**Exhibit13.3**

** **

**Management’sDiscussion and Analysis of Financial Position and Operating Resultsand Financial Statements 2005**

** **

** **

**REINVENT**

**RECOMMIT**

**REAFFIRM**

itsaccountability practices

 

 

 

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** **

**General Information**

 

The Annual General Meeting of Shareholders will be held on May 4, 2006at 11:00 a.m. at

Ex-Centris, Cinema

and New Media Complex,

3536 Saint-Laurent Blvd.,

Montréal, Québec.

 

The 2005 Annual Information Form of Cascades Inc. will be available uponrequest from the Company’s head office as of March 24, 2006.

 

*On peut se procurer la version française du présentrapport annuel en s’adressant au :*

*Secrétaire corporatif Cascades inc.*

*404, boul. Marie-Victorin*

*Kingsey Falls (Québec) J0A 1B0*

*Vous le trouverez aussi sur notre site*

*Internet à l’adresse : www.cascades.com*

 

Transfer agent and registrar:

Computershare Investor Services Inc.

 

**Head Office**

 

Cascades Inc.

404 Marie-Victorin Blvd.

Kingsey Falls, Québec

Canada J0A 1B0

Telephone: (819) 363-5100

Fax: (819) 363-5155

 

**Investor Relations**

 

For additional information, please contact:

Marc Jasmin, CMA

Director, Investor Relations

Cascades Inc.

772 Sherbrooke Street West

Montréal, Québec H3A 1G1

Telephone: (514) 282-2681

Fax: (514) 282-2624

investor@cascades.com

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**THE COMPANY**

 

The following is management’s discussion andanalysis (“MD&A”) of the operatingresults and the financialposition of Cascades Inc. (“Cascades” or “the Company”), which should be read in conjunction with the Company’s consolidated financial statementsand accompanying notes for the years ended December 31, 2005 and 2004. For additional information, readers are referred to theCompany’s Annual Information Form (“AIF”),which is published separately.Information contained hereinincludes any significant developments as at February 22, 2006, the date of approval of the MD&A by the Company’s Board of Directors.

 

MD&A is intended toprovide readers with theinformationthat management believes is required to gain an understanding of Cascades’ current results and to assess the Company’s future prospects.Accordingly, certain statements in this MD&A, including statementsregarding future results and performance,are forward-looking statements withinthe meaning of securities legislation based on current expectations. The accuracy of such statements is subject to a number of risks,uncertainties and assumptionsthat may cause actual results to differmaterially from those projected, including, but not limited to, the effect of general economic conditions, decreases in demand for theCompany’s products, increases inthe cost of raw materials, changesin the relative values of certain currencies, fluctuations in selling prices and adverse changes in general market and industry conditions. MD&Aalso includes price indexes, variance and sensitivity analyses that are intended to provide thereader with a betterunderstanding of the trends related to our business activities. These items are based on the best estimates available to the Company.

 

The financial informationcontained herein,includingtabular amounts, is expressed in Canadian dollars unless otherwise specified, and is prepared in accordance with generally acceptedaccounting principles in Canada(Canadian GAAP). Unless otherwiseindicated or if required by the context, the terms “we,” “our” and “us” refer to Cascades Inc. and all of its subsidiaries and jointventures. The financialinformation included in this analysis also contains certain data that are not measures of performance under Canadian GAAP (“non-GAAP measures”). For example, the Companyuses operating income beforedepreciation and amortization (“OIBD”)because it is the measure usedby management to assess the operating and financial performance of the Company’s operating segments. Such information is reconciled tothe most directly comparablefinancial measures, as set forth inthe supplemental information on non-GAAP measures section.

 

1

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**DIRECTORS AND SENIOR MANAGEMENT**

 
| **Alain Lemaire**  PRESIDENT  AND CHIEF  EXECUTIVE  OFFICER,  CASCADES INC. |        | **James B.C. Doak**PRESIDENTAND MANAGINGDIRECTOR,MEGANTIC ASSETMANAGEMENTINC. |        | **André Desaulniers**DIRECTOR OFCOMPANIES        |        |
|-----------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                                        |   |                                                                          |   |                                                  |   |
| **Laurent Lemaire**EXECUTIVEVICE-CHAIRMANOF THE BOARD,CASCADES INC.         |        | **Robert Chevrier**PRESIDENT,SOCIÉTÉ DEGESTIONROCHE INC.            |        | **Michel Desbiens**CONSULTANTAND DIRECTOROF COMPANIES |        |
|                                                                        |   |                                                                          |   |                                                  |   |
| **Bernard Lemaire**CHAIRMAN OFTHE BOARD,CASCADES INC.                       |        |                                                                          |   |                                                  |   |

 

**Board of Directors**

 

Bernard Lemaire (1)

Chairman of the Board,

Cascades Inc.

 

Laurent Lemaire (1)

Executive Vice-Chairman of the Board, Cascades Inc.

 

Alain Lemaire (1)

President and Chief Executive Officer, Cascades Inc.

 

Martin P. Pelletier (4)

Pulp and Paper Consultant

 

Paul R. Bannerman

Chairman of the Board,

Etcan International Inc.

 

André Desaulniers (2),(5)

Director of companies

 

Louis Garneau (3)

President, Louis Garneau Sports Inc.

 

Sylvie Lemaire (4)

President, Fempro Inc.

 

Michel Desbiens (3),(4)

Consultant and Director of companies

 

Laurent Verreault (2),(3)

Chairman of the Board and Chief Executive Officer,

Groupe Laperrière & Verreault Inc.

 

Robert Chevrier (2)

President, Société de gestion

Roche Inc.

 

David McAusland (5)

Executive Vice-president,

Corporate Development and

Chief Legal Officer, Alcan Inc.

 

James B.C. Doak (2),(5)

President and Managing Director,

Megantic Asset Management Inc.

 

**Committees**

 

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(1) Member of the Administrative Committee

 

(2) Member of the Audit Committee

 

(3) Member of the Human Resources Committee

 

(4) Member of the Environmental, Health and Safety Committee

 

(5) Member of the Corporate Governance Committee

 

2

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| **Louis Garneau**PRESIDENT,LOUIS GARNEAUSPORTS INC.            |        | **David McAusland**EXECUTIVEVICE-PRESIDENT,CORPORATEDEVELOPMENTAND CHIEFLEGAL OFFICER,ALCAN INC. |        | **Paul R. Bannerman**CHAIRMANOF THE BOARD,ETCAN INTERNATIONALINC.                                             |        |
|----------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|
|                                                           |   |                                                                                             |   |                                                                                                          |   |
| **Sylvie Lemaire**PRESIDENT,FEMPRO INC.                        |        | **Martin P. Pelletier**PULP AND PAPERCONSULTANT                                                  |        | **Laurent Verreault**CHAIRMANOF THE BOARDAND CHIEFEXECUTIVEOFFICER, GROUPELAPERRIÈRE &VERREAULT INC. |        |
| ** **                                                     |   |                                                                                             |   |                                                                                                          |   |
| **Christian Dubé**VICE-PRESIDENTAND CHIEFFINANCIALOFFICER |        | **Robert F. Hall**VICE-PRESIDENT,LEGAL AFFAIRSAND CORPORATESECRETARY                             |        | **Allan Hogg**CORPORATECONTROLLERAND TREASURER                                                                |        |

 

**Senior Management**

 

Bernard Lemaire

Chairman of the Board

 

Alain Lemaire

President and Chief Executive Officer

 

Laurent Lemaire

Executive Vice-Chairman of the Board

 

Robert F. Hall

Vice-President, Legal Affairs and Corporate Secretary

 

Christian Dubé

Vice-President and Chief Financial Officer

 

Norman Boisvert

Vice-President, Administration

 

Claude Cossette

Vice-President, Human Resources

 

Alain Ducharme

Corporate Vice-President

 

Jean-Luc Bellemare

Vice-President, Information Technology and purchasing

 

Hubert Bolduc

Vice-President, Communications and Public Affairs

 

Allan Hogg

Corporate Controller and Treasurer

 

Léon Marineau

Vice-President, Environment

 

Suzanne Blanchet

President and Chief Executive Officer, Cascades Tissue Group

 

Marc-André Dépin

President and Chief Executive Officer, Norampac Inc.

 

Éric Laflamme

President and Chief Operating Officer, North America,

Cascades Boxboard Group

 

Mario Plourde

President and Chief Operating Officer,Cascades Specialty Products Group and

President and Chief Executive Officer,

Cascades Fine Papers Group Inc.

 

Stéphane Thiollier

Vice-President, Managing Director, Cascades S.A.

 

3

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**OBJECTIVES**

 

**Long-term objective**

 

Maximize our return on assets

 

 

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(1) OIBD excluding specific items/average total assets.

 

Established in 1964, Cascades is the parentcompany of a North American and European group of companies involved in theproduction and conversion ofpackaging products, tissue papers andfine specialty papers mainly manufactured from recycled fibres. Cascades conducts its businessprincipally through three operatingsegments: Packaging, Tissue Papers and Fine Papers. 

 

Financial results within sustainable development

 

**Environmental performance**

 

Despite the numerous changes in the paper and packaging industry,Cascades firmly intends to remaina leader by maintaining its environmental objectives: increase the volume of recycled materials, reduce greenhousegas emissions, reduce waterconsumption, recover waste from water treatment systems for beneficial use and maximize energy efficiency by reducing itsconsumption by 2% per year.

 

**Human element**

 

Our employees are the driving force behindCascades’ success. They havea voice in the way we run our business. We constantly strive to meet theexpectations of our employees and to find new and beneficial ways of workingtogether for the benefit of ourshareholders.

 

**Economic environment**

 

Sustainable development is not only rooted inour deepest value, respect, butit also aims at constantly achieving better financial performances. Formore than 40 years, Cascades hasused tools, such as profit sharing, based on cash flows to optimize the value of its assets in order to increase itsreturn on capital employed andthereby, attain or exceed its cost of capital.

 

4

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**STRATEGY**

 

**Focus on packaging and tissue**

 

The focus on packaging and tissue is one of the main characteristicsthatmakes Cascades uniquein the industry in Canada. Effectively, through asset purchases, we have positioned ourselves in the packaging and tissuesegments, which are moreconsumer-oriented markets. In these businesses, we operate in different geographic locations and we are among the marketleaders.

 

**Optimize use of recycled fiber**

 

Cascades produces the majority of its products from recycled fiber. Wemanufactured approximately 2.5million tons of packaging, tissue products and fine papers last year. The overall purchase content of recycledfiber is estimated to be close to65% in terms of tons representing approximately 45% of our cost of manufacturing raw materials. We intend to continue touse recycled fiber as our main source ofraw materials. We enjoy more than 40years of experience with this type of raw material and the volume of our purchasesgives us a unique position in Canada. Furthermore, we firmly believe that the demand for recycled productswill grow in the future.

 

**Increase integration rate**

 

By increasing our converting integration rate,we expand the quantity ofboardand paper that we convert into value-added products. Also, a better integration rate presents three mainadvantages: it brings us closer to the end-user; converting operations are less capital intensive; and itimproves stability at the mill.

 

**Promote the entrepreneurial culture**

 

We have a decentralized management structurein which each of our unitsoperatesas a distinct profit center. We believe in market price transfer as an important tool to support and measureefficient capital allocation. In addition, we have implemented a profit sharing plan that is linked to thefinancial and operatingperformance of each individual facility. Our work force is young and we believe that our corporate culture and ouremployees are the best assets wehave to adapt to an ever-changing environment. 

 

5

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**ACTION PLAN**

 

In line with our strategy, our action plan focus on improving ourprofitability as well as optimizing our portfolio of assets.

 

**Continuous improvement program**

 

One of Cascades’ top priorities has always been the improvement ofprocesses, including eliminatingunnecessary activities and variations. Through targets, tools and measures (presented on the next page),Cascades is dedicated to thedevelopment of new products, to the improvement of the quality of its existing products, loweringcosts and inefficiencies, and optimizingcustomer service.

 

**Focus on non-performing assets**

 

Through our continuous improvement program, we closely monitor non-performingassets, which represent less than10 manufacturing and convertingunits out of more than 100. Important cost-cutting measures have been implemented in order to improveprofitability and difficult decisions were taken in 2005 in the Fine Papers segment. Currently, we are mainlyfocussing on the Boxboardoperations.

 

**Divestiture of non-core assets**

 

In our 2004 strategic plan, we highlighted that our focus would be onpackaging and tissue.Consequently, we identified our distribution operations as assets held for sale. In 2005, we completedthe divestiture of our Tissue andFine Papers distribution activities (closing occurred in February 2006). In thefuture, other assets could be targeted for sale if they fail to provide synergies with our core operations.

 

**Deleveraging our balance sheet**

 

We intend to continue to deleverage our balance sheet in order toimproveour financialflexibility. This will be accomplished through a combination of cost-cutting measures, assets-optimizationprogram, realization of potential divestitureprogram, and positive free cash flow improvement.

 

**Selective acquisitions in core segments**

 

In line with our deleveraging objective, weplan to continue seekingopportunisticand selective acquisitions. Without neglecting our financial flexibility, we believe that the conditionsprevailing in the industry create manyopportunities.

 

 

6

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**MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS**

 

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

 
| ** **                                                | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| **OPERATIONAL**                                           |       |      | ** ** |     |       |     |       |
| **Manufacturing shipments (in thousands of  short tons)** |       |      | ** ** |     |       |     |       |
| Packaging                                                 |       |      | ** ** |     |       |     |       |
| Boxboard                                                  | ** ** | **889**   | ** ** | 857      |       | 856      |       |
| Containerboard                                            | ** ** | **715**   | ** ** | 718      |       | 721      |       |
| Specialty products                                        | ** ** | **198**   | ** ** | 195      |       | 190      |       |
| ** **                                                |       | **1,802** | ** ** | 1,770    |       | 1,767    |       |
| Tissue papers                                             | ** ** | **425**   | ** ** | 399      |       | 368      |       |
| Fine papers                                               | ** ** | **267**   | ** ** | 289      |       | 279      |       |
| Total                                                     | ** ** | **2,494** | ** ** | 2,458    |       | 2,414    |       |
| **Integration rate (%)**                                  |       |      | ** ** |     |       |     |       |
| Packaging                                                 |       |      | ** ** |     |       |     |       |
| Boxboard (North America)                                  | ** ** | **47**    | **%**      | 44       | %          | 44       | %          |
| Containerboard (North America)                            | ** ** | **61**    | **%**      | 65       | %          | 61       | %          |
| Specialty products (paper only)                           | ** ** | **18**    | **%**      | 19       | %          | 19       | %          |
| Tissue papers                                             | ** ** | **63**    | **%**      | 64       | %          | 61       | %          |
| ** **                                                |       | **46**    | **%**      | 46       | %          | 44       | %          |
| **Operating rate (%)**(1)                                 |       |      | ** ** |     |       |     |       |
| Packaging                                                 |       |      | ** ** |     |       |     |       |
| Boxboard                                                  | ** ** | **93**    | **%**      | 89       | %          | 89       | %          |
| Containerboard                                            | ** ** | **94**    | **%**      | 89       | %          | 90       | %          |
| Specialty products                                        | ** ** | **94**    | **%**      | 93       | %          | 90       | %          |
| Tissue papers                                             | ** ** | **97**    | **%**      | 91       | %          | 88       | %          |
| Fine papers                                               | ** ** | **78**    | **%**      | 85       | %          | 82       | %          |
| Total                                                     | ** ** | **92**    | **%**      | 89       | %          | 88       | %          |
| **% of recycled fiber content**(2)                        | ** ** | **65**    | **%**      | 67       | %          | 65       | %          |
| **Water consumption – m3/ton**                       | ** ** | **18.7**  | ** ** | 18.3     |       | 18.3     |       |
| **Energy consumption – GJ/ton**                      | ** ** | **10.85** | ** ** | 11.18    |       | 11.35    |       |
| **Work accidents – OSHA frequency rate**             | ** ** | **9.2**   | ** ** | 10.6     |       | 10.9     |       |
| **FINANCIAL**                                             |       |      | ** ** |     |       |     |       |
| **Return on assets (%)**(3)                               |       |      | ** ** |     |       |     |       |
| Packaging                                                 |       |      | ** ** |     |       |     |       |
| Boxboard                                                  | ** ** | **6**     | **%**      | 7        | %          | 6        | %          |
| Containerboard                                            | ** ** | **9**     | **%**      | 12       | %          | 11       | %          |
| Specialty products                                        | ** ** | **10**    | **%**      | 10       | %          | 10       | %          |
| Tissue papers                                             | ** ** | **19**    | **%**      | 14       | %          | 13       | %          |
| Fine papers                                               | ** ** | **-3**    | **%**      | -1       | %          | 2        | %          |
| Consolidated return on assets (%)                         | ** ** | **8.5**   | **%**      | 8.5      | %          | 8.5      | %          |
| **Working capital**(4)                                    |       |      | ** ** |     |       |     |       |
| In millions of $                                          | ** ** | **594**   | ** ** | 577      |       | 542      |       |
| % of sales                                                | ** ** | **15.4**  | **%**      | 15.6     | %          | 15.7     | %          |

 

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(1)   Paper manufacturing only. Basedon practical capacity

(2)   Recycled fiber purchases /Total fiber purchases (in tons, including 100% of Norampac)

(3)   Return on assets is a non-GAAPmeasure and is defined as OIBD excluding specific items / Average assets

(4)   Working capital: accountsreceivable plus inventories less accounts payable and accrued liabilities. Itincludes assets held for sale but excludes unpaid provisions for closing andrestructuring costs of $55 million.

