UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 20-F/A

(Amendment No. 3)





(Mark One)



|o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
      THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------------

OR



|x | ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
|- | ------------------------------------------------------------------------------------------------

For the fiscal year ended December 31,
2007

OR



|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

OR



|o | SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
|- | -------------------------------------------------------------------------------------------------------

Date of event requiring this shell company report.

For the transition period from
___________________________ to _______________________

Commission file number _____________________

ABITIBI-CONSOLIDATED INC.

(Exact name of Registrant as specified in its
charter)

N/A

(Translation of Registrant's name into English)



|                                                |  |                                                                         |  | 
|----------------------------------------------- |  | ----------------------------------------------------------------------- |  | 
|Canada                                          |  | 1155 Metcalfe Street, Suite 800, Montreal, Quebec, Canada H3B
      5H2
|(Jurisdiction of incorporation or organization) |  | (Address of principal executive
offices)                               



Securities registered or to be registered pursuant to Section 12(b)
of the Act.



|                          |  |                                                
|------------------------- |  | -----------------------------------------------
|Title of
      each class |  | Name of
      each exchange on which registered

None

(Title of Class)

Securities registered or to be registered pursuant to Section 12(g)
of the Act.

None

(Title of Class)

SEC 1852 (03-07)

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

None

(Title of Class)



Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of December 31, 2007.

440,174,994

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

oYes
 xNo

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

oYes
 xNo

Note - Checking the box above will not relieve any registrant required to
file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 from their obligations under those Sections.

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

oYes
 xNo

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



|                         |  |                    |  |                       
|------------------------ |  | ------------------ |  | ----------------------
|Large accelerated filero |  | Accelerated filero |  | Non-accelerated filerx

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

oItem 17
 xItem 18

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

oYes
 xNo

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

oYes
oNo









---

##### 

EXPLANATORY STATEMENT

Abitibi-Consolidated Inc. is filing this Amendment
No. 3 on Form 20-F/A ("this Amendment") to its Annual Report on Form 20-F for
the fiscal year ended December 31, 2007, originally filed on March 31, 2008 (the
"Original Filing") and amended on April 10, 2008 (the "Amendment No. 1") and on
May 30, 2008 (the "Amendment No. 2"), for the sole purpose of combining the
Original Filing, Amendment No. 1 and Amendment No. 2 into a complete annual
report.

This Amendment does not
modify or update any of the disclosures contained in the Original Filing, as
amended by Amendment No. 1 and Amendment No. 2, to
reflect any events that occurred at a later date.



---



ABITIBI-CONSOLIDATED INC.

FORM 20-F/A

(Amendment No. 3)

For the year ended December 31, 2007

TABLE OF CONTENTS



|                                                                            |  |                                                                                          |  |   
|--------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | --
|                                                                            |  | Part
      1                                                                             |  | 1 
|Item 1                                                                      |  | Identity
      of Directors, Senior Management and Advisers                              |  | 2 
|Item 2                                                                      |  | Offer
      Statistics and Expected Timetable                                            |  | 2 
|Item 3                                                                      |  | Key
      Information                                                                    |  | 2 
|Item 4                                                                      |  | Information
      on the Company                                                         |  | 12
|Item 4A                                                                     |  | Unresolved Staff
	Comments                                                               |  | 25
|Item 5                                                                      |  | Operating
      and Financial Review and Prospects                                       |  | 25
|Item 6                                                                      |  | Directors,
      Senior Management and Employees                                         |  | 48
|Item 7                                                                      |  | Major
      Shareholders and Related Party Transactions                                  |  | 57
|Item 8                                                                      |  | Financial
      Information                                                              |  | 57
|Item 9                                                                      |  | The
      Offer and Listing                                                              |  | 58
|Item 10                                                                     |  | Additional
      Information                                                             |  | 59
|Item 11                                                                     |  | Quantitative
      and Qualitative Disclosures about Market Risk                         |  | 60
|Item 12                                                                     |  | Description
      of Securities Other than Equity Securities                             |  | 63
|                                                                            |  | Part
      II                                                                            |  | 63
|Item 13                                                                     |  | Defaults,
      Dividend Arrearages and Delinquencies                                    |  | 63
|Item 14                                                                     |  | Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds |  | 63
|Item 15                                                                     |  | Controls
      and Procedures                                                            |  | 63
|Item 16A                                                                    |  | Audit
      Committee Financial Expert                                                   |  | 64
|Item 16B                                                                    |  | Code of Ethics                                                                           |  | 65
|Item 16C                                                                    |  | Principal Accountant Fees and
      Services                                             |  | 65
|Item 16D                                                                    |  | Exemptions from the
	Listing Standards for Audit Committees                              |  | 66
|Item 16E                                                                    |  | Purchases of Equity
	Securities by the Issuer and Affiliated Purchasers                  |  | 66
|                                                                            |  | Part
      III                                                                           |  | 66
|Item 17                                                                     |  | Financial
      Statements                                                               |  | 66
|Item 18                                                                     |  | Financial
      Statements                                                               |  | 66
|Item 19                                                                     |  | Exhibits                                                                                 |  | 66
|Signatures                                                                  |  | 70                                                                                      
|Section 302 President and Vice President and
      Treasurer Certifications |  |                                                                                         



---

##### 

PART I

In this Annual Report unless otherwise
noted or the context otherwise requires, the terms "we," "our," "ours," "us,", "ACI,"
"Abitibi" and Company refer to Abitibi-Consolidated Inc., a corporation
amalgamated under the laws of Canada, and its direct and indirect subsidiaries.
All references to the "Combination" refer to the combination of
Abitibi-Consolidated Inc. and Bowater Incorporated ("Bowater") to form
AbitibiBowater Inc. ("AbitibiBowater").

In this Annual Report, unless otherwise
stated, dollar amounts are expressed in Canadian dollars.

Unless we indicate otherwise, all
information in this Annual Report is stated as of March 31, 2008.

Forward-Looking Statements

Statements in this Annual Report that are
not reported financial results or other historical information are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and "forward-looking information" within the
meaning of the Securities Act (Ontario), collectively referred to herein as
"forward-looking statements." They include, for example, statements relating to
Abitibi's current liquidity situation, the sale of our Snowflake, Arizona Mill,
industry conditions and trends, plans to achieve operational improvements and
efficiencies, the effects of our reduction of newsprint and specialty paper
capacity, including the closures of certain paper and sawmills, the ability to
realize synergies from the combination of Abitibi and Bowater, the anticipated
timing and progress of integration efforts related to the combination, the
ability to meet AbitibiBowater's $1 billion debt reduction target (including the
success of its program to sell non-core assets, consolidate operations and the
success of other actions aimed at reducing its debt), the ability to maintain
and improve customer service levels, and assessments of market conditions,
anticipated future financial performance and our business outlook generally.
Forward-looking statements may be identified by the use of forward-looking
terminology such as the words "will," "could," "may," "intend," "expect,"
"believe," "anticipate," and other terms with similar meaning indicating
possible future events or potential impact on the business or security holders
of Abitibi-Consolidated Company of Canada ("ACCC"), Abitibi and AbitibiBowater.

The reader is cautioned not to place undue
reliance on these forward-looking statements, which are not guarantees of future
performance. These statements are based on management's current assumptions,
beliefs and expectations, all of which involve a number of business risks and
uncertainties that could cause actual results to differ materially. These risks
and uncertainties include, but are not limited to, our ability to derive
additional liquidity in a timely fashion and on terms acceptable to us, if at
all, our ability to sell the Snowflake, Arizona mill, the current state of the
credit markets, the ability to reduce newsprint and specialty paper capacity as
quickly as anticipated, the continued strength of the Canadian dollar against
the U.S. dollar, worsening industry conditions and further growth in alternative
media, actions of competitors, the demand for higher margin uncoated mechanical
paper, our ability to realize announced price increases, and the costs of raw
materials such as energy, chemicals and fiber. In addition, with respect to
forward-looking statements relating to the combination of Abitibi and Bowater,
the following factors, among others, could cause actual results to differ
materially from those set forth in the forward-looking statements: the risk that
the businesses will not be integrated successfully or that the improved
financial performance, product quality and product development will not be
achieved; the risk that other combinations within the industry or other factors
may limit our ability to improve our competitive position; the risk that the
cost savings and other expected synergies from the combination may not be fully
realized, may take longer to realize than expected or may not benefit Abitibi
and Bowater to the same or similar extent; and disruption from the transaction
making it more difficult to maintain relationships with customers, employees or
suppliers. The assumptions used to develop the forward-looking statements
referred to below under the headings "Business Overview-Recent Developments" and
elsewhere also include the assumption that none of the identified material risk
factors that could cause actual results to differ from forward-looking
statements will occur.

Any forward-looking information contained
in this Annual Report about prospective results of operations, financial
position or cash flows that is based upon assumptions about future economic
conditions and courses of action is presented for the purpose of assisting
prospective purchasers of securities in making their investment decision
regarding the offering and may not be appropriate for other purposes. We
undertake no obligation to



1



---

##### 

publicly update or revise any forward-looking information, whether as a
result of new information, future events or otherwise.

Item 1. Identity of Directors, Senior
Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected
Timetable

Not applicable.

Item 3. Key Information

A. Selected Financial Data

You should read the following selected
financial data together with Item 5 "Operating and Financial Review and
Prospects," the Consolidated Financial Statements in Item 18 and the other
information in this Annual Report. The selected financial data is derived from
the consolidated financial statements for the years we present.

The Consolidated Financial Statements have
been prepared in accordance with Canadian generally accepted accounting
principles ("Canadian GAAP"). These principles differ in certain respects from
United States generally accepted accounting principles ("U.S. GAAP") as
described in note 26 to the Consolidated Financial Statements in Item 18. For
all the years presented, the selected financial data is prepared in accordance
with Canadian GAAP unless otherwise indicated.



2



---

##### 

SELECTED FINANCIAL AND OTHER DATA

The following table sets forth
consolidated historical financial data and operating data for Abitibi for the
periods indicated. The consolidated statements of earnings (loss) data for the
years ended December 31, 2007, 2006 and 2005 and the consolidated balance sheet
data at December 31, 2007 and 2006 is derived from our audited consolidated
financial statements as at December 31, 2007 and 2006 and for the three year
period ended December 31, 2007, beginning on page F-1 of this Annual Report. The
consolidated statements of earnings data for the two years ended December 31,
2004 and 2003 have been derived from our audited financial statements and
related notes thereto not included in this Annual Report. This information
should also be read in conjunction with Operating and Financial Review and
Prospects, which is included in Item 5 of this Annual Report. The financial
information has been derived from consolidated financial statements that have
been prepared in accordance with Canadian GAAP. See note 26 to our audited
consolidated financial statements beginning on page F-1 for a description of the
differences between U.S. GAAP and Canadian GAAP as it relates to Abitibi. All
information provided below is in millions of Canadian dollars, except
information related to volume, information per share and revenue per tonne.



|                                                                          |  |                         |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                          |  | Year Ended December 31, |       
|                                                                          |  | 2003                    |        |   | 2004 |   |       | 2005 |  |   | 2006  |   |  | 2007 |      
|Consolidated Statements of
		Earnings (loss) Data:                        |  |                         |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Sales                                                                     |  | $                       | 4,980  |   |      | $ | 5,299 |      |  | $ | 5,342 |   |  | $    | 4,851 |   |  | $ | 4,113 |  
|Distribution costs                                                        |  |                         | 555    |   |      |   | 592   |      |  |   | 581   |   |  |      | 509   |   |  |   | 461   |  
|Countervailing, anti-dumping and
		other duties                           |  |                         | 77     |   |      |   | 50    |      |  |   | 67    |   |  |      | 28    |   |  |   | 11    |  
|Cost of sales, excluding
		amortization                                   |  |                         | 3,809  |   |      |   | 3,777 |      |  |   | 3,910 |   |  |      | 3,616 |   |  |   | 3,491 |  
|Selling, general and
		administrative expenses                            |  |                         | 169    |   |      |   | 169   |      |  |   | 179   |   |  |      | 143   |   |  |   | 224   |  
|Closure costs, impairment and
		other related charges                     |  |                         | 155    |   |      |   | 396   |      |  |   | 431   |   |  |      | 5     |   |  |   | 503   |  
|Interest expense                                                          |  |                         | 370    |   |      |   | 363   |      |  |   | 374   |   |  |      | 330   |   |  |   | 333   |  
|Gain on translation of foreign
		currencies                               |  |                         | (739   | ) |      |   | (317  | )    |  |   | (101  | ) |  |      | (10   | ) |  |   | (446  | )
|Other expenses (income), net                                              |  |                         | 14     |   |      |   | (16   | )    |  |   | 48    |   |  |      | 5     |   |  |   | 14    |  
|Net gain on dilution of interest
		in subsidiary                          |  |                         | -      |   |      |   | -     |      |  |   | -     |   |  |      | -     |   |  |   | (33   | )
|Earnings (loss) from continuing
		operations                              |  |                         | 152    |   |      |   | (126  | )    |  |   | (353  | ) |  |      | 54    |   |  |   | (714  | )
|Earnings from discontinued
		operations                                   |  |                         | 23     |   |      |   | 90    |      |  |   | 3     |   |  |      | -     |   |  |   | -     |  
|Net earnings (loss)                                                       |  |                         | 175    |   |      |   | (36   | )    |  |   | (350  | ) |  |      | 54    |   |  |   | (714  | )
|Earnings (loss) per share, basic
		and diluted(1)                         |  |                         | 0.40   |   |      |   | (0.08 | )    |  |   | (0.80 | ) |  |      | 0.12  |   |  |   | N/A   |  
|Consolidated Statements of Cash
		Flows Data:                             |  |                         |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Cash flows from (used in)
		continuing operating activities               |  | $                       | 19     |   |      | $ | (3    | )    |  | $ | 164   |   |  | $    | 232   |   |  | $ | (468  | )
|Cash flows from (used in)
		financing activities of continuing operations |  |                         | 145    |   |      |   | 161   |      |  |   | (789  | ) |  |      | 27    |   |  |   | 390   |  
|Cash flows from (used in)
		investing activities of continuing operations |  |                         | (279   | ) |      |   | (86   | )    |  |   | 566   |   |  |      | (123  | ) |  |   | 7     |  
|Dividends declared per share(1)                                           |  |                         | 0.175  |   |      |   | 0.100 |      |  |   | 0.100 |   |  |      | 0.050 |   |  |   | N/A   |  
|Other Financial Data (unaudited):                                         |  |                         |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Capital expenditures                                                      |  | $                       | 229    |   |      | $ | 256   |      |  | $ | 177   |   |  | $    | 165   |   |  | $ | 107   |  
|Selected Operations Data (unaudited):                                     |  |                         |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Newsprint volume sold (in tonnes)                                         |  |                         | 4,611  |   |      |   | 4,563 |      |  |   | 3,972 |   |  |      | 3,486 |   |  |   | 3,292 |  
|Newsprint revenue per tonne ($)                                           |  |                         | 599    |   |      |   | 613   |      |  |   | 714   |   |  |      | 740   |   |  |   | 660   |  
|Specialty papers sold (in tonnes)                                         |  |                         | 1,810  |   |      |   | 1,842 |      |  |   | 1,782 |   |  |      | 1,748 |   |  |   | 1,679 |  
|Specialty papers revenue per tonne
		($)                                  |  |                         | 822    |   |      |   | 803   |      |  |   | 855   |   |  |      | 854   |   |  |   | 804   |  
|Wood products volume sold (in
		millions of board feet)                   |  |                         | 1,930  |   |      |   | 2,169 |      |  |   | 1,965 |   |  |      | 1,858 |   |  |   | 1,572 |  
|Wood products revenue per million
		board feet ($)                        |  |                         | 379    |   |      |   | 473   |      |  |   | 453   |   |  |      | 391   |   |  |   | 339   |  
|Consolidated Balance Sheet
		Data:                                        |  |                         |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Working capital(2)                                                        |  | $                       | 146    |   |      | $ | 346   |      |  | $ | 282   |   |  | $    | 605   |   |  | $ | 318   |  
|Property, plant and equipment, net                                        |  |                         | 5,709  |   |      |   | 5,005 |      |  |   | 4,260 |   |  |      | 3,984 |   |  |   | 3,015 |  
|Total assets                                                              |  |                         | 10,312 |   |      |   | 9,787 |      |  |   | 8,052 |   |  |      | 8,099 |   |  |   | 6,572 |  
|Long-term debt due within one year
		and short term debt                  |  |                         | 269    |   |      |   | 491   |      |  |   | 95    |   |  |      | 72    |   |  |   | 725   |  
|Long-term debt                                                            |  |                         | 4,504  |   |      |   | 4,121 |      |  |   | 3,675 |   |  |      | 3,805 |   |  |   | 3,001 |  
|Total debt                                                                |  |                         | 4,773  |   |      |   | 4,612 |      |  |   | 3,770 |   |  |      | 3,877 |   |  |   | 3,726 |  
|Total shareholders' equity                                                |  |                         | 2,870  |   |      |   | 2,726 |      |  |   | 2,401 |   |  |      | 2,451 |   |  |   | 1,546 |  
|U.S. GAAP Consolidated
		Financial Data:                                  |  |                         |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Property, plant and equipment                                             |  |                         | 5,609  |   |      |   | 4,967 |      |  |   | 4,226 |   |  |      | 3,950 |   |  |   | 2,982 |  
|Total assets                                                              |  |                         | 9,871  |   |      |   | 9,263 |      |  |   | 7,902 |   |  |      | 7,532 |   |  |   | 5,954 |  
|Net earnings (loss)                                                       |  |                         | 191    |   |      |   | (38   | )    |  |   | (350  | ) |  |      | 55    |   |  |   | (908  | )
|Earnings (loss) per share, basic
		and diluted                            |  |                         | 0.44   |   |      |   | (0.09 | )    |  |   | (0.80 | ) |  |      | 0.12  |   |  |   | N/A   |  
|Shareholders' equity                                                      |  |                         | 2,698  |   |      |   | 2,373 |      |  |   | 1,925 |   |  |      | 1,705 |   |  |   | 758   |  



|(1) | On
		October 29, 2007, pursuant to the Combination, Abitibi became a
		wholly-owned subsidiary of AbitibiBowater.
|--- | -----------------------------------------------------------------------------------------------------------------

|(2) | Working capital excludes short-term debt and long-term debt within one
		year.
|--- | ------------------------------------------------------------------------------



