisition and to capacity rationalization in the industry and by 2% inEurope following a strong demandduring the first quarter of 2006 which offset the production problems at the La Rochette, Francemill. In North America, averageselling prices in US$ increased by $14 per ton compared with the same period of 2005. In Europe, average selling prices in euros decreased by 1% as aresult of lower selling prices atthe La Rochette mill due to second-quality production.  

The operating income beforedepreciation and amortizationexcluding specific items decreased by 13% to $53 million compared with $61 million and was negativelyimpacted by higher energy,freight and raw materials production costs resulting, in part, from the purchase of external boardby our converting operations.These higher costs were compensated by a higher volume of converted products from the QSR business. The strengthening of the Canadian dollar and thedifficult market conditionsprevailing at the Fjordcell pulp mill and Scierie Lemay sawmill also affected the results. Bothof these units contributed negativelyto the operating income before depreciation and amortization for $9.7 million in 2006 and $7.7 million in 2005 and were temporarily shut down asdiscussed previously. Thestrengthening of the Canadian dollar also affected the results with a negative impact ofapproximately $21 million overthe year. In addition, this group recorded revenue in the amount of $3 million in 2006 following arefund of countervailing andanti-dumping duties paid in prior years.

This Group recorded a gain of$4 million in 2006 on thedisposalof its interest in a joint venture company of its converting sector for a cash consideration of $11million, of which $9 million

22

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| ** **                        | ** ** | **OIBD/assets** | ** ** | **Shipments**           | ** ** | **Average selling price**      | ** ** | **Average selling price**                    | ** ** | **Price reference**                               | ** ** |
|-----------------------------------|------------|-----------------|------------|-------------------------|------------|------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                        | ** ** | **(%)**         | ** ** | **(in thousands)** | ** ** | **(in Canadian dollars/unit)** | ** ** | **(in U.S. dollars or Euro/unit)** | ** ** | **(in U.S. dollars or Euro/unit)** | ** ** |
| ** **                        | ** ** | **2006**        | ** ** | **2005**                | ** ** | **2006**                                 | ** ** | ** **                                             | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Boxboard                          | ** ** | ** **      | ** ** | ** **              |       | ** **                               |       |                                                   | ** ** |                                                   |       |   | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   |   |   |
| Manufacturing - North America     | ** ** | ** **      | ** ** | ** **              |       | **445**                                  |       | s.t.                                                   | ** ** | 336                                                    |       | **677** | ** ** | 706 |   | **597** | ** ** | 583 |   | **770** |   | 720 |   |
| Manufacturing - Europe            | ** ** | ** **      | ** ** | ** **              |       | **562**                                  |       | s.t.                                                   | ** ** | 553                                                    |       | **757** | ** ** | 808 |   | **€                   531** | ** ** | €           535 |   | **€                786** |   | €              777 |   |
| Converting                        | ** ** | ** **      | ** ** | ** **              |       | **21,944**                               |       | cartons                                                |       | 20,718                                                 |       | ** ** |   |   |   |   |   |   |   |   |   |   |   |
| Others and eliminations           | ** ** | ** **      | ** ** | ** **              |       | ** **                               |       |                                                   |       |                                                   |       | ** ** |   |   |   |   |   |   |   |   |   |   |   |
|                              | ** ** | **3.9**         | **%**      | 2.7                     | %          |                                     |       |                                                   |       |                                                   |       | ** ** |   |   |   |   |   |   |   |   |   |   |   |
| Containerboard  (1)               | ** ** | ** **      | ** ** |                    |       |                                     |       |                                                   |       |                                                   |       | ** ** |   |   |   |   |   |   |   |   |   |   |   |
| Manufacturing                     | ** ** | ** **      | ** ** | ** **              |       | **691**                                  |       | s.t.                                                   | ** ** | 715                                                    |       | **481** | ** ** | 461 |   | **424** | ** ** | 380 |   | **553** |   | 478 |   |
| Converting                        | ** ** | ** **      | ** ** | ** **              |       | **6,799**                                |       | msf                                                    | ** ** | 6,868                                                  |       | **74** | ** ** | 72 |   | **66** |   | 59 |   | ** ** |   |   |   |
| Others and eliminations           | ** ** | ** **      | ** ** | ** **              |       | ** **                               |       |                                                   | ** ** |                                                   |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   |   |   |
|                              | ** ** | **7.1**         | **%**      | 6.3                     | %          |                                     |       |                                                   |       |                                                   |       | ** ** |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  products               | ** ** | ** **      | ** ** |                    |       |                                     |       |                                                   |       |                                                   |       | ** ** |   |   |   |   |   |   |   |   |   |   |   |
| Manufacturing                     | ** ** | ** **      | ** ** | ** **              |       | **367**                                  | **(3)**    | s.t.                                                   | ** ** | 354                                                    | (3)        | **884** | ** ** | 889 |   | **779** | ** ** | 733 |   | **777** |   | 700 |   |
| Converting                        | ** ** | ** **      | ** ** | ** **              |       | ** **                               | ** ** |                                                   | ** ** |                                                   |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   |   |   |
| Recovery, deinked pulp and others | ** ** | ** **      | ** ** |                    |       |                                     |       |                                                   |       |                                                   |       | ** ** |   |   |   |   |   |   |   |   |   |   |   |
|                              | ** ** | **8.6**         | **%**      | 4.6                     | %          |                                     |       |                                                   |       |                                                   |       | ** ** |   |   |   |   |   |   |   |   |   |   |   |
| Eliminations                      | ** ** | ** **      | ** ** |                    |       |                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total excluding  specific items   | ** ** | **6.0**         | **%**      | 4.1                     | %          | **2,065**                                |       | s.t.                                                   |       | 1,958                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Boxboard                          | ** ** | **5.0**         | **%**      | 5.6                     | %          |                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Containerboard  (1)               | ** ** | **14.7**        | **%**      | 10.5                    | %          |                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  products               | ** ** | **11.0**        | **%**      | 6.3                     | %          |                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Excluding specific items          | ** ** | **9.2**         | **%**      | 7.1                     | %          | ** **                               | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |   | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |

 

was received at closing. Thisgroup also incurred closing andrestructuring costs of $2 million relating to the permanent closure of the Montréal converting plant andto the Fjordcell pulp milltemporary closure. In addition, an impairment charge in the amount of $14 million was recorded tobring the net book value of theproperty, plant and equipment and other assets of the Scierie Lemay sawmill to their estimated netrealizable value.

Containerboard

Sales for the ContainerboardGroup decreased slightly by$5million, amounting to $600 million in 2006 compared with $605 million in 2005. Manufacturingshipments slightly decreased dueto the indefinite closure of its Red Rock, Ontario containerboard mill that occurred in October2006. Despite the acquisition ofStandard Paper Box (SPB) at the end of 2005, converting shipments slightly decreased in 2006 which reflects a decrease in demand in the Canadianmarket. In 2006, U.S. industrybox shipments were up 1.3% average-week from 2005, the highest level for U.S. box shipments in five years. Box shipments have now risen for fourconsecutive years but are still2.5% below the industry’s all-time high in 1999. Transaction prices for containerboard products surged twice in the course of the year in the U.S. Byyear-end, pricing for 42-lb Kraftlinerboard was up by about 20% year-over-year. The industry-operating rate for the full year was 97.5% and the U.S. combined mill and box plantinventories were 3.5 weeks ofsupply at the end of December 2006, i.e. the same level as 2005. Despite US$price increases, average CAN$ selling prices increased by only 4% inthe manufacturing sector and by3% in the converting market over the year due to the appreciation of the Canadian dollar.  