 

7

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**BUSINESS ENVIRONMENT**

 

**Key financial drivers**

 

As a packaging and Tissue company, our financial results are mainlydriven by the following factors:

 

**Sales**

 

•      Selling prices

•      Demand for packaging and tissue

•      Foreign exchange rates, mainly CAN$/US$

•      Product mix

•      Population growth

•      Industrial production

•      Demand for durable and non-durable goods

•      Product substitution

•      Product innovation

•      Demand for environmentally friendly, recycledproducts

 

**Costs**

 

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

•      Foreign exchange rates (mainly CAN$/US$)

•      Energy prices

•      Labour

•      Freight

•      Chemical prices

•      Operating rates and production downtime

•      Government policies

 

**Geographical breakdown of operations**

 

Our financial results are also influenced by our geographical sales andassets mix:

 

 

**Segmented breakdown of operations**

 

In addition, our financial results are affected by the relative weightof each of our business segments:

 

 

8

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**Structural issues**

 

In general, the paper and packaging industry isfacing challenging conditions. Demand inWestern countries in 2005 hasbeen mostly flat or declining withthe exception of the tissue sector. Furthermore, energy and chemical costs, two important cost drivers, have been steadily increasing since2003. In Canada, marketconditions have worsened because of the rapid and constant appreciation of the Canadian dollar against the U.S. dollar.

 

This situation led toannouncements of massiverestructuringinitiatives and closures, mostly in North America, in 2005. In the last year, nearly 6 million tons of North American capacity was shut in the pulp, paper and packagingindustry. This supplycontraction in North America was in response to soft demand as well as increased capacity in Asia and South America. China, which is an important export market for packagingproducts, has been increasingcapacity in the past few years. Asa result, export conditions have been difficult for North American producers but even more for European and other Asian producers. Thissituation is expected tocontinue in the coming years.

 

**Recycled paper, virgin pulp and woodchips**

 

Recycled paper, virgin pulp and woodchips representthe main cost of our manufacturingoperations. They account for65%, 11% and 24% respectively of our total purchased volumes.

 

Overall, the North Americanpaper and packagingindustryclosures resulted in a decrease in thedemand for virgin and recycled fiber in 2005. This decrease in North America was offset by the increased Asian demand.

 

With regard to the recycledpaper market, in2005, Asiaconsumed approximately 30% of the recycledpaper generated in the U.S. with more than 50% going to China (source: RISI). However, this stronger Asian demand for recovered paper didnot lead to recycled fiber priceincreases. In fact, as a resultof the massive North American closures and lower demand, U.S. dollar prices decreased for most of the grades, including old corrugatedcontainers (OCC), old newspapers(ONP), and sorted office papers(SOP).

 

In the virgin pulp market,global shipmentswerenearly flat in 2005 compared to the prior year. Inventories remained relatively high throughout the year and this situation, combined withcost pressures, led to pulpcapacity closures in North America. This drop in supply resulted in price increases.On a global scale, many projects are under construction, mostly in South America, and will add new capacity in the coming years.

 

Concerning the woodchipsituation in EasternCanada,prices have risen steadily since 2003 and they are now the highest in the world (source: CIBC World Markets). This increase is mostly due to the imbalance between chips productionand demand, as well as the rising costsof sawmills, which are relatedto the lumber duties imposed bythe U.S. and growing stumpage fees (source: CIBC World markets). In addition, with the recent reduction of 20% imposed by the Government ofQuébec (Canada) on the allowableprovincial harvest of softwoodtimber, the business environment in the woodchip industry remains challenging.

 

**Packaging**

 

In packaging, we operate in three different sectors:Boxboard, Containerboard (through our jointventure, norampac), and Specialtyproducts (mostly protectivepackaging products). Each sector is facing its own structural issues.

 

9

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***Boxboard***

 

Our coated boxboard manufacturing operations arelocated in Europe and in North America. NorthAmerica accounts for approximately 70% of our sales in the sector. In Europe, we manufacturevirgin as well as recycledcoated boxboard. In North America, wemanufacture mainly recycled coated boxboard. We also have converting operations in North America, divided into two businesses: General foldingcartons andQuick-service-restaurants (QSR).

 

In Europe, in the coatedrecycled sector, themarketwas in oversupply and prices in euros decreased in the past two years. As a result of the growing Asian capacity and a strong Euro,exports were under pressure andcompetition intensified. Nevertheless,price increases were announced for thebeginning of 2006 as a result of increasing cost pressures.

 

In the European virginboxboard market, businessconditionsremained relatively healthy in 2005. Helped by a supply constraint because of a strike in Finland and good demand from end-use markets, notablycosmetics and tobacco, Euro prices were stable in 2005.

 

In North America, the coatedrecycled boxboardmarketis facing challenging conditions. The growing Asian capacity, end-customer purchasing power, as well as product substitution put pressure onthis sector. In this context,based on RISI’s capacity figures,approximately 5% of North American capacitywas closed in 2005 and roughly 30% was identified as assets held for sale. Nonetheless, pressured by higher costs, the U.S. dollar sellingprices increased by approximately4% in 2005.

 

On the converting side, duemainly to overcapacity,thegeneral folding carton business conditions are extremely competitive. As for the QSR business, demand remains healthy.

 

***Containerboard***

 

With the exception of one mill, Norampac’scontainerboard operations are located in NorthAmerica. According to RISI, the top five North American manufacturers accountfor roughly 70% of totalcapacity. The North American market is affected by the pressure on exports as a result of the growing capacity in Asia, and thedisplacement of themanufacturing capacity of Western countriesto China. According to the Fibre Box Association, approximately 80% of the primary end-use markets for corrugated products arenon-durable goods (food,beverages and agricultural products, paper products, petroleum, plastic, synthetic and rubber products).

 

In the North Americancontainerboard market,demandwas soft for the first nine months of 2005. As a result, official U.S. dollar transaction prices decreased during the summer. However, thistrend was reversed in the fourthquarter of 2005 following aseasonal pickup in demand, important closures by almost all industry players (about 3.5% of North American capacityaccording to RISI) as well as twomajor hurricanes, which damaged production facilities and inventories. This led to record-level shipments in the following months whichresulted in two selling priceincreases, and an announcement ofa third price increase for spring 2006.

 

***Specialty products***

 

The Specialty products Group includes 23 operatingunits located in North America and three in Europe. This Group is active mostly inprotective packaging and isdivided into seven subgroups, namely: paper mill packaging, deinked pulp, plastic products, specialty paper & board, honeycombproducts, moulded pulp productsand waste paper recovery.

 

10

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The Group mostly operates inniche marketsand is,therefore, less impacted by global structural issues. However, prices in this segment are often influenced by other grades of paper.Substitution also plays a role,as well as production levels in the paper and packaging industry.

 

**Tissue**

 

Our tissue operations are located in North America,and are divided into two businesses: retailand away-from-home (AFH). In theretail sector, we operate in twomarkets: private label and national brand. Also, we either convert products ourselves or sell parent rolls to independentconverters.

 

According to RISI, the topfive North Americanmanufacturersaccounted for roughly 78% of total capacityin 2005. The tissue industry is not considered a global industry since international trade of tissue products is expensive and currentlymarginal. In that sense, thestructural issues influencing Cascades’tissue segment are North American. Themain determinants for demand are population growth and product innovation. In the private label retail market, clients are becomingbigger and are looking forsuppliers that can fully satisfy their volume requirements.

 

In 2005, driven by capacityexpansion, U.S. tissueproductionincreased by more than 4% (source: RISI).However, North American tissue demand grew for the fifth consecutive year preventing market imbalance (source: RISI). As a resultof growing demand and escaladingcost pressures, price increaseswere implemented in 2005 and additionalincreases were announced for the beginning of 2006. During the next two years, the market is expected to remain balanced as further capacity expansion should be offset by growthin demand and the closure of140,000 tons of capacity announcedby Georgia-Pacific in October 2005.

 

**Fine papers**

 

The Fine papers Group now includes one papermill, one converting plant and one de-inkedpulp mill. We estimate thecapacity of the paper mill representsless than 1% of the North American capacityof uncoated free sheet.

 

In North America, the U.S.uncoated free sheetdemanddeclined approximately 4% in 2005 as customers reduced inventories, but also due to the continued substitution effect fromelectronic information (source:RISI). In fact, according to RISI,demand has dropped by more than 12% from its peak in 1999. In addition, the uncoated free sheet market has been affected by paperbrightness issues and increasingcompetition from overseas. As aresult, North American producers reduced capacity by approximately 6% in 2005 (source: RISI). With this tightening of supply andcost pressures, producersannounced price increases for thebeginning of 2006.

 

In 2005, the Fine papersGroup announcedtheclosure of its coated free sheet mill, located in Thunder Bay, Ontario and thereby terminatedits activities in this market.In North America, the coatedfree sheet market is strongly affected by the growing capacity in Asia, the drop in demand for magazines and paper publications, as wellas newsprint mill conversion tocoated paper.

 

Finally, the Group announcedthe sale of itsdistributionassets in 2005 (closing occurred in February 2006). These assets were identified as held for sale in 2004.

 

11

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**Economic data and pricing**

 

Cascades’ results are sensitive to exchange rates, mostly CAN$/US$, andenergy prices. Therefore, the following graphs and table show the historical movementof the Canadian dollar against the U.S. dollar, and the U.S. dollar against theEuro, as well as the spot prices for Henry Hub natural gas (US$/mmBtu) and WTIcrude oil (US$/barrel). The influence of these factors on Cascades’ financial resultsis highlighted in the sensitivity table (see p.35). The natural gas hedgeportfolio (see p.37) should also be considered.

 

**Evolution of exchange rates**

 

 

**Evolution of energy prices**

 

 
| ** **                              | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| **Foreign exchange rates–average** |       |      |       |     |       |     |       |
| CAN$/US$                                |       | **1.211** |       | 1.301    |       | 1.401    |       |
| US$/CAN$                                |       | **0.826** |       | 0.769    |       | 0.714    |       |
| CAN$/EURO                               | ** ** | **1.508** |       | 1.617    |       | 1.582    |       |
| **Energy prices–average**          |       |      |       |     |       |     |       |
| Natural gas Henry Hub (US$/mmBtu)       | ** ** | **8.62**  |       | 6.11     |       | 5.38     |       |
| Crude oil WTI (US$/barrel)              | ** ** | **57.28** |       | 41.60    |       | 30.84    |       |

 

Source: Bloomberg

 

12

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The following graphs and table show the historicalmovement of average benchmark list prices forsome of our key products as wellas for woodchips and some gradesof recycled paper and virgin pulp used in the manufacturing process. Recycled papers, virgin pulp and woodchips are the primary raw materialsused in the manufacture of our products and represent the highest production cost. Selling and raw materials list prices fluctuateconsiderably and are heavilyinfluenced by economic conditions andforeign demand. These list prices could be different from the Company’s cost of purchase and actual selling prices. The influence ofsome of these prices on theCompany’s financial results is highlightedin the sensitivity table (see p.35).

 

**Cascades North American priceindexes**

 

 

**Cascades North American rawmaterial indexes**

 

 

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(1)   Cascades North American selling prices indexrepresents an approximation of Cascades’ selling prices in North America.It is weighted according toshipments. It takes into account some of the main products of Cascades for which prices areavailable in the Pulp & PaperWeek magazine and the Cascades Tissue Index. This index should only be used as indicator trends as itmight be different from ouractual selling prices and our product mix.

(2)   Cascades North American raw materials indexrepresents the average weightedcost paid for some of our raw materials namely, recycled fiber, virgin pulp and woodchips in NorthAmerica. It is weighted accordingto the volume of purchase (in tons). This index should only be used as indicator trends and it might bedifferent than our actual purchasingcosts and our purchase mix.

(3)   Cascades North American virgin pulp pricesindex represents the average weighted cost paid for virgin pulp in NorthAmerica.

(4)   Cascades North American woodchips indexrepresents the average weighted cost paid for woodchips in North America.

(5)   Cascades North American recycled fiber indexrepresents the average weighted cost paid for recycled papers in North America.

 

13

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These indexes should only beused as indicator trends and they might be different than our actual sellingprices or purchasing costs.

 
| ** **                                                         | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| **Selling prices**                                                 |       |      |       |     |       |     |       |
| **Cascades North American US$ index**                         |       |      |       |     |       |     |       |
| **(index 2002 = 1,000)**(1)                                        | ** ** | **1,147** |       | 1,070    |       | 995      |       |
| **Packaging**                                                      |       |      |       |     |       |     |       |
| Boxboard                                                           |       |      |       |     |       |     |       |
| North America (US$/ton)                                            |       |      |       |     |       |     |       |
| Recycled boxboard–20pt. clay coated news  (list)              | ** ** | **720**   |       | 686      |       | 653      |       |
| Europe (Euro/tonne)                                                |       |      |       |     |       |     |       |
| Recycled white-lined chipboard (GD2) index  (2)                    | ** ** | **650**   |       | 679      |       | 685      |       |
| Virgin coated duplex boxboard (GC2) index  (3)                     | ** ** | **1,014** |       | 1,003    |       | 997      |       |
| Containerboard (US$/ton)                                           |       |      |       |     |       |     |       |
| Linerboard 42-lb. unbleached kraft, East US  (list)                | ** ** | **478**   |       | 468      |       | 421      |       |
| Corrugated medium 26-lb. semichemical, East  U.S. (list)           | ** ** | **447**   |       | 432      |       | 376      |       |
| Specialty products (US$/ton)                                       |       |      |       |     |       |     |       |
| Recycled boxboard–20pt. bending chip (list)                   | ** ** | **600**   |       | 557      |       | 501      |       |
| Deinked pulp (f.o.b; U.S. air-dried &  wet-lap, post-consumer) | ** ** | **580**   |       | 520      |       | 470      |       |
| Unbleached kraft paper, grocery bag 30-lb.                         | ** ** | **765**   |       | 699      |       | 663      |       |
| **Tissue papers**                                                  |       |      |       |     |       |     |       |
| Cascades Tissue papers (index 1999 = 1,000)  (4)                   | ** ** | **1,335** |       | 1,189    |       | 1,131    |       |
| **Fine papers (US$/ ton)**                                         |       |      |       |     |       |     |       |
| Uncoated white 50-lb. offset, rolls                                | ** ** | **726**   |       | 676      |       | 634      |       |
| Coated publication No. 3 grade, 60-lb.  rolls                      | ** ** | **902**   |       | 808      |       | 795      |       |
| **Raw materials**                                                  |       |      |       |     |       |     |       |
| **Cascades North American US$ index**                         |       |      |       |     |       |     |       |
| **(index 2002 = 300)**(5)                                          | ** ** | **364**   |       | 370      |       | 316      |       |
| **Recycled paper (US$/short ton)**                                 |       |      |       |     |       |     |       |
| North America (US$/ton)                                            |       |      |       |     |       |     |       |
| Corrugated containers, no. 11 (OCC)                                | ** ** | **82**    |       | 82       |       | 60       |       |
| Special news, de-inked quality, no. 6 (ONP)                        | ** ** | **57**    |       | 57       |       | 42       |       |
| Sorted office papers, no. 37 (SOP)                                 | ** ** | **97**    |       | 122      |       | 110      |       |
| Europe (Euro/tonne)                                                |       |      |       |     |       |     |       |
| Recovered mixed paper & board sorted  index (6)                | ** ** | **43**    |       | 46       |       | 49       |       |
| **Virgin pulp (US$/metric ton)**                                   |       |      |       |     |       |     |       |
| Bleached softwood kraft Northern, East U.S.                        | ** ** | **647**   |       | 640      |       | 553      |       |
| Bleached hardwood kraft Northern mixed,  East U.S.                 | ** ** | **607**   |       | 536      |       | 522      |       |
| **Woodchips, conifer Eastern Canada  (US$/odmt)**                  | ** ** | **136**   |       | 121      |       | 108      |       |

 

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Source: Pulp&Paper Week, PPI, CIBC World Markets and Cascades.

 

(1)   Cascades North American selling prices indexrepresents an approximation of Cascades’ selling prices in North America. It isweighted according to shipments. It takes into account some of the mainproducts of Cascades for which prices are available in Pulp & Paper Weekmagazine and the Cascades Tissue Index. This index should only be used as anindicator of a trend as it might be different from our actual selling pricesand our product mix.

 

(2)   Cascades recycled white-lined chipboardselling prices index represents an approximation of Cascades’ recycled gradesselling prices in Europe. It is weighted by country. For each country we use anaverage of PPI and EUWID prices for white-lined chipboard.