3



---

##### 

Exchange Rate Information

Exchanging Canadian Dollars. The
following table sets forth, for each period indicated, the high and low exchange
rates for one Canadian dollar during that period, the average of the exchange
rates during that period and the exchange rate at the end of that period, in
each case expressed in U.S. dollars, based, from 2003 to October 2007, upon the
inverse noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New
York, and from November 2007, on the end of day rate based on New York City
composite as reported by Bloomberg:



|           |  |                         |  |       |  |       |  |       |  |      
|---------- |  | ----------------------- |  | ----- |  | ----- |  | ----- |  | -----
|           |  | Year ended December 31,
|           |  | 2007                    |  | 2006  |  | 2005  |  | 2004  |  | 2003 
|High       |  | 0.844                   |  | 0.910 |  | 0.869 |  | 0.849 |  | 0.774
|Low        |  | 1.086                   |  | 0.853 |  | 0.787 |  | 0.716 |  | 0.635
|Average    |  | 0.931                   |  | 0.882 |  | 0.826 |  | 0.769 |  | 0.714
|Period End |  | 1.002                   |  | 0.858 |  | 0.860 |  | 0.832 |  | 0.771

The following table sets forth, for each
period indicated, the high and low exchange rates for one Canadian dollar during
that period, in each case expressed in U.S. dollars, based, from September to
October 2007, upon the inverse noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York, and from November 2007, on the end of day rate based
on New York City composite as reported by Bloomberg:



|     |  |               |  |             |  |              |  |              |  |             |  |             
|---- |  | ------------- |  | ----------- |  | ------------ |  | ------------ |  | ----------- |  | ------------
|     |  | September2007 |  | October2007 |  | November2007 |  | December2007 |  | January2008 |  | February2008
|High |  | 0.948         |  | 1.000       |  | 1.002        |  | 0.980        |  | 0.966       |  | 0.983       
|Low  |  | 1.004         |  | 1.061       |  | 1.087        |  | 1.020        |  | 1.011       |  | 1.025       

On March 28, 2008, the exchange rate for
one Canadian dollar expressed in U.S. dollars, based upon the inverse end of day
rate in New York City composite as reported by Bloomberg, was US$0.978.

Exchanging U.S. Dollars. The
following table sets forth, for each period indicated, the high and low exchange
rates for one U.S. dollar during that period, the average of the exchange rates
during that period and the exchange rate at the end of that period, in each case
expressed in Canadian dollars, based, from 2003 to October 2007, upon the noon
buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York, and from
November 2007, on the end of day rate based on New York City composite as
reported by Bloomberg:



|           |  |                         |  |       |  |       |  |       |  |      
|---------- |  | ----------------------- |  | ----- |  | ----- |  | ----- |  | -----
|           |  | Year ended December 31,
|           |  | 2007                    |  | 2006  |  | 2005  |  | 2004  |  | 2003 
|High       |  | 1.185                   |  | 1.173 |  | 1.270 |  | 1.397 |  | 1.575
|Low        |  | 0.920                   |  | 1.099 |  | 1.151 |  | 1.178 |  | 1.292
|Average    |  | 1.074                   |  | 1.134 |  | 1.211 |  | 1.301 |  | 1.401
|Period End |  | 0.998                   |  | 1.165 |  | 1.163 |  | 1.202 |  | 1.297

The following table sets forth, for each
period indicated, the high and low exchange rates for one U.S. dollar during
that period, in each case expressed in Canadian dollars, based, from 2003 to
October 2007, upon the noon buying rate in New York City for cable transfers in
foreign currencies as certified for customs purposes by the Federal Reserve Bank
of New York, and from November 2007, on the end of day rate based on New York
City composite as reported by Bloomberg:

|     |  |               |  |             |  |              |  |              |  |             |  |             
|---- |  | ------------- |  | ----------- |  | ------------ |  | ------------ |  | ----------- |  | ------------
|     |  | September2007 |  | October2007 |  | November2007 |  | December2007 |  | January2008 |  | February2008
|High |  | 1.055         |  | 1.000       |  | 0.999        |  | 1.021        |  | 1.035       |  | 1.017       
|Low  |  | 0.996         |  | 0.943       |  | 0.920        |  | 0.981        |  | 0.990       |  | 0.975       

On March 28, 2008 the exchange rate for
one U.S. dollar expressed in Canadian dollars, based upon the end of day rate in
New York City composite as reported by Bloomberg, was CDN$1.023.

B. Capitalization and Indebtedness.

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors



Risks Related to Our Liquidity

We have substantial indebtedness that could adversely affect our
financial health, and our efforts to reduce and restructure this indebtedness
may not be successful.

We have a significant amount of indebtedness. As
of December 31, 2007, we had approximately $3.7 billion of indebtedness.
The Company's ability to meet its debt service obligations and to repay its
outstanding indebtedness will depend on a combination of new financings, cash
from operations and cash produced by divestitures of some of the Company's
assets. There can be no assurance that such new financings or divestitures will
be consummated, or, if consummated, that the terms of such transactions will be
advantageous to us. Further, there can be no assurance that we will be able to
generate sufficient cash flows to repay our outstanding



4



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##### 

indebtedness, in light of the significant decreases in North American
demand for newsprint, which is our principal product, and other negative factors
affecting our industry.

Our substantial amount of debt could have
important negative consequences. For example, it could:



| | - |  | limit our ability to
      obtain additional financing, if needed, or refinancing, when needed, for
      debt service requirements, working capital, capital expenditures, or other
      purposes;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | increase our
      vulnerability to adverse economic and industry conditions;
| | - |  | -----------------------------------------------------------------------------



| | - |  | require us to dedicate a
      substantial portion of our cash flows from operations to make payments on
      our debt;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| | - |  | cause us to liquidate
      assets such as timberland or production facilities on terms that may be
      unfavorable to us;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| | - |  | cause us to offer debt
      or equity securities on terms that may not be favorable to us or our
      affiliates;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| | - |  | reduce funds available
      for operations, future business opportunities or other purposes;
| | - |  | ---------------------------------------------------------------------------------------------



| | - |  | limit our flexibility in
      planning for, or reacting to, changes in our business and our industry;
| | - |  | ------------------------------------------------------------------------------------------------------



| | - |  | increase employee
      turnover and uncertainty, divert management's attention from routine
      business and hinder our ability to recruit qualified employees; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | place us at a
      competitive disadvantage compared to our competitors that have less debt.
| | - |  | ---------------------------------------------------------------------------------------------

Despite progress on integration following the
Combination and an improved pricing environment in our industry, our near-term
cash flow remains constrained. We currently expect to experience negative cash
flow for fiscal year 2008. In addition, the credit agreement governing Bowater's
bank credit facility substantially restricts the transfer of funds from Bowater
to Abitibi. At the same time, we are faced with significant near-term debt
maturities and currently lack the liquidity to repay them.

The Company, ACCC and AbitibiBowater are
undertaking several financing transactions, each of which are contingent on the
consummation of all of the others to address these issues (the "Financing
Transactions"). On March 10, 2008, ACCC commenced a private exchange offer
and consent solicitation with respect to certain debt securities to be issued by
the Company in exchange for certain of the Company's outstanding debt securities
(the "Exchange Offers"). The Exchange Offers expire on April 4, 2008. On
March 27, 2008, ACCC priced a private offering of US $413,000,000 aggregate
principal amount of 13.75% senior secured notes due April 1, 2011 (the "New
Secured Notes"). ACCC also entered into a 364-day senior secured term loan with
a syndicate of lenders in an amount up to US$400 million (the "Senior Term
Loan"). In addition, on March 24, 2008, AbitibiBowater Inc. entered into a
Purchase Agreement with Fairfax Financial Holdings Limited ("Fairfax") for the
sale and issuance of $350 million aggregate principal amount of 8.0% Convertible
Notes due 2013 (the "Convertible Notes"). The Financing Transactions are
discussed further in the "Business Overview-Recent Developments" section below.
We intend to complete the Financing Transactions (other than the Exchange
Offers) on April 1, 2008.

Immediately upon the consummation of the Financing
Transactions, and the sale of our mill located in Snowflake, Arizona (the
"Snowflake Mill") (as further described below), on a pro forma basis we expect
to have approximately US$278 million of cash on hand. However, we are currently
free cash flow negative from our operations, and future cash flow will be
further negatively impacted from our increased interest expense as a result of
the Financing Transactions. In order to become free cash flow positive, we will
need to realize a combination of previously announced price increases, new price
increases, cost reductions and synergies from the Combination. Without raising
additional capital or proceeds from asset sales, we expect our liquidity to
decline in the near term. Based on our current expectations, even if the
Financing Transactions are completed, we currently expect that by the second
half of 2008 we will have limited cash available for working capital, debt
service or any other purpose and will not have any revolving credit agreement or
commitments to provide revolving credit indebtedness.

We also intend to sell select assets in order to
reduce our indebtedness. On February 10, 2008, we entered into an agreement
with Catalyst Paper Corporation pursuant to which we agreed to sell our
Snowflake mill for approximately US$180 million, including US$161 million in
cash and approximately US$19 million in retained trade receivables. We expect
this sale to close in April 2008, once all conditions to close, including a
financing condition, which is expected to be satisfied in part by a fully
backstopped rights offering, and certain customary



5



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##### 

closing conditions, have been satisfied. This sale is required to comply
with the requirements set forth by the U.S. Department of Justice (the "DOJ") in
October 2007 for approval of the Combination. If this sale does not close as
expected, the DOJ may ask a court to appoint a trustee, who will be empowered to
complete the sale on terms then obtainable by the trustee using its reasonable
efforts. We continue to explore opportunities for the sale of other assets such
as timberland or production facilities, but can make no assurances that we will
be able to complete any such sales or that the terms of any such sales would be
favorable to us.

In addition, the terms of the Senior Term Loan,
the indentures governing our various notes, debentures and other debt securities
and the terms and conditions of our other indebtedness may permit us or our
subsidiaries to incur or guarantee additional indebtedness, including secured
indebtedness in some circumstances. To the extent we incur additional
indebtedness, some or all of the risks discussed above will increase.

Although management believes that we will be able
to comply with the terms of our debt agreements, there can be no assurance that
we will not be required to refinance all or a portion of our debt or to obtain
additional financing. We may be unable to refinance or obtain additional
financing because of our high levels of debt. We may be forced to default on our
debt obligations if cash flow is insufficient and refinancing or additional
financing is unavailable. If we default under the terms of some of our
indebtedness, the relevant debt holders may accelerate the maturity of our
obligations, which could cause cross-defaults or cross-acceleration under our
other obligations.

If we are unable to refinance or restructure our
indebtedness on or before the maturity thereof, by reason of acceleration or
otherwise, we could be compelled to seek protection under or be forced into a
proceeding under Canada's Companies' Creditors Arrangement Act, the U.S.
Bankruptcy Code, or both.

Our independent auditors have referred to our disclosure regarding
our ability to continue as a going concern in our financial statements.

Our financial statements include a going concern
note, which indicates that there is substantial doubt about the Company's
ability to continue as a going concern. Our auditors have provided comments by
Auditor for U.S. Readers on Canada-U.S. Reporting Difference, which states that
in the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the company's ability to continue as a going concern, such as those described in
Note 1 to Abitibi's consolidated financial statements. This disclosure will
likely make it more difficult for us to raise capital on favorable terms and
could hinder, to some extent, our operations.

We need additional funds and we may be unable to obtain needed
funds on favorable terms to us.

We are currently seeking additional funds by
borrowing more money to repay our current indebtedness and fund our operations.
Upon the closing of the Financing Transactions, we will not have any revolving
credit agreements or committed sources of liquidity. Moreover, our outstanding
debt agreements contain, and after the closing of the Financing Transactions
will contain, provisions that may restrict the secured debt we may incur in the
future. In addition, the agreement governing Bowater's bank credit facility
substantially restricts the transfer of funds from Bowater to Abitibi. Even if
the Financing Transactions are completed, we currently expect that by late 2008
we will have limited cash available for working capital, debt service or any
other purpose and will not have any revolving credit agreement or commitments to
provide revolving credit indebtedness.

The availability of additional funds, whether from
private capital sources (including banks), or the public capital markets,
fluctuates as market conditions change. There may be times when the private
capital markets and the public debt or equity markets are disrupted and lack
sufficient liquidity or when our securities cannot be sold at attractive prices,
in which case we may not be able to access capital from these sources. We
believe the markets for our indebtedness are currently experiencing this type of
disruption, making it difficult to secure the financing we need on terms
acceptable to us. In addition, on March 10, 2008, Standard &
Poor's Rating Services downgraded our corporate and debt ratings and expressed
concern regarding our ability to timely address our near-term debt maturities
given current credit market conditions, and on March 18, 2008, Moody's
similarly downgraded our corporate and debt ratings. Such downgrade will likely
make it more difficult for us to raise capital on favorable terms and could
hinder, to some extent, our operations. It is possible that additional
downgrades could occur if our interest coverage, leverage levels and/or outlook
for our industry deteriorates further.



6



---

##### 

Restrictive covenants in the indentures may reduce our operations
and financial flexibility, which may prevent us from capitalizing on business
opportunities.