Operating income beforedepreciation and amortization excludingspecific items increased to $91 million from $65 million due to US$ selling price increases in bothmanufacturing and convertingsectors, lower energy, raw materials and other production costs as well as the acquisition of SPB at theend of 2005, all of which werepartially offset by the strengthening of the Canadian dollar, which had a negative impact of approximately $13 million over the year, and volumedecreases mainly in the convertingsector despite the SPB acquisition.

This group also incurreda $5 million unrealized gain on derivative commodity instruments of certaincommodity swap contracts. In 2006, closure and restructuring costs in the amountof $12 million and an impairment charge of $40 million were recorded followingthe announcement that it had ceased operations at its Red Rock, Ontariocontainerboard mill for an indefinite period of time due to unfavourableeconomic factors and following the impairment test performed on the property, plantand equipment recoverable value. This unit contributed negatively to theoperating income before depreciation and amortization for $3 million in 2006and $3.5 million in 2005.

23

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Specialty products

Sales for the Specialty ProductsGroup increased by 2% to$773million in 2006 compared with $756 million in 2005. The higher activities recorded in our mouldedpulp, honeycomb, de-inked pulpand fine papers businesses more than offset the decline in sales volume of our plastics units. In addition, a sales decrease was recorded in our specialtyboard business (vinyl floorbacking), resulting from lower North American demand combined with the negative impact of thepermanent closure of ourSte-Marie, France division. Shipments of manufacturing products increased by 4%, mainly coming fromthe uncoated fine papers unit dueto improved market conditions and a lower production level in 2005 resulting from a planned shutdown to install a new press. Selling prices foruncoated fine papers increased byUS $100 per ton on average compared to 2005, due to better market conditions. Sales were also negatively affected by the strengthening of the Canadian dollar.

Operating income beforedepreciation and amortization excluding specific items increased to $61 millionfrom $37 million in 2005. This improvement is mainly due to the majorturnaround of the fine papers business units, which accounted for $16 millionof this increase. The St-Jérôme paper mill continued to realign its productmix, expand its specialty and high recycled content paper offerings and improveits cost structure with the implementation, in 2005, of several restructuring measures,which started to show benefits at the beginning of 2006. The deinking pulpunits increased their profitability compared with 2005. The Greenfield, Francemill benefited from higher demand combined with higher selling prices. Finally,higher sales volume combined with better operational efficiencies resulted inincreased profitability for our honeycomb units. These improvements werepartially offset by the strengthening of the Canadian dollar, which had anegative impact of approximately $20 million over the year. In addition, in2006 this group recorded revenue in the amount of $2 million following the curtailmentof one of its post-retirement program.

This group also incurredclosing and restructuring costs of $3 million and a $7 million impairmentcharge on property, plant and equipment relating to the permanent closure ofits specialty board mill located in France due to continuing lower volumes anddifficult market conditions. In 2006, an additional provision in the amount of$3 million was taken in relation to restructuring and closure costs followingthe 2005 announcement of production curtailment at the St-Jérôme operations.

Tissue Group
| ** **                      | ** ** | **Sales**                                   | ** ** | **OIBD**                                    | ** ** | **Assets (1)**                         | ** ** | **OIBD/assets** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-----------------|------------|
| ** **                      | ** ** | **(in millions of dollars)** | ** ** | **(in millions of dollars)** | ** ** | **(in millions of dollars)** | ** ** | **(**%)         | ** ** |
| ** **                      | ** ** | **2006**                                    | ** ** | **2005**                                    | ** ** | **2006**                                    | ** ** | **2005**        | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Manufacturing  & converting |       | **727**                                     |       | 708                                         |       | **116**                                     | ** ** | 100             |       | **531** |   | 555 |   | **21.8** | **%** | 18.0 | % |
| Excluding specific  items       |       |                                        |       |                                        |       | **116**                                     | ** ** | 102             |       |   |   |   |   |   |   |   |   |

 

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(1) Average quarterlytotal assets.
| ** **                      | ** ** | **Shipments**           | ** ** | **Average selling price**      | ** ** | **Average selling price**  | ** ** | **Price reference**             | ** ** |
|---------------------------------|------------|-------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **(in thousands)** | ** ** | **(in Canadian dollars/unit)** | ** ** | **(in U.S. dollars/unit)** | ** ** | **(in U.S. dollars/unit)** | ** ** |
| ** **                      | ** ** | **2006**                | ** ** | ** **                               | ** ** | **2005**                             | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Manufacturing  & converting | ** ** | **443**                 |       | s.t.                                     |       | 425                                  | ** ** | **1,607**                            |       | 1,622 | ** ** | **1,417** |   | 1,339 | ** ** | **1,411** |   | 1,335 |   |

 

Sales for the Tissue Groupincreased by 3% amounting to$727 million in 2006 compared with $708 million in 2005. Average net realized prices in US$were 6%higher in 2006 in comparison with2005, as a result of price increases implemented over the last twelve months. Shipments increased by 4% in 2006, resulting from increased sales ofjumbo rolls, new major accountsin the U.S. and continuous growth of our client base for our converted products business.

The Tissue Group’soperating income before depreciation and amortization excluding specific itemsstood at $116 million for 2006, compared with $102 million in 2005. This Group benefitedfrom an increase in the average realized U.S. dollar selling price of jumborolls and converted products, which was partially offset by the strengtheningof the Canadian dollar, which had a negative impact of approximately $11million over the year. Operating income before depreciation and amortization wasalso negatively affected by additional maintenance and repairs on assets fromprevious acquisitions, additional warehousing costs, and higher raw materials,energy and transportation costs. In addition, in 2006 this group recorded prioryears’ manufacturing sales tax credits that were claimed in the U.S. in theamount of $1.5 million.

24

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**Other itemsanalysis**

Depreciation andamortization

Depreciation and amortizationdecreased to $163 million in2006, from $172 million for the corresponding period of 2005, primarily as a result of the impairmentcharges of property, plant andequipment recorded in 2005 in the amount of $67 million and by the conversion into Canadian dollars of our U.S.-based assets depreciation.

Operating income

As a result of the above,operating income for the year increasedby $54 million to $81 million, compared with $27 million for the same period in 2005. Operating marginsincreased from 0.8% in 2005 to2.4% in 2006.

Excluding specific items,operating income for the year stood at $153 million, compared with $90 millionfor the same period in 2005. Operating margins increased from 2.7% in 2005 to 4.5%in 2006.

Interest expense

Interest expense increased to$82 million compared to$78million in 2005. The debt level has increased in 2005 and 2006 but the strengthening of the Canadiandollar during the year helped toreduce the interest expense on the Company’s U.S.-denominated debts.