 

(3)   Cascades virgin coated duplex boxboard sellingprices index represents an approximation of Cascades’ virgin grades sellingprices in Europe. It is weighted by country. For each country we use an averageof PPI and EUWID prices for the coated duplex boxboard.

 

(4)   Cascades Tissue paper selling prices indexrepresents a mix of primary and converted products.

 

(5)   Cascades North American raw materials indexrepresents the average weighted cost paid for some of our raw materials namely,recycled fiber, virgin pulp and woodchips. It is weighted according to thevolume of purchase (in tons). This index should only be used as an indicator ofa trend and it might be different than our actual purchasing costs and ourpurchase mix.

 

(6)   Cascades recovered mixed paper & boardsorted prices index represents an approximation of Cascades’ recovered paperpurchase prices in Europe. It is weighted by country. For each country we usean average of PPI and EUWID prices for the recovered mixed paper & board.This index should only be used as indicator trends and it might be differentthan our actual purchasing costs and our purchase mix.

 

14

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**RESULTS**

 

**Overview**

 

In 2005, sales increased by $206 million, or 6.3%to $3.5 billion compared to $3.3 billion in2004. Operating income decreasedby $143 million includingspecific items which substantially affected the results during the year 2005. Excluding these specific items which will be discussed indetail in each of the segments,operating income was down $14million or 15%, at $77 million, compared to $91 million in 2004. Even with the 7.4% strengthening of the Canadian dollar against the U.S.dollar compared to 2004, and thestrong increase in energy costsduring the year, these results highlight the positive impact of the Company’s diversification of business lines, the improvement in Tissuepapers and the lower prices ofrecycled fibre. The Company’s netloss was $97 million or $1.19 per share, following substantial impairment loss on property,plant and equipment as well asrestructuring and closure chargesincurred during the third and fourth quarter of 2005. These were however partially offset by a foreign exchange gain on U.S. denominateddebts. These U.S. denominateddebts offer an additional hedgeagainst currency fluctuation.

 

15

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**Selected Consolidated Information**

 
| **For the years ended December 31**                              | ** ** | **As reported** | ** ** | **Excluding specific items (1)** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------------------------------------|------------|
| **(in millions of dollars, except amounts per share)** | ** ** | **2005**             | ** ** | **2004**                                        | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** |   | **2003** | ** ** |
| **Sales (net of eliminations)**                                                           |       |                 | ** ** |                                            |       |   |   |   | ** ** |   |   |   |   |
| Packaging                                                                                 | ** ** | **2,437**            | ** ** | 2,274                                           |       | 2,040 |   |   | ** ** |   |   |   |   |
| Tissue Papers                                                                             | ** ** | **718**              | ** ** | 714                                             |       | 684 |   |   | ** ** |   |   |   |   |
| Fine Papers                                                                               | ** ** | **707**              | ** ** | 704                                             |       | 725 |   |   | ** ** |   |   |   |   |
| Assets held for sale                                                                      | ** ** | **(402**             | **)**      | (438                                            | )          | (454 | ) |   | ** ** |   |   |   |   |
| ** **                                                                                |       | **3,460**            | ** ** | 3,254                                           |       | 2,995 |   |   | ** ** |   |   |   |   |
| **Operating income (loss) before depreciation  and amortization “OIBD”**(1)     |       |                 | ** ** |                                            |       |   |   |   | ** ** |   |   |   |   |
| Packaging                                                                                 | ** ** | **109**              | ** ** | 178                                             |       | 174 | ** ** | **169** | ** ** | 190 |   | 174 |   |
| Tissue Papers                                                                             | ** ** | **101**              | ** ** | 76                                              |       | 73 | ** ** | **102** | ** ** | 76 |   | 73 |   |
| Fine Papers                                                                               | ** ** | **(114**             | **)**      | (3                                              | )          | 6 | ** ** | **(9** | **)** | (3 | ) | 6 |   |
| Corporate                                                                                 | ** ** | **7**                | ** ** | (4                                              | )          | (3 | ) | **—** | ** ** | (4 | ) | (3 | ) |
| Assets held for sale                                                                      | ** ** | **7**                | ** ** | (9                                              | )          | (13 | ) | **(11** | **)** | (9 | ) | (13 | ) |
| ** **                                                                                |       | **110**              | ** ** | 238                                             |       | 237 | ** ** | **251** | ** ** | 250 |   | 237 |   |
| OIBD / sales                                                                              | ** ** | **3.2**              | **%**      | 7.3                                             | %          | 7.9 | % | **7.3** | **%** | 7.7 | % | 7.9 | % |
| **Assets**(2)                                                                             |       |                 | ** ** |                                            |       |   |   |   | ** ** |   |   |   |   |
| Packaging                                                                                 | ** ** | **2,149**            | ** ** | 2,086                                           |       | 2,009 |   |   | ** ** |   |   |   |   |
| Tissue Papers                                                                             | ** ** | **547**              | ** ** | 549                                             |       | 578 |   |   | ** ** |   |   |   |   |
| Fine Papers                                                                               | ** ** | **344**              | ** ** | 366                                             |       | 367 |   |   | ** ** |   |   |   |   |
| Corporate(3)                                                                              | ** ** | **55**               | ** ** | 35                                              |       | (11 | ) |   | ** ** |   |   |   |   |
| Consolidated                                                                              | ** ** | **3,095**            | ** ** | 3,036                                           |       | 2,943 |   |   | ** ** |   |   |   |   |
| OIBD (including assets held for  sale)/assets                                             | ** ** | **3.3**              | **%**      | 8.1                                             | %          | 8.5 | % | **8.5** | **%** | 8.5 | % | 8.5 | % |
| **Net earnings (loss)**                                                                   |       |                 | ** ** |                                            |       |   |   |   | ** ** |   |   |   |   |
| Net earnings (loss)                                                                       | ** ** | **(97**              | **)**      | 23                                              |       | 55 | ** ** | **6** | ** ** | 16 |   | 16 |   |
| Basic and diluted per common share                                                        | ** ** | **$**                | **(1.19**  | **)**                                           | $          | 0.28 |   | $ | 0.66 | ** ** | **$** | **0.07** | ** ** | $ | 0.20 |   | $ | 0.19 |   |
| Net earnings (loss) from continuing  operations                                           | ** ** | **(87**              | **)**      | 20                                              |       | 51 | ** ** | **—** | ** ** | 13 |   | 12 |   |
| Basic and diluted per common share                                                        | ** ** | **$**                | **(1.07**  | **)**                                           | $          | 0.25 |   | $ | 0.61 | ** ** | **—** | ** ** | $ | 0.17 |   | $ | 0.14 |   |
| **Other key results**                                                                     |       |                 | ** ** |                                            |       |   |   |   | ** ** |   |   |   |   |
| Operating income (loss) from continuing  operations                                       | ** ** | **(64**              | **)**      | 79                                              |       | 94 | ** ** | **77** | ** ** | 91 |   | 94 |   |
| Cash flow from operations (1)                                                             | ** ** | **94**               | ** ** | 158                                             |       | 158 | ** ** | **154** | ** ** | 158 |   | 158 |   |
| per common share(1)                                                                       | ** ** | **$**                | **1.16**   | ** **                                      | $          | 1.93 |   | $ | 1.93 | ** ** | **$** | **1.90** | ** ** | $ | 1.93 |   | $ | 1.93 |   |
| Total long-term debt                                                                      | ** ** | **1,297**            | ** ** | 1,226                                           |       | 1,110 |   |   | ** ** |   |   |   |   |
| Other long-term liabilities                                                               | ** ** | **265**              | ** ** | 303                                             |       | 265 |   |   | ** ** |   |   |   |   |
| Dividends per common share                                                                | ** ** | **$**                | **0.16**   | ** **                                      | $          | 0.16 |   | $ | 0.16 |   |   | ** ** |   |   |   |   |
| **Selected operational data**                                                             |       |                 | ** ** |                                            |       |   |   |   | ** ** |   |   |   |   |
| Shipments(4)                                                                              | ** ** | ** **           | ** ** |                                            |       |   |   | **2,494** | ** ** | 2,458 |   | 2,414 |   |
| Cascades North American US$ selling price  index(5)                                  | ** ** | ** **           | ** ** |                                            |       |   |   | **1,147** | ** ** | 1,070 |   | 995 |   |
| Cascades North American US$ raw material  price index(6)                             | ** ** | ** **           | ** ** |                                            |       |   |   | **364** | ** ** | 370 |   | 316 |   |
| Energy average price(7)                                                                   | ** ** | ** **           | ** ** |                                            |       |   |   | **$** | **8.62** | ** ** | $ | 6.11 |   | $ | 5.38 |   |
| Currency average rate–CAN$/US$                                                       | ** ** | ** **           | ** ** |                                            |       |   |   | **$** | **1.21** | ** ** | $ | 1.30 |   | $ | 1.40 |   |

 

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(1)  See the supplemental information on non-GAAPmeasures.

(2)  Average total assets.

(3)  Including consolidation revaluation,intersegment eliminations and investments.

(4)  Paper manufacturing shipments only.

(5)  Cascades North American selling prices indexrepresents an approximation of Cascades’ selling prices in North America. It isweighted according to shipments. It takes into account some of the mainproducts of Cascades for which prices are available in the Pulp & PaperWeek magazine and the Cascades Tissue Index. This index should only be used asan indicator of a trend as it might be different from our actual selling pricesand our product mix.

(6)  Cascades North American raw materials indexrepresents the average weighted cost paid for some of our raw materials namely,recycled fiber, virgin pulp and woodchips in North America. It is weightedaccording to the volume of purchase (in tons). This index should only be usedas indicator trends and it might be different than our actual purchasing costsand our purchase mix.

(7)  Henry Hub (US$/mmBtu), Source: Bloomberg

 

16

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**Assets held for sale**

 

During the fourth quarter of 2004, the Companyinitiated a divestiture plan to dispose ofsubstantially all of thedistribution activities of its Fine Papers and Tissue Paper segments, mainly distributors of third-party products. This decision resultedfrom the Company’s strategicplan, which concluded thatfuture developments would be through its Packaging and Tissue manufacturing and converting activities.

 

Consequently, the assets,liabilities, results andcashflows of the distribution activities for the current year and for other comparison periods have been classified as assets held for sale.For further financialinformation related to the assets heldfor sale, refer to note 4 of the consolidated financial statements.

 

The following specific itemsare included in the results of the assets held for sale:

 

a) On March 31, 2005, the Company completedthe sale of its distribution activities inthe Tissue Paper segment to asubsidiary of Groupe Sani-Marc, locatedin Victoriaville, Québec for a total net consideration of $15.7 million. The disposal of the net assets resulted in a gain of $1.2 millionbefore related income taxes of$0.5 million.

 

b) On November 17, 2005, the Company announcedthat it reached an agreement for the sale ofits paper merchant divisionknown as Cascades Resources, thedistribution activities of its Fine Papers Group, to Coast Paper Limited, now known as PaperlinXCanada Limited, a subsidiary of PaperlinXLimited, for a purchase price ofapproximately $85 million. TheCompany expects to complete this transaction by the end of February 2006, subject to regulatory approval and other normal closing conditions.In regard to this transaction,the Company recorded a loss of$9 million ($7 million after-tax). The net book value of these net assets was revised to their net realizable value. The final purchaseprice will be adjusted duringthe year 2006.

 

c) In 2003, the Company was informed that one ofits divisions, Cascades Resources, was thesubject of an inquiry by theCanadian Commissioner of Competitionas to whether this division and its competitors had colluded to unduly reduce market competition between paper merchants inCanada. On January 9, 2006, theCompany entered a guilty plea inOntario Superior Court in relation to sales in Ontario and Québec of carbonless sheet paper by its paper merchant business, CascadesResources. Pursuant to the plea,the Company has agreed to pay atotal of $12.5 million, payable in equal instalments over a period of six and a half years. The first payment will be due in January2008. In 2005, a loss of $10million was recorded in earnings, representingthe discounted amount of the liabilitywhich is presented as other liabilities in the balance sheet.

 

**Financial results for the year ended December 31, 2005 compared with theyear ended December 31, 2004**

 

**Sales**

 

Sales increased by $206 million, or 6.3%, to $3.5 billion for the year2005, versus $3.3 billion for 2004.

 

Business acquisitionsincurred in 2004 and 2005haveaccounted for $175 million in sales for the year. On August 24, 2004, the Company increased itsparticipation from 50% to 100% in Dopaco Inc. Consequently, its results were consolidated proportionately between October 1, 2003 and August 24,2004 and have been fully consolidatedsince that date, contributing$150 million in additional sales for2005. In addition, companies acquired in 2004 and 2005 have contributed $25 million in additional sales for the year.

 

Because of the increase ininput costs during2005,net average selling prices have been increased in the Tissue Papers and Fine Papers segments. Furthermore, in the Tissue Papers segment,favorable market conditionsexplained the price increases. Theseprice fluctuations have been affected by the

 

17

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7.4% strengthening of the Canadian dollar versus theU.S. dollar, compared with 2004. Thefluctuation of the Canadiandollar had a direct impact on exportprices. Nevertheless, it has also contributed to downward prices in Canadian dollars, on the domestic market because several of theCompany’s product lines arepriced in U.S. dollars.

 

Overall, shipments increased1.5% compared with2004,mainly in the European boxboard market and in the Tissue Papers segment but decreased in the Fine Papers segment due to marketdowntime because of lower demandfor some products.

 

***Operating income before depreciation and amortization***

 

The Company generated operating income beforedepreciation and amortization of $110 millionfor the year compared with $238 millionfor 2004. The margin ofoperating income before depreciation and amortization has substantially decreased at 3.2% for the year,compared with 7.3% in 2004. The2005 operating income before depreciation and amortization includes $141 million of specific items which are detailed in the next section. Excludingthese specific items, the Company was able to maintain operating income before depreciation andamortization at the same levelas 2004, at $251 million, evenin a difficult business environment: higher raw materials production costs, energy and transportation costs, and the strengthening of the Canadiandollar which had an estimated $35 millionnegative impact for 2005. Also,variable costs were affected by downtimein the Fine Papers sector and changes in the production mix in the Boxboard Group. Higher prices in all sectors, higher volume mainlyin the Tissue sector as well asthe business acquisitions realizedover the last twelve months added a positive contribution. The diversity of the Company’s business lines mitigated these variations.

 

The operating income before depreciation variance analysis is asfollow:

 

OIBD variance analysis

 
| ** **                                                                | ** ** | ** **    | ** ** | **Tissue** | ** ** | **Fine**   | ** ** | ** **    | ** ** | **Assets held** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------|------------|---------------|------------|------------|------------|------------|------------|---------------|------------|----------------------|------------|------------------|------------|
| **(in millions of dollars)**                               | ** ** | **Packaging** | ** ** | **Papers** | ** ** | **Papers** | ** ** | **Corporate** | ** ** | **for sale**    | ** ** | **Consolidated** | ** ** |
| **OIBD for the year ended December 31, 2004 (excluding  specific items)** |       | 190           |       | 76         |       | (3         | )          | (4            | )          | (9                   | )          | **250**          | ** ** |
| Positive (negative) impact from:                                          |       |          |       |       |       |       |       |          |       |                 |       |             |       |
| Sales volume                                                              |       | 2             |       | 13         |       | (3         | )          | —        |       | —               |       | **12**           | ** ** |
| Selling price                                                             |       | 65            |       | 63         |       | 23         |       | (9            | )          | (1                   | )          | **141**          | ** ** |
| Raw materials(1)                                                          |       | (35           | )          | (5         | )          | (3         | )          | —        |       | —               |       | **(43**          | **)**      |
| Energy                                                                    |       | (16           | )          | (10        | )          | (2         | )          | —        |       | —               |       | **(28**          | **)**      |
| Variation of the Canadian dollar(2)                                       |       | (27           | )          | (9         | )          | (9         | )          | 9             |       | 1                    |       | **(35**          | **)**      |
| Variable costs(3)                                                         |       | (24           | )          | (6         | )          | (14        | )          | —        |       | —               |       | **(44**          | **)**      |
| Fixed costs and other sectors(4)                                          |       | (5            | )          | (20        | )          | 2          |       | 4             |       | (2                   | )          | **(21**          | **)**      |
| Business acquisitions                                                     |       | 19            |       | —     |       | —     |       | —        |       | —               |       | **19**           | ** ** |
| **OIBD excluding specific items**                                         |       | 169           |       | 102        |       | (9         | )          | —        |       | (11                  | )          | **251**          | ** ** |
| Specific items                                                            |       | (60           | )          | (1         | )          | (105       | )          | 7             |       | 18                   |       | **(141**         | **)**      |
| **OIBD for the year ended December 31, 2005**                             |       | 109           |       | 101        |       | (114       | )          | 7             |       | 7                    | ** ** | **110**          | ** ** |

 

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(1)   The impacts of these estimatedcosts are based on production costs per unit, which are affected by yield, mixchanges, purchase and transfer prices. In addition to market pulp and recycledfiber, they include purchases of external parent rolls for the convertingsectors and other raw materials such as plastics and woodchips.