The terms of the indentures governing the notes to
be issued in the financing transactions (as described under "-Recent
Developments") contain a number of operating and financial covenants restricting
our ability to among other things:



| | - |  | incur additional debt;
| | - |  | ----------------------



| | - |  | create liens on assets;
| | - |  | -----------------------



| | - |  | pay dividends or
      distributions on, or redeem or repurchase, our capital stock;
| | - |  | ------------------------------------------------------------------------------------



| | - |  | make investments;
| | - |  | -----------------



| | - |  | engage in sale and
      leaseback transactions;
| | - |  | ------------------------------------------------



| | - |  | engage in transactions
      with affiliates including the possibility to integrate our business with
      that of Bowater to realize synergies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | transfer or sell assets;
| | - |  | ------------------------



| | - |  | issue and sell equity
      interests in ACI's wholly-owned subsidiaries;
| | - |  | -------------------------------------------------------------------------



| | - |  | guarantee debt;
| | - |  | ---------------



| | - |  | restrict dividends and
      other payments to us;
| | - |  | --------------------------------------------------



| | - |  | consolidate, merge or
      transfer all or substantially all of our assets and the assets of our
      subsidiaries; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| | - |  | engage in unrelated
      businesses.
| | - |  | -------------------------------------

In addition, our ability to comply with such
covenants and those contained in the agreements governing other debt to which we
are or may become a party may be affected by events beyond our control,
including prevailing economic, financial and industry conditions. Our failure to
comply with these covenants could result in an event of default which, if not
cured or waived, could result in an acceleration of our debt and cross-defaults
under our other debt. This could require us to repay or repurchase debt prior to
the date it would otherwise be due, which could adversely affect our financial
condition. Even if we are able to comply with all applicable covenants, the
restrictions on our ability to manage our business in our sole discretion could
adversely affect our business by, among other things, limiting our ability to
take advantage of financings, mergers, acquisitions and other corporate
opportunities that we believe would be beneficial to us.



Risks Related to Our Business

We may experience difficulties in integrating our business with
that of Bowater and may not realize the anticipated synergies, efficiencies and
cost savings from the Combination.

The success of the Combination will depend, in
significant part, on our ability to realize the anticipated synergies,
efficiencies and cost savings from integrating our business with that of
Bowater. Our success in realizing these synergies, efficiencies and cost
savings, and the timing of this realization, depend on the successful
integration of such businesses and operations. We may not be able to accomplish
this integration process smoothly or successfully. The necessity of coordinating
geographically disparate organizations and addressing possible differences in
corporate and regional cultures and management philosophies may increase the
difficulties of integration. The integration of certain operations following the
Combination takes time and requires the dedication of significant management
resources, which may temporarily divert management's attention from our routine
business. Employee uncertainty and lack of focus during the integration process
may also disrupt our business.

Even if we are able to integrate such businesses
and operations successfully, there can be no assurance that this integration
will result in the realization of the full benefits of synergies, efficiencies
and cost savings that we currently expect from this integration or that these
benefits will be achieved within the time frame or in the manner anticipated.
For example, the elimination of duplicative costs may not be possible or may
take longer than anticipated, or the benefits from the Combination may be offset
by the costs incurred in integrating the businesses and operations or adverse
conditions imposed by regulatory authorities on the combined business in
connection with granting approval for the Combination. In addition, the benefit
of any synergies realized may not be shared equally between Abitibi and Bowater.
If we do not realize our anticipated synergies and efficiencies, in the amounts
or in the



7



---

##### 

time frame expected, or if our management cannot integrate successfully
the operations of the two companies, our business and results of operations may
be adversely affected.

Developments in alternative media could continue to adversely
affect the demand for our products, especially in North America, and our
response to these developments may not be successful.

Trends in advertising, electronic data
transmission and storage and the Internet could have further adverse effects on
traditional print media, including our products and those of our customers, but
neither the timing nor the extent of those trends can be predicted with
certainty. Our newspaper, magazine and catalog publishing customers may
increasingly use, and compete with businesses that use, other forms of media and
advertising and electronic data transmission and storage, including television
and the Internet, instead of newsprint, uncoated specialty papers or other
products made by us. The demand for certain of our products weakened
significantly over the last several years. For example, industry statistics
indicate that North American newsprint demand has been in decline since at least
1999 and has experienced annual declines of approximately 5% in 2005, 6% in
2006, and 10% in 2007. We believe, and certain third party forecasters indicate,
that these declines in newsprint demand could continue in 2008 and beyond due to
conservation measures taken by publishers, reduced North American newspaper
circulation, less space devoted to advertising and substitution to other
uncoated mechanical grades.

In response to the decline in North American
demand for our newsprint product, we have reduced our paper production capacity.
Between November 29, 2007 and February 29, 2008, we reduced our
newsprint and specialty papers production capacity by approximately 500,000
tonnes per year. As a result of our continuing review of our business to reduce
cost, improve our manufacturing platform, and better position ourselves in the
global marketplace, it may be necessary to curtail even more production or
permanently shut down even more machines or facilities. We expect to announce
the results and detailed action steps from this review during the second quarter
of 2008 and additional curtailments or closures could take place by mid-2008.
Such curtailments and shut downs would become increasingly likely as North
American newsprint demand continues to decline or if market conditions otherwise
worsen. Curtailments or shutdowns could result in goodwill impairment or asset
write-downs at the affected facilities, which facilities may include facilities
that are collateral for the notes, and could negatively impact our cash flows
and materially affect our results of operations and financial condition.

We may not be successful in our strategy of increasing our share of
specialty papers and competing in growth markets with higher returns.

One of the components of our long-term strategy is
to improve our portfolio of businesses by focusing on specialty papers and
competing more aggressively in growth markets with higher return. There are
risks associated with the implementation of this strategy. For example,
implementation involves an investment in machines and personnel and initial
efforts to penetrate these markets often require reductions in prices in order
to gain initial market share, which can make it more difficult to recover our
investment. To the extent we are unsuccessful in achieving this strategy, our
results of operations may be adversely affected.

We face intense competition in the forest products industry and the
failure to compete effectively would have a material adverse effect on our
business, financial condition and results of operations.

We compete with numerous forest products
companies, some of which have greater financial resources than we do. There has
been a continued trend toward consolidation in the forest products industry,
leading to new global producers. These global producers are typically large,
well-capitalized companies that may have greater flexibility in pricing and
financial resources for marketing, investment and expansion than we do. The
markets for our products are all highly competitive. Actions by competitors can
affect our ability to sell our products and can affect the volatility of the
prices at which our products are sold. While the principal basis for competition
is price, we also compete on the basis of customer service, quality and product
type. There has also been an increasing trend toward consolidation among our
customers. In addition, lumber demand is primarily driven by U.S. and Canadian
residential housing construction. According to Freddie Mac, total U.S. housing
starts declined 25% in 2007 to approximately 1.4 million units, and housing
starts are expected to further decline 23% to approximately 1.1 million
units in 2008. With fewer customers in the market for our products, our
negotiation position with these customers could be weakened.



8



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##### 

In addition, our industry is capital intensive,
which leads to high fixed costs. Some of our competitors may be lower-cost
producers in some of the businesses in which we operate. Global newsprint
capacity, particularly Chinese newsprint capacity, has been increasing, which
could result in lower prices, volumes or both for our exported products. Other
actions by competitors, such as reducing costs or adding low-cost capacity, may
adversely affect our competitive position in the products we manufacture and,
consequently, our sales, operating income and cash flows. We may not be able to
compete effectively and achieve adequate levels of sales and product margins.
Failure to compete effectively would have a material adverse effect on our
business, financial condition and results of operations.

The forest products industry is highly cyclical. Fluctuations in
the prices of, and the demand for, our products could result in smaller or
negative profit margins, lower sales volumes, and curtailment or closure of
operations.

The forest products industry is highly cyclical.
Historically, economic and market shifts, fluctuations in capacity and changes
in foreign currency exchange rates have created cyclical changes in prices,
sales volume and margins for our products. Most of our paper and wood products
are commodities that are widely available from other producers and even our
specialty paper is susceptible to these fluctuations. Because our commodity
products have few distinguishing qualities from producer to producer,
competition for these products is based primarily on price, which is determined
by supply relative to demand. The overall levels of demand for the products we
manufacture and distribute and, consequently, our sales and profitability,
reflect fluctuations in levels of end-user demand, which depend in part on
general economic conditions in North America and worldwide. In 2007, we
experienced lower demand and decreased pricing for our wood products due to a
weaker U.S. housing market. We are not expecting any significant improvements in
the wood products market before 2009. As such, we currently have idled
annualized capacity of approximately 1.1 billion board feet of lumber in the
provinces of Quebec and British Columbia. We are also conducting an in-depth
review of our wood products business with the objective of selling non-core
assets, consolidating facilities, and curtailing or closing non-contributing
operations. Other wood products producers have also announced closures or
curtailments of sawmills. Continued closures and curtailments are likely to
reduce the supply and increase the price of wood fiber. See also "Developments
in alternative media could continue to adversely affect the demand for our
products, especially in North America, and our response to these developments
may not be successful."

Our manufacturing businesses may have difficulty obtaining fiber at
favorable prices, or at all.

Fiber is the principal raw material we use in our
business. We use both virgin fiber (wood chips and logs) and recycled fiber (old
newspapers and magazines) as fiber sources for our paper mills. Wood fiber is a
commodity and prices historically have been cyclical. Environmental litigation
and regulatory developments have caused, and may cause in the future,
significant reductions in the amount of timber available for commercial harvest
in Canada and the United States. In addition, future domestic or foreign
legislation, litigation advanced by aboriginal groups and litigation concerning
the use of timberlands, the protection of endangered species, the promotion of
forest diversity and the response to and prevention of catastrophic wildfires
could also affect timber supplies and the use of timberland. For example, one
paper company recently announced conditions on its continued purchase of our
pulp containing fiber we harvest from timberland that has been contested by an
aboriginal group. Availability of harvested timber may further be limited by
factors such as fire and fire prevention, insect infestation, disease, ice
storms, wind storms, drought, flooding and other natural and man-made causes,
thereby reducing supply and increasing prices.

Wood fiber pricing is subject to market influences
and our cost of wood fiber may increase in particular regions due to market
shifts. In 2007, we experienced lower demand and decreased pricing for our wood
products due to a weaker U.S. housing market. We are not expecting any
significant improvements in the wood products market before 2009. We currently
have idled annualized capacity of approximately 1.1 billion board feet of lumber
in the provinces of Quebec and British Columbia. We are also conducting an
in-depth review of our wood products business with the objective of selling
non-core assets, consolidating facilities, and curtailing or closing
non-contributing operations. Other wood products producers have also announced
closures or curtailments of sawmills. Continued closures and curtailments are
likely to reduce the supply and increase the price of wood fiber.

Pricing of recycled fiber has recently been
increasing. For example, prices of old newspapers have increased from an average
of $88 per ton in December 2006 to $127 per ton in February 2008. We believe
that these price increases are related to expanding paper and packaging capacity
in Asia, as well as strong North American demand, and that prices may remain at
elevated levels. Any sustained increase in fiber prices would increase our
operating costs and we may be unable to increase prices for our products in
response.



9



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##### 

Although we believe that the balance of fiber
supply between our internal sources and the open market is adequate to support
our current wood products and paper and pulp production requirements, there is
no assurance that access to fiber will continue at the same levels achieved in
the past. The cost of softwood fiber and the availability of wood chips may be
affected. If our cutting rights pursuant to the forest licenses or our forest
management agreements are reduced or if any third-party supplier of wood fiber
stops selling or is unable to sell wood fiber to us, our financial condition and
operating results would suffer.

An increase in the cost of our purchased energy, chemicals and
other raw materials would lead to higher manufacturing costs, thereby reducing
our margins.

Our operations consume substantial amounts of
energy such as electricity, natural gas, fuel oil, coal and wood waste. We buy
energy and raw materials, including chemicals, wood, recovered paper and other
raw materials, primarily on the open market. The prices for raw materials and
energy are volatile and may change rapidly, directly affecting our results of
operations. The availability of raw materials and energy may also be disrupted
by many factors outside our control, adversely affecting our operations. Energy
prices, particularly for electricity, natural gas and fuel oil, have been
volatile in recent years and prices for 2005, 2006 and 2007 exceeded historical
averages. As a result, fluctuations in energy prices will impact our
manufacturing costs and contribute to earnings volatility.

We are a major user of renewable natural resources
such as water and wood. Accordingly, significant changes in climate and
agricultural diseases or infestation could affect our financial condition and
results of operations. The volume and value of timber that we can harvest or
purchase may be limited by factors such as fire and fire prevention, insect
infestation, disease, ice storms, wind storms, flooding, other weather
conditions and other causes. As is typical in the industry, we do not maintain
insurance for any loss to our standing timber from natural disasters or other
causes. Also, we can provide no assurance that we will be able to maintain our
rights to utilize water or to renew them at conditions comparable to those
currently in effect.

For our commodity products, the relationship
between industry supply and demand for these products, rather than changes in
the cost of raw materials, will determine our ability to increase prices.
Consequently, we may be unable to pass along increases in our operating costs to
our customers. Any sustained increase in energy, chemical or raw material prices
without any corresponding increase in product pricing would reduce our operating
margins and potentially require us to limit or cease operations of one or more
of our machines.

We could experience disruptions in operations and/or increased
labor costs due to labor disputes.

We believe we are the largest employer in the
Canadian pulp and paper sector and have the sector's largest representation by
unions. A significant number of our collective bargaining agreements with
respect to our paper operations in Eastern Canada will expire in the second
quarter of 2009. In early 2008, we initiated negotiations with the union
representing the majority of our Eastern Canadian employees on the 2009
agreements. Those negotiations occurred in March 2008 and were not successful in
reaching an early agreement. Our collective agreements for our employees at our
facility located in Bridgewater, U.K. is up for renewal in 2008. While
negotiations with the unions in the past have resulted in collective agreements
being signed, as is the case with any negotiation, we may not be able to
negotiate acceptable new agreements, which could result in strikes or work
stoppages by affected employees. Renewal of collective bargaining agreements
could also result in higher wage or benefit costs. Therefore, we could
experience a disruption of our operations or higher ongoing labor costs which
could have a material adverse effect on our business, financial condition or
results of operations.

Our operations require substantial capital and we may not have
adequate capital resources to provide for all of our capital requirements.

Our businesses are capital intensive and require
that we regularly incur capital expenditures in order to maintain our equipment,
increase our operating efficiency and comply with environmental laws. If our
available cash resources and cash generated from operations are not sufficient
to fund our operating needs and capital expenditures, we would have to obtain
additional funds from borrowings or other available sources or reduce or delay
our capital expenditures. We may not be able to obtain additional funds on
favorable terms or at all. In addition, our debt service obligations will reduce
our available cash flows. If we cannot maintain or upgrade our equipment as we
require, we may become unable to manufacture products that compete effectively
in one or more of our product lines.



10



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##### 

Changes in laws and regulations could adversely affect our results
of operations.

We are subject to a variety of foreign, federal,
state, provincial and local laws and regulations dealing with trade, employees,
transportation, taxes, timber and water rights and the environment. Changes in
these laws or regulations or their interpretations or enforcement have required
in the past, and could require in the future, substantial expenditures by us and
adversely affect our results of operations. For example, changes in
environmental laws and regulations have in the past, and could in the future,
require us to spend substantial amounts to comply with restrictions on air
emissions, wastewater discharge, waste management and landfill sites, including
remediation costs. Environmental laws are becoming increasingly stringent and
violations could lead to substantive fines and penalties. Consequently, our
compliance and remediation costs could increase materially.

We are controlled by AbitibiBowater.

All of our issued and outstanding common shares
are held by AbitibiBowater and its indirect wholly owned subsidiaries. As a
result, AbitibiBowater controls our policies and operations. In addition, any
synergies generated as a result of the Combination may not benefit Abitibi to
the same or a similar extent to which they benefit Bowater, or at all. In
addition actions taken by AbitibiBowater and its financial condition, matters
over which we have no control, may affect us and the market for the notes.
Additionally, adverse developments at AbitibiBowater or any of its other
subsidiaries could have an adverse impact on us.

Conditions could arise related to our hydroelectric facilities that
could adversely affect our results of operations

Our hydroelectric facilities supply large amounts
of energy for our operations. Our hydroelectric facilities are subject to
generally applicable regulations regarding, among other things, environmental
compliance, wildlife protection, water quality, capital improvements, and flood
control. Changes to applicable regulations could require us to incur additional
costs related to our hydroelectric facilities. Hydroelectric power generation is
dependent upon the availability of navigable water in the related waterways. We
can provide no assurance regarding the water that will be available to us for
power generation or regarding our ability to maintain or renew our rights to
utilize that water on conditions comparable to those currently in effect. Any
reduction in our level of hydroelectric power generation would increase our
energy costs.