Financial instruments

During the first quarter of2005, the Company entered intoan interest rate swap agreement for a notional amount of US $125 million maturing in 2013 in relationto the Company’s 7.25% unsecuredsenior notes. As this instrument was not designated as a hedge, an unrealized loss of $0.7 million was recorded in earnings in the first quarter of2005. During the second quarterof 2005, the Company early-settled this swap agreement and a realized gain of $3 million has been recorded in earnings (included in specific items).

Foreign exchange gain onlong-term debt

In 2006, the Company recordedno foreign exchange gainorloss on its U.S.-denominated debts, as the Canadian dollar remained stable at $0.858 against theU.S. dollar as at December 31,2005 and 2006. This compares to a gain of $10 million in 2005. These gains or losses have no impact on the Company’s liquidities.

Provision for income taxes

The recovery of income taxfor 2006 amounted to $1 million.In 2006, the tax provision includes a recovery of future tax in the amount of $3 million following thereduction of the federal taxrate. Excluding the impact of specific items, the tax rate would have been approximately 31%.

In addition to this $3million tax rate reduction impact, another adjustment of $2 million due to thischange is recorded in the share of results of significantly influencedcompanies. The total tax rate adjustment for 2006 is $5 million ($0.06 pershare).

The effective tax rateand the current income taxes are affected by the results of certainsubsidiaries located in countries where the income tax rate is higher than in Canada, notably Germany and theUnited States. Starting in the third quarter of 2006, the future tax assetsresulting from the tax loss of the French subsidiaries of the Boxboard groupare no longer recognized to earnings due to their cumulative amount and theuncertainty of recovery within a reasonable period of time.

Share of results of significantlyinfluenced companies

The share of results ofsignificantly influenced companies is mainlyattributable to our 43% interest in BoralexInc., a Canadian public companyand a producer of green and renewable energy with operations in the northeastern United States,Canada and France.

Net earnings

As a result of the foregoingfactors, the Company posted netearnings of $3 million, or $0.04 per share, in 2006 versus a loss of $97 million, or $1.19 per share in2005. However, when excludingcertain specific items, net earnings increased to $52 million or $0.64 per share compared with $6 million or $0.07 per share in 2005.

25

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**Liquidityand capital resources**

Cash flows from operatingactivities

Operating activitiesgenerated $213 million in 2006, as comparedto $124 million in 2005. Changes in non-cashworking capital componentsprovided funds of $31 million compared to a use of funds of $32 million in 2005. This cash inflowin 2006 is mainly attributable toreduction of inventories and general improvement of our working capital management. During the year, $35 million was paid on the restructuring and closure costprovisions recorded in 2005 and2006.

Cashflow from operating activities, excluding the change in non-cash workingcapital components, amounted to $182 million for 2006 or $2.25 per sharecompared with $156 million or $1.92 per share for the same period in 2005. Anamount of $13 million ($0.16 per share) related to closing and restructuring chargeshas reduced cash flow from operating activities in 2006 as compared with $13million ($0.16 per share) in 2005. This cash flow measure is important since itenables the Company to pursue its capital expenditures program and reduce itsindebtedness.

Investing activities

In2006, investment activities required total cash resources of $684 million forcapital expenditure projects and business acquisitions. Capital expendituresamounted to $110 million and the most important capital projects were: $14million to add converting equipment in the Boxboard Group’s QSR business, $1million to build a biological treatment system in Sweden, $4 million to acquire9,000 hectares of wood lots thereby securing a portion of the wood fiber forone mill of the Containerboard sector, $2 million to complete the upgrade ofthe Avot-Vallée, France containerboard mill, $2 million to add corrugatedequipment at the Vaudreuil containerboard converting plant, $2 million for anew warehouse at the Kingsey Falls plastic plant of the Specialty Productsgroup, $5 million to add converting equipment in the U.S. tissue mills and $8.5million for the acquisition of the assets of the de-inked pulp mill located inHagerstown, Maryland in the Tissue group.

TheCompany also acquired an interest in a Tissue product converting business foran amount of $10 million. This will secure a portion of the volume for thejumbo rolls business.

Inorder to improve its positioning in the recycled boxboard market, the Companyacquired certain assets from the paperboard division of Simkins Industrieslocated in Ridgefield, New Jersey and in New Haven, Connecticut, for $14 million(US $12.5 million). On July 19 and August 7, 2006, the Company also completedthe acquisition of the assets of the Caraustar Industries coated recycledboxboard mills located in Sprague, Connecticut and certain assets from theCaraustar Industries coated recycled boxboard mills located in Rittman, Ohiofor a total purchase price of $18 million (US $15 million).

OnDecember 29, 2006, the Company completed one of the most important transactionsof its history by acquiring the remaining 50% interest in Norampac from Domtar,Inc. The shares purchase price paid amounted to $561 million (including $1million of transaction costs) which was financed by a public offering of $250million of common shares and the Company’s bank credit facility. Thisacquisition will give the Company access to 100% of the cash flow generated byNorampac.

TheCompany also finalized the allocation of the purchase price of SPB Canadaacquired in 2005. The final allocation required a positive adjustment of $3million to the price paid in 2005.

OnSeptember 7, 2006, the Company disposed of its interest in a joint venture ofits Boxboard Group for a consideration of $11 million (US $10 million) of which$9 million (US $8 million) was received at closing and $2 million (US $2million) will be received over the next two years. Until its date of disposalin 2006, this joint-venture contributed $11 million of sales and $1 million ofoperating income before depreciation and amortization.

Financing activities

In 2006, the Company borrowed$186 million on its revolvingfacilities following the business acquisitions discussed above. The borrowings were reduced by the proceedsreceived from the sale of itsFine Papers distribution activities and its interest in a joint venture of its Boxboard Group for atotal of $94 million.

OnDecember 29, 2006, in order to finance the Norampac acquisition, the Companyissued 18.9 million shares at a price of $13.25 for a net consideration of $242million including $1 million from the shares issued resulting from the exerciseof stock options. Following this common share issuance, the Lemaire familyownership of the Company fell from 38% to 31%.

TheCompany also redeemed 284,700 of its common shares on the open market, pursuantto a normal course issuer bid for an amount of $3.7 million. Taking intoaccount these transactions and the $13 million in dividends paid out during 2006,financing activities provided $399 million in liquidity.

Liquidity from discontinuedoperations

On February 28, 2006, theCompany sold its fine papers, thedistribution activities for a total net consideration of $86 million. The cash flow from operations andworking capital requirements, includingclosure and restructuring cost payments of these activities, required $24 million in liquidity.

**Refinancingof debt**

On December 29,2006, in connection with the acquisition of the remaining outstanding commonshares of Norampac, the Company completed the refinancing of its $875 millioncredit facility (including $325 million of Norampac) originally put in place inOctober 2005 to provide for a new $850 million credit facility consisting of a$650 million 5-year secured revolving credit facility maturing in December2011, a $100 million secured term facility maturing in October 2012 and asix-month $100 million senior unsecured revolving credit facility which shouldbe converted into the secured revolving facility in 2007. Subject to certainconditions, the Company also has the option to request an increase of theamount of the secured revolving credit facility by an additional amount of upto $150 million. The six-year term facility can be reimbursed without penalty,at the company’s option any time prior to maturity. The Company’s obligationsunder this new revolving credit facility are secured by all inventory andreceivables of Cascades located in North America and by the property, plant andequipment of three of its mills.