(2)   The estimated impact of foreignexchange is based on the Company’s national and export sales less purchasesthat are impacted by the CAN$/US$ variation.

(3)   The impacts of these estimatedcosts are based on production costs per unit, which are affected by downtimes,efficiencies and product mix changes.

(4)   Includes all other costs suchas repair and maintenance, selling and administration, profit sharing and thechange in OIBD of operation units that are not in the manufacturing orconverting sectors.

 

18

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The segmented reconciliation ofoperating income before depreciation as reported to operating income beforedepreciation excluding specific items is as follows:

 
| ** **                                  | ** ** | ** ** | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | **OIBD excluding** | ** ** |
|---------------------------------------------|------------|------------|------------|-------------------------|------------|-------------------------|------------|------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **OIBD**   | ** ** | **Specific items** | ** ** | **specific items** | ** ** |
| **(in millions of dollars)** | ** ** | **2005**   | ** ** | **Closure**             | ** ** | **Impairment**          | ** ** | **Others** | ** ** | **2005**                | ** ** |
| **Packaging**                               |       |       |       |                    |       |                    |       |       |       |                    |       |
| Boxboard                                    | ** ** | **33**     |       | 2                       |       | 30                      |       | —     | ** ** | **65**                  | ** ** |
| Containerboard(1)                           | ** ** | **42**     |       | 8                       |       | 13                      |       | 5          | ** ** | **68**                  | ** ** |
| Specialty products                          | ** ** | **34**     |       | —                  |       | 2                       |       | —     | ** ** | **36**                  | ** ** |
| ** **                                  |       | **109**    |       | 10                      |       | 45                      |       | 5          | ** ** | **169**                 |       |
| **Tissue Papers**                           | ** ** | **101**    |       | 2                       |       | —                  |       | (1         | )          | **102**                 | ** ** |
| **Fine Papers**                             | ** ** | **(114**   | **)**      | 64                      |       | 22                      |       | 19         |       | **(9**                  | **)**      |
| **Corporate**                               | ** ** | **7**      |       | —                  |       | —                  |       | (7         | )          | **—**              | ** ** |
| **Total OIBD**                              | ** ** | **103**    |       | 76                      |       | 67                      |       | 16         |       | **262**                 | ** ** |
| **Assets held for sale**                    | ** ** | **7**      |       | —                  |       | —                  |       | (18        | )          | **(11**                 | **)**      |
| **Consolidated OIBD**                       | ** ** | **110**    |       | 76                      |       | 67                      |       | (2         | )          | **251**                 | ** ** |

 

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(1) The Company’s containerboard businessconsists entirely of its 50% share of the results of Norampac Inc., a jointventure. 

 

**Specific items included in operating Income before depreciation andamortization**

 

The Company incurred in 2005 and 2004 somespecific items that adversely or positivelyaffected its operating results.The Company believes that it isuseful for the readers to be aware of these items and that they provide a measure ofperformance to compare itsresults between periods without regard to these specific items.

 

a) UNUSUAL GAINS In 2005, the Company and a joint venture recorded the following unusualgains amounting to $10 million:

 

•      a gain of $4 million, representing the shareof the Company, on the disposalof a building by a joint venturecompany;

 

•      a gain of $7 million has been recorded inearnings following the sale bythe Company of a warehouse ofthe corporate sector resulting in again of $11 million. The remaining portion of the gain has been deferred and will be amortized over the term of a 2-year lease agreemententered into with the buyer;

 

•      an impairment loss of $1 million oninvestment in a significantlyinfluenced company of a joint venturecompany.

 

b) IMPAIRMENT LOSSAND CLOSURE AND RESTRUCTURING COSTS. In 2005, the Company announced the permanent shutdown of its Fine papers Thunder Bay, Ontario mill and a joint venture companyannounced the permanent shutdownof one machine at its Red Rockmill in Ontario. A joint-venture companyclosed three corrugated products converting units: in Montréal (Québec), Concord (Ontario) and Buffalo (New York). The company also announced the closure of certainequipment at its St-Jérôme Finepapers mill and at its Montréal boxboardconverting plant as well as the relocation of certain equipment from its Toronto Tissue converting unit. The Company and a joint venturealso reduced the value of some fixedassets to their net realizablevalue.

 

After performing assetimpairment testson someof its units, the Company recorded an impairment charge of €20 million ($28 million or $19 million after-tax) against its Blendecques,France boxboard mill.

 

19

----

 

The following impairment charges and closure and restructuring costswere recorded:

 
| ** **                                              | ** ** | **Impairment** | ** ** | **Closure & restructuring** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|-------------------------------------------|------------|-----------|------------|
| Boxboard–Montréal                             |       | —         |       | 2                                         |       | 2         |       |
| Boxboard–Blendecques                               |       | 28             |       | —                                    |       | 28        |       |
| Containerboard–Red Rock                            |       | 7              |       | 4                                         |       | 11        |       |
| Containerboard–Montréal, Concord and  Buffalo |       | 2              |       | 4                                         |       | 6         |       |
| Tissue papers–Toronto                              |       | —         |       | 2                                         |       | 2         |       |
| Fine Papers–Thunder Bay                            |       | 20             |       | 58                                        |       | 78        |       |
| Fine Papers–St-Jérôme                    |       | 2              |       | 6                                         |       | 8         |       |
| Other impairment charges                                |       | 8              |       | —                                    |       | 8         |       |
|                                                    |       | 67             |       | 76                                        |       | 143       |       |

 

The following table showsconciliation of all closure and restructuring costs provisions as at December31, 2005: 

 
| **Balance–Beginning of the year** |   | — |   |
|----------------------------------------|--------|--------|--------|
| Additional provisions                  |   |   |   |
| Severance and pension liability        |   | 57     |   |
| Write down of inventories              |   | 13     |   |
| Other closing costs                    |   | 6      |   |
| Non-monetary items                     |   |   |   |
| Write down of inventories              |   | (13    | )      |
| Pension liability                      |   | (3     | )      |
| Closure costs payments                 |   | (5     | )      |
| **Balance–End of the year**       |   | 55     |   |

 

c) LOSS ONDERIVATIVE FINANCIAL COMMODITY INSTRUMENTS In 2005, a joint venture of the Company recorded an unrealized loss oncertain commodity swap contracts that were not designated as hedging instrumentsin the net amount of $8 million (including $1 million as amortization of thetransitional deferred unrealized gain under AcG-13). This compares with a gainof $2 million in 2004.

 

20

----

 

**Segmented analysis**

**Packaging products**

 
| ** **                       | ** ** | **Sales**                                   | ** ** | **OIBD**                                    | ** ** | **Assets(2)**                               | ** ** | **OIBD/assets** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-----------------|------------|
| ** **                       | ** ** | **(in millions of dollars)** | ** ** | **(in millions of dollars)** | ** ** | **(in millions of dollars)** | ** ** | **(%)**         | ** ** |
| ** **                       | ** ** | **2005**                                    | ** ** | **2004**                                    | ** ** | **2005**                                    | ** ** | **2004**        | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Boxboard                         |       |                                        |       |                                        |       |                                        |       |            |       |   |   |   |   |   |   |   |   |
| Manufacturing–North America | ** ** | **237**                                     |       | 241                                         | ** ** | **—**                                  |       | —          |       |   |   |   |   |   |   |   |   |
| Manufacturing–Europe        | ** ** | **447**                                     |       | 464                                         | ** ** | **(17**                                     | **)**      | 19              |       |   |   |   |   |   |   |   |   |
| Converting                       | ** ** | **717**                                     |       | 513                                         | ** ** | **56**                                      | ** ** | 45              |       |   |   |   |   |   |   |   |   |
| Others and eliminations          | ** ** | **(20**                                     | **)**      | 13                                          | ** ** | **(6**                                      | **)**      | 3               |       |   |   |   |   |   |   |   |   |
| ** **                       |       | **1,381**                                   |       | 1,231                                       | ** ** | **33**                                      | ** ** | 67              | ** ** | **1,037** |   | 972 | ** ** | **3** | **%** | 7 | % |
| Containerboard(1)                |       |                                        | ** ** |                                        |       |                                        | ** ** |            |       |   |   |   |   |   | ** ** |   |   |
| Manufacturing                    | ** ** | **331**                                     | ** ** | 344                                         | ** ** | **(14**                                     | **)**      | 25              |       |   |   |   |   |   | ** ** |   |   |
| Converting                       | ** ** | **494**                                     | ** ** | 489                                         | ** ** | **46**                                      |       | 54              |       |   |   |   |   |   | ** ** |   |   |
| Others and eliminations          | ** ** | **(186**                                    | **)**      | (200                                        | )          | **10**                                      |       | 8               |       |   |   |   |   |   | ** ** |   |   |
| ** **                       |       | **639**                                     |       | 633                                         |       | **42**                                      |       | 87              | ** ** | **745** |   | 731 | ** ** | **6** | **%** | 12 | % |
| Specialty products               | ** ** | **509**                                     | ** ** | 509                                         |       | **34**                                      |       | 24              | ** ** | **367** |   | 383 | ** ** | **9** | **%** | 6 | % |
| Eliminations                     | ** ** | **(47**                                     | **)**      | (44                                         | )          | **—**                                  |       | —          | ** ** | **—** |   | — |   |   | ** ** |   |   |
| ** **                       |       | **2,482**                                   |       | 2,329                                       |       | **109**                                     |       | 178             | ** ** | **2,149** |   | 2,086 | ** ** | **5** | **%** | 9 | % |
| Excluding specific items         |       |                                        |       |                                        |       |                                        |       |            |       |   |   |   |   |   |   |   |   |
| Boxboard                         | ** ** | ** **                                  |       |                                        | ** ** | **65**                                      |       | 67              |       |   |   |   |   | **6** | **%** | 7 | % |
| Containerboard(1)                | ** ** | ** **                                  |       |                                        | ** ** | **68**                                      |       | 85              |       |   |   |   |   | **9** | **%** | 12 | % |
| Specialty products               | ** ** | ** **                                  |       |                                        | ** ** | **36**                                      |       | 38              |       |   |   |   |   | **10** | **%** | 10 | % |
| **Excluding specific items**     | ** ** | ** **                                  |       |                                        | ** ** | **169**                                     |       | 190             |       |   |   |   |   | **8** | **%** | 9 | % |

 
| ** **                | ** ** | **Shipments**           | ** ** | **Average selling price** | ** ** | **Average selling price** | ** ** | **Price reference** | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|--------------------------|------------|
| ** **                | ** ** | **(in thousands)** | ** ** | **(in CAN$/unit)**             | ** ** | **(in US$/unit)**                   | ** ** | **(in US$/unit)**        | ** ** |
| ** **                | ** ** | **2005**                | ** ** | **2004**                            | ** ** | **2005**                            | ** ** | **2004**                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Boxboard                  |       |                    |       |                                |       |                                |       |                     |       |   |   |   |   |   |   |   |   |
| Manufacturing–       |       |                    |       |                                |       |                                |       |                     |       |   |   |   |   |   |   |   |   |
| North America             | ** ** | **336****st**           |       | 336 st                              | ** ** | **706**                             |       | 717                      | ** ** | **583** |   | 551 | ** ** | **720** |   | 686 |   |
| Manufacturing–Europe | ** ** | **553****st**           |       | 521 st                              | ** ** | **808**                             |       | 889                      | ** ** | **€** | **535** |   | € | 550 | ** ** | **€** | **777** |   | € | 787 |   |
| Converting                | ** ** | **20,718****carton**    |       | 13,988 carton                       |       |                                |       |                     |       |   |   |   |   |   |   |   |   |
| Containerboard(1)         |       |                    |       |                                |       |                                |       |                     |       |   |   |   |   |   |   |   |   |
| Manufacturing             | ** ** | **715****st**           |       | 718 st                              | ** ** | **461**                             |       | 479                      | ** ** | **380** |   | 368 | ** ** | **478** |   | 468 |   |
| Converting                | ** ** | **6,868****msf**        |       | 6,802 msf                           |       | **72**                              |       | 72                       | ** ** | **59** |   | 55 |   |   |   |   |   |
| Specialty products        | ** ** | **198 st**              | **(3)**    | 195st                               | (3)        |                                |       |                     |       |   |   |   |   |   |   |   |   |
| ** **                |       | **1,802****st**         |       | 1,770 st                            |       |                                |       |                     |       |   |   |   |   |   |   |   |   |
|                           |            |                         |            |                                     |            |                                     |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)  The Company’s containerboard business consists entirelyof its 50% share of the results of Norampac Inc., a joint venture.

(2)  Average total assets

(3)  Consist of the paper manufacturing shipments only.

 

21

----

 

Sales of the packagingproducts segment increasedby$153 million, or 6.6%, amounting to $2.482 billion for 2005, compared with $2.329 billion in2004. The additionalcontributions of new businesses acquiredduring the last twelve months combined with price increases in U.S. dollars have mitigated the impact of the Canadian dollarappreciation on general pricing.

 

Packaging segment operatingincome beforedepreciationand amortization stood at $109 million for the year compared with $178 million for the same period in 2004, representing a 39%decrease.

 

Excluding specific items, the operating incomebefore depreciation and amortizationdecreased by 11% to $169 million from $190 million in 2004. The decrease of $21 million is due to lowerprofitability of the recycledboxboard sector in Europe, higherraw materials production costs mainly in the converting sector, energy costs and by the strengthening of the Canadian dollar which impacted theresults by approximately $27 million.These negative impacts have beenoffset by the entire consolidation ofDopaco’s results since august 24, 2004 and also by improved selling prices.

 

OIBD variance analysis

 
| **(in millions of dollars)**                               | ** ** | **Boxboard** | ** ** | **Containerboard** | ** ** | **Specialty Group** | ** ** | **Packaging** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|
| **OIBD for the year ended December 31, 2004  (excluding specific items)** |       | 67           |       | 85                 |       | 38                       |       | **190**       | ** ** |
| Positive (negative) impact from:                                          |       |         |       |               |       |                     |       |          |       |
| Sales volume                                                              |       | 3            |       | 1                  |       | (2                       | )          | **2**         | ** ** |
| Selling price                                                             |       | 28           |       | 22                 |       | 15                       |       | **65**        | ** ** |
| Raw materials(1)                                                          |       | (18          | )          | (13                | )          | (4                       | )          | **(35**       | **)**      |
| Energy                                                                    |       | (9           | )          | (5                 | )          | (2                       | )          | **(16**       | **)**      |
| Variation of the Canadian dollar(2)                                       |       | (11          | )          | (14                | )          | (2                       | )          | **(27**       | **)**      |
| Variable costs(3)                                                         |       | (17          | )          | (1                 | )          | (6                       | )          | **(24**       | **)**      |
| Fixed costs and other sectors(4)                                          |       | 3            |       | (7                 | )          | (1                       | )          | **(5**        | **)**      |
| Business acquisitions                                                     |       | 19           |       | —             |       | —                   |       | **19**        | ** ** |
| **OIBD excluding specific items**                                         |       | 65           |       | 68                 |       | 36                       |       | **169**       | ** ** |
| Specific items                                                            |       | (32          | )          | (26                | )          | (2                       | )          | **(60**       | **)**      |
| **OIBD for the year ended December 31, 2005**                             |       | 33           |       | 42                 |       | 34                       |       | **109**       | ** ** |

 

----

(1)  The impacts ofthese estimated costs are based on production costs per unit, which areaffected by yield, mix changes, purchase and transfer prices. In addition tomarket pulp and recycled fiber, they include purchases of external parent rollsfor the converting sectors and other raw materials such as plastics andwoodchips.

(2)  The estimatedimpact of foreign exchange is based on the Company’s national and export salesless purchases that are impacted by the CAN$/US$ variation.

(3)  The impacts of these estimated costs are based on production costs perunit, which are affected by downtimes, efficiencies and product mix changes.

(4)  Includes allother costs such as repair and maintenance, selling and administration, profitsharing and the change in OIBD of operation units that are not in themanufacturing or converting sectors.

 

22

----

 

**Boxboard**

 

Sales for the Boxboard Group amounted to$1.381 million for the year, compared with $1,231million for the same period in 2004. Excluding Dopaco’s contribution of $150 million, sales actually remained stable. Over thecourse of this period, shipmentsby primary mills remained stablein North America, but increased approximately 6% in Europe, due to an upturn in some market segments, especially in virgin boxboard which was helped by a strike in Finland. Inaddition, the 6% increase of netselling prices in US$ in NorthAmerica during the year was offset by the strengthening of the Canadian dollar. In Europe, average selling prices in euros decreased by2.6% as a result of productionovercapacity exercing strong pressureon prices.

 

Operating income beforedepreciation and amortizationexcluding specific items was impacted by higher raw materials production costs resulting, in part, from the purchase of external board byour converting operations andhigher energy costs. Thestrengthening of the Canadian dollar and the start-up costs of the Fjordcell pulp mill in the second quarter of 2005 following asevenmonth lock-out alsoaffected the results. This mill hasnot yet reached the targeted profitability level because of, among other things, prevailing difficult market conditions.Other variable costs were alsoaffected by the change of product offering in folding cartons following a change in its commercial strategy. Nevertheless, these items have beenpartially offset by the integral consolidation of Dopaco’s results since August 24, 2004.