Changes in the political or economic conditions in Canada, the
United States or other countries in which our products are manufactured or sold
could adversely affect our results of operations.

We manufacture products in Canada, the United
States and the United Kingdom and sell products throughout the world. Paper
prices are tied to the health of the economies of North and South America, Asia
and Europe, as well as to paper inventory levels in these regions. The economic
and political climate of each region has a significant impact on our costs and
the prices of, and demand for, our products. Changes in regional economies or
political instability, including acts of war or terrorist activities, can affect
the cost of manufacturing and distributing our products, pricing and sales
volume, directly affecting our results of operations. Such changes could also
affect the availability or cost of insurance.

We are subject to environmental laws and regulations.

We are subject to a wide range of general and
industry-specific laws and regulations relating to the protection of the
environment, including those governing air emissions, wastewater discharges,
timber harvesting, the release, storage, management and disposal of, and
exposure to, hazardous substances and waste, the clean-up of contaminated sites,
landfill operation and closure, forestry operations, threatened and endangered
species habitat, and health and safety. As an owner and operator of real estate
and manufacturing and processing facilities, we may be liable under
environmental laws for cleanup and other costs and damages, including tort
liability and damages to natural resources, resulting from past or present
spills or releases of hazardous or toxic substances on or from our current or
former properties. We may incur liability under these laws without regard to
whether we knew of, were responsible for, or owned the property at the time of,
any spill or release of hazardous or toxic substances on or from our property,
or at properties where we arranged for the disposal of regulated materials.
Claims may arise out of currently unknown environmental conditions or
enforcement efforts by governmental or private parties.

Under Canada's regulatory framework for greenhouse
gas emissions proposed in April 2007, existing paper facilities would be
required to reduce their greenhouse gas emissions intensity by 18% by 2010 from
2006 sector



11



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average levels, and by an additional 2% annually thereafter. Although we
do not expect to be disproportionately affected compared with comparable
operations future climate change regulation may require capital investments.

We have net liabilities with respect to our pension plans and the
actual cost of our pension plan obligations could exceed current provisions.

As of December 31, 2007, our defined benefit
pension plans were under-funded by approximately $436 million. Our future
funding obligations for the defined benefit pension plans depend upon changes to
the level of benefits provided by the plans, the future performance of assets
set aside in trusts for these plans, the level of interest rates used to
determine minimum funding levels, actuarial data and experience and any changes
in government laws and regulations. Any adverse change to any of these factors
may require us to increase our cash contributions to our pension plans and those
additional contributions could have a material adverse effect on our cash flows
and results of operations.

Currency fluctuations may adversely affect our results of
operations and financial condition, and changes in foreign currency exchange
rates can affect our competitive position, selling prices and manufacturing
costs.

We compete with North American, European and Asian
producers in most of our product lines. Our products are sold and denominated in
U.S. dollars, Canadian dollars and selected foreign currencies. A substantial
portion of our manufacturing costs are denominated in Canadian dollars. In
addition to the impact of product supply and demand, changes in the relative
strength or weakness of the U.S. dollar may also affect international trade
flows of these products. A stronger U.S. dollar may attract imports into North
America from foreign producers, increase supply and have a downward effect on
prices, while a weaker U.S. dollar may encourage U.S. exports and increase
manufacturing costs that are in Canadian dollars or other foreign currencies.
Variations in the exchange rates between the U.S. dollar and other currencies,
particularly the Euro and the currencies of Canada and the United Kingdom, and
certain Asian and Scandinavian countries, could significantly affect our
competitive position compared to many of our competitors.

We are particularly sensitive to changes in the
value of the Canadian dollar versus the U.S. dollar. The impact of these changes
depends primarily on our production and sales volume, the proportion of our
production and sales that occur in Canada, the proportion of our financial
assets and liabilities denominated in Canadian dollars, our hedging levels and
the magnitude, and direction and duration of changes in the exchange rate. We
expect exchange rate fluctuations to continue to impact costs and revenues;
however, we cannot predict the magnitude or direction of this effect for any
quarter, and there can be no assurance of any future effects. During 2007, the
relative value of the Canadian dollar ranged from a low of $0.85 in January 2007
to a high of $1.09 in November 2007. See "Quantitative and Qualitative
Disclosure About Market Risk - Price, Cost and Exchange Rate Sensitivity."

Based on exchange rates, hedging levels and
operating conditions projected for the first quarter of 2008, we project that a
one-cent increase in the Canadian dollar exchange rate would reduce our
operating income for the first quarter by approximately $5 million.

If the Canadian dollar remains strong for an
extended period of time, it could influence the foreign exchange rate
assumptions that are used in our evaluation of goodwill and long-lived assets
for impairment and, consequently, result in additional goodwill or asset
impairment charges.

Item 4. Information on the Company

A. History and Development of the
Company

Our legal name and commercial name is
Abitibi-Consolidated Inc. The Company results from the amalgamation under the
Canada Business Corporation's Act of Abitibi-Price Inc. and Stone-Consolidated
Corporation, another forest product company, pursuant to a certificate and
articles of amalgamation dated May 30, 1997. We are a corporation domiciled in
the Province of Quebec, Canada and operate under the Canada Business
Corporations Act. Our principal executive offices are located at 1155 Metcalfe
Street, Suite 800, Montreal, Quebec, Canada H3B 5H2, and our telephone number is
(514) 875-2160. Our information can be found on AbitibiBowater's website at
www.abitibibowater.com. Information on AbitibiBowater's website is not
incorporated by reference in this Annual Report. Our United States contact
person is Duane Owens, Vice President and Treasurer of AbitibiBowater, at
(864) 282-9488.



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Originally, Abitibi was formed by the
merger of Abitibi-Price and Stone-Consolidated on May 29th, 1997. Both companies
were Canadian-based, forest product companies. In 1998, Abitibi formed a
joint-venture partnership, Pan Asia Paper Company Pte Ltd., with Norske Skog of
Norway and Hansol Paper Co. of South Korea.

On April 18th, 2000, Abitibi acquired
approximately 96% of the Class A Subordinated Voting Shares and approximately
92% of the Class B Shares of Donohue Inc., a major Canadian integrated forest
products company engaged in forest management and in the manufacture and sale of
newsprint, specialty papers, market pulp and wood products with mills located in
Québec, Ontario, British Columbia and Texas. On August 16, 2002, Abitibi
increased its stake in Pan Asia Paper Company Pte Ltd. from 33.3% to 50%. On
November 17, 2005, Abitibi completed the sale of its 50% share ownership in Pan
Asia Paper Company Pte Ltd. to Norske Skog. The Company has reclassified its
historical information to exclude PanAsia's results from continuing operations.

On October 29, 2007, we combined with
Bowater in a merger of equals to form AbitibiBowater (the "Combination"). As a
result of the Combination, we and Bowater became subsidiaries of AbitibiBowater.
AbitibiBowater common stock trades on the New York Stock Exchange and the
Toronto Stock Exchange under the symbol ABH.

Immediately after the combination,
AbitibiBowater began a company-wide strategic review of its business. The
AbitibiBowater Board of Directors approved an action plan to reduce the
consolidated company's newsprint and specialty papers production capacity by
almost 1 million tonnes per year by the end of the first quarter of 2008. As
part of these reductions, we permanently closed our Belgo (Shawinigan, Quebec)
mill and indefinitely idled our Mackenzie (British Columbia) mill. We also
indefinitely idled two sawmills that directly supported the Mackenzie paper
operation. These facilities in the aggregate represent capacity of approximately
311,000 tonnes of newsprint, 260,000 tonnes of specialty papers, and 500 million
board feet of lumber, and were all cash flow negative. Additionally, we
permanently closed previously idled paper mills at Fort William (Thunder Bay,
Ontario) and Lufkin (Texas). The previously idled operations had a total
capacity of approximately 525,000 tonnes. These actions were completed by
February 18, 2008. These actions were taken in order to assist us in supplying
our customers' demand efficiently by manufacturing products on machines best
positioned to produce the products and by taking specific actions designed to
ensure that our production is focused on our more profitable product lines from
lower cost sites. During the implementation of the action plan generated during
the first phase of our strategic review, we have simultaneously been working on
phase two, which is a comprehensive review of all aspects of our business in an
effort to further reduce costs, improve our manufacturing platform and better
position the combined companies in the global marketplace. We expect to announce
the results and detailed action steps from this second phase during the second
quarter of 2008. We are also conducting an in-depth review of our wood products
business with the objective of selling non-core assets, consolidating facilities,
and curtailing or closing non-contributing operations.

In connection with the review and approval
of the Combination by the antitrust division of the U.S. Department of Justice,
the Company agreed, among other things, to sell its Snowflake newsprint mill and
certain related assets and liabilities. The Company expects to complete the sale
of this facility to Catalyst Paper Corporation in the second quarter of 2008 for
approximately $161 million, excluding trade accounts receivable of $19 million
that it will retain.

B. Business Overview

Recent Developments

On April 1, 2008, the Company, ACCC and
AbitibiBowater completed a number of financing transactions (the "Financing
Transactions"), each of which is described in more detail below, to address the
Company's near-term liquidity challenges.



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ACCC Senior Secured Note Offerings.
ACCC issued and sold approximately $413 million aggregate principal amount of
13.75% Senior Secured Notes due 2011 (the "New Secured Notes") to Goldman
Sachs & Co. and J.P. Morgan Securities Inc., as initial purchasers. The New
Secured Notes were sold to qualified institutional buyers in reliance on Rule
144A under the Securities Act of 1933, as amended (the "Securities Act"), and to
non-U.S. persons in reliance on Regulation S under the Securities Act. The New
Secured Notes are guaranteed by Abitibi and certain of its subsidiaries (the
same subsidiaries guaranteeing the Exchange Notes) and secured by security
interests on our and the guarantors' fixed assets (subject to permitted liens)
and certain other assets. The transaction closed on April 1, 2008.

ACCC Exchange Offers.On April 4,
2008, ACCC completed a private offer to exchange (the "Exchange Offer")
approximately US$496 million in aggregate principal amount of three series of
outstanding senior notes due in 2008 and 2009 issued by Abitibi, ACCC and
another of our subsidiaries (the "ACI Notes") for a combination of cash and new
ACCC 15.5% senior notes due 2010, guaranteed by Abitibi and certain of its
subsidiaries (the "Exchange Notes"). Approximately 89.4% of the outstanding
6.95% Senior Notes due 2008, 92.1% of the outstanding 5.25% Senior Notes due
2008 and 94.8% of the outstanding 7.875% Senior Notes due 2009 had been validly
tendered. As a result, ACCC issued an aggregate of approximately US$293 million
principal amount of Exchange Notes and approximately US$218 million in cash (including
payment of accrued interest) to tendering noteholders in connection with the
Exchange Offer.

ACCC Senior Secured Term Loan.ACCC,
Abitibi and certain of its subsidiaries entered into a senior secured term loan
on April 1, 2008 with a syndicate of lenders in an amount of US$400 million (the
"Senior Term Loan"). The Senior Term Loan has maturity of 364 days with a coupon
of LIBOR + 800 basis points, with a 3.5% LIBOR floor, at a price of 96% of par
and is secured by a first lien on substantially all of Abitibi's and ACCC's
assets other than fixed assets, intellectual property and capital stock of
subsidiaries and by a first lien on substantially all of the assets of Donohue
Corp., an indirect subsidiary of AbitibiBowater ("D Corp."), including fixed
assets and certain other assets. The Senior Term Loan ranks effectively senior
to the New Secured Notes to the extent of the collateral securing the Senior
Term Loan.

AbitibiBowater Convertible Notes.
AbitibiBowater issued and sold US$350 million of unregistered convertible
debentures due 2013 of AbitibiBowater (the "Convertible Notes") to Fairfax and
its designated subsidiaries in a private placement. The Convertible Notes bear
interest at a rate of 8.0% per annum and are convertible into shares of
AbitibiBowater common stock at an estimated conversion price of $10.00 per share,
subject to standard antidilution adjustments. The Convertible Notes are not
guaranteed by Abitibi or any of its respective subsidiaries. The transaction
closed on April 1, 2008.

D-Corp. Reorganization.Upon
consummation of the Financing Transactions, AbitibiBowater, through a newly
created direct subsidiary, acquired from Abitibi, through a series of
intercompany transactions, all of the common stock and all of the outstanding
non-voting preferred stock of D Corp. D Corp., previously a subsidiary of
Abitibi, indirectly owns the investment in Augusta Newsprint Company, which
operates a newsprint mill, the Alabama River and Snowflake paper mills, and the
U.S. Recycling Operations. As a result, D Corp. is now an indirect subsidiary of
AbitibiBowater. This transaction will have a material impact on the Company's
results of operations going forward.

Our Company

Abitibi is a global leader in the
production of newsprint and specialty papers as well as a major producer of wood
products, and generated sales of approximately $4.1 billion in 2007. Our
operations are currently comprised of 15 pulp and paper mills, 19 sawmills, four
remanufacturing facilities, two engineered wood facilities and eight
hydroelectric plants in Canada, the United States and the United Kingdom. We
supply products to a diverse group of customers worldwide, marketing our
products in over 70 countries. We are also among the world's largest recyclers
of newspapers and magazines and are responsible for the forest management of
approximately 16 million hectares of third-party certified sustainable forest
land.





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Our Parent Corporation

On October 29, 2007, we combined with
Bowater in a merger of equals to form AbitibiBowater. As a result of the
Combination, we and Bowater became subsidiaries of AbitibiBowater.
AbitibiBowater is the largest producer of newsprint in the world by capacity and
one of the largest publicly traded pulp and paper manufacturers in the world.
AbitibiBowater currently owns or operates 28 pulp and paper facilities, 31 wood
products facilities, located in Canada, the United States, the United Kingdom
and South Korea. AbitibiBowater produces a wide variety of newsprint coated and
uncoated specialty papers, market pulp and wood products, which are marketed in
over 90 countries. AbitibiBowater common stock trades on the New York Stock
Exchange and the Toronto Stock Exchange under the symbol ABH.

Following the consummation of the
Combination and a strategic review of the businesses, AbitibiBowater announced a
number of significant strategic decisions on November 29, 2007, including (i) a
reduction in newsprint and specialty papers production capacity by approximately
one million tonnes per year during the first quarter of 2008 and (ii) the idling
of our sawmill operations in Mackenzie, British Columbia. These actions
represent a reduction of approximately 600,000 tonnes of newsprint, 400,000
tonnes of specialty papers, and 500 million board feet of lumber capacity. It
also permanently closed pulp and paper operations that had previously been idled
with a total capacity of approximately 650,000 tonnes.

AbitibiBowater expects to generate
annualized synergies as a result of the Combination of approximately US$375
million by the end of 2009. These synergies are expected to come from
improvements in areas such as manufacturing; selling, general and administrative
(SG&A); procurement; and logistics costs, as described below.



| | - |  | Approximately US$205 million from lower manufacturing costs.Since
		the Combination, AbitibiBowater has focused on reallocating production
		of newsprint and paper grades across its combined machine base,
		improving asset performance by operating machines in narrower ranges
		around their peak production and sharing best practices among mills to
		enhance production efficiency and lower cost.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | Approximately US$90 million from reducing SG&A costs. Through
		the elimination of duplicative sales, marketing and customer service
		personnel and centralization of corporate administration, management,
		finance and human resource functions, AbitibiBowater intends to lower
		fixed overhead costs and reduce headcount.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | Approximately US$50 million from reducing procurement costs. AbitibiBowater
		is seeking to lower prices of key raw materials through negotiation of
		volume discounts, consolidation of raw materials collection and
		improvement in inventory management.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | Approximately US$30 million from improved logistics. AbitibiBowater
		also intends to realize cost reductions from improved logistics through
		an optimization of freight rates as well as an enhancement of
		distribution facilities and timberland-mill and mill-customer pairings.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For a description of certain risks
relating to the achievement of the synergies described above, see "Risk Factors
- Risks Related to Our Business - We may experience difficulties in integrating
our business with that of Bowater and may not realize the anticipated synergies,
efficiencies and cost savings from the Combination." Additionally, any such
synergies may not benefit Abitibi to the same or a similar extent to which they
benefit Bowater and some synergies that are beneficial to Bowater may be
detrimental to Abitibi.