26

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Consolidated financialposition as at December 31, 2006 and 2005

The Company has the followingfinancial position and ratios:
| **Balance sheet data as at December 31, (in millions of Canadian dollars)** | ** ** | **2006**  | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|
| Working capital (1)                                                                                                                |       | **504**   | ** ** | 594        |       |
| % of sales (2)                                                                                                                     |       | **16.3**  | **%**      | 16.5       | %          |
| Bank loan and advances                                                                                                             |       | **42**    | ** ** | 44         |       |
| Current portion of  long-term debt                                                                                                 |       | **9**     | ** ** | 8          |       |
| Long-term debt                                                                                                                     |       | **1,657** | ** ** | 1,289      |       |
| Total debt                                                                                                                         |       | **1,708** | ** ** | 1,341      |       |
| Shareholders’ equity                                                                                                          |       | **1,157** | ** ** | 897        |       |
| Total equity and debt                                                                                                              |       | **2,865** | ** ** | 2,238      |       |
| Ratio of debt/total  equity and debt                                                                                               |       | **59.6**  | **%**      | 59.9       | %          |
| Shareholders’ equity per share                                                                                                |       | **$**     | **11.62**  | ** ** | $          | 11.10 |   |
|                                                                                                                                    |            |           |            |            |            |  |  |

 

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(1)          Working capital includes accounts receivable plus inventories lessaccounts payable. It includes discontinued operations but excludes unpaidprovision for closure and restructuring costs in the amount of $47 million in2006 and $55 million in 2005 andthe working capital acquired from Norampac on December 29, 2006 in the amountof $94 million and the current future taxes in the amount of $40 million.

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

The liquidity available viathe Company’s credit facilities,along with the cash flow generated by the operating activities, will provide the Company with sufficient fundsto meet its financial obligationsand fulfill its capital expenditure program, which we estimate at approximately $165 million for 2007. The Company had $277 million (net of letter ofcredit in the amount of $16million) available under its $850 million revolving credit facility at the end of 2006.

**Subsequentevent**

On January 25, 2007, theCompany announced the sale of its40% interest in GSD Packaging, LLC, a US food pail manufacturing company, to Rock-Tenn Company. The proceeds ofthis transaction, which amount toUS $32 million, will be used to reducedebt.

**Comments onthe results of the****fourth quarter of 2006**

The net loss for the fourthquarter ended December 31, 2006amounted to $46 million ($0.56 per share) compared to a net loss of $104 million ($1.28 per share) for thefourth quarter ended December 31,2005. When excluding specific items, net earnings for the fourth quarter of 2006 amounted to $13 million ($0.16 per share) compared withnet earnings of $1 million ($0.01per share) for the same quarter in 2005.

As a result of recentbusiness acquisitions, better selling prices and shipments, sales increased by8% during the fourth quarter of 2006, amounting to $876 million compared with $810million for the same period last year. Operating losses amounted to $28 millionfor the period compared to operating losses of $34 million for the same quarterlast year.

Operating income fromcontinuing operations excluding specific items amounted to $40 million andexcludes the following items: a $40 million pre-tax amount representing the impairmentcharge on certain assets of the Red Rock, Ontario containerboard mill, and a$12 million pre-tax amount representing severance and other benefits payablefollowing the closures of the Red Rock containerboard mill and the announcedclosure of the Montréal boxboard converting plant. It also includes a $14million pre-tax amount representing an impairment charge of the company’s soleNorth-American sawmill asset (Scierie Lemay). In addition, the 2006 fourth quarteroperating results also include a $3 million pre-tax amount representing arefund of countervailing and antidumping duties in relation to the ScierieLemay operations and a $3 million positive adjustment of post-retirement benefits.Net earnings for the fourth quarter are also impacted by an additional incometax provision in the amount of $2 million following the Norampac acquisition.

Operating income beforedepreciation and amortization amounted to $13 million compared with $7 millionin the fourth quarter of 2005. Excluding the specific items, the operatingincome before depreciation and amortization stood at $81 million compared with$61 million in 2005, a 33% increase.

Higher volume and sellingprices offset the impact of the stronger Canadian dollar. The Company’s actionsregarding less-performing assets also contributed to the increased profitabilityin the fourth quarter of 2006.

27

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**Outlook**

Cascades**2007Issues and potential developments**

·                  Integration of acquisitions

·                  Continuous optimization of asset base

·                  Deleveragingof balance sheet

Overall, we continue to remain cautious in regards toour expectations for the next few months, given the volatility of energy pricesand the recently observed upward trend in fiber prices. However, we intend tocontinue building a stronger Cascades by focusing our efforts on the successfulintegration of recent acquisitions, maintaining our focus on less-performingassets and deleveraging our balance sheet while keeping an eye out forpotential value-creating acquisition opportunities. 

Packaging 

**BOXBOARD****2007 Issues and potential developments**

·                  Continuous optimization ofmanufacturing assets, both in North America and Europe

·                  CRB price increaseimplementation in North America

·                  Status of theindefinitely shut pulpmill and sawmill operations 

In North America, in 2007, theBoxboard Group expects to benefit from the recent acquisition of the Versaillesmill from Caraustar, from the acquisitions of certain assets, as well as fromthe implementation of price increases on recycled grades. The Group will remainfocused on the integration of the newly acquired mill and the optimization ofits production across its North American facilities in order to increasesynergies. In addition, the Group will closely monitor the situation of itsindefinitely shut pulpmill and sawmill, which could lead to further actions. InEurope, given fierce competition and high energy prices, the Group continues toanticipate challenging market conditions in both the virgin and the recycledgrades, despite the announced price increases in the latter market. In thiscontext, the Group will continue to focus on its less-performing assets, namelyBlendecques and La Rochette, France. However, the results of the first quarterof 2007 may be impacted by a boiler failure which occurred at the end of thefourth quarter of 2006 which led to a complete shutdown of the Toronto mill inJanuary. The Company is working closely with its insurance adviser while it isimpossible to evaluate, at this time, the outcome of this situation. 

Packaging 

**CONTAINERBOARD (NORAMPAC)****2007 Issues and potential developments**

·                  Market management ofsupply/demand balance (level of inventories) 

·                  OCC pricing and woodchipsituation on the West Coast 

·                  Status of theindefinitely shut of Red Rock mill 

In 2007, the ContainerboardGroup expects to benefit from the current favorable pricing environment whilemaintaining the right balance between production and inventory levels. However,the Group anticipates a continuously strong competition against its Canadianbox plant operations. Nevertheless, it will focus on completing theoptimization of its box plant production system while particularly focusing onachieving full potential at its three converting plants acquired from SPBCanada. On the cost side, it expects to be negatively impacted by increasingOCC prices (old corrugated containers) during the first months of 2007. At thestrategic level, the Group may explore selective growth opportunities in theUnited States in order to gain a better geographical balance between itsproduction and customer base and also with the goal of achieving logisticalgains. Also, the Group will continue reviewing the situation of its Red Rocklinerboard mill. 