 

After performing assetimpairment tests onitsBlendecques, France recycled boxboard mill, the Company recorded an impairment charge of €20 million ($28 million or $19 millionafter-tax).

 

The Company also closed a converting line at its Montréal unit andreduced the value of some fixed assets for a total charge of $4 million.

 

**Containerboard**

 

Sales for the Containerboard Group increasedby $6 million, amounting to $639 million forthe year, compared with $633million for the same period in2004. Shipments remained stable in the manufacturing sector over the period while average selling prices in US$ increased by 3%.Shipments of corrugated productsincreased slightly compared with2004, helped by additional volume generated by acquisitions. Also, market conditions allowed for the gradual implementation throughout2005 of certain price increasesthat offset the negative impactof a stronger Canadian dollar.

 

Despite higher sellingprices, the operatingincomebefore depreciation and amortization excluding specific items decreased to $68 million from $85 million due to higher raw materialsproduction and energy costs,repairs and maintenance costsand by the strengthening of the Canadian dollar. In 2005, this group incurred some specific items following the permanent shutdown of onemachine at its mill in Red Rock (Ontario), the closing of three corrugated products converting units in Montréal (Québec), Concord (Ontario)and Buffalo (New York) resultingin specific charges of $17million. This joint venture also incurred an $8 million unrealized loss on derivative commodity instruments of certain commodity swapcontracts, a $4 million gain onthe sale of a building and other impairmentcharges of some assets in the amount of $5 million.

 

23

----

 

**Specialty Products**

 

Sales for the Specialty products Group remainedstable at $509 million for 2005, comparedwith 2004 due to the increasedactivity of de-inked pulp millsand the full consolidation of its Greenfield SAS de-inked pulp mill for the entire year in 2005.

 

Operating income beforedepreciation andamortizationexcluding specific items, decreased by $2 million to $36 million thanks to better overall pricing for its products. The increased priceof market pulp improved theresults of the Auburn, Mainede-inked pulp mill which offset the lower contribution of its plastics sector following reduced volume and higher input costs. This groupalso reduced the value of somefixed assets for an amount of $2million.

 

**Tissue Group**

 
| ** **                                               | ** ** | **Sales**                                   | ** ** | **OIBD**                                    | ** ** | **Assets(1)**                               | ** ** | **OIBD/assets** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-----------------|------------|
| ** **                                               | ** ** | **(in millions of dollars)** | ** ** | **(in millions of dollars)** | ** ** | **(in millions of dollars)** | ** ** | **(%)**         | ** ** |
| ** **                                               | ** ** | **2005**                                    | ** ** | **2004**                                    | ** ** | **2005**                                    | ** ** | **2004**        | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Manufacturing & converting                           | ** ** | **711**                                     |       | 665                                         | ** ** | **99**                                      |       | 74              |       |   |   |   |   |   |   |   |   |
| Distribution                                             | ** ** | **22**                                      |       | 87                                          | ** ** | **2**                                       |       | 2               |       |   |   |   |   |   |   |   |   |
| Eliminations                                             | ** ** | **(9**                                      | **)**      | (35                                         | )          | **—**                                  |       | —          |       |   |   |   |   |   |   |   |   |
| ** **                                               |       | **724**                                     |       | 717                                         | ** ** | **101**                                     |       | 76              | ** ** | **547** |   | 549 | ** ** | **18** | **%** | 14 | % |
| Specific items                                           | ** ** | ** **                                  |       |                                        |       | **1**                                       |       | —          |       |   |   |   |   |   |   |   |   |
| Excluding specific items                                 | ** ** | ** **                                  |       |                                        | ** ** | **102**                                     |       | 76              | ** ** | **547** |   | 549 | ** ** | **19** | **%** | 14 | % |
| Assets held for sale                                     | ** ** | **(16**                                     | **)**      | (64                                         | )          | **—**                                  |       | —          |       |   |   |   |   |   |   |   |   |
| Total excluding specific items and assets  held for sale | ** ** | **708**                                     |       | 653                                         | ** ** | **102**                                     |       | 76              | ** ** | **547** |   | 549 | ** ** | **19** | **%** | 14 | % |

 

----

(1)  Average totalassets 

 
| ** **                     | ** ** | **Shipments**           | ** ** | **Average selling price** | ** ** | **Average selling price** | ** ** | **Tissue index** | ** ** |
|--------------------------------|------------|-------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** | **(in CAN$/unit)**             | ** ** | **(in US$/unit)**                   | ** ** | **(in US$/unit)**     | ** ** |
| ** **                     | ** ** | **2005**                | ** ** | **2004**                            | ** ** | **2005**                            | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Manufacturing & converting | ** ** | **425****st**           |       | 339 st                              | ** ** | **1,622**                           |       | 1,553                 | ** ** | **1,339** |   | 1,193 | ** ** | **1,335** |   | 1,189 |   |

 

24

----

 

Sales of the Tissue Groupincreased 1%,amountingto $724 million for the year, compared with $717 million in 2004 despite the sale of its distribution activities that occurred at theend of the first quarter of2005. These activities contributed $64million in sales in 2004 compared with $16 million in 2005. Average net realized prices in US$ were 12% higher in 2005, in comparisonwith the corresponding period in2004, as a result of priceincreases implemented over the last twelve months. Shipments increased by 6.5% in 2005, particularly following the ramp-up of the Memphisplant. The integration rate decreased by 1% from 64% in 2004 to 63% in 2005. This is mainly due to the increase in shipments of parent rollsfor external markets from the Memphisplant, which started itsoperations at the end of 2004 and has a theoritical capacity of 40,000 tons.

 

Tissue Group operatingincome before depreciationandamortization excluding specific items stood at $102 million for 2005, compared with $76 million in 2004. This Group benefited from anincrease in the average realizedCanadian dollar price of jumbo rollsand converted products. The strengthening of the Canadian dollar had a negative impact of approximately $9 million for the year. Thisgroup also incurred additionalcosts for repairs and maintenance, profitsharing due to higher profitability and selling costs following increased commercial activity in the U.S. Operating income beforedepreciation and amortizationwas also negatively affected by approximately$8 million due to the ramp-up of theMemphis mill and converting units in Western Canada and United States. Operating income before depreciation and amortization for 2005also includes a $1 million gainrelated to the disposal of thedistribution activities that occurred March 31, 2005 for a net consideration of $15.7 million and a $2 million provision charge for the closingand relocation of its Torontoconverting unit, which shouldtake place in the first quarter of 2006.

 

OIBD variance analysis

 
| ** **                                                                | ** ** | ** **    | ** ** | **Tissue** | ** ** | **Fine**   | ** ** | ** **    | ** ** | **Assets held** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------|------------|---------------|------------|------------|------------|------------|------------|---------------|------------|----------------------|------------|------------------|------------|
| **(in millions of dollars)**                               | ** ** | **Packaging** | ** ** | **Papers** | ** ** | **Papers** | ** ** | **Corporate** | ** ** | **for sale**    | ** ** | **Consolidated** | ** ** |
| **OIBD for the year ended December 31, 2004  (excluding specific items)** |       | 190           | ** ** | **76**     |       | (3         | )          | (4            | )          | (9                   | )          | 250              |       |
| Positive (negative) impact from:                                          |       |          |       |       |       |       |       |          |       |                 |       |             |       |
| Sales volume                                                              |       | 2             | ** ** | **13**     |       | (3         | )          | —        |       | —               |       | 12               |       |
| Selling price                                                             |       | 65            | ** ** | **63**     |       | 23         |       | (9            | )          | (1                   | )          | 141              |       |
| Raw materials(1)                                                          |       | (35           | )          | **(5**     | **)**      | (3         | )          | —        |       | —               |       | (43              | )          |
| Energy                                                                    |       | (16           | )          | **(10**    | **)**      | (2         | )          | —        |       | —               |       | (28              | )          |
| Variation of the Canadian dollar(2)                                       |       | (27           | )          | **(9**     | **)**      | (9         | )          | 9             |       | 1                    |       | (35              | )          |
| Variable costs(3)                                                         |       | (24           | )          | **(6**     | **)**      | (14        | )          | —        |       | —               |       | (44              | )          |
| Fixed costs and other sectors(4)                                          |       | 5             |       | **(20**    | **)**      | 2          |       | 4             |       | (2                   | )          | (21              | )          |
| Business acquisitions                                                     |       | 19            |       | **—** | ** ** | —     |       | —        |       | —               |       | 19               |       |
| OIBD excluding specific items                                             |       | 169           |       | **102**    | ** ** | (9         | )          | —        |       | (11                  | )          | 251              |       |
| Specific items                                                            |       | (60           | )          | **(1**     | **)**      | (105       | )          | 7             |       | 18                   |       | (141             | )          |
| **OIBD for the year ended December 31, 2005**                             |       | 109           | ** ** | **101**    |       | (114       | )          | 7             |       | 7                    |       | 110              |       |

 

----

(1)     The impacts of these estimated costs are basedon production costs per unit, which are affected by yield, mix changes,purchase and transfer prices. In addition to market pulp and recycled fiber,they include purchases of external parent rolls for the converting sectors andother raw materials such as plastics and woodchips.

(2)     The estimated impact of foreign exchange is based on theCompany’s national and export sales less purchases that are impacted by theCAN$/US$ variation.

(3)     The impacts of these estimated costs are based on productioncosts per unit, which are affected by downtimes, efficiencies and product mixchanges.

(4)     Includes all other costs such as repair and maintenance,selling and administration, profit sharing and the change in OIBD of operationunits that are not in the manufacturing or converting sectors.

 

25

----

 

**Fine Papers Group**

 
| ** **                                               | ** ** | **Sales**                                   | ** ** | **OIBD**                                    | ** ** | **Assets(****1)**                           | ** ** | **OIBD/assets** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-----------------|------------|
| ** **                                               | ** ** | **(in millions of dollars)** | ** ** | **(in millions of dollars)** | ** ** | **(in millions of dollars)** | ** ** | **(%)**         | ** ** |
| ** **                                               | ** ** | **2005**                                    | ** ** | **2004**                                    | ** ** | **2005**                                    | ** ** | **2004**        | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Manufacturing                                            | ** ** | **319**                                     |       | 341                                         | ** ** | **(105**                                    | **)**      | (10             | )          |   |   |   |   |   |   |   |   |
| Distribution                                             | ** ** | **421**                                     |       | 409                                         | ** ** | **(9**                                      | **)**      | 7               |       |   |   |   |   |   |   |   |   |
| Eliminations                                             | ** ** | **(33**                                     | **)**      | (36                                         | )          | **—**                                  | ** ** | —          |       |   |   |   |   |   |   |   |   |
| ** **                                               |       | **707**                                     | ** ** | 714                                         |       | **(114**                                    | **)**      | (3              | )          | **344** |   | 366 | ** ** | **(33** | **)%** | (1 | )% |
| Specific items                                           | ** ** | ** **                                  | ** ** |                                        |       | **105**                                     | ** ** | —          |       |   |   |   |   |   | ** ** |   |   |
| Excluding specific items                                 | ** ** | **707**                                     | ** ** | 714                                         |       | **(9**                                      | **)**      | (3              | )          | **344** |   | 366 | ** ** | **(3** | **)%** | (1 | )% |
| Assets held for sale                                     | ** ** | **(386**                                    | **)**      | (374                                        | )          | **(11**                                     | **)**      | (9              | )          |   |   |   |   |   | ** ** |   |   |
| Total excluding specific items and assets  held for sale | ** ** | **321**                                     |       | 340                                         | ** ** | **(20**                                     | **)**      | (12             | )          | **344** |   | 366 | ** ** | **(8** | **)%** | (5 | )% |

 

----

(1)     Average total assets

 
| ** **    | ** ** | **Shipments**           | ** ** | **Average selling price** | ** ** | **Average selling price** | ** ** | **Price reference**     | ** ** |
|---------------|------------|-------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **    | ** ** | **(in thousands)** | ** ** | **(in CAN$ /unit)**       | ** ** | **(in US$ /unit)**        | ** ** | **(in US$ /unit)** | ** ** |
| ** **    | ** ** | **2005**                | ** ** | **2004**                            | ** ** | **2005**                            | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Manufacturing | ** ** | **267****st**           |       | 289st                               | ** ** | **1,147**                           |       | 1,140                        | ** ** | **947** |   | 876 | ** ** | **822** |   | 745 |   |

 

Sales for the Fine Papers Group amounted to$707 million in 2005, compared with $714million for 2004. The pricing ofour products increased in thesecond half of 2004 and during 2005 due to better market conditions. However, these price increases were affected by the strengtheningof the Canadian dollar against theU.S. dollar. Shipments decreasedby 7.6% compared to 2004 due to more market-related downtime for some products from our St-Jérôme uncoated paper mill, resultingfrom a decrease in demand. Thedistribution division, CascadesResources, contributed total sales of $421 million for 2005, compared with $409 million in 2004. Cascades Resources’ shipments ofpaper products were 7.5% highercompared with the same period in2004 but resale price per ton showed a reduction of 4% as well as its gross profit per ton which decreased by 5.6% as compared with2004.

 

Fine Papers Group operatingincome beforedepreciationand amortization excluding specific items stood at a negative $9 million for the year, compared with a negative amount of $3 millionfor the same period in 2004. This reduction of $6 million is mainly due to decrease in the volume of shipments, an increase pulp costs and theappreciation of the Canadiandollar, which negatively impacted profitability by approximately $9 million duringthe last twelve months.

 

In 2005, the Companyannounced the permanentshutdownof its Thunder Bay, Ontario mill and also decided to close some equipment at its St-Jérôme mill resulting in an impairment charge,closure and restructuring costsof $86 million. Production at the ThunderBay mill ceased January 21, 2006. This mill generated a negative operating income before depreciation and amortization of $11 millionin 2005 and $10 million in 2004.According to CICA Section 3475, *“Disposal of long-livedassets and discontinued**operations”*,the activity of Thunder Bay will bepresented as a discontinued operation starting with the first quarter of 2006.

 

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OIBD variance analysis

 
| ** **                                                                | ** ** | ** **    | ** ** | **Tissue** | ** ** | **Fine**   | ** ** | ** **    | ** ** | **Assets held** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------|------------|---------------|------------|------------|------------|------------|------------|---------------|------------|----------------------|------------|------------------|------------|
| **(in millions of dollars)**                               | ** ** | **Packaging** | ** ** | **Papers** | ** ** | **Papers** | ** ** | **Corporate** | ** ** | **for sale**    | ** ** | **Consolidated** | ** ** |
| **OIBD for the year ended December 31, 2004  (excluding specific items)** |       | 190           |       | 76         | ** ** | **(3**     | **)**      | (4            | )          | (9                   | )          | 250              |       |
| Positive (negative) impact from:                                          |       |          |       |       |       |       | ** ** |          |       |                 |       |             |       |
| Sales volume                                                              |       | 2             |       | 13         | ** ** | **(3**     | **)**      | —        |       | —               |       | 12               |       |
| Selling price                                                             |       | 65            |       | 63         | ** ** | **23**     | ** ** | (9            | )          | (1                   | )          | 141              |       |
| Raw materials(1)                                                          |       | (35           | )          | (5         | )          | **(3**     | **)**      | —        |       | —               |       | (43              | )          |
| Energy                                                                    |       | (16           | )          | (10        | )          | **(2**     | **)**      | —        |       | —               |       | (28              | )          |
| Variation of the Canadian dollar(2)                                       |       | (27           | )          | (9         | )          | **(9**     | **)**      | 9             |       | 1                    |       | (35              | )          |
| Variable costs(3)                                                         |       | (24           | )          | (6         | )          | **(14**    | **)**      | —        |       | —               |       | (44              | )          |
| Fixed costs and other sectors(4)                                          |       | 5             |       | (20        | )          | **2**      | ** ** | 4             |       | (2                   | )          | (21              | )          |
| Business acquisitions                                                     |       | 19            |       | —     |       | **—** | ** ** | —        |       | —               |       | 19               |       |
| **OIBD excluding specific items**                                         |       | 169           |       | 102        |       | **(9**     | **)**      | —        |       | (11                  | )          | 251              |       |
| Specific items                                                            |       | (60           | )          | (1         | )          | **(105**   | **)**      | 7             |       | 18                   |       | (141             | )          |
| **OIBD for the year ended December 31, 2005**                             |       | 109           |       | 101        | ** ** | **(114**   | **)**      | 7             |       | 7                    |       | 110              |       |

 

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(1)     The impacts of these estimated costs are basedon production costs per unit, which are affected by yield, mix changes,purchase and transfer prices. In addition to market pulp and recycled fiber,they include purchases of external parent rolls for the converting sectors andother raw materials such as plastics and woodchips.

(2)     The estimated impact of foreign exchange isbased on the Company’s national and export sales less purchases that areimpacted by the CAN$/US$ variation.

(3)     The impacts of these estimated costs are basedon production costs per unit, which are affected by downtimes, efficiencies andproduct mix changes.