Product Lines

We manage our business based on the
products that we manufacture and sell to external customers. Our reportable
segments, which correspond to our primary product lines, are newsprint,
specialty papers and wood products. In general, our products are globally traded
commodities. Pricing and the level of shipments of these products will continue
to be influenced by the balance between supply and demand as affected by global
economic conditions, changes in consumption and capacity, the level of customer
and producer inventories and fluctuations in currency exchange rates.





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Newsprint. We own or operate
10 newsprint facilities in Canada, the United States and the United Kingdom (after
giving effect to the pending sale of our Snowflake mill). We are one of the
largest producers of newsprint in the world, with annual capacity of
approximately 3 million tonnes, or approximately 7% of worldwide newsprint
capacity. Our annual North American production capacity of approximately
2.8 million tonnes represents approximately 25% of North American newsprint
capacity. We supply leading publishers in more than 70 countries with top-quality
newsprint, including varieties made of up to 100% recycled fiber. In 2007,
approximately 37% of our total newsprint production was sold to markets outside
North America and newsprint represented approximately 53% of our sales.

Specialty Papers. We are one
of the world's largest producers of uncoated mechanical papers with five
facilities in North America and annual capacity, including market pulp, of
approximately 1.5 million tonnes. This tonnage represents approximately 23% of
North American uncoated mechanical capacity and 32% of our total pulp and paper
production capacity. We manufacture a broad range of uncoated mechanical papers
including supercalendered and super-brite specialty papers that are used in
books, retail advertising, direct mail inserts, flyers, and other commercial
printing applications. In 2007, specialty papers represented approximately 33%
of sales.

Wood Products. We operate
sawmills in Canada that produce construction-grade lumber that is sold in Canada
and in the United States. Our sawmills have an annual capacity of approximately
1.9 billion board feet of lumber. Lumber products manufactured at our sawmills
include studs, structural lumber and remanufactured wood products such as
furniture parts, fencing and bed frames. In addition, our sawmills are a major
source of wood chips for our pulp and paper mills. In 2007, wood products
represented approximately 13% of our sales.

Our Industry

Newsprint. The newsprint
industry is a commodity market and newsprint prices are cyclical. The majority
of newsprint demand comes from daily newspapers with the remainder of demand
from weekly newspapers and commercial printing. U.S. newsprint demand has
declined from 11.9 million tonnes in 1999 to 7.7 million tonnes in 2007,
representing an average annual decline of 5%. Key drivers for the decline in
demand include: decreased grammage (metric measure of paper weight), decreased
advertising demand, decreased circulation and decreased web-width. However,
according to a third party study, global newsprint demand reached its highest
level since 2001 during the month of January 2008, driven largely by strong
demand in Asia and Latin America. According to Resource Information Systems,
Inc. (RISI), North American newsprint prices have risen since the fourth quarter
of 2007, as North American producers have separately announced a number of price
increases totaling US$145 per metric ton to be implemented by June 2008.
According to RISI, North American newsprint capacity is expected to decrease by
958,000 tonnes (a decline of 8%) in 2008, while average newsprint prices are
expected to increase US$74 per tonne or 13% in 2008.

The following table shows prices per
metric ton for newsprint (48.8 gram) for the periods indicated below:



Specialty Papers. The
uncoated groundwood paper industry is a commodity market and paper prices are
cyclical. Specialty paper demand is primarily driven by advertising spending and
print media usage, which tend to rise when gross domestic product in the United
States is robust and typically decline in a sluggish economy. According to RISI,
prices for supercalendered grades (glossy grades) declined 4% in 2007 compared
to 2006. However, prices are expected to rise 14% for supercalendered in 2008.
We announced a US$60 per short ton





16



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##### 

increase in supercalendered and super-brite
papers in the fourth quarter of 2007 and most North American producers have
announced an additional US$60 per short ton increase for uncoated mechanical
papers, effective April 2008.

The following table shows prices per
metric ton for uncoated groundwood, supercalendered paper, 35lb. weight, for the
periods indicated below:



Wood Products. The softwood
lumber industry is a commodity market and lumber prices are cyclical. Lumber
demand is primarily driven by U.S. and Canadian residential housing
construction. According to Freddie Mac, total U.S. housing starts declined 25%
in 2007 to approximately 1.36 million units, and housing starts are expected to
further decline 23% to 1.05 million units in 2008. According to RISI, U.S.
softwood lumber demand decreased 7.1 billion board feet in 2007, representing a
decline of 10% from 2006 levels and a decline of 13% from peak levels of 75.0
billion board feet reached in 2005; demand is expected to decrease 5% in 2008.
According to RISI, average Crows Framing Lumber index prices decreased 15% in
2007 to US$276 per thousand board feet and are expected to decrease 3% in 2008
to US$267 per thousand board feet. As a result, we currently have idled
annualized capacity of approximately 1.1 billion board feet of lumber.

The following table shows prices of lumber
per million board feet for the periods indicated below:



Business Strategy

The key elements of our business strategy
include the following:

Proactively manage our core
newsprint and specialty paper business. We intend to maintain our focus
on the largest components of our business: newsprint and specialty papers.
Additionally, we continue to focus on the faster growing export market by
seeking to export more newsprint from North America into Asia, South America and
certain European countries, where market conditions are stronger. In 2007, we
sold approximately 37% of our newsprint outside of North America.

Continue to reduce costs through
synergies and further productivity improvements. As discussed above, our
parent company, AbitibiBowater, expects to generate annualized synergies as a
result of the Combination of approximately US$250 million by the first quarter
of 2009, with an anticipated increase to US$375 million by the end of 2009 (although
these synergies may not be realized equally by us and Bowater or at anticipated
levels). We will seek to implement additional measures as we enhance our
operating efficiency and productivity through continual systems analyses and
operational improvements. In the second quarter of 2008, AbitibiBowater plans to



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##### Table
of Contents

##### Index
to Financial Statements

announce the specifics of an additional
strategic review ("Phase 2"). As part of its Phase 2 review, AbitibiBowater is
continuing to review its business to further reduce costs, improve its
manufacturing platform and better position itself for the global marketplace. As
part of Phase 2, it may be necessary to curtail even more production or shut
down even more machines or facilities. We believe that the synergies resulting
from the Combination and these additional measures will enhance our ability to
further decrease production costs per ton and to increase operating cash flow
and margins. For a description of certain risks relating to the achievement of
these synergies, see "Risk Factors - Risks Related to Our Business - We may
experience difficulties in integrating our business with that of Bowater and may
not realize the anticipated synergies, efficiencies and cost savings from the
Combination."

Enhance product mix to improve
margins, cash flow and earnings. We continue to seek opportunities to
increase sales of grades of uncoated groundwood papers and ultra hi-brite offset
alternatives through grade improvements and optimizing grade shifts in mills. We
intend to continue to do so through increased sales to our existing customers as
well as to new customers, in particular, printers, publishers and paper
merchants. We also seek to increase our margins by focusing on more profitable
customer categories.

Business Strengths

We believe that our core strengths include
the following:

One of the largest manufacturers of
newsprint and specialty papers in the world. We believe our size and
scale, through AbitibiBowater, our parent company, affords us the opportunity to
more effectively understand changing market dynamics and respond rapidly to
industry trends. We have been able to leverage this strength effectively by
focusing our efforts in the faster growing overseas markets. Our international
operations include a newsprint mill in the United Kingdom, which provides better
access to the European markets. We plan to continue employing this strength to
seek and seize similar promising opportunities in the future.

Well positioned to benefit from
strengthening pricing environment. We believe that we are well
positioned to benefit from price increases in the paper industry as a result of
our product breadth and long-standing customer relationships. According to RISI,
newsprint prices have risen since the fourth quarter of 2007, as North American
producers have separately announced a number of price increases totaling US$145
per metric ton to be implemented by June 2008. We also announced a $60 per short
ton increase in supercalendered and super-brite papers in the fourth quarter of
2007 and most North American producers have announced an additional US$60 per
short ton increase for uncoated mechanical papers, effective April 2008.

Attractive cost position coupled
with further profit improvement initiatives. Our newsprint and paper
mills are among the most cost-effective in North America. Based on a 2006 third
party industry study (the most recent date for which such information is
available), of our nine currently operating newsprint facilities in North
America, two are in the top quartile and five are in the top half in terms of
cash cost. We plan to further enhance this strength through continual
refinements and capacity adjustments to reduce production at our higher cost
facilities and focus on continual improvements at our lower cost mills,
including manufacturing products on machines best positioned to produce the
various grades.

Strong relationships with key
customers. We supply products to a diverse group of customers worldwide,
marketing our products in over 70 countries. Our pulp and paper products are
sold to leading publishers, commercial printers and advertisers. Our wood
products are sold to a diversified group of customers, including large retailers,
buying groups, distributors, wholesalers and industrial accounts.

Experienced management team with
proven track record. AbitibiBowater's senior management team is the
combination of two world class management teams, with an average of over 21
years experience in the forest products industry. John Weaver, Executive
Chairman, has over 30 years of experience in the forest products industry and
was formerly the Chief Executive Officer of Abitibi. David Paterson, President
and Chief Executive Officer, has held various senior positions within the forest
products industry, including Chief Executive Officer of Bowater and Executive
Vice President, Building Products Division at Georgia-Pacific Corporation.
William Harvey, Chief Financial Officer, has held various executive positions at
Avenor Inc. and Bowater and was most recently Chief Financial Officer at Bowater.





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of Contents

##### Index
to Financial Statements

Raw Materials

Our operations consume substantial amounts
of raw materials, such as wood, recovered paper and chemicals, and energy,
including electricity, natural gas, fuel oil, coal and wood waste, in the
manufacturing of our pulp, paper and wood products. We purchase raw materials
and energy sources primarily on the open market.

Wood

Our sources of wood include property we
own or lease, property on which we possess cutting rights and purchases from
local producers, including sawmills that supply residual wood chips. At
December 31, 2007, we owned approximately 1 million acres in Canada. We also
have contractual cutting rights on approximately 37.1 million acres of
Crown-owned land in Canada. The contractual cutting rights contracts are
approximately 20-25 years in length and automatically renew every 5 years,
contingent upon our continual compliance with environmental performance and
reforestation requirements.

In accordance with our values, our
environmental vision statement and forestry policies and the interests of our
customers and other stakeholders, we are committed to environmental management
systems with the goal of sustainable forest management. Approximately 99% of our
Crown-owned land operations and our private land in Canada are certified to the
Canadian Standards Association Z809 (CSA Z809) forest management standard. This
standard utilizes a continual improvement approach and requires public
participation, practical demonstration of sustainable forest management
practices, and management commitment.

Recovered Paper

We are among the largest recyclers of
newspapers and magazines in the world. We have a number of recycling plants that
utilize advanced mechanical and chemical processes to manufacture high quality
pulp from a mixture of old newspapers and old magazines ("recovered paper"). The
resulting products, which include recycled fiber newsprint and uncoated
specialty paper, are comparable in quality to paper produced with 100% virgin
fiber pulp. The Bridgewater and Thorold operations produce newsprint containing
100% recycled fiber. In 2007, we used 1.8 million tonnes of recovered paper
worldwide. In 2007, our recycled fiber content in newsprint averaged 34%, which
is above the industry average of 31%. We produce more than 40 grades with
recycled content.

Our North American recycling division
collects or purchases 2.4 million tonnes of recovered paper per year. Our
trademarked Paper Retriever®
program collects recovered fiber through a combination of community drop-off
containers and recycling programs with businesses and commercial offices. The
recovered paper we physically purchase is from suppliers generally within the
region of our recycling plants, primarily under long-term agreements.

Our European recycling division focuses
its efforts on Paper Retriever®
and Paper Bank®
programs, and curbside collection from over 1.7 million homes in the United
Kingdom.

Energy

Steam and electrical power are the primary
forms of energy used in paper production. Process steam is produced in boilers
using a variety of fuel sources. All of our mills produce all of their own steam
requirements, except our Alabama and Bridgewater operations, which purchase
their steam from third-party suppliers. Our Alma, Baie-Comeau, Fort Frances,
Grand Falls, Iroquois Falls, Kenogami, Mackenzie and Snowflake operations
collectively produce approximately 46% of their own electrical requirements. The
balance of our energy needs is purchased from third parties. We have nine sites
in Canada with cogeneration facilities which generate "green energy" from carbon-neutral
biomass. In addition, we utilize alternative fuels, such as used oil, to reduce
consumption of virgin fossil fuels.

Competition

Competition is present in all markets for
our products. Our main competitors are North American and Western European paper
manufacturers and North American lumber producers. While selling prices, cost of
production, quality and customer service are generally the principal factors
influencing competition, other factors such as risks related to foreign
exchange, and cost of fiber supply, can also have an impact on our competitive
position.

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##### Table
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##### Index
to Financial Statements

In general, our products are globally
traded commodities, and the markets in which we compete are highly competitive.
Pricing and the level of shipments of our products are influenced by the balance
between supply and demand, global economic conditions, changes in consumption
and capacity, the level of customer and producer inventories and fluctuations in
currency exchange rates. Any material decline in prices for our products or
other adverse developments in the markets for our products could have a material
adverse effect on our financial results, financial condition and cash flow.
Prices for our products have been and are likely to continue to be highly
volatile.

Newsprint, one of our principal products,
is produced by numerous manufacturers worldwide. Aside from quality
specifications to meet customer needs, the production of newsprint does not
depend upon a proprietary process or formula. The five largest North American
producers represent approximately 80% of the North American capacity for
newsprint. The five largest global producers represent approximately 41% of
global newsprint capacity. Our annual production capacity is approximately 7% of
worldwide capacity. We face actual and potential competition from both large,
global producers and numerous smaller regional producers. In recent years, a
number of global producers of newsprint based in Asia, particularly China, have
grown their production capacity substantially. Price, quality, customer
relationships and the ability to produce paper with recycled fiber are important
competitive determinants.

Abitibi sold approximately 1.6 million
tonnes of specialty papers in 2007. This represented about 26% of North American
specialty papers sales in 2007 and was comprised mainly of supercalendered,
superbright, high bright, bulky book and directory papers. In addition to
AbitibiBowater, other producers of uncoated mechanical papers include Catalyst,
New Page (formerly Stora Enso North America), Fraser, Irving, St Marys, Madison
and Norpac. In addition, imports from overseas represented about approximately
10% of North American sales in 2007. We compete primarily on the basis of price,
quality and service.

As with other global commodities, the
competitive position of our products is significantly affected by the volatility
of currency exchange rates. We have operations in Canada, the United States and
the United Kingdom. Several of our primary competitors are located in Canada,
Sweden, Finland and certain Asian countries. Accordingly, the relative rates of
exchange between those countries' currencies and the Canadian dollar can have a
substantial effect on our ability to compete. In addition, the degree to which
we compete with foreign producers depends in part on the level of demand abroad.
Shipping costs and relative pricing generally cause producers to prefer to sell
in local markets when the demand is sufficient in those markets.

Trends in advertising, electronic data
transmission and storage, and the Internet have and could continue to adversely
affect traditional print media, including our products and those of our
customers, but neither the timing nor the extent of those trends can be
predicted with certainty. Our newspaper publishing customers in North America
use and compete with businesses that use other forms of media and advertising,
such as direct mailings and newspaper inserts (both of which are end uses for
several of our products), television and the Internet. U.S. consumption of
newsprint declined in 2007 as a result of continued declines in newspaper
circulation, declines in newspaper advertising volume and publishers'
conservation measures which include increased usage of lighter basis-weight
newsprint and web-width and page count reductions. Our magazine and catalog
publishing customers are also subject to the effects of competing media,
including the Internet.