Packaging 

**SPECIALTY PRODUCTS2007 Issues and potential developments**

·                  Continue refocusing ofactivities

·                  Integration and optimization ofrecovery operations

·                  Potential strategicacquisitions

In 2007, the SpecialityProducts Group intends to continue to take advantage of its favourablepositioning in niche markets while increasing its integration with otherbusiness segments of Cascades. It will continue its research and developmentefforts and is committed to new product development while bringing to market newinnovative and cost-effective packaging solutions. Having assumed themanagement of all specialized fine papers operations within the Company, theGroup will continue tho implement of its cost reduction program at theSt-Jérôme mill while expanding and promoting its line of environmentallyfriendly recycled-content fine papers. Finally, the Specialty Products groupwill seek to expand and optimize its waste paper recovery and processingactivities, through the operations of Metro Waste.

Tissue**2007 Issues and potential developments**

·                  Level of competition in theCanadian retail market

·                  Virgin pulp and SOP pricing

·                  Optimization ofconverting operations and potential expansion at both the manufacturing andconverting levels 

Overall, the Tissue Group anticipates that market conditionswill remain relatively favourable as the new capacities in the US should bewell absorbed by the growing demand. In fact, the Group’s operations areexpected to benefit from an upward selling pricing environment as price hikesare currently being implemented in some of its sub-segments. On the cost side,the Group acknowledges upward pricing pressures for virgin pulp and sortedoffice papers. Strategically, the Group will continue its development ofhigher-end products, try to leverage the favourable market positioning of itsenvironmentally friendly products and mainly invest in its convertingoperations. Finally, the Group may consider acquisition opportunities and theexpansion of its manufacturing capacity.

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**Evolution of credit ratings**

Cascades’s outstanding SeniorNotes have been rated by DominionBond Rating Service (“DBRS”), by Moody’s Investor Service Inc. (“Moody’s”) and by Standard & Poor’sCorporation (“S&P”).

The following table reflectsthe Company’s Secured debt rating/Corporate rating/Unsecured debt rating at the date of the approval of this MD&A by the Board ofDirectors and their evolution comparedto past years:
| **Credit Rating**    | ** ** | **Moody’s**           | ** ** | **Standard & Poor’s** | ** ** | **DBRS (Unsecured debt only)** | ** ** |
|---------------------------|------------|----------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|
| 2004                      |       | Ba1/Ba2/Ba3  (stable)      |       | BBB-/BB+/BB +  (negative)                |       | not  rated                                    |       |
| 2005                      |       | Ba1/Ba2/Ba3  (stable)      |       | BB+/BB/BB- (negative)                    |       | BBB  (low) (negative)                         |       |
| **2006 and January 2007** |       | **Baa3/Ba2/Ba3  (stable)** | ** ** | **BB+/BB/BB (stable)**                   | ** ** | **BB  (high) (stable)**                       |       |

 

**Capitalstock information**

As at December 31, 2006, thecapital stock issued and outstandingconsisted of 99,533,654 common shares (80,818,540 as at December 31, 2005). As at December 31, 2006,2,315,391 stock options wereissued and outstanding (2,115,167 as at December 31, 2005). During the year, 131,229 options wereexercised and 85,963 wereforfeited. In addition, the Company issued 417,416 options at an exercise price of $11.49.

**Contractualobligations and other commitments**

The Company’s principalcontractual obligations and commercialcommitments relate to outstanding debt, operating leases, capital leases and purchase obligations forits normal business operations.The following table summarizes these obligations as at December 31, 2006:

**Contractual obligations**
| **Payment due by period (in millions of dollars)** | ** ** | **Total** | ** ** | **Year 2007** | ** ** | **Years 2008 and 2009** | ** ** | **Years 2010 and 2011** | ** ** | **Thereafter** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------|------------|--------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------|------------|
| Long-term debt                                                                        |       | 1,659     |       | 4                  |       | 6                                      |       | 459                                    |       | 1,190          |       |
| Capital lease                                                                         |       | 8         |       | 6                  |       | 2                                      |       | —                                 |       | —         |       |
| Operating lease                                                                       |       | 206       |       | 42                 |       | 68                                     |       | 47                                     |       | 49             |       |
| Purchase  obligations                                                                 |       | 484       |       | 163                |       | 159                                    |       | 86                                     |       | 76             |       |
| Legal settlement                                                                      |       | 12        |       | —             |       | 5                                      |       | 5                                      |       | 2              |       |
| **Total contractual obligations**                                                     |       | 2,369     |       | 215                |       | 240                                    |       | 597                                    |       | 1,317          |       |

 

**Transactionswith related parties**

The Company has also enteredinto various agreements withits joint ventures, significantly influenced companies and entities controlled by one or more directors forthe supply of raw materials,including recycled paper, virgin pulp and energy, supply of unconverted and converted products,sale and lease of equipment andother agreements in the normal course of business. The aggregate amount of sales from the Company to its joint ventures and other affiliates was$82 million and $83 million for2005 and 2006, respectively. The aggregate amount of sales from the joint ventures and other affiliates to the Company was $53 million and $60 millionfor 2005 and 2006, respectively.The aggregate amount of sales from entities controlled by one or more of our directors to us was $7 million and $7 million for 2005 and 2006,respectively. The previous figuresinclude 100% of the joint ventures interest.

**Off-balancesheet arrangements**

In the normal course ofbusiness, the Company finances certainof its activities off-balance sheet through leases. The Company enters into operating leases for buildings andequipment. Minimum future rentalpayments under these operating leases, determined as at December 31, 2006, are included in the contractual obligations table above.

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**Criticalaccounting policies**

Some of the Company’saccounting policies require significantestimates and assumptions about future events that affect the amounts reported in the financialstatements and the accompanyingnotes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise ofmanagement’s judgment. Actualresults could differ from those estimates, and any such differences may be material to the Company’s financial statements.

Impairment of tangibleassets

At least annually, we assesswhether there has been a permanentimpairment in the value of assets. This is accomplished by determining whether projected undiscountedfuture cash flows from operationsexceed the net carrying amount of the asset as of the assessment date. Estimates of future cash flows and fair values require judgment and may change.

Valuation of identifiableintangibleassets andgoodwill

Business acquisitions areaccounted for under the purchasemethod of accounting. The total cost of an acquisition is allocated to the underlying net assets based ontheir respective estimated fairvalues. As part of this allocation process, the Company must identify and attribute values and estimated lives to the intangible assets acquired. Whilean expert may be employed toassist the Company with these matters, these types of determinations involve considerable judgment and often involve the use of estimates andassumptions, including those withrespect to future cash inflows and outflows, discount rates and asset lives. These determinations affect the amount of amortization expense recognized infuture periods. The Companyreviews the carrying values of all identifiable intangible assets and goodwill when certain conditions arise to determine whether any impairment hasoccurred.