(4)     Includes all other costs such as repair andmaintenance, selling and administration, profit sharing and the change in OIBD ofoperation units that are not in the manufacturing or converting sectors.

 

The Company recorded a lossof $9 million($7 millionafter-tax) on the sale of its paper merchant division known as Cascades Resources. The net book value of these assets wasrevised to its net realizablevalue. The final purchase price will be adjusted during the year 2006. The Company also recorded in earnings a loss of $10million representing thediscounted amount of the legal settlement.These two items are presented in the results of the assets held for sale in the statement of earnings. 

 

**Other items analysis**

 

**Depreciation and amortization**

 

Depreciation and amortization increased to$174 million in 2005, from $159 million for thecorresponding period of 2004, primarily as a result of recent business acquisitions and capital expenditures.

 

**Operating income**

 

As a result of the above, operating income for the yeardecreased by $143 million to a loss of $64million, compared with an incomeof $79 million for the sameperiod in 2004. Operating margins decreased from 2.4% in 2004 to minus 1.8% in 2005.

 

Excluding specific items,operating incomefor theyear stood at $77 million, compared with $91 million for the same period in 2004. Operating margins decreased from 2.8% in 2004 to 2.2%in 2005.

 

27

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**Interest expense**

 

Interest expense increased to $83 millioncompared with $76 million in 2004. The debt levelhas increased when compared to 2004 but the strengthening of the Canadian dollar contributed to reducing the interest expense on theCompany’s U.S.-denominateddebts.

 

**Financial instruments**

 

During the first quarter of 2005, the Companyentered into an interest rate swap agreementfor a notional amount ofU.S.$125 million maturing in 2013in relation to the Company’s 7.25% unsecured senior notes. As this instrument was not designated as a hedge, an unrealized loss of $0.7million was recorded in earningsin the first quarter. During the secondquarter, the Company early-settled this swap agreement and a realized gain of $3 million has been recorded in earnings (included in specificitems).

 

**Foreign exchange gain on long-term debt**

 

In 2005, the Company recorded a foreign exchangegain of $10 million on its own and its jointventure US-denominated debts, asthe Canadian dollar went from$0.831 against the U.S. dollar as at December 31, 2004 to $0.858 as at December 31, 2005. This compareswith a gain of $18 million in 2004. This gain had no impact on the Company’s liquidities.

 

**Provision for income taxes**

 

The income tax recovery for the year 2005 amountedto $41 million representing an effective taxrate of 30%. Excluding theimpact of specific items, the taxrate would have been approximately 34%. The provision includes a charge of $4 million resulting from the tax rate increase in the province ofQuébec ($0.05 per share).

 

The effective tax rate andthe current incometaxesare affected by the results of certain subsidiaries located in countries where the income taxrate in higher than in Canada,notably in Germany and in theUnited States.

 

**Share of results of significantly influenced company**

 

The share of results of significantly influencedcompany is mainly attributable to our 43%participation in Boralex inc., aCanadian producer of green andrenewable energy. Boralex’s results improved in 2005 due to better electricity prices in the U.S., to renewable energy certificates that givesBoralex a premium on the baseprice of electricity in some of itsmarkets and to U.S. non-refundable tax credits for renewable energy producers. Boralex also had a positive adjustment of its tax provision.

 

**Net earnings (loss)**

 

As a result of the foregoing factors, the Companyposted a net loss of $97 million, or $1.19per share for 2005, versus netearnings of $23 million, or $0.28per share, for 2004.

 

However, the Company postednet earningswhenexcluding specific items for 2005. The net earnings excluding these specific items decreased to $6 million or $0.07 per share compared to $16million, or $0.20 per share in 2004.

 

**Liquidity and capital resources**

 

**Cash flows from operating activities**

 

Operating activities generated $84 million in 2005,as compared to $156 million in 2004. In 2005,changes in non-cash working capitalcomponents amounted to a use offunds of $10 million compared toa use of funds of $2 million in 2004. This use of cash is mainly attributable to an increase ininventories of finished productsmainly in the Tissue Papers segment.Accounts receivable have also increaseddue to the higher level of sales in 2005. Accounts payable are higher at the end of 2005 due to provision for closure and restructuringcosts which have not been paidfor an amount of $55 million.

 

Cash flow from operatingactivities, excludingthechange in non-cash working capital components, amounted to $94 million in 2005, or $1.16 per share compared with $158 million or $1.93 pershare

 

28

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for the same period in 2004. An amount of$60 million ($0.74 per share) related to theclosing and restructuringcharges has reduced cash flow fromoperating activities in 2005. This cash flow measure is important for the Company in order to pursue its capital expenditures program andreduce its indebtedness.

 

**Investing activities**

 

In 2005, investment activities required total cashresources of $168 million. The Companyinvested $121 million inproperty, plant and equipment. The majorcapital projects realized in 2005 for each business segment excluding corporate activities were:

 

•                  Packagingsegment–Boxboard ($39M): Capacity increasein converting sector of its QSR business and other investment to improve quality of converting products.

 

•                  Packagingsegment–Containerboard ($26M): Improvementof PM#2 at the Avot-Vallée, Francemill and first phase of the upgrade of the paper machine at Cabano.

 

•                  Packagingsegment–Specialty products ($10M): Installationof a new moulded pulp machine in itsNorth Carolina plant.

 

•                  Tissuepapers segment ($33M): Installation of a new converting line in Wisconsin and the upgrade of one of the paper machines inCandiac, which was completedduring the third quarter of 2005.In 2005, we also added new equipment at the Memphis Tissue mill which began operating in the fourth quarter of 2004.

 

•                  Finepapers segment ($9M): Completion of the sim-sizer press and biogas projects at St-Jérôme and the optimization of the Breakeyville de-inkedpulp mill.

 

During the first quarter of2005, a joint ventureofthe Company (the Company’s share amounted to $4 million), sold a building for an amount of $8 million. During the second quarter of2005, the Company sold awarehouse of the corporate sectorfor an amount of $15 million.

 

The Company also invested $8million to acquirethepackaging business of Dover Industries Limited, located in Canada, for the converting business of its Boxboard Group and $6 million to acquirecertain assets of the paperboarddivision of Fraser Papers locatedin Edmundston, New-Brunswick.

 

On October 11, 2005, Norampac,a joint venturecompany,announced that it had completed the acquisition of three corrugated products converting plants, respectively located in Montréal,Québec, Le Gardeur, Québec andBelleville, Ontario, from SPBCanada inc. for an approximate consideration of $75 million (the Company’s share amounted to $38 million). The final purchase price hasnot yet been finalized. 

 

**Financing activities**

 

In 2005, the Company borrowed an additional$174 million on its revolving facilitiesfollowing the repayment of thebalance of the 2004 purchase priceof Dopaco in the amount of $57 million (US$46 million) and also due to the cash used by the working capital. It also redeemed 555,600of its common shares on the openmarket, pursuant to a normalcourse issuer bid for an amount of $6million.

 

Taking into account thesetransactions and the$13million in dividends paid out during 2005, financing activities generated $86 million inliquidity.

 

**Liquidity from assets held for sale**

 

On March 31, 2005, the Company sold the distributionactivities of its Tissue Papers segment for atotal net consideration of $15.7 million. Of the total selling price, $13.7 million was received at closing; $1 million will be received on thefirst anniversary date and $1million in four instalments due March31, 2006 to March 31, 2009.

 

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**Consolidated financial position as at December 31, 2005**

 

The Company has the following financial position and ratios:

 
| **Balance sheet data as at December 31,** | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **(in millions of Canadian $)**                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital(1)                                                      | ** ** | **594**    |       | 577        |       |
| % of sales(1)                                                           | ** ** | **15.4**   | **%**      | 15.6       | %          |
| Bank loan and advances                                                  | ** ** | **44**     |       | 47         |       |
| Current portion of long-term debt                                       | ** ** | **8**      |       | 58         |       |
| Long-term debt                                                          | ** ** | **1,289**  |       | 1,168      |       |
| Total debt                                                              | ** ** | **1,341**  |       | 1,273      |       |
| Shareholders’ equity                                               | ** ** | **897**    |       | 1,059      |       |
| Total equity and debt                                                   | ** ** | **2,238**  |       | 2,332      |       |
| Ratio debt / total equity and debt                                      | ** ** | **59.9**   | **%**      | 54.6       | %          |
| Shareholders’ equity per share                                     | ** ** | **$**      | **11.10**  |       | $          | 13.02 |   |
|                                                                         |            |            |            |            |            |  |  |

 

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(1)     Working capital includes accounts receivableplus inventories less accounts payables. It includes assets held for sale butexcludes unpaid provision for closure and restructuring costs in the amount of$55 million

 

Long-term debt, includingthe current portion,increasedfollowing the cash requirements of theyear. The current portion of long-term debt decreased by $50 million, mainly as a result of the payment of the balance of the purchase pricefor Dopaco, in the amount of $57million, which was increased by$5 million as compared with 2004. The Company had $274 million (net of letter of credit in the amount of $9 million) available underits $550 million revolvingcredit facility at the end of the year.The Company’s joint ventures had $126 million of credit availability as at December 31, 2005.

 

The liquidity available viathe credit facilities oftheCompany and its joint ventures, along with the cash flow generated by the operating activities, will provide the Company sufficient funds to meetits financial obligations andfulfill its capital expenditure program,which we estimate at approximately $110million for 2006 including our share of the joint ventures.

 

**Refinancing of debt**

 

On October 31, 2005, the Company announced thecompletion of the refinancing of its $500million credit facility originallyput in place in February 2003.The new $550 million credit facility includes a five-year $450 million revolving facility and a seven-year $100 million term facility. Theseven-year term facility can bereimbursed without penalty, atthe Company’s option any time prior to maturity. With the enhancement of its financial terms, this facility will provide the Company withincreased financial flexibilitythrough improved financial covenantswhile reducing interest expenses and extending the maturity date originally scheduled for February 2007 until 2010 for $450 millionand 2012 for $100 million.

 

**Evolution of credit ratings for Senior Notes**

 

Cascades’s outstanding Senior Notes have beenrated BBB(low) by Dominion Bond RatingService (“DBRS”), Ba3 by Moody’sInvestor Service Inc. (“Moody’s”)and BB- by Standard & Poor’s Corporation(“S&P”), each a “Rating agency”.

 

30

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The following table reflects the Company’s Senior Notes credit ratingat the date of the approval of this MD&A by the Board of Directors andtheir evolution compared to last year:

 
| **Credit Rating** | ** ** | **Moody’s** | ** ** | **Standard  & Poor’s** | ** ** | **DBRS**                 | ** ** |
|-------------------|------------|------------------|------------|---------------------------------|------------|--------------------------|------------|
| 2004              |       | Ba3 (stable)     |       | BB+ (negative)                  |       | BBB (low)  (stable)      |       |
| **2005**          | ** ** | **Ba3 (stable)** | ** ** | **BB – (negative)**        | ** ** | **BBB (low) (Negative)** | ** ** |

 

**Capital stock information**

 

As at December 31, 2005, the capital stock issuedand outstanding consisted of 80,818,540common shares (81,361,580 as atDecember 31, 2004). As atDecember 31, 2005, 2,115,167 stock options were issued and outstanding (1,756,986 as at December 31, 2004).

 

**Contractual obligations and other commitments**

 

The Company’s principal contractual obligationsand commercial commitments relate tooutstanding debt, operatingleases, capital leases and purchase obligations for its normal business operations. The following table summarizes these obligationsas at December 31, 2005:

 

Contractual obligations

 
| ** **                                                                            | ** ** | ** ** | ** ** | ** **         | ** ** | **Years 2007** | ** ** | **Years 2009** | ** ** | ** **     | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|
| **Payment due by period (in millions of dollars)** | ** ** | **Total**  | ** ** | **Year 2006** | ** ** | **and 2008**   | ** ** | **and 2010**   | ** ** | **Thereafter** | ** ** |
| Long-term debt                                                                        |       | 1,286      |       | 3                  |       | 63                  |       | 173                 |       | 1,047          |       |
| Capital lease                                                                         |       | 12         |       | 6                  |       | 6                   |       | —              |       | —         |       |
| Operating lease                                                                       |       | 178        |       | 40                 |       | 58                  |       | 37                  |       | 43             |       |
| Purchase obligations                                                                  |       | 496        |       | 120                |       | 178                 |       | 93                  |       | 105            |       |
| Legal settlement                                                                      |       | 12         |       | —             |       | 2                   |       | 4                   |       | 6              |       |
| **Total contractual obligations**                                                     |       | 1,984      |       | 169                |       | 307                 |       | 307                 |       | 1,201          |       |

 

**Transactions with related parties**

 

The Company has also entered into variousagreements with its joint ventures,significantly influencedcompanies and entities controlled by one or more directors for the supply of raw materials, including recycled paper, virgin pulp andenergy, supply of unconvertedand converted products, sale andlease of equipment and other agreements in the normal course of business. The aggregate amount of sales from the Company to its jointventures and other affiliateswas $61 million and $82 million for 2004 and 2005, respectively. The aggregate amount of sales from the joint ventures and otheraffiliates to the Company was$69 million and $53 million for 2004and 2005, respectively. The aggregate amount of sales from entities controlled by one or more of our directors to us was $6 million and $2million for 2004 and 2005,respectively. The previous figures include100% of the joint ventures participation.

 

**Off-balance sheet arrangements**

 

In the normal course of business, we finance certainof our activities off-balance sheet throughleases. We enter into operatingleases for buildings and equipment. Minimum future rental payments under these operating leases, determined as at December31, 2005, are included in thecontractual obligations tableabove.

 

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**Critical accounting policies**

 

Some of the Company’s accounting policies requiresignificant estimates and assumptions aboutfuture events that affect the amountsreported in the financial statementsand the accompanying notes. Future eventsand 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 tangible assets**

 

At least annually, we assess whether there has beena permanent impairment in the value ofassets. This is accomplished bydetermining whether projected undiscountedfuture cash flows from operations exceedthe 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 identifiable intangible assets and goodwill**

 

Business acquisitions are accounted for under thepurchase method of accounting. The total costof an acquisition is allocatedto the underlying net assets basedon their respective estimated fair values. As part of this allocation process, the Company must identify and attribute values and estimatedlives to the intangible assetsacquired. While an expert may beemployed to assist the Company with these matters, these types of determinations involve considerable judgment and often involve theuse of estimates andassumptions, including those with respectto future cash inflows and outflows, discount rates and asset lives. These determinations affect the amount of amortization expense recognizedin future periods. The Companyreviews the carrying values ofall identifiable intangible assets and goodwill when certain conditions arise to determine whether any impairment has occurred.

 

**Income taxes**

 

The Company is required to estimate the incometaxes in each of the jurisdictions in whichit operates. This includesestimating a value for existing netoperating losses based on the Company’s assessment of its ability to utilize them against futuretaxable income before they expire. If the Company’s assessment of its ability to use the netoperating losses provesinaccurate in the future, more or less of the net operating losses might be recognized as assets, which would increase or decrease theincome tax expense, andconsequently affect the Company’s netearnings in the relevant year.

 

**Pension and post-retirement benefit costs**

 

Pension and post-retirement benefit costs aredeveloped from actuarial valuations. Inherentin these valuations are keyassumptions provided by theCompany to actuaries, including discount rates, expected returns on plan assets, rates of compensation increases and medical cost inflation. Inselecting the rates and returns,the Company is required toconsider current market conditions, including changes in interest rates. Material changes in pension and post-retirement benefit costs may occurin the future, resulting fromfluctuations in headcount in additionto changes in the assumptions.

 

**Environmental cleanup costs**

 

The Company expenses environmental expendituresrelated to existing conditions caused by pastor current operations and fromwhich no future benefit isdiscernible. The Company’s estimated environmental remediation costs are based upon an evaluation of currently available facts withrespect to each individual site,including the results of environmentalstudies and testing, and considering existing technology, applicable laws and regulations, and prior experience in remediation ofcontaminated sites. Expendituresthat extend the life of therelated property, or mitigate or prevent future

 

32

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environmental contamination, are capitalized. TheCompany determines its liability on asite-by-site basis and records aliability at the time when it is probableand can be reasonably estimated. The contingencies take into account the anticipated participation of other potentiallyresponsible parties in thoseinstances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of therelevant costs. Actual costs tobe incurred in future periods at the identified sites may vary from the estimates, given the inherent uncertainties in evaluatingenvironmental exposures. Futureinformation and developments mayrequire the Company to reassess the expected impact of these environmental matters.

 

**Collectibility of accounts receivable**

 

In order to record its accounts receivable at theirnet realizable value, the Company must assesstheir collectibility. A considerable amount of judgment is required in order to make this assessment, including a review of the agingof its receivables and thecurrent creditworthiness of eachcustomer. The Company has recorded allowances for receivables that it feels are uncollectible. However, if the financial condition of theCompany’s customers were to deteriorate, their ability to make required payments may become further impaired, and increases in theseallowances would be required.