Environmental Policies

We are committed to protecting and
enhancing the resources in our care. We have determined that integrating our
vision and values and our Environmental, Health and Safety ("EH&S") Policy into
our daily activities is the best way to meet our business objectives. Our
Environmental Management System is used to plan activities, implement procedures
and distribute resources among our divisions to help them comply with the
environmental aspects of the EH&S Policy and meet the requirements of our
Environmental and Sustainable Forest Management Policy. To best achieve these
objectives, we have set guidelines that are adapted to the activities of our
different divisions.

We are subject to a wide range of general
and industry-specific laws and regulations relating to the protection of the
environment, including those governing air emissions, wastewater discharges,
timber harvesting, the release, storage, management and disposal of, and
exposure to, hazardous substances and waste, the clean-up of contaminated sites,
landfill operation and closure, forestry operations, threatened and endangered
species habitats, and health and safety. We believe that we are in material
compliance with all laws and regulations governing our

20



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##### Index
to Financial Statements

activities, although we regularly incur
environmental costs and liabilities as is typical for similar companies.
Environmental expenditures that will benefit us in future years are recorded at
cost and capitalized as part of property, plant and equipment. Amortization is
charged to income over the estimated future benefit period of the assets.
Environmental expenditures that are not expected to provide a benefit to us in
future periods are accrued on a non-discounted basis and expensed to earnings,
on a site-by-site basis, including when a requirement to remedy an environmental
exposure is probable and a cost can be reasonably estimated. See "Risk Factors -
Risks Related to Our Business - We are subject to environmental laws and
regulations."

Geographic Market Information

The following table summarizes the total
revenue for the newsprint segment as well as geographic market for the last 3
years.



|          |  |                          |  |                                 |   |  |        |   |  |        |   |  |               |   |  |      |   |  |                 |  
|--------- |  | ------------------------ |  | ------------------------------- | - |  | ------ | - |  | ------ | - |  | ------------- | - |  | ---- | - |  | --------------- | -
|Newsprint |  | In millions of
		dollars |  | Distribution of Newsprint Sales |  
|          |  | Total ($)                |  | United States                   |   |  | Europe |   |  | Canada |   |  | Latin America |   |  | Asia |   |  | Other Countries |  
|2007      |  | 2,174                    |  | 53                              | % |  | 18     | % |  | 10     | % |  | 13            | % |  | 2    | % |  | 4               | %
|2006      |  | 2,579                    |  | 58                              | % |  | 12     | % |  | 10     | % |  | 12            | % |  | 4    | % |  | 4               | %
|2005      |  | 2,837                    |  | 57                              | % |  | 16     | % |  | 9      | % |  | 10            | % |  | 3    | % |  | 5               | %

The manufacturing and selling of Specialty
Papers and a small volume of market pulp constitute the "Specialty Papers"
segment. Specialty Papers are used by commercial printers, converters,
advertisers and publishers to produce advertising inserts, books, telephone
directories, business forms, magazines, catalogues, envelopes, instruction
manuals and financial printing. The following table summarizes the total revenue
for the specialty paper segment as well as geographic market for the last 3
years.



|                 |  |                          |  |                                         |   |  |        |   |  |                 |  
|---------------- |  | ------------------------ |  | --------------------------------------- | - |  | ------ | - |  | --------------- | -
|Specialty Papers |  | In millions of
		dollars |  | Distribution of Specialty Paper
		Sales |  
|                 |  | Total ($)                |  | United States                           |   |  | Canada |   |  | Other Countries |  
|2007             |  | 1,350                    |  | 82                                      | % |  | 12     | % |  | 6               | %
|2006             |  | 1,493                    |  | 83                                      | % |  | 12     | % |  | 5               | %
|2005             |  | 1,523                    |  | 86                                      | % |  | 9      | % |  | 5               | %

The following table summarizes the total
revenue for the wood products segment as well as geographic market for the last
3 years.



|              |  |                          |  |                               |   |  |        |  
|------------- |  | ------------------------ |  | ----------------------------- | - |  | ------ | -
|Wood Products |  | In millions of
		dollars |  | Distribution of Wood Products |  
|              |  | Total ($)                |  | United States                 |   |  | Canada |  
|2007          |  | 533                      |  | 45                            | % |  | 55     | %
|2006          |  | 726                      |  | 56                            | % |  | 44     | %
|2005          |  | 890                      |  | 63                            | % |  | 37     | %



21



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to Financial Statements

Governmental Regulation

The Company is subject to environmental
laws and regulations relating to forest management, air emissions, wastewater
discharge, waste management, site operations and landfill sites, sawmills and
woodlands operations. The environmental laws and regulations are enacted by
federal, provincial, state and local authorities. The Company conducts
environmental compliance audits, generally performed by internal auditors, which
cover all the Company's paper and wood products sites over a defined schedule of
time. The Company has implemented an Environmental Management System in all of
its operations. The Company has implemented a certification process of its
Environmental Management Systems, under the International Standards Organization
(ISO ), for its pulp and paper mills. All the Company's operations in its pulp
and paper mills are certified ISO 14001.

The virgin fiber supply required by the
Company in Canada is mostly assured by cutting right agreements with provincial
governments. The agreements are granted for various terms, from 5 to 25 years,
and are generally subject to regular renewal every 5 years. They incorporate
commitments with respect to sustainable forest management, silvicultural work,
forest and soil renewal, as well as cooperation with other forest users. The
Company believes that it is in material compliance with all applicable forest
laws and regulations.

The wood products segment is also subject
to regulatory decisions impacting the timber supply made by regulatory bodies.
The regulations place constraints on the Annual Allowable Cut (AAC) on Crown
land in Québec and Ontario with thresholds dependent on the regions.

In addition, under Canada's regulatory
framework for greenhouse gas emissions proposed in April 2007, existing paper
facilities would be required to reduce their greenhouse gas emissions intensity
by 18% by 2010 from 2006 sector average levels, and by an additional 2% annually
thereafter.

The Company's ability to continue to
internally generate hydroelectric power in some cases is conditional upon its
ability to maintain and renew its rights, granted by the Ministry of Natural
Resources of Ontario, by the Ministère des ressources naturelles et de la
Faune (the Ministry of Natural Resources and Wildlife) and the Ministère
du Développement durable, de l'Environnement et des Parcs (the Ministry of
Sustainability, Environment and Parks) of Québec and by the Minister of
Environment and Conservation of Newfoundland and Labrador, to utilize and manage
provincial waterways. Some of its rights in respect of flow and levels are also
subject to the jurisdiction of the International Rainey Lake Board of Control
and Lake of the Woods Control Book. In addition, these rights are subject to
certain conditions and their renewal is subject to government discretion. The
right to utilize and manage provincial waterways is granted by the provincial
governments of Quebec, Ontario, Newfoundland and Labrador.

C. Organization Structure

On October 29, 2007, pursuant to a
Combination Agreement and Agreement and Plan of Merger, dated as of January 29,
2007, Abitibi and Bowater became subsidiaries of AbitibiBowater.

We conduct our business through
subsidiaries operating on a worldwide basis. The following companies are
considered significant subsidiaries as of April 7, 2008:





|                                                              |  |                                
|------------------------------------------------------------- |  | -------------------------------
|Abitibi-Consolidated, Inc.
		Subsidiary List                 
|Name                                                          |  | Jurisdiction of
		Incorporation
|1508756 Ontario Inc.                                          |  | Ontario                        
|3834328 Canada Inc.                                           |  | Canada                         
|6169678 Canada Incorporated                                   |  | Canada                         
|Abitibi-Consolidated Company of
		Canada                      |  | Quebec                         
|Abitibi-Consolidated Inc.                                     |  | Canada                         
|Abitibi-Consolidated Canadian
		Office Products Holdings Inc. |  | Canada                         
|Abitibi-Consolidated Hydro Inc.                               |  | Canada                         
|Abitibi-Consolidated Nova Scotia
		Incorporated               |  | Nova Scotia                    
|Abitibi Consolidated Europe                                   |  | Belgium                        
|Abitibi-Consolidated Finance LP                               |  | Canada                         
|ACH Calm Lake Inc.                                            |  | Canada                         
|ACH Fort Frances Inc.                                         |  | Canada                         
|ACH Iroquois Falls Inc.                                       |  | Canada                         
|ACH Island Falls Inc.                                         |  | Canada                         
|ACH Kenora Inc.                                               |  | Canada                         
|ACH Limited Partnership                                       |  | Manitoba                       
|ACH Norman Inc.                                               |  | Canada                         
|ACH Sturgeon Falls Inc.                                       |  | Canada                         
|ACH Twin Falls Inc.                                           |  | Canada                         
|Bridgewater Paper Leasing Ltd.                                |  | United
		Kingdom               
|Bridgewater Paper Company Limited                             |  | United
		Kingdom               
|Cheshire Recycling Ltd.                                       |  | United
		Kingdom               
|Donohue Malbaie Inc.
		(1)                                    |  | Quebec                         
|Donohue Recycling Inc.                                        |  | Ontario                        
|The International Bridge and
		Terminal Company               |  | Canada                         
|La Compagnie de Pulpe de Jonquiere                            |  | Quebec                         
|Manicouagin Power Company(2)                                  |  | Quebec                         
|Marketing Donohue Inc.                                        |  | Quebec                         
|Produits Forestiers La Tuque Inc.(3)                          |  | Quebec                         
|Produits Forestiers Saguenay Inc.(4)                          |  | Quebec                         
|Scramble Mining Ltd.                                          |  | Ontario                        
|Star Lake Hydro Partnership(5)                                |  | Newfoundland                   
|St. Maurice River Drive Company
		Limited                     |  | Quebec                         
|Terra Nova Explorations Ltd.                                  |  | Quebec                         

Note: Except as otherwise indicated, each
of the above entities is a wholly owned direct or indirect subsidiary of
Abitibi. The names of certain other direct and indirect subsidiaries of Abitibi
have been omitted from the list above because such unnamed subsidiaries in the
aggregate as a single subsidiary would not constitute a significant subsidiary.

(1) 51 percent owned

(2) 60 percent owned

(3) 83 percent owned

(4) Approximately 86 percent owned

(5) 51 percent owned

D. Description of Property



22



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##### Index
to Financial Statements

The location and capacity of each of our
paper manufacturing and sawmill operations as of April 7, 2008 are set forth in
the tables below.



|                               |  |                              |  |                          |  |                           |  |                                   |  |                   
|------------------------------ |  | ---------------------------- |  | ------------------------ |  | ------------------------- |  | --------------------------------- |  | ------------------
|                               |  |                              |  |                          |  |                           |  | 2007 Production by
		Product Line
|                               |  | Number
		of Paper
		Machines |  | 2008
		Annual
		Capacity |  | 2007
		Total
		Production |  | Newsprint                         |  | Specialty
		Papers
|                               |  | (in thousands of tonnes)    
|Canada                         |  |                              |  |                          |  |                           |  |                                   |  |                   
|Alma, Quebec                   |  | 3                            |  | 335                      |  | 330                       |  | -                                 |  | 330               
|Amos, Quebec                   |  | 1                            |  | 207                      |  | 200                       |  | 200                               |  | -                 
|Baie-Comeau, Quebec            |  | 4                            |  | 573                      |  | 560                       |  | 560                               |  | -                 
|Beaupré, Quebec                |  | 2                            |  | 233                      |  | 192                       |  | -                                 |  | 192               
|Clermont, Quebec(1)            |  | 2                            |  | 343                      |  | 335                       |  | 335                               |  | -                 
|Fort Frances, Ontario          |  | 3                            |  | 387                      |  | 391                       |  | -                                 |  | 275               
|Grand Falls, Newfoundland      |  | 2                            |  | 206                      |  | 177                       |  | 170                               |  | 7                 
|Iroquois Falls, Ontario        |  | 2                            |  | 280                      |  | 260                       |  | 225                               |  | 35                
|Kénogami, Quebec               |  | 2                            |  | 206                      |  | 209                       |  | -                                 |  | 209               
|Laurentide, Quebec             |  | 2                            |  | 364                      |  | 341                       |  | -                                 |  | 341               
|Mackenzie, British Columbia(2) |  | 1                            |  | 195                      |  | 174                       |  | 174                               |  | -                 
|Thorold, Ontario               |  | 2                            |  | 412                      |  | 398                       |  | 398                               |  | -                 
|United Kingdom                 |  |                              |  |                          |  |                           |  |                                   |  |                   
|Bridgewater, England           |  | 2                            |  | 211                      |  | 195                       |  | 195                               |  | -                 
|                               |  |                              |  |                          |  |                           |  |                                   |  |                   
|Total                          |  | 28                           |  | 3,952                    |  | 3,762                     |  | 2,257                             |  | 1,389             



|(1) | Donohue Malbaie Inc. ("DMI"), which owns one of Clermont's paper
		machines, is owned 51% by Abitibi and 49% by the New York Times. We
		manage the facility and wholly own all of the other assets at the site.
		Manufacturing costs are transferred between Abitibi and DMI at
		agreed-upon transfer costs. DMI's paper machine produced 212,000 tonnes
		of newsprint in 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Indefinitely idled.
|--- | -------------------

Wood Products



|                                                |  |                                                   |  |                        
|----------------------------------------------- |  | ------------------------------------------------- |  | -----------------------
|                                                |  | 2008
		Annual Capacity                            |  | 2007
		Total Production
|                                                |  | (in million board feet, except
		where indicated)
|Sawmills                                        |  |                                                  
|Comtois, Quebec                                 |  | 144                                               |  | 143                    
|Girardville-Normandin, Quebec                   |  | 114                                               |  | 108                    
|La Doré, Quebec                                 |  | 130                                               |  | 148                    
|La Tuque, Quebec(1)                             |  | 125                                               |  | 103                    
|Mackenzie, British Columbia (2
		Facilities)(2) |  | 500                                               |  | 322                    
|Pointe-aux-Outardes, Quebec                     |  | 175                                               |  | 49                     
|Roberval, Quebec                                |  | 105                                               |  | 93                     
|Saguenay, Quebec (3 facilities)(3)              |  | 190                                               |  | 165                    
|Saint-Hilarion                                  |  | 51                                                |  | 43                     
|Saint-Ludger-de-Milot, Quebec(4)                |  | 80                                                |  | 88                     
|Saint-Raymond, Quebec                           |  | 54                                                |  | 16                     
|Saint-Thomas, Quebec                            |  | 90                                                |  | 88                     



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|                                                               |  |                                                   |  |                        
|-------------------------------------------------------------- |  | ------------------------------------------------- |  | -----------------------
|                                                               |  | 2008
		Annual Capacity                            |  | 2007
		Total Production
|                                                               |  | (in million board feet, except
		where indicated)
|Senneterre, Quebec                                             |  | 85                                                |  | 113                    
|                                                               |  |                                                   |  |                        
|Total Sawmills                                                 |  | 1,843                                             |  | 1.479                  
|Remanufacturing Wood Facilities                                |  |                                                   |  |                        
|Château-Richer, Quebec                                         |  | 63                                                |  | 50                     
|La Doré, Quebec                                                |  | 15                                                |  | 14                     
|Manseau, Quebec                                                |  | 20                                                |  | 20                     
|Saint-Prime, Quebec                                            |  | 28                                                |  | 23                     
|                                                               |  |                                                   |  |                        
|Total Remanufacturing Wood
		Facilities                        |  | 126                                               |  | 107                    
|Engineered Wood Facilities                                     |  |                                                   |  |                        
|Larouche and Saint-Prime, Quebec
		(in million linear feet)(5) |  | 145                                               |  | 81                     



|(1) | Produits Forestiers La Tuque is owned 82% by AbitibiBowater and 18% by
		Coopérative Forestière du Haut Saint-Maurice. We manage the facility.
		The amounts in the above table represent the mill's total capacity and
		production.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Indefinitely idled.
|--- | -------------------

|(3) | Produits Forestiers Saguenay is owned 86% by Abitibi and 14% by Les
		Placements H.N.M.A. Inc. The amounts in the above table represent the
		mills' total capacity and production.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Produits Forestiers Petit-Paris is located in Saint-Ludger-de-Milot,
		Quebec, and is an unconsolidated entity in which we have a 50% interest.
		The amounts in the above table represent the mill's total capacity and
		production.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Abitibi-LP Engineering Wood Inc. and Abitibi-LP Engineering Wood II Inc.
		are, respectively, located in Larouche and Saint-Prime, Quebec, and are
		unconsolidated entities in which we have a 50% interest. We operate the
		facility, and our joint venture partner sells the products. The amounts
		in the above table represent the mill's total capacity and production.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table provides a listing of
our hydroelectric plants and their respective capacity and generation. For
better illustrative purposes, we have reflected the generation of these
facilities for the full year of 2007. These hydroelectric facilities provide
electricity primarily to a number of our paper manufacturing and sawmill
operations. See "Business Overview - Raw Materials - Energy" for more
information regarding our use of energy produced at these facilities.