Income taxes

The Company is required toestimate the income taxes ineach of the jurisdictions in which it operates. This includes estimating a value for existing net operatinglosses based on the Company’sassessment of its ability to utilize them against future taxable income before they expire. Ifthe Company’s assessment of itsability to use the net operating losses proves inaccurate in the future, more or less of the net operating losses might be recognized as assets, whichwould increase or decrease theincome tax expense, and consequently affect the Company’s net earnings in the relevant year.

Pension and post-retirement benefitcosts

Pension and post-retirement benefitcosts are developed fromactuarialvaluations. Inherent in these valuations are key assumptions provided by the Company to actuaries, including discount rates, expected returns on planassets, rates of compensation increasesand medical cost inflation. In selecting the rates and returns, the Company is required to consider current market conditions, including changesin interest rates. Materialchanges in pension and post-retirement benefit costs may occur in the future, resulting from fluctuationsin headcount in addition tochanges in the assumptions.

Environmental cleanup costs

The Company expensesenvironmental expenditures related toexisting conditions caused by past or current operations and from which no future benefit is discernible.The Company’s estimatedenvironmental remediation costs are based upon an evaluation of currently available facts with respect to each individual site, including the results ofenvironmental studies andtesting, and considering existing technology, applicable laws and regulations, and prior experience inremediation of contaminatedsites. Expenditures that extend the life of the related property, or mitigate or prevent future environmental contamination, are capitalized. The Companydetermines its liability on asite-by-site basis and records a liability at the time when it is probable and can be reasonablyestimated. The contingencies takeinto account the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties arelegally responsible and financiallycapable of paying their respective shares of the relevant costs. Actual costs to be incurred in futureperiods at the identified sitesmay vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. Future information and developments may require theCompany to reassess the expectedimpact of these environmental matters.

Collectibility of accountsreceivable

In order to record itsaccounts receivable at their netrealizable value, the Company must assess their collectibility. A considerable amount of judgment is requiredin order to make this assessment,including a review of the aging of its receivables and the current creditworthiness of each customer. The Company has recorded allowances forreceivables that it feels areuncollectible. However, if the financial condition of the Company’s customers were to deteriorate,their ability to make requiredpayments may become further impaired, and increases in these allowances would be required.

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**Introductionof new accounting policies in 2006**

No new accounting policieswere adopted in 2006

**Newaccounting policies not yet adopted**

Financial instruments,hedging, equityandcomprehensive income

In January 2005, the CICApublished four new sections:Section 1530, “*Comprehensive Income*”;Section 3251, “*Equity*”; Section 3855, “*Financial Instruments — Recognition and**Measurement*”; and Section 3865, “*Hedges*”. These new standards regarding recognition and measurement of financialinstruments, hedging andcomprehensive income have been issued to allow harmonization with the generally accepted accounting principles already used in the United States(U.S. GAAP). These new standardswill be adopted by the Company as of January 1, 2007. The application of these standards does not have a material impact on the financialposition or results of operationof the Company.

Accounting changes

In July 2006, the CICArevised the existing Section 1506,“*Accounting Changes*”. Therevised standard established criteria for changing policies, together with the accounting treatment and disclosure of changes in accountingpolicies and estimates, andcorrection of errors. The revised standard will be applied to accounting changes initiated in periodsbeginning after January 1, 2007.

Capital disclosures

In December 2006, the CICApublished a new section:Section1535, “*Capital Disclosures*”. Thisnew standard established disclosurerequirements about capital such as: qualitative information about its objectives, policies and processes for managing capital; quantitative data about whatit regards as capital; whether ithas complied with any externally imposed capital requirements and, if not, the consequences of suchnoncompliance. The newrequirements will be effective starting January 1, 2008. The Company is presently evaluating the impact of this new standard.

Financial instruments —disclosuresandpresentation

In December 2006, the CICApublished two new sections:Section3862, “*Financial Instruments — Disclosures*”and Section 3863, “*Financial Instruments — Presentation*”.These new standards replaceSection 3861, “*Financial Instruments —Disclosure and**Presentation*”,revising and enhancing its disclosure requirements, and carrying forward unchanged itspresentation requirements. Thesenew standards will be effective starting January 1, 2008. The Company is presently evaluating the impactof these new standards.

**Environmentalissues**

The Company is subject toenvironmental laws and regulationsimposed by the various governmental and regulatory authorities in all the countries where it operates. TheCompany is also subject to theU.S. Federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, as well as other applicable legislation in theUnited States, Canada and Europethat holds companies accountable for the investigation and remediation of hazardous substances.  

The Company is incompliance, in all material respects, with all applicable environmentallegislation or regulations. However, ongoing capital and operating expenses areexpected to be incurred to achieve and maintain compliance with applicable environmentalrequirements.

The Company’s Europeansubsidiaries are also subject to the Pre-Kyoto protocol in order to reduceworld-wide CO2 emission.Each unit has been allocated emission rights based on its 2002 emission level (“CO2 quota”). On a yearlycalendar basis, if the emissions are higher than the quota, the Company must buy,on the open market, the necessary credits to cover its deficit. However, if theCompany has a credit surplus, it can sell it on the open market for cashsettlement. The Company is still focussing on reducing its CO2 emission and in 2006 and 2005 some ofour European subsidiaries were in a surplus credit position and sold 56,500tons of CO2 credits(29,500 in 2005) on the open market for an amount of €0.8 million (€0.6 millionin 2005). This amount was recorded in earnings. The same regulations should beimplemented in Canada starting in January 2008. However, at this time, it isimpossible to evaluate the impact on the Canadian company’s units as quotas arenot yet defined.

**Effectivenessof disclosure procedures and controls**

The Company evaluated theeffectiveness of its disclosure controlsand procedures, supervised by and with the participation of the President and Chief Executive Officer and theVice-President and ChiefFinancial Officer as of December 31, 2006. They concluded that, based on this evaluation, the Company’s disclosure controls and procedures wereeffective to provide reasonableassurance that material information relating to the Company and its consolidated subsidiarieswould be made known to them byothers within those entities.

**Internalcontrol over financial reporting**

Internal control over financialreporting (“ICFR”) is designedto provide reasonable assurance regarding the reliability of the Company’s financial reporting and itscompliance with GAAP in its financialstatements. The President and Chief Executive Officer and the Vice-President and Chief Financial Officer have evaluated whether there were changes toits ICFR during the most recentperiod ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, Company’s ICFR. No such changes wereidentified through theirevaluation.

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**Riskmanagement**

The Company is exposed tocertain market risks as part of itsongoing business operations, including risks from changes in selling prices for its principal products,costs of raw materials, interestrates and foreign currency exchange rates, all of which impact the Company’s financial position,results of operations and cash flows.The Company manages its exposure to these and other market risks through regular operating and financing activities and, on a limited basis, throughthe use of derivative financialinstruments. The Company uses these derivative financial instruments as risk management tools and not for speculative investment purposes.

Interest risk

The Company’s principalinterest rate risks relate to outstandingdebt obligations. As of December 31, 2006, approximately 34% (26% in 2005) of its long-term debtaccrued interest at floatingrates. A 1% change in the interest rates applicable to its actual variable rate debt would haveapproximately a $5.6 millioneffect on the interest expense.