 

**Introduction of new accounting policies in 2005**

 

**Variable interest entities**

 

On January 1, 2005, the Company adoptedprospectively Accounting Guideline 15 (“AcG-15”),*“Consolidation ofvariable interest entities”*.The new guideline requirescompanies to identify variable interestentities in which they have an interest to determine whether they are the primary beneficiary of such entities and, if so, to consolidatethem. A variable interest entity is defined as an entity in which the equity is not sufficient to permitthat entity to finance itsactivities without external support,or the equity investors lack either voting control and obligation to absorb future losses or the right to receive future returns. Theapplication of this standard didnot have any material impact onthe financial position or results of operations of the Company.

 

**New accounting policies not yet adopted**

 

**Financial instruments, hedging, capital assets and comprehensive income**

 

In January 2005, the CICA published four newsections: Section 1530, *“Comprehensive Income”*; Section 3251, *“Equity”*; Section 3855, *“Financial Instruments—Recognitionand Measurement”*; andSection 3865,  *“Hedges”*. These new standards regarding recognition andmeasurement of financial instruments, hedging and comprehensive income have been created to harmonize with the generally acceptedaccounting policies already used in the United States (U.S. GAAP). These new standards have to be adoptedby the Company at the latest forthe period beginning January 1,2007, but early adoption is encouraged. The Company is presently evaluating the impact of these new standards.

 

**Non-monetary Transactions**

 

In June 2005, the CICA revised the existingSection 3830 *“Non-monetary Transactions”*and replaced it by Section 3831 *“Non-monetary Transactions”*. The revised standard replaces the current exception from measurement of a non-monetary transaction atfair value for non-monetaryexchanges which do not representthe culmination of the earnings process, with an exception based on whether the transaction has commercial substance. The revisedstandard will be applied tonon-monetary transactions initiated in periods beginning after January 1, 2006.

 

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**Environmental issues**

 

The Company is subject to environmental laws andregulations imposed by the variousgovernmental and regulatoryauthorities in all the countries where it operates. The Company is also subject to the U.S. Federal Comprehensive Environmental Response,Compensation and Liability Act, or CERCLA, as well as other applicable legislation in the United States, Canada and Europe that hold companiesaccountable for the investigation and remediation of hazardous substances.

 

The Company is incompliance, in all materialrespects,with all applicable environmental legislation or regulations. However, ongoing capital and operating expenses are expected to beincurred to achieve and maintaincompliance with applicable environmentalrequirements.

 

The European subsidiaries ofthe Companyand its jointventures are also subject to the Pre-Kyoto protocol in order to reduce world-wideCO2 emission.Each unit has been allocated emission rights based on their 2002 emission level (“CO2 quota”).On a yearly calendar basis, if the emissionsare higher than the quota, the Company must buy on the open market the necessary credits to cover its deficit. However, if the Companyhas a credit surplus, it cansell it on the open market for cashsettlement. The Company is always focussing on reducing its CO2 emission and in 2005certain subsidiaries were in asurplus credit situation and sold29,500 tons of CO2 credits on the open market for an amount of €0.6 million. This amountwas recorded in earnings. Thesame regulations should beimplemented in Canada starting in January 2008. However, at this time, it is impossible to evaluate the impact on the Canadian Company’sunits as quotas are not yet defined.

 

**Internal controls**

 

The ambitious Sarbanes Oxley certification processfor the Company advanced significantly in2005: the documentation andanalysis for most of the selected businessunits has been completed. In the course of this work, some internal control deficiencies have been identified. The action plans to resolvethem have either beenimplemented or are in the course ofbeing implemented. In 2006, the corrective measures will continue to be implemented and the documentation already accumulated will beintegrated in a newly developed software in order to reinforce the controls in place at alllevels of the Company.

 

**Risk management**

 

The Company is exposed to certain market risks aspart of its ongoing business operations,including risks from changes inselling prices for its principal products,costs of raw materials, interest rates and foreign currency exchange rates, all of which impact the Company’s financial condition, results ofoperations and cash flows. TheCompany manages its exposure tothese and other market risks through regular operating and financing activities and, on a limited basis, through the use of derivativefinancial instruments. TheCompany uses these derivative financialinstruments as risk management tools and not for speculative investment purposes.

 

The following chart providesa quantitativeillustrationof the impact on the Company’s annual operating income before depreciation and amortization from possible changes in the prices of its principalproducts, the cost of raw materials and energy, and the exchange rate of the U.S. dollar. This is based on 2005 shipments as adjustedfor expected increase inshipments as a result of recent acquisitions,assuming for each price change that all other variables remain constant. To reduce the Company’s vulnerability to selling pricefluctuations, some of ouroperations have implemented riskmanagement programs. The Company uses

 

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financial hedges on the selling prices of certainfinished products or on the purchase cost ofcertain raw materials to coverpart of the risk related to pricefluctuations. Also, from time to time, the Company negotiates term contracts to protect itself against increases in energy prices, includingnatural gas, for periods of upto 60 months. In addition, byselling marketable pulp in the open market, the Company is able to limit its vulnerability to price fluctuations for this raw material.

 

**Sensitivity analysis**(1)

 
| ** **                                       | ** ** | **Volume**                                                                                                | ** ** | **Unit**   | ** ** | **Change** | ** ** | **OIBD Impact(1)**                     | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **(in millions of short tons with the  exception of natural gas in mmBtu)** | ** ** | ** ** | ** ** | ** ** | ** ** | **(in millions of dollars)** | ** ** |
| **Selling  prices (manufacturing)**(2)           |       |                                                                                                      |       |       |       |       |       |                                        |       |
| Boxboard                                         |       | 889                                                                                                       |       | U.S./ST    |       | $          | 25         | ** **                                  | **26**     | ** ** |
| Containerboard(3)                                |       | 715                                                                                                       |       | U.S./ST    |       | $          | 25         | ** **                                  | **21**     | ** ** |
| Specialty  Products (paper only)                 |       | 198                                                                                                       |       | U.S./ST    |       | $          | 25         | ** **                                  | **6**      | ** ** |
| Tissue                                           |       | 425                                                                                                       |       | U.S./ST    |       | $          | 25         | ** **                                  | **12**     | ** ** |
| Fine Papers                                      |       | 267                                                                                                       |       | U.S./ST    |       | $          | 25         | ** **                                  | **8**      | ** ** |
| **Input  cost**                                  |       |                                                                                                      |       |       |       |       |       |                                        |       |
| Recycled  papers(3)                              |       |                                                                                                      |       |       |       |       |       |                                        |       |
| Brown grades                                     |       | 622                                                                                                       |       | U.S./ST    |       | $          | 15         | ** **                                  | **(11**    | **)** |
| Groundwood grades                                |       | 455                                                                                                       |       | U.S./ST    |       | $          | 15         | ** **                                  | **(8**     | **)** |
| White grades                                     |       | 892                                                                                                       |       | U.S./ST    |       | $          | 15         | ** **                                  | **(16**    | **)** |
| Commercial  pulp(3),(4)                          |       | 159                                                                                                       |       | U.S./MT    |       | $          | 30         | ** **                                  | **(6**     | **)** |
| Natural gas(3)                                   |       | 12,710,000                                                                                                |       | U.S./mmBTu |       | $          | 0.10       | ** **                                  | **(2**     | **)** |
| **Foreign  exchange**                            |       |                                                                                                      |       |       |       |       |       |                                        |       |
| **(Change  of US$0.01 vs CAN$)**(3),(5)          |       |                                                                                                      |       |       |       |       |       |                                        |       |
| Net sales in US$ from  Canadian operations  | ** ** | ** **                                                                                                | ** ** |       |       |       |       | **(3**                                      | **)**      |
| Net sales in  Canada impacted by US$ effect | ** ** | ** **                                                                                                | ** ** |       |       |       |       | **(3**                                      | **)**      |
| U.S. subsidiaries  translation                   | ** ** | ** **                                                                                                | ** ** |       |       |       |       | **(1**                                      | **)**      |

 

----

(1)     Sensitivity calculated according to 2005volumes and with an exchange rate of 1.17 CAN$/US$, excluding hedging programsand excluding the impact of related expenses such as discounts, commissions onsales and profit sharing.

(2)     Total shipments, including internal shipments.

(3)     Includes our 50% share of our joint ventureNorampac Inc.

(4)     Considering our external purchases net of tonssold.

(5)     Using a change from 1.17 CAN$/US$ to 1.16CAN$/US$. Note that impact of a change of exchange rate is not linear. In otherwords, the incidence of a change from 1.17 CAN$/US$ to 1.16 CAN$/US$ isdifferent than a change from 1.25 CAN$/US$ to 1.24 CAN$/US$.

 

35

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**Interest risk**

 

The Company’s principal interest rate risks relateto outstanding debt obligations. As ofDecember 31, 2005, approximately26% (17% in 2004) of its long-term debtaccrued interest at floating rates. A 1% change in the interest rates applicable to its actual variable rate debt would have a $3.3 millioneffect on interest expense.

 

In addition, a joint ventureholds certain interestrateswap agreements designated as hedges. These contracts have the objective of covering the variation of the fair value for part of the promissory notefrom our joint venture caused by the variation in interest rates. The interest rate has been subsequently fixed at 6.23% for a notionalamount of $25 million maturingin 2013.

 

**Foreign currency risk**

 

The Company is exposed to foreign currency risksthat arise from normal business operations.These risks include thetranslation of local currency balances of our foreign subsidiaries, intercompany loans with foreign subsidiaries and transactionsdenominated in foreigncurrencies. A significant portion ofthe Company’s debt is denominated in foreign currencies and so is exposed to foreign currency risks related to interest on this debt andits repayment. The Company isalso exposed to exchange raterisks when its sales are in foreign currencies and its costs are not. Fluctuations in exchangerates may adversely affect itsability to compete with non-local producersas well as to export its products. The Company’s objective is to minimize its exposure to these risks through its normal operatingactivities and, whereappropriate, through foreign currency forward contracts. Our policy is to negotiate forward exchange contracts that can cover up to 50%of the net exposure to currencyfluctuations for periods of 12to 18 months. In 2005, approximately 24% of the Company’s total sales from its Canadian operations were made in the United States. Gains andlosses arising from these contractsare applied to earnings onlywhen they are realized. The fair value of these contracts represented unrealized gains as of December 31, 2005 of $1.5 million ($12.3million as of December 31,2004).

 

**Credit risks**

 

The Company is exposed to credit risk on theaccounts receivable from its customers. Inorder to reduce this risk, theCompany’s credit policies includean analysis of the financial position of its customers and a regular review of their credit limits. The Company believes there is noparticular concentration of credit risks, due to the geographic diversity of its customers and its proceduresfor the management of commercialrisks. Derivative financialinstruments include an element of credit risk, should the counterparty be unable to meet its obligations. The Company reduces thisrisk by dealing withcreditworthy financial institutions.

 

**Commodity price risk**

 

The Company and a joint venture entered intovarious derivative financial instrumentswhereby it sets the price fornotional quantities of old corrugated containers, electricity, natural gas, unbleached 42-lb. kraft linerboard and 26-lb.semi-chemical corrugated medium.In 2004 and in 2005, gains andlosses arising from electricity contracts and natural gas contracts are applied to earnings only when they are realized, whereas all othertypes of contracts are accountedfor at fair value. The fair valueof these contracts represented unrealized gains as of December 31, 2005 of $29 million ($5 million as of December 31, 2004).

 

36

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Additional information on our North American natural gas andelectricity hedging programs.

 

North American natural gashedging (1)

 
| ** **                      | ** ** | **United States**    | ** ** | **Canada** | ** ** |
|---------------------------------|------------|---------------------------|------------|------------|------------|
| Natural gas consumption         |       | 26                        | %          | 74         | %          |
| % of consumption hedged         |       | 37                        | %          | 44         | %          |
| Average price – hedge book |       | US$  7.84/MMBtu |       | $          | 7.03/GJ    |   |
|                                 |            |                           |            |            |            |  |

 

North American electricityhedging (1)

 
| ** **                                       | ** ** | **United States**   | ** ** | **Canada** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|------------|------------|
| Electricity consumption                          |       | 22                       | %          | 78         | %          |
| Electricity consumption in a regulated  market   |       | 57                       | %          | 63         | %          |
| % of consumption hedged in a deregulated  market |       | 40                       | %          | 41         | %          |
| Average price – hedge book                  |       | US$  0.043/KWh |       | $          | 0.045/KWh  |   |
|                                                  |            |                          |            |            |            |  |

 

----

(1)     Includes our 50% share of our joint ventureNorampac Inc.

 

**Outlook**

 

The Boxboard Group is expected to continue tobe confronted with difficult market conditions,especially in recycled grades for boththe European and north-americanmarkets. This situation may leadto further industry rationalization, including merger and acquisition activity and Cascades is willing, given proper conditions, toparticipate in this process. Inaddition, it is expected that market-relateddowntime may at times be necessary throughoutthe year to avoid building excess inventories.In 2006, the Company intends to directits capital expenditures within this sector primarily towards converting assets. This effort will be complemented by a growing emphasis onnew product development. Overall, both of these gestures are intended to support the long-term objective of growing the overall integrationrate.

 

The Containerboard Groupalso intends tocontinuein 2006 to focus on maintaining the right balance between production and inventory levels. Better industry operating rates are expectedto support improvedcontainerboard prices achieved earlyin 2006 and old corrugated container prices are expected to be stable or slightly higher for the remainder of the year. In case such anincrease were to materialize,its impact should however be mitigatedby our year-end physical inventory (OCC is the main type of recycled papers used within this Group). Following the closure of a machine inRed Rock (Ontario) in 2005, andin light of the future evolutionof certain input costs, the Group may proceed to further rationalization of its Canadian manufacturing capacity while optimizing its NorthAmerican converting operations. In conjunction with these potential measures, while maintaining its customer-oriented approach, the group mayexplore selective growth opportunities in the United States in order to gain a better geographicalbalance between its manufacturingand customer base and also withthe goal to achieve logistical gains.

 

37

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The Speciality productsGroup intends in2006 tore-evaluate its portfolio of 26 diverse production units which often tend to offer limited cross synergies as well as to sharpen itsfocus on North-Americanoperations. At the same time, theGroup will continue to develop synergies with other Cascades Groups and will assume the management of the St-Jérôme specialty fine papers mill andrelated assets. The Speciality products Group intends to expand its product offering as a result of increased research and developmentefforts. The Group also intendsto expand and optimize itsstrategic activities of waste paper recovery and processing.

 

Overall, fundamental demandfor tissue isexpected toremain healthy and the Company anticipatesthat market conditions will remain relativelyfavourable. Our operations are anticipated to benefit from relatively stable selling and sorted office papers pricing environments (SOP isthe main type of recycled papersused within this Group). The Groupremains sensitive to high natural gas prices which, however, will be mitigated by the Company’s year-end hedging positions. In 2006, theGroup will continue itsdevelopment of higher-end products, try to leverage the favourable market positioning of its environmentally friendly products andmay also consider redeploying alimited number of its convertinglines in order to gain a better geographical balance between its manufacturing and customer base. The expansion of primary(manufacturing) capacity remainspossible, but the Company wishes tomake the best choice in regards to location, typed of equipment as well as reunite advantageous financing and energy supply conditions.

 

Following the closure of theThunder Bay coatedfinepapers mill in early 2006 and the divestiture of its paper merchant network, announced late in 2005, the management of the remaining assets of this Group will be transferred tothe Speciality Products Groupduring the course of the year.The main remaining asset, the St-Jérôme uncoated paper mill is still facing challenging times. However management has put in place asignificant profitabilityimprovement program that is expected to show benefits in the second part of 2006. In addition, recent capacity closures in North-Americaand generally improving market conditions in the uncoated paper business should help this unit. Over the long term, this mill will aim torealign its product mix, expandits speciality paper and highrecycled content paper offering and improve its cost structure. 