|                                    |  |           |   |  |                             |  |                            |  |                    |  |                               |  |                                         
|----------------------------------- |  | --------- | - |  | --------------------------- |  | -------------------------- |  | ------------------ |  | ----------------------------- |  | ----------------------------------------
|                                    |  | Ownership |   |  | Installed
		Capacity
		(MW) |  | Share of
		Capacity
		(MW) |  | Generation
		(GWh) |  | Share of
		Generation
		(GWh) |  | Share of
		Generation
		Received
		(GWh)
|Hydro Saguenay                      |  | 100       | % |  | 162                         |  | 162                        |  | 1,043              |  | 1,043                         |  | 1,043                                   
|Grand Falls                         |  | 100       | % |  | 61                          |  | 61                         |  | 488                |  | 488                           |  | 488                                     
|Fort Frances(1)(2)                  |  | 75        | % |  | 27                          |  | 20                         |  | 127                |  | 100                           |  | 100                                     
|Kenora(1)(2)                        |  | 75        | % |  | 18                          |  | 14                         |  | 64                 |  | 51                            |  | 51                                      
|Iroquois Falls(1)(2)                |  | 75        | % |  | 92                          |  | 69                         |  | 509                |  | 423                           |  | 423                                     
|Manicouagan Power Company(1)(3)     |  | 60        | % |  | 335                         |  | 201                        |  | 2,889              |  | 1,733                         |  | 632                                     
|Star Lake Hydro Partnership         |  | 51        | % |  | 18                          |  | 9                          |  | 148                |  | 75                            |  | 75                                      
|Exploits River Hydro Partnership(4) |  | 49        | % |  | 37                          |  | 18                         |  | 153                |  | 75                            |  | 75                                      
|                                    |  |           |   |  |                             |  |                            |  |                    |  |                               |  |                                         
|                                    |  |           |   |  | 750                         |  | 554                        |  | 5,421              |  | 3,988                         |  | 2,887                                   
|                                    |  |           |   |  |                             |  |                            |  |                    |  |                               |  |                                         



|(1) | The
		amounts in the above table represent the facility's total installed
		capacity and power generation.
|--- | ----------------------------------------------------------------------------------------------------------

|(2) | Prior to April 2, 2007, we owned 100% of these facilities.
|--- | ----------------------------------------------------------

|(3) | We
		are required to sell a portion of our share of the power generation back
		to Alcoa, Inc. through January 1, 2011; therefore, the power we receive
		is net of the amounts sold under this contract with our partner.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Exploits River Hydro Partnership is a limited partnership and
		unconsolidated entity in which we have 49% interest. The amounts in the
		above table represent the facility's total installed capacity and power
		generation.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See "Operating and Financial Review of
Prospects - Business Strategy and Outlook" for a discussion of the closing or
idling of certain of our operations and "History and Development of the Company"
for a discussion of the sale of our Snowflake Mill. In addition, the Company has
granted a security interest in its property, plants and equipment under its
credit agreement with Bank of Nova Scotia, Citibank, N.A. and Goldman Sachs
Credit Partners.



24



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Our principal executive office is located at 1155
Metcalfe Street, Suite 800, Montreal, Quebec, Canada H3B 5H2.

Item 4A. Unresolved Staff Comments.

Not applicable.

Item 5. Operating and Financial Review and
Prospects

The following operating and financial review and
prospects provides information that we believe is useful in understanding our
operating results, cash flows and financial condition for the three years ended
December 31, 2007. The discussion should be read in conjunction with, and
is qualified in its entirety by reference to, Abitibi's audited consolidated
financial statements and related notes included elsewhere in this Annual Report.

Our consolidated financial statements are
expressed in Canadian dollars and prepared in accordance with Canadian GAAP.
These financial statements differ in certain respects from those prepared in
accordance with United States GAAP and do not provide certain disclosures which
would be found in United States GAAP financial statements. These measurement and
disclosure differences are described in more detail in Note 26 of our
consolidated financial statements included in this Annual Report.

Business Fundamentals

We are a global leader in newsprint and uncoated
groundwood (specialty) papers, as well as a major producer of wood products,
generating sales of $4.1 billion in 2007. We own or are a partner in 15 paper
mills, 19 sawmills, four remanufacturing facilities, two engineered wood
facilities and eight hydroelectric plants in Canada, the United States and the
United Kingdom. We supply customers in approximately 70 countries and employ
approximately 11,500 people. Responsible for the forest management of
approximately 16 million hectares of woodlands in Canada, the Company is
committed to the sustainability of the natural resources in its care. We are
also amongst North America's largest recyclers of newspapers and magazines,
serving 21 metropolitan areas in Canada and the U.S., and 13 regions in the
U.K., with more than 28,000 Paper Retriever® and paper bank containers.

We are one of North America's lowest-cost global
newsprint producers based on a third party source, annually marketing
approximately 3.5 million tons of newsprint, including third-party volumes,
2 million tons of specialty papers and 2 billion board feet of lumber.

Our products are, in large part, commodities sold
in global markets. Our business is influenced by general economic conditions
that impact our customers as well as changes within our industry that affect
demand, supply, pricing, shipments or the cost of production. North American
demand for newsprint continued to decline in 2007, and there is no indication as
to whether or when the demand will stabilize.

The manufacturing facilities we operate are
capital-intensive and require significant amounts of cash to maintain. Our
ability to generate positive cash flow is dependent on achieving revenues that
exceed manufacturing costs, interest costs and the amount of cash that must be
reinvested in the business.

Most of our manufacturing facilities are located
in Canada; however, the majority of our sales are denominated in U.S. dollars.
Therefore, fluctuations in currency rates can have a significant impact on our
revenues and cash flows. In particular, our results can be materially influenced
by the movement of the United States dollar. A stronger Canadian dollar, such as
existed throughout 2007, will typically weaken our results, whereas a weaker
Canadian dollar will tend to strengthen our earnings. We can also be subject to
government imposed trade restrictions that can limit shipments or increase
costs.

Significant cost components of manufacturing our
products can be highly volatile, particularly the cost of wood, recycled fiber
(old newspapers and magazines), energy, and commodity and specialty chemicals.

The strength of the general economy influences the
level and extent of publishing and advertising, which in turn affects the demand
for our pulp and paper products. The strength of the construction and real
estate markets influences the level of building and remodelling, which impacts
the demand for our wood products. An unanticipated decline in demand for our
products also could have a negative effect on prices. Changes in the level of



25



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##### Index
to Financial Statements

supply caused by capacity additions or contractions could also influence
the supply and demand balance for our products and have a direct impact on
shipment levels and pricing.

Overview of Financial Performance

Our net loss for 2007 was $714 million, as
compared to net earnings of $54 million for 2006.

Our operating loss from continuing operations was
$907 million on sales of $4,113 million in 2007, compared to an operating income
of $327 million on sales of $4,851 million in 2006.

On November 29, 2007, AbitibiBowater, our
parent company, announced the results of the initial phase of a comprehensive
review of the consolidated company, which included a decision to reduce
newsprint and specialty papers production capacity by approximately one million
metric tons per year during the first quarter of 2008. The reductions included
the permanent closure of a number of our facilities, including our Belgo, Québec
facility, and two additional facilities which had already been idled for some
time, namely our Fort William, Ontario facility, and Lufkin, Texas facility. We
also indefinitely idled our Mackenzie, British Columbia facility, which includes
the paper mill and two sawmills directly supporting the paper mill operations.
We recorded charges totalling $445 million in 2007 as a result of the initial
phase of this comprehensive review, consisting of $371 million for the
impairment of long-lived assets, $71 million for severance and other
labour-related costs and $3 million for contractual obligations and other
commitments.

Our current liquidity assessment and outlook,
including the significant near-term liquidity challenges is discussed further in
the "Business Strategy and Outlook" section below and the "Liquidity and Capital
Resources" section of this Item 5, and notes 1 and 19 of our consolidated
financial statements.

Business Strategy and Outlook

On October 29, 2007, Abitibi and Bowater
combined in an all-stock merger of equals. Abitibi's parent company,
AbitibiBowater, is the largest producer of newsprint in the world and the eighth
largest publicly traded pulp and paper manufacturer in the world.

Under the terms of the transaction, each common
share of Abitibi was exchanged for 0.06261 shares of AbitibiBowater common
stock, and each share of Bowater common stock was exchanged for 0.52 shares of
AbitibiBowater common stock. The exchange ratio resulted in approximately 48% of
AbitibiBowater being owned by former Abitibi shareholders and approximately 52%
of AbitibiBowater being owned by former Bowater shareholders.

Through the combination, AbitibiBowater is a
global leader in newsprint manufacturing, which we believe well positions
AbitibiBowater to compete more effectively in an increasingly global market. In
addition, through the combination, AbitibiBowater is creating a stronger and a
more efficient manufacturing platform that we believe will better enable us, as
a subsidiary of AbitibiBowater, to address the challenges of continuing
newsprint demand declines in North America and near-historic strength of the
Canadian dollar. Our goal is to create a low-cost, financially disciplined
organization with a stronger financial profile and increased focus on
value-added products and growth markets. Our business strategy is to
successfully execute on this goal, the result of which we believe will be a more
dynamic and competitive organization better able to meet the needs of our
customers.

AbitibiBowater is making progress integrating our
business and operations with those of Bowater in order to achieve an annualized
synergy target of at least US$375 million by the end of 2009. We expect these
synergies to be achieved from improved efficiencies in areas such as
manufacturing, SG&A costs, distribution and procurement. For a description
of certain risks relating to the achievement of these synergies, see "Risk
Factors - Risks Related to Our Business - We may experience difficulties in
integrating our business with that of Bowater and may not realize the
anticipated synergies, efficiencies and cost savings from the Combination."

Immediately after the combination, AbitibiBowater
began a company-wide strategic review of its business. The AbitibiBowater Board
of Directors approved an action plan to reduce the consolidated company's
newsprint and specialty papers production capacity by almost 1 million
metric tons per year by the end of the first quarter of 2008. As part of these
reductions, we permanently closed our Belgo (Shawinigan, Quebec) mill and
indefinitely idled our Mackenzie (British Columbia) mill. We also indefinitely
idled two sawmills that directly supported the



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##### Index
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Mackenzie paper operation. These facilities in the aggregate represent
capacity of approximately 311,000 metric tons of newsprint, 260,000 metric tons
of specialty papers, and 500 million board feet of lumber, and were all
cash flow negative. Additionally, we permanently closed previously idled paper
mills at Fort William (Thunder Bay, Ontario) and Lufkin (Texas). The previously
idled operations had a total capacity of approximately 525,000 metric tons.
These actions were completed by February 18, 2008. These actions were taken
in order to assist us in supplying our customers' demand efficiently by
manufacturing products on machines best positioned to produce the products and
by taking specific actions designed to ensure that our production is focused on
our more profitable product lines from lower cost sites. During the
implementation of the action plan generated during the first phase of our
strategic review, we have simultaneously been working on phase two, which is a
comprehensive review of all aspects of our business in an effort to further
reduce costs, improve our manufacturing platform and better position the
combined companies in the global marketplace. We expect to announce the results
and detailed action steps from this second phase during the second quarter of
2008. We are also conducting an in-depth review of our wood products business
with the objective of selling non-core assets, consolidating facilities, and
curtailing or closing non-contributing operations.

From a financial perspective, achieving stable
liquidity and reducing out debt are the top priorities going forward. We are
currently experiencing a liquidity shortfall and face significant near-term
liquidity challenges. We have a total of US$346 million of long-term debt that
matures in 2008: US$196 million principal amount of 6.95% Senior Notes due
April 1, 2008 and US$150 million principal amount of 5.25% Senior Notes due
June 20, 2008. Our revolving bank credit facilities with commitments
totaling $710 million mature in the fourth quarter of 2008. None of these debts
has been refinanced. As of February 29, 2008, we had cash of approximately
$153 million (excluding $24 million of restricted cash) and undrawn amounts
under our bank credit facilities of approximately $62 million. Our parent
company, AbitibiBowater is a holding company and does not have any operations or
existing sources of liquidity. If we are unable to secure adequate new
financing, we will be unable to make the near term mandatory repayments when
due.

In July 2007, the Company amended its credit
agreement to waive its interest coverage ratio requirement until the end of the
second quarter of 2008. We are currently in compliance with the net funded debt
to total capitalization covenant, under our credit agreement at
December 31, 2007; however, there can be no assurance that we will remain
in compliance in the near term in light of the factors discussed above and our
forecast of continued operating losses. Based on current forecasts, we expect to
be in default with our net funded debt to total capitalization covenant to be
measured as of the end of the first quarter of 2008. However, we have developed
a refinancing plan (discussed below) to address the upcoming debt maturities and
replace the bank credit facilities. Failure to comply with the financial or
other covenants could result in the outstanding borrowings under these
facilities becoming immediately due and payable (unless the lenders waive any
resulting event of default).

If we default under the terms of any of our
indebtedness, the relevant debt holders may accelerate the maturity of their
obligations, which could cause cross-defaults or cross-acceleration under our
other obligations. In the event of any combination of an inability to repay or
refinance our 2008 debt maturities or acceleration of indebtedness under our
bank credit facilities, we may be compelled to seek protection or be forced into
a proceeding under Canada's Companies' Creditors Arrangement Act. These
circumstances lend substantial doubt as to the ability of our Company to meet
its obligations as they come due and, accordingly, the appropriateness of the
use of accounting principles applicable to a going concern. These financial
statements do not reflect the adjustments to the carrying values of assets and
liabilities and the reported expenses and balance sheet classifications that
would be necessary were the going concern assumption inappropriate, and these
adjustments could be material.

To address these near-term liquidity challenges,
we have developed a refinancing plan, consisting of the Financing Transactions,
to address upcoming debt maturities and general liquidity needs designed to
enable us to repay the US$346 million due in April and June 2008 and to repay
all its maturities due in 2009, while continuing to fund our operations, debt
service and capital expenditures. We expect these initiatives to consist of
approximately US$200-300 million of new senior unsecured exchange notes due
2010; US$400 million of a new 364-day Senior Term Loan secured by a first lien
on substantially all of Abitibi's and ACCC's assets and by a first lien on
substantially all of the assets of D Corp.; US$413 million of New Secured Notes;
and approximately US$350 million of new Convertible Notes borrowed by our
parent company, AbitibiBowater. See "-Recent Developments". The current state of
the credit markets is a significant impediment to securing the necessary
financing for us. Although the Financing Transactions are scheduled to close on
April 1, 2008, subject to certain conditions, there is no assurance that these
financing alternatives will ultimately be consummated on terms acceptable to us
or at all.



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We have announced price increases for several of
our products in the fourth quarter of 2007 and further price increases in the
first quarter of 2008. We expect our financial performance to improve over the
course of 2008. We believe that the combination of recently announced price
improvements, continued integration efforts, implementation of actions resulting
from our strategic review, and further progress toward achievement of our
synergy targets will result in further improvements in financial performance.