The Company holds certaininterest rate swap agreements not designated as hedges. These agreements,maturing from 2008 to 2012, have been contracted to fix interest at a weightedaverage rate of 8.23% on a notional amount of US $5.2 million. As at December31, 2006, these agreements are recorded as liabilities at their fair value of$0.4 million (2005 — $0.4 million). In April 2004, the Company has entered intointerest rate swaps maturing in 2013. These contracts are designated as hedgesof the change in fair value of a portion of the Company’s long-term debt.Accordingly, the interest rate went from a fixed rate of 6.75% to an average floatingrate paid in 2006 of 7.50% (2005 — 6.23%) for a notional amount of US $50million. As at December 31, 2006, the fair value of these instruments representedan unrealized loss of $2.4 million (2005 — unrealized gain of $1.1 million).

Foreign currency risk

The Company is exposed toforeign currency risks that arisefrom normal business operations. These risks include the translation of local currency balances of ourforeign subsidiaries, intercompanyloans with foreign subsidiaries and transactions denominated in foreign currencies. A significant portion of the Company’s debt is denominated in foreigncurrencies and so is exposed toforeign currency risks related to interest on this debt and its repayment. The Company is also exposed to exchange rate risks when its sales are inforeign currencies and its costsare not. Fluctuations in exchange rates may adversely affect its ability to compete with non-local producersas well as to export itsproducts. The Company’s objective is to minimize its exposure to these risks through its normal operating activities and, where appropriate, through foreigncurrency forward contracts. Ourpolicy is to negotiate forward exchange contracts that can cover up to 50% of the net exposureto currency fluctuations forperiods of 12 to 18 months. In 2006, approximately 30% of the Company’s total sales from itsCanadian operations were made tothe United States. Gains and losses arising from these contracts are applied to earnings only when they are realized. The fair value of these contractsrepresented unrealized losses of$0.6 million as of December 31, 2006 (unrealized gains of $1.5 million as of December 31, 2005).

Credit risks

The Company is exposed tocredit risk on the accountsreceivablefrom its customers. In order to reduce this risk, the Company’s credit policies include an analysisof the financial position of itscustomers and a regular review of their credit limits. The Company believes there is no particular concentration of credit risks, due to the geographicdiversity of its customers andits procedures for the management of commercial risks. Derivative financial instruments include an element of credit risk, should the other party beunable to meet its obligations.The Company reduces this risk by dealing with creditworthy financial institutions.

Commodity price risk

The Company entered intovarious derivative financial instrumentswhereby it sets the price for notional quantities of old corrugated containers, electricity, natural gas andunbleached 42-lb. kraftlinerboard. In 2005 and in 2006, gains and losses arising from electricity contracts and natural gascontracts are applied to earningsonly when they are realized, whereas all other types of contracts are accounted for at fair value.The fair value of these contractsrepresented unrealized gains of $0.7 million as of December 31, 2006 ($10.9 million as ofDecember 31, 2005).

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Additional information onour North American natural gas and electricity hedging programs, consideringthe recent acquisitions and closures, is as follows:

**North American natural gas hedging**
| ** **                       | ** ** | **United States** | ** ** | **Canada** | ** ** |
|----------------------------------|------------|------------------------|------------|------------|------------|
| Natural gas  consumption         |       |                   | 41         | %          | 59         | % |
| % of consumption  hedged         |       |                   | 34         | %          | 87         | % |
| Average price –  hedge book |       | US$                    | 7.99/MMBtu |       | $          | 6.17/GJ |   |
|                                  |            |                        |            |            |            |  |  |

 

**NorthAmerican electricity hedging**
| ** **                                       | ** ** | **United States** | ** ** | **Canada** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|------------|------------|
| Electricity  consumption                         |       |                   | 25         | %          | 75         | % |
| Electricity  consumption in a regulated market   |       |                   | 51         | %          | 24         | % |
| % of consumption  hedged in a deregulated market |       |                   | 26         | %          | 10         | % |
| Average price –  hedge book                 |       | US$                    | 0.036/KWh  |       | $          | 0.018/KWh |   |
|                                                  |            |                        |            |            |            |  |  |

 

**Supplementalinformation on non-GAAP measures**

Neither operating incomebefore depreciation and amortization,operating income, cash flow from operations or cash flow from operations per share are measures ofperformance under Canadian GAAP.The Company includes operating income before depreciation and amortization, operating income, cash flow from operations and cash flow fromoperations per share because theyare the measures used by management to assess the operating and financial performance of the Company’s operating segments. Moreover, the Companybelieves that these items provideadditional measures often used by investors to assess a company’s operating performance and its ability to meet debt service requirements. However, thesemeasures do not represent, andshould not be used as, a substitute for net earnings or cash flows from operating activities as determined in accordance with Canadian GAAP, and they arenot necessarily an indication ofwhether cash flow will be sufficient to fund our cash requirements. In addition, our definition of operating income before depreciation and amortization,operating income, cash flow fromoperations and cash flow from operations per share may differ from those of other companies. Cash flow from operations is defined as cash flow fromoperating activities asdetermined in accordance with Canadian GAAP, excluding the change in working capital components, andcash flow from operations per shareis determined by dividing cash flow from operations by the weighted average number of common shares of the period.

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 excluding specificitems and cash flow from operations per share excluding specific items arenon-GAAP measures. The Company believes that it is useful for investors to beaware of specific items that adversely or positively affected its GAAP measures,and that the above-mentioned non-GAAP measures provide investors with a measureof performance to compare its results between periods without regard to these specificitems. The Company’s measures excluding specific items have no standardizedmeaning prescribed by GAAP and are not necessarily comparable to similarmeasures presented by other companies and therefore should not be considered inisolation. 

Specific items are definedas items such as charges for impairment of assets, charges for facility ormachine closures, debt restructuring charges, gain or loss on sale of businessunits, unrealized gain or loss on derivative financial instruments that do notqualify for hedge accounting, foreign exchange gain or loss on long-term debtand other significant items of an unusual or non-recurring nature.

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Net earnings (loss),which is a performance measure defined by Canadian GAAP, is reconciled below tooperating income, operating income excluding specific items and operatingincome before depreciation and amortization excluding specific items:
| **(in millions of Canadian dollars)**                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Net  earnings (loss)**                                                              |       | **3**      | ** ** | (97      | )          | 23       |       |
| Net loss from  discontinued operations                                                |       | **5**      | ** ** | 74       |       | 7        |       |
| Share of results  of significantly influenced companies                               |       | **(8**     | **)**      | (7       | )          | (2       | )          |
| Provision for  (recovery of) income taxes                                             |       | **(1**     | **)**      | (9       | )          | 7        |       |
| Loss on  long-term debt refinancing                                                   |       | **—** | ** ** | —   |       | 1        |       |
| Foreign exchange  gain on long-term debt                                              |       | **—** | ** ** | (10      | )          | (18      | )          |
| Gain on  financial derivative instruments                                             |       | **—** | ** ** | (2       | )          | —   |       |
| Interest expense                                                                      |       | **82**     | ** ** | 78       |       | 73       |       |
| **Operating  income**                                                                 |       | **81**     | ** ** | 27       |       | 91       |       |
| Specific items:                                                                       |       | ** ** | ** ** |     |       |     |       |
| Unusual gains                                                                         |       | **(4**     | **)**      | (10      | )          | (4       | )          |
| Impairment loss  on property, plant and equipment                                     |       | **61**     | ** ** | 47       |       | 18       |       |
| Closure and  restructuring costs                                                      |       | **20**     | ** ** | 18       |       | —   |       |
| Unrealized loss  (gain) on commodity derivative financial instruments                 |       | **(5**     | **)**      | 8        |       | (2       | )          |
|                                                                                  |       | **72**     | ** ** | 63       |       | 12       |       |
| **Operating  income – excluding specific items**                                 |       | **153**    | ** ** | 90       |       | 103      |       |
| Depreciation and  amortization                                                        |       | **163**    | ** ** | 172      |       | 157      |       |
| **Operating income before depreciation  and amortization - excluding specific items** |       | **316**    | ** ** | 262      |       | 260      |       |