 

38

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**Quarterly results (****1)**

 
| **(in million of dollars, except amounts per share)** | ** ** | **2005**          | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|
| **(unaudited)**                                                                          | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** | **Total** | ** ** |
| Sales                                                                                    | ** ** | **843**           | ** ** | **901** | ** ** | **874** | ** ** | **842** | ** ** | **3,460** | ** ** |
| OIBD                                                                                     | ** ** | **61**            | ** ** | **73** | ** ** | **42** | ** ** | **(66** | **)** | **110** | ** ** |
| Operating income (loss)                                                                  | ** ** | **17**            | ** ** | **29** | ** ** | **(2** | **)** | **(108** | **)** | **(64** | **)** |
| Net earnings (loss) from continuing  operations                                          | ** ** | **(3**            | **)**      | **3** | ** ** | **1** | ** ** | **(88** | **)** | **(87** | **)** |
| Basic and diluted per common share                                                       | ** ** | **$**             | **(0.03**  | **)** | **$** | **0.03** | ** ** | **$** | **0.02** | ** ** | **$** | **(1.09** | **)** | **$** | **(1.07** | **)** |
| Net earnings (loss)                                                                      | ** ** | **—**        | ** ** | **4** | ** ** | **3** | ** ** | **(104** | **)** | **(97** | **)** |
| Basic and diluted per common share                                                       | ** ** | **—**        | ** ** | **$** | **0.05** | ** ** | **$** | **0.04** | ** ** | **$** | **(1.28** | **)** | **$** | **(1.19** | **)** |
| Cash flow from operations                                                                | ** ** | **31**            | ** ** | **38** | ** ** | **36** | ** ** | **(11** | **)** | **94** | ** ** |
| per common share                                                                         | ** ** | **$**             | **0.38**   | ** ** | **$** | **0.47** | ** ** | **$** | **0.44** | ** ** | **$** | **(0.13** | **)** | **$** | **1.16** | ** ** |
| Excluding specific items(1)                                                              |       |              |       |   |   |   |   |   |   |   |   |
| OIBD                                                                                     | ** ** | **59**            | ** ** | **69** | ** ** | **65** | ** ** | **58** | ** ** | **251** | ** ** |
| Operating income                                                                         | ** ** | **15**            | ** ** | **25** | ** ** | **21** | ** ** | **16** | ** ** | **77** | ** ** |
| Net earnings (loss) from continuing                                                      | ** ** | ** **        | **(4**     | **)** | ** ** | **3** | ** ** | **—** | ** ** | ** ** | **1** | ** ** | **—** | ** ** |
| operations per common share                                                              | ** ** | **$**             | **(0.04**  | **)** | **$** | **0.03** | ** ** | **—** | ** ** | **$** | **0.01** | ** ** | **—** | ** ** |
| Net earnings (loss)                                                                      | ** ** | ** **        | **(1**     | **)** | ** ** | **4** | ** ** | ** ** | **2** | ** ** | ** ** | **1** | ** ** | ** ** | **6** | ** ** |
| per common share                                                                         | ** ** | **$**             | **(0.01**  | **)** | **$** | **0.05** | ** ** | **$** | **0.02** | ** ** | **$** | **0.01** | ** ** | **$** | **0.07** | ** ** |
| Cash flow from operations                                                                | ** ** | ** **        | **31**     | ** ** | ** ** | **38** | ** ** | ** ** | **46** | ** ** | ** ** | **39** | ** ** | ** ** | **154** | ** ** |
| per common share                                                                         | ** ** | **$**             | **0.38**   | ** ** | **$** | **0.47** | ** ** | **$** | **0.56** | ** ** | **$** | **0.49** | ** ** | **$** | **1.90** | ** ** |

 
| **(in million of dollars, except amounts per share)** | ** ** | **2004**          | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|
| **(unaudited)**                                                                          | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** | **Total** | ** ** |
| Sales                                                                                    |       | 763               |       | 831 |   | 854 |   | 806 |   | 3,254 |   |
| OIBD                                                                                     |       | 54                |       | 66 |   | 74 |   | 44 |   | 238 |   |
| Operating income (loss)                                                                  |       | 15                |       | 27 |   | 34 |   | 3 |   | 79 |   |
| Net earnings (loss) from continuing  operations                                          |       | (7                | )          | (3 | ) | 25 |   | 5 |   | 20 |   |
| Basic and diluted per common share                                                       |       | $                 | (0.09      | ) | $ | (0.03 | ) | $ | 0.31 |   | $ | 0.06 |   | $ | 0.25 |   |
| Net earnings (loss)                                                                      |       | (6                | )          | (3 | ) | 27 |   | 5 |   | 23 |   |
| Basic and diluted per common share                                                       |       | $                 | (0.08      | ) | $ | (0.03 | ) | $ | 0.33 |   | $ | 0.06 |   | $ | 0.28 |   |
| Cash flow from operations                                                                |       |              | 31         |   |   | 42 |   |   | 48 |   |   | 37 |   |   | 158 |   |
| per common share                                                                         |       | $                 | 0.38       |   | $ | 0.51 |   | $ | 0.59 |   | $ | 0.45 |   | $ | 1.93 |   |
| Excluding specific items(1)                                                              |       |              |       |   |   |   |   |   |   |   |   |
| OIBD                                                                                     |       | 49                |       | 65 |   | 78 |   | 58 |   | 250 |   |
| Operating income (loss)                                                                  |       | 10                |       | 26 |   | 38 |   | 17 |   | 91 |   |
| Net earnings (loss) from continuing                                                      |       |              | (6         | ) |   | 5 |   |   | 12 |   |   | 2 |   |   | 13 |   |
| operations per common share                                                              |       | $                 | (0.08      | ) | $ | 0.07 |   | $ | 0.15 |   | $ | 0.03 |   | $ | 0.17 |   |
| Net earnings (loss)                                                                      |       |              | (5         | ) |   | 5 |   |   | 14 |   |   | 2 |   |   | 16 |   |
| per common share                                                                         |       | $                 | (0.07      | ) | $ | 0.07 |   | $ | 0.17 |   | $ | 0.03 |   | $ | 0.20 |   |
| Cash flow from operations                                                                |       |              | 31         |   |   | 42 |   |   | 48 |   |   | 37 |   |   | 158 |   |
| per common share                                                                         |       | $                 | 0.38       |   | $ | 0.51 |   | $ | 0.59 |   | $ | 0.45 |   | $ | 1.93 |   |

 

----

(1).    The reconciliation items of the non-GAAPmeasures in this table are the same as these of the annual results included inthe next section on pages 41, 42 and 43.

 

39

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**Comments on the results of the fourth quarter of 2005**

 

Mostly as a result of recent business acquisitions,sales increased by 4.5% during the fourthquarter of 2005, amounting to$842 million compared with $806million for the same period last year.Operating losses amounted to a negative $108 million for the period compared to operating income of $3 million last year. In general,higher prices were offset by increased energy and chemical costs and the appreciation of the CAN$/US$exchange rate. In addition, we recordedduring the quarter someimpairment, closure and restructuring charges for an after-tax amount of $105 million. Finally, included in the previous amount, wealso recorded under theclassification of assets held forsale, a $7 million after-tax loss on disposal of our Fine papers distribution assets (closing in February 2006) and also a $10 million charge(non tax-deductible) resulting from afine imposed on the Company bythe Canadian Commissioner of Competition.

 

Net earnings for the fourthquarter endedDecember31, 2005, amounted to a loss of $104million ($1.28 per share) or $1 million of net earnings excluding specific items ($0.01 per share) compared to net earnings of $5 million ($0.06per share) or net earnings of $2million, excluding specificitems, ($0.03 per share) for the same period in 2004.

 

**Supplemental information on non-GAAP measures**

 

Neither operating income before depreciation andamortization, operating income, cash flowfrom operations or cash flowfrom operations per share are measuresof performance under Canadian GAAP. The Company includes operating income before depreciation and amortization, operatingincome, cash flow fromoperations and cash flow from operations per share because they are the measures used by management to assess the operating andfinancial performance of theCompany’s operating segments. Moreover,the Company believes that these items provide additional measures often used by investors to assess a company’s operating performanceand its ability to meet debtservice requirements. However, thesemeasures do not represent, and should not be used, as a substitute for net earnings or cash flows from operating activities as determinedin accordance with Canadian GAAP,and they are not necessarily anindication of whether cash flow willbe 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 fromoperations per share may differ from those of other companies. Cash flow from operations is defined as cash flow from operatingactivities as determined inaccordance with Canadian GAAP, excludingthe change in working capital components, and cash flow from operations per share is determined by dividing cash flow fromoperations by the weightedaverage number of common shares ofthe period.

 

Operating income beforedepreciation and amortizationexcluding specific items, operating income excluding specific items, net earningsexcluding specific items, netearnings per common share excludingspecific items, cash flow from operations excluding specific items and cash flow from operations per share excluding specific itemsare non-GAAP measures. TheCompany believes that it isuseful for investors to be aware of specific 

 

40

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items that adversely or positively affected its GAAPmeasures, and that the above mentioned non-GAAP measures provide investors with ameasure of performance tocompare its results between periodswithout regard to these specific items. The Company’s measures, excluding specific items have no standardized meaning prescribed by GAAPand are not necessarilycomparable to similar measures presentedby other companies and therefore should not be considered in isolation.

 

Specific items are definedas items such as chargesforimpairment of assets, charges for facility or machine closures, debt restructuring charges, gain or loss on sale of business units, unrealizedgain or loss on derivativefinancial instruments that do not qualifyfor hedge accounting, foreign exchange gain or loss on long-term debt and other significant items of an unusual or non-recurring nature.

 

Net earnings (loss), whichis a performancemeasuredefined by Canadian GAAP, is reconciled below to operating income (loss), operating income excluding specific items and operating incomebefore depreciation and amortization excluding specific items:

 
| **(in millions of dollars)**                                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Net earnings (loss)**                                                             | ** ** | **(97**    | **)**      | 23       |       | 55       |       |
| Net (earnings) loss from assets held for  sale                                      | ** ** | **10**     | ** ** | (3       | )          | (4       | )          |
| Share of results of significantly  influenced companies                             | ** ** | **(7**     | **)**      | (2       | )          | 3        |       |
| Provision (recovery) for income taxes                                               | ** ** | **(41**    | **)**      | 2        |       | 10       |       |
| Loss on long-term debt refinancing                                                  | ** ** | **—** | ** ** | 1        |       | 22       |       |
| Gain on derivative financial instruments                                            | ** ** | **(2**     | **)**      | —   |       | —   |       |
| Foreign exchange gain on long-term debt                                             | ** ** | **(10**    | **)**      | (18      | )          | (72      | )          |
| Interest expense                                                                    | ** ** | **83**     | ** ** | 76       |       | 80       |       |
| **Operating income (loss)**                                                         | ** ** | **(64**    | **)**      | 79       |       | 94       |       |
| Specific items:                                                                     |       |       | ** ** |     |       |     |       |
| Impairment loss on property, plant and  equipment                                   | ** ** | **67**     | ** ** | 18       |       | —   |       |
| Closure and restructuring costs                                                     | ** ** | **76**     | ** ** | —   |       | —   |       |
| Unusual gains                                                                       | ** ** | **(10**    | **)**      | (4       | )          | —   |       |
| Unrealized loss (gain) on financial  derivative instruments                         | ** ** | **8**      | ** ** | (2       | )          | —   |       |
| ** **                                                                          |       | **141**    | ** ** | 12       |       | —   |       |
| **Operating income excluding specific items**                                       | ** ** | **77**     | ** ** | 91       |       | 94       |       |
| Depreciation and amortization                                                       | ** ** | **174**    | ** ** | 159      |       | 143      |       |
| **Operating income before depreciation and  amortization excluding specific items** | ** ** | **251**    |       | 250      |       | 237      |       |

 

41

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The following table reconciles net earnings (loss) and net earnings(loss) per share to net earnings excluding specific items and net earnings pershare excluding specific items:

 
| ** **                                                                                | ** ** | **Net earnings (loss)** | ** ** | **Net earnings (loss) per share(****1)** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------|------------|
| **(in millions of dollars, except amounts per share)** | ** ** | **2005**                          | ** ** | **2004**                                                     | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **As per GAAP**                                                                           | ** ** | **(97**                           | **)**      | 23                                                           |       | 55 | ** ** | **$** | **(1.19** | **)** | $ | 0.28 |   | $ | 0.66 |   |
| Specific items:                                                                           |       |                              | ** ** |                                                         |       |   |   |   | ** ** |   |   |   |   |
| Impairment loss on property, plant and  equipment                                         | ** ** | **67**                            | ** ** | 18                                                           |       | — | ** ** | **$** | **0.55** | ** ** | $ | 0.15 |   | — |   |
| Closure and restructuring costs                                                           | ** ** | **76**                            | ** ** | —                                                       |       | — | ** ** | **$** | **0.63** | ** ** | — |   | — |   |
| Unusual gains                                                                             | ** ** | **(10**                           | **)**      | (4                                                           | )          | — | ** ** | **$** | **(0.10** | **)** | $ | (0.03 | ) | — |   |
| Unrealized loss (gain) on financial derivative  instruments                               | ** ** | **8**                             | ** ** | (2                                                           | )          | — | ** ** | **$** | **0.07** | ** ** | $ | (0.02 | ) | — |   |
| Unusual losses included in assets held for  sale                                          | ** ** | **18**                            | ** ** | —                                                       |       | — | ** ** | **$** | **0.19** | ** ** | — |   | — |   |
| Gain on derivative financial instruments                                                  | ** ** | **(2**                            | **)**      | —                                                       |       | — | ** ** | **$** | **(0.03** | **)** | — |   | — |   |
| Foreign exchange gain on long-term debt                                                   | ** ** | **(10**                           | **)**      | (18                                                          | )          | (72 | ) | **$** | **(0.10** | **)** | $ | (0.19 | ) | $ | (0.77 | ) |
| Loss on long-term debt refinancing                                                        | ** ** | **—**                        | ** ** | 1                                                            |       | 22 | ** ** | **—** | ** ** | $ | 0.01 |   | $ | 0.18 |   |
| Share of results of significantly influenced  companies                                   | ** ** | **—**                        | ** ** | —                                                       |       | 4 | ** ** | **—** | ** ** | — |   | $ | 0.05 |   |
| Adjustment of statutory tax rate                                                          | ** ** | **4**                             | ** ** | —                                                       |       | 5 | ** ** | **$** | **0.05** | ** ** | — |   | $ | 0.07 |   |
| Tax effect on specific items                                                              | ** ** | **(48**                           | **)**      | (2                                                           | )          | 2 | ** ** | **—** | ** ** | — |   | — |   |
| ** **                                                                                |       | **103**                           | ** ** | (7                                                           | )          | (39 | ) | **$** | **1.26** | ** ** | $ | (0.08 | ) | $ | (0.47 | ) |
| **Excluding specific items**                                                              | ** ** | **6**                             |       | 16                                                           |       | 16 | ** ** | **$** | **0.07** | ** ** | $ | 0.20 |   | $ | 0.19 |   |

 

----

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

 

The following table reconciles the net cash provided by operatingactivities to operating income and operating income before depreciation andamortization:

 
| **(in millions of dollars)**                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Cash flow provided by operating activities**                                                                        | ** ** | **84**   |       | 156      |       | 126      |       |
| Changes in non-cash working capital  components                                                                       | ** ** | **10**   |       | 2        |       | 32       |       |
| Depreciation and amortization                                                                                         | ** ** | **(174** | **)**      | (159     | )          | (143     | )          |
| Current income taxes                                                                                                  | ** ** | **14**   | ** ** | 22       |       | 11       |       |
| Interest expense (includes interest on  long-term debt, other interest less interest income and capitalized interest) | ** ** | **83**   | ** ** | 76       |       | 80       |       |
| Unusual gains                                                                                                         | ** ** | **10**   | ** ** | 4        |       | —   |       |
| Impairment loss on property, plant and  equipment                                                                     | ** ** | **(67**  | **)**      | (18      | )          | —   |       |
| Closure and restructuring costs                                                                                       | ** ** | **(16**  | **)**      | —   |       | —   |       |
| Unrealized loss (gain) on derivative  financial commodity instruments                                                 | ** ** | **(8**   | **)**      | 2        |       | —   |       |
| Gain on derivative financial instruments                                                                              | ** ** | **(2**   | **)**      | —   |       | —   |       |
| Other non-cash adjustments                                                                                            | ** ** | **2**    | ** ** | (6       | )          | (12      | )          |
| Operating income (loss) from continuing  operations                                                                   | ** ** | **(64**  | **)**      | 79       |       | 94       |       |
| Depreciation and amortization                                                                                         | ** ** | **174**  | ** ** | 159      |       | 143      |       |
| **Operating income before depreciation and  amortization**                                                            | ** ** | **110**  |       | 238      |       | 237      |       |

 

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The following table reconcilescash flow from operations and cash flow from operations per share to cash flowfrom operations excluding specific items and cash flow from operations pershare excluding specific items:

 
| ** **                                                                                | ** ** | **Cash flow from operations** | ** ** | **Cash flow from operations per share** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------|------------|
| **(in millions of dollars, except amounts per share)** | ** ** | **2005**                                     | ** ** | **2004**                                                         | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flow provided by operating activities                                                | ** ** | **84**                                       |       | 156                                                              |       | 126 |   |   |   |   |   |   |   |
| Changes in non-cash working capital  components                                           | ** ** | **10**                                       |       | 2                                                                |       | 32 |   |   |   |   |   |   |   |
| Cash flow from operations                                                                 | ** ** | **94**                                       |       | 158                                                              |       | 158 | ** ** | **$** | **1.16** |   | $ | 1.93 |   | $ | 1.93 |   |
| Specific items:                                                                           |       |                                         |       |                                                             |       |   |   |   |   |   |   |   |   |
| Closure and restructuring costs                                                           | ** ** | **60**                                       | ** ** | ** **                                                       |       |   |   | **$** | **0.74** |   |   |   |   |   |
| Excluding specific items                                                                  | ** ** | **154**                                      |       | 158                                                              |       | 158 | ** ** | **$** | **1.90** |   | $ | 1.93 |   | $ | 1.93 |   |
|                                                                                           |            |                                              |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Additional Information**

 

Additional information relating to the Company, including the AIF, isavailable on SEDAR at www.sedar.com.

 

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