 

The following tablereconciles net earnings (loss) and net earnings (loss) per share to netearnings excluding specific items and net earnings per share excluding specificitems:
| ** **                                                                                             | ** ** | **Net earnings (1)** | ** ** | **Net earnings per share (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------|------------|
| **(in millions of Canadian dollars, except amount per share)** | ** ** | **2006**                       | ** ** | **2005**                                           | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **As per  GAAP**                                                                                       |       | **3**                          | ** ** | (97                                                | )          | 23 |   | **0.04** | ** ** | (1.19 | ) | 0.28 |   |
| Specific items:                                                                                        |       | ** **                     | ** ** |                                               |       |   |   | ** ** | ** ** |   |   |   |   |
| Impairment loss  on property, plant and equipment                                                      |       | **61**                         | ** ** | 47                                                 |       | 18 |   | **0.54** | ** ** | 0.39 |   | 0.15 |   |
| Closure and  restructuring costs                                                                       |       | **20**                         | ** ** | 18                                                 |       | — |   | **0.18** | ** ** | 0.15 |   | — |   |
| Unusual gains                                                                                          |       | **(4**                         | **)**      | (10                                                | )          | (4 | ) | **(0.02** | **)** | (0.10 | ) | (0.03 | ) |
| Unrealized loss  (gain) on commodity derivative financial instruments                                  |       | **(5**                         | **)**      | 8                                                  |       | (2 | ) | **(0.05** | **)** | 0.07 |   | (0.02 | ) |
| Gain on  financial derivative instruments                                                              |       | **—**                     | ** ** | (2                                                 | )          | — |   | **—** | ** ** | (0.03 | ) | — |   |
| Foreign exchange  gain on long-term debt                                                               |       | **—**                     | ** ** | (10                                                | )          | (18 | ) | **(0.02** | **)** | (0.10 | ) | (0.19 | ) |
| Loss on  long-term debt refinancing                                                                    |       | **—**                     | ** ** | —                                             |       | 1 |   | **—** | ** ** | — |   | 0.01 |   |
| Included in  discontinued operations                                                                   |       | **4**                          | ** ** | 96                                                 |       | — |   | **0.03** | ** ** | 0.83 |   | — |   |
| Adjustment of  statutory tax rate                                                                      |       | **(5**                         | **)**      | 4                                                  |       | — |   | **(0.06** | **)** | 0.05 |   | — |   |
| Tax effect on  specific items                                                                          |       | **(22**                        | **)**      | (48                                                | )          | (2 | ) | ** ** | ** ** |   |   |   |   |
|                                                                                                   |       | **49**                         | ** ** | 103                                                |       | (7 | ) | **0.60** | ** ** | 1.26 |   | (0.08 | ) |
| **Excluding specific items**                                                                           |       | **52**                         | ** ** | 6                                                  |       | 16 |   | **0.64** | ** ** | 0.07 |   | 0.20 |   |

 

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(1)          Specific amounts per share are calculated onan after-tax basis.

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The following tablereconciles the net cash provided by operating activities to operating incomeand operating income before depreciation and amortization:
| **(in millions of dollars)**                                                                            | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Cash flow  provided by operating activities                                                                            |       | **213**    |       | 124      |       | 166      |       |
| Changes in  non-cash working capital components                                                                        |       | **(31**    | )          | 32       |       | 6        |       |
| Depreciation and  amortization                                                                                         |       | **(163**   | )          | (172     | )          | (157     | )          |
| Current income  taxes                                                                                                  |       | **34**     |       | 21       |       | 21       |       |
| Interest expense  (includes interest on long-term debt, other interest less interest income and  capitalized interest) |       | **82**     |       | 78       |       | 73       |       |
| Unusual gains                                                                                                          |       | **4**      |       | 10       |       | 4        |       |
| Impairment loss  on property, plant and equipment                                                                      |       | **(61**    | )          | (47      | )          | (18      | )          |
| Closure and  restructuring costs                                                                                       |       | **(3**     | )          | (5       | )          | —   |       |
| Unrealized loss  (gain) on derivative financial commodity instruments                                                  |       | **5**      |       | (8       | )          | 2        |       |
| Gain on  derivative financial instruments                                                                              |       | **—** |       | (2       | )          | —   |       |
| Other non-cash  adjustments                                                                                            |       | **1**      |       | (4       | )          | (6       | )          |
| Operating income  from continuing operations                                                                           |       | **81**     |       | 27       |       | 91       |       |
| Depreciation and  amortization                                                                                         |       | **163**    |       | 172      |       | 157      |       |
| **Operating income before  depreciation and amortization**                                                             |       | **244**    |       | 199      |       | 248      |       |

 

The following tablereconciles cash flow from operations and cash flow from operations per share tocash flow from operations excluding specific items and cash flow fromoperations per share excluding specific items:
| ** **                                                                                | ** ** | **Cash flow from operations** | ** ** | **Cash flow from operations per share** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------|------------|
| **(in millions of dollars, except amounts per share)** | ** ** | **2006**                                     | ** ** | **2005**                                                         | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash  flow provided by operating activities**                                           |       | **213**                                      |       | 124                                                              |       | 166 |   |   |   |   |   |   |   |
| Changes in  non-cash working capital components                                           |       | **(31)**                                     |       | 32                                                               |       | 6 |   | ** ** |   |   |   |   |   |
| **Cash  flow from operations**                                                            |       | **182**                                      |       | 156                                                              |       | 172 |   | **2.25** |   | 1.92 |   | $ | 2.11 |   |
| Specific items:                                                                           |       | ** **                                   |       |                                                             |       |   |   | ** ** |   |   |   |   |   |
| Closure and  restructuring costs, net of current income tax                               |       | **13**                                       |       | 13                                                               |       | — |   | **0.16** |   | 0.16 |   | — |   |
| **Excluding specific items**                                                              |       | **195**                                      |       | 169                                                              |       | 172 |   | **2.41** |   | 2.08 |   | $ | 2.11 |   |

 

**Additionalinformation**

Additional informationrelating to the Company, includingthe AIF, is available on SEDAR at www.sedar.com

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