Business and Financial Review

Consolidated Results of Operations (in millions)



|                                                         |  |      |       |   |      |   |       |  |   |       |  
|-------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | ----- | -
|                                                         |  | 2007 |       |   | 2006 |   | 2005  | 
|Sales                                                    |  | $    | 4,113 |   |      | $ | 4,851 |  | $ | 5,342 |  
|Operating income (loss) from continuing
      operations |  |      | (907  | ) |      |   | 327   |  |   | (276  | )
|Net earnings (loss)                                      |  |      | (714  | ) |      |   | 54    |  |   | (350  | )

Year Ended 2007 compared to Year Ended 2006 (in millions)



|                                                                              |  |        |       |   |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   |       |  
|----------------------------------------------------------------------------- |  | ------ | ----- | - | ---------------------------------------- | - | ---- | ------ |  | - | ----- | - |  | - | ---- | - |  | - | ---- | - |  | - | ----- | -
|                                                                              |  | 2007   |       |   | Favorable/(unfavorable) variance due to: |   |      | 2006   | 
|                                                                              |  | Volume |       |   | Foreignexchange                          |   |      | Prices |  |   | Costs |   | 
|Sales                                                                         |  | $      | 4,113 |   |                                          | $ | (317 | )      |  | $ | (156  | ) |  | $ | (265 | ) |  | $ |      |   |  | $ | 4,851 |  
|Cost of sales                                                                 |  |        | 3,491 |   |                                          |   | 244  |        |  |   | 26    |   |  |   |      |   |  |   | (145 | ) |  |   | 3,616 |  
|Distribution costs                                                            |  |        | 461   |   |                                          |   | 38   |        |  |   | 9     |   |  |   |      |   |  |   | 1    |   |  |   | 509   |  
|CVD, AD and other duties                                                      |  |        | 11    |   |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   | 17   |   |  |   | 28    |  
|Lumber duties refund                                                          |  |        | -     |   |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   | (197 | ) |  |   | (197  | )
|SG&A                                                                          |  |        | 224   |   |                                          |   | 2    |        |  |   | 2     |   |  |   |      |   |  |   | (85  | ) |  |   | 143   |  
|Amortization                                                                  |  |        | 428   |   |                                          |   | 26   |        |  |   | 1     |   |  |   |      |   |  |   | (15  | ) |  |   | 440   |  
|Closure costs, impairment and other related
      charges                     |  |        | 503   |   |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   | (498 | ) |  |   | 5     |  
|Net gain on disposition of
    assets                                         |  |        | (98   | ) |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   | 78   |   |  |   | (20   | )
|                                                                              |  |        |       |   |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   |       |  
|Operating income (loss) from continuing
      operations                      |  |        | (907  | ) |                                          |   | (7   | )      |  |   | (118  | ) |  |   | (265 | ) |  |   | (844 | ) |  |   | 327   |  
|Interest expense                                                              |  |        | 333   |   |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   | 330   |  
|Gain on translation of foreign
      currencies                               |  |        | (446  | ) |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   | (10   | )
|Net gain on dilution of interest in
      subsidiary                          |  |        | (33   | ) |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   | -     |  
|Other expenses                                                                |  |        | 14    |   |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   | 5     |  
|Income tax recovery                                                           |  |        | (81   | ) |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   | (85   | )
|Share of earnings from
investments
      subject to significant
    influence |  |        | 1     |   |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   | 4     |  
|Non-controlling interests                                                     |  |        | (21   | ) |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   | (37   | )
|                                                                              |  |        |       |   |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   |       |  
|Net earnings (loss)                                                           |  | $      | (714  | ) |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  | $ | 54    |  
|                                                                              |  |        |       |   |                                          |   |      |        |  |   |       |   |  |   |      |   |  |   |      |   |  |   |       |  

Abitibi reported a net loss of $714 million in
2007 compared to net earnings of $54 million in the previous year. The Company's
operating loss from continuing operations amounted to $907 million on sales of
$4,113 million in 2007, compared to an operating income of $327 million on sales
of $4,851 million in 2006.

The decrease in sales $738 million was mainly
attributable to lower sales volume and lower prices in the Company's three
business segments and most specifically in the Newsprint segment, and by a
stronger Canadian dollar compared to the U.S. dollar.

Cost of sales was $3,491 million in 2007, compared
to $3,616 million in 2006. This decrease was mainly attributable to lower sales
volume particularly in the Newsprint segment and the strength of the Canadian
dollar reflected in the costs of the Company's U.S. newsprint mills, partly
offset by higher operating costs per unit. The increase in the Company's
operating costs per unit is mainly due to higher input prices for energy and
fiber as well as pension and other employee future benefits. These increases
were partly offset by productivity improvements and by reducing input usage.



28



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##### Index
to Financial Statements

Distribution costs were $461 million in 2007,
compared to $509 million in 2006. Cost decreases were mainly due to improvements
in transportation mode and logistics as well as the strength of the Canadian
dollar and lower sales volume particularly in the Newsprint segment.

SG&A expenses amounted to $224 million in
2007, compared to $143 million in 2006. The increase was mainly attributable to
merger-related expenses of $75 million incurred in 2007 in connection with the
Combination.

In 2007, total amortization decreased to $428
million compared to $440 million in 2006. The decrease can be attributed to
levels of capital expenditures that continue to be below amortization expense,
impairments of long-lived assets and a stronger Canadian dollar.

The Company recorded closure costs, impairment and
other related charges of $503 million in 2007. This included impairment charges
totaling $371 million on its long-lived assets, relating to the permanent
closure of its Belgo ($158 million), Lufkin ($184 million) facilities and a
number of other facilities ($29 million), and an impairment charge of assets
held for sale of $58 million as described below. These facilities to be
permanently closed will be dismantled, therefore, the fair value of the closed
facilities' assets was nominal and was determined based on the estimated sale
and salvage value plus any projected cash generated from its operations through
the date of closing. It also included charges of $71 million for severance and
other labor-related costs and $3 million for contractual obligations and other
commitments.

In connection with the review and approval of the
Combination by the antitrust division of the U.S. Department of Justice, the
Company agreed, among other things, to sell its Snowflake newsprint mill and
certain related assets and liabilities. The Company expects to complete the sale
of this facility to Catalyst Paper Corporation in the second quarter of 2008 for
approximately $161 million, excluding trade accounts receivable of $19 million
that it will retain. The Company recorded an impairment charge of $58 million,
consisting of $5 million on that facility's long-lived assets and $53 million
relating to the goodwill allocated to the facility. In 2007, the Snowflake mill
generated earnings before interest, taxes, depreciation and amortization of
US$16 million (excluding allocation of AbitibiBowater corporate, selling,
general and administrative expenses) on net revenues of US$172 million. The
Snowflake mill has an annual production capacity of approximately 375,000 metric
tons of newsprint.

In 2007, the Company recorded a net gain of $98
million on the sale of approximately 54,000 acres of timberlands and other fixed
assets for cash proceeds of $135 million. In 2006, the Company recorded a total
gain of $20 million on the disposal of assets relating to the closure of the
Sheldon mill in 2004 and the Kenora mill in 2005 for total cash proceeds of $32
million.

When comparing the average exchange rate in 2007
to 2006, the Canadian dollar strengthened by 5.6% compared to the U.S. dollar.
The Company estimates that foreign exchange, consisting mainly of the Canadian
dollar appreciation against the U.S. dollar, had an unfavorable impact, net of
hedging, on its operating results of approximately $118 million compared to the
previous year.

Interest expense of $333 million in 2007 was
relatively stable compared to $330 million in 2006.

On April 1, 2007, the Company completed the
transfer of its Ontario hydroelectric assets and related water rights (the
"Facilities") to its wholly owned subsidiary called ACH Limited Partnership
("ACH LP"). On April 2, 2007, ACH LP issued new units equivalent to a 25%
interest of the partnership to the Caisse de dépôt et placement du Québec (the
"Caisse"), for gross proceeds of $48 million ($37 million net of $11 million of
transaction costs). This transaction resulted in a net gain on dilution
resulting from units issued by a subsidiary of $33 million.

Other expenses in 2007 were $14 million, an
increase of $9 million compared to other expenses of $5 million the previous
year. This increase is mainly due to a $25 million decrease in interest income
due to $32 million realized in 2006 related to the settlement of the softwood
lumber dispute, partly

offset by a $9 million gain on transfer of timberlands in 2007 and a $7
million decrease due to the write-off of deferred financing costs that were
previously amortized into earnings.

On February 23, 2007, the Company acquired
all of the timberlands from its 52.5%-owned subsidiary located in Augusta,
Georgia. As a result, the Company recorded a gain on the transfer of $9 million,
representing the



29



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##### Table
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##### Index
to Financial Statements

47.5% non-controlling interest's share of the gain recorded by the
subsidiary, and a non-controlling interest expense of the same amount.

Income tax recovery during the year amounted to
$81 million, compared to $85 million in 2006. Average effective tax rates are
impacted mainly by the mix and level of earnings (loss) subject to different tax
rates applicable to the various jurisdictions.

Year Ended 2006 compared to Year Ended 2005 (in millions)



|                                                                          |  |        |       |   |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   |       |  
|------------------------------------------------------------------------- |  | ------ | ----- | - | ---------------------------------------- | - | ---- | ------ |  | ----- | ---- | - |  | - | --- |  | - | --- | - |  | - | ----- | -
|                                                                          |  | 2006   |       |   | Favorable/(unfavorable) variance due to: |   |      | 2005   | 
|                                                                          |  | Volume |       |   | Foreignexchange                          |   |      | Prices |  | Costs |      |  
|Sales                                                                     |  | $      | 4,851 |   |                                          | $ | (428 | )      |  | $     | (298 | ) |  | $ | 235 |  | $ |     |   |  | $ | 5,342 |  
|Cost of sales                                                             |  |        | 3,616 |   |                                          |   | 313  |        |  |       | 51   |   |  |   |     |  |   | (70 | ) |  |   | 3,910 |  
|Distribution costs                                                        |  |        | 509   |   |                                          |   | 48   |        |  |       | 14   |   |  |   |     |  |   | 10  |   |  |   | 581   |  
|CVD, AD and other duties                                                  |  |        | 28    |   |                                          |   | 4    |        |  |       | 2    |   |  |   |     |  |   | 33  |   |  |   | 67    |  
|Lumber duties refund                                                      |  |        | (197  | ) |                                          |   |      |        |  |       |      |   |  |   |     |  |   | 197 |   |  |   | -     |  
|SG&A                                                                      |  |        | 143   |   |                                          |   | 4    |        |  |       | 29   |   |  |   |     |  |   | 3   |   |  |   | 179   |  
|Amortization                                                              |  |        | 440   |   |                                          |   |      |        |  |       | 5    |   |  |   |     |  |   | 63  |   |  |   | 508   |  
|Closure costs, impairment and other related
      charges                 |  |        | 5     |   |                                          |   |      |        |  |       |      |   |  |   |     |  |   | 426 |   |  |   | 431   |  
|Net gain on disposition of
    assets                                     |  |        | (20   | ) |                                          |   |      |        |  |       |      |   |  |   |     |  |   | (38 | ) |  |   | (58   | )
|                                                                          |  |        |       |   |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   |       |  
|Operating income (loss) from continuing
      operations                  |  |        | 327   |   |                                          |   | (59  | )      |  |       | (197 | ) |  |   | 235 |  |   | 624 |   |  |   | (276  | )
|Interest expense                                                          |  |        | 330   |   |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   | 374   |  
|Gain on translation of foreign
      currencies                           |  |        | (10   | ) |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   | (101  | )
|Other (income) expenses                                                   |  |        | 5     |   |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   | 48    |  
|Income tax recovery                                                       |  |        | (85   | ) |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   | (271  | )
|Share of earnings from investments subject
      to significant influence |  |        | 4     |   |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   | 2     |  
|Non-controlling interests                                                 |  |        | (37   | ) |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   | (29   | )
|Earnings from discontinued
      operations                               |  |        | -     |   |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   | 3     |  
|                                                                          |  |        |       |   |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   |       |  
|Net earnings (loss)                                                       |  | $      | 54    |   |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  | $ | (350  | )
|                                                                          |  |        |       |   |                                          |   |      |        |  |       |      |   |  |   |     |  |   |     |   |  |   |       |  

Sales were $4,851 million in 2006, compared to
$5,342 million in 2005. The decrease in sales was mainly attributable to lower
sales volume in the Company's three business segments and most specifically in
the Newsprint segment, where the Company permanently closed two mills in
December 2005, and by a stronger Canadian dollar compared to the U.S. currency.
This was partly offset by higher prices in the Company's paper business
segments.

Cost of sales was $3,616 million in 2006, compared
to $3,910 million in 2005. This decrease was mainly attributable to lower sales
volume particularly in the Newsprint segment and the strength of the Canadian
dollar reflected in the costs of the Company's U.S. newsprint mills, partly
offset by higher operating costs per unit. The increase in the Company's
operating costs per unit is mainly due to higher input prices for energy and
fiber as well as pension and other employee future benefits. These increases
were partly offset by productivity improvements and by reducing input usage.

Distribution costs were $509 million in 2006,
compared to $581 million in 2005. Cost decreases were mainly due to improvements
in transportation mode and logistics as well as the strength of the Canadian
dollar and lower sales volume particularly in the Newsprint segment.

In 2006, following the lumber dispute settlement,
the Company received a refund of $197 million. In 2005, the Company recorded $67
million of CVD and AD deposits.

SG&A expenses amounted to $143 million in
2006, compared to $179 million in 2005. The reduction was mainly attributable to
the SG&A initiative.



30



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##### Table
of Contents

##### Index
to Financial Statements

In 2006, total amortization decreased to $440
million compared to $508 million the previous year. The decrease can be
attributed to levels of capital expenditures that continue to be below
amortization expense and impairments of long-lived assets.

Closure costs, impairment and other related
charges amounted to $5 million in 2006 compared to $431 million in 2005. In
2005, the Company wrote down assets for an amount of $215 million mainly due to
the permanent closure of the Kenora and Stephenville paper mills. Also in the
fourth quarter of 2005, the Company recorded an impairment charge of $125
million as a result of the impairment test of long-lived assets of the Lufkin
paper mill. Furthermore, following the sale of timberlands in the Thunder Bay
area, the Company assessed its Fort William paper mill to net realizable value
and recognized an impairment charge of $43 million. With respect to the
permanent closure of the Stephenville and Kenora newsprint mills, as well as the
Champneuf, Québec sawmill, and the closure of one paper machine at the
Bridgewater paper mill, the Company recorded charges of $32 million for
severance and other labor-related costs and $10 million for contractual
obligations and other commitments.

In 2006, the Company recorded a total gain of $20
million on the disposal of assets relating to the closure of the Sheldon mill in
2004 and the Kenora mill in 2005 for total cash proceeds of $32 million. In
2005, the Company recorded a net gain of $58 million on the sale of timberlands
and other fixed assets for cash proceeds of $64 million.

When comparing the average exchange rate in 2006
to the same period in 2005, the Canadian dollar strengthened by 6.8% compared to
the U.S. dollar. The Company estimates that foreign exchange, consisting mainly
of the Canadian dollar appreciation against the U.S. dollar, had an unfavorable
impact, net of hedging, on its operating results of approximately $197 million
compared to the previous year.

Interest expense totaled $330 million in 2006,
compared to $374 million in 2005. This decrease was mainly due to the reduction
in the Company's long-term debt, largely attributable to debt repayment made
with the proceeds from the sale of Pan Asia and the sale of Ontario timberlands
in 2005, partly offset by higher interest costs on the Company's floating rate
debt.

Other expenses in 2006 decreased to $5 million
compared to $48 million the previous year. This decrease is mainly due to a
premium on the early retirement of debt and other related elements of $32
million in 2005, an increase in interest income of $20 million mainly due to
interest received related to the lumber softwood dispute settlement, which was
partly offset by an $11 million increase in the discount on sale of accounts
receivable.

Income tax recovery during the year amounted to
$85 million, compared to $271 million in 2005. Average effective tax rates are
impacted mainly by the mix and level of earnings (loss) subject to different tax
rates applicable to the various jurisdictions. In 2006, the Company recorded
positive income tax adjustments of $79 million, mainly related to the
prospective reduction in the Canadian federal income tax rate, an after-tax
interest income of $22 million, which represented the interest portion of the
CVD and AD refunds, and an after-tax gain on translation of foreign currencies
of $6 million.

Earnings from discontinued operations of $3
million in 2005 represented net earnings of Pan Asia for the year until closing
of the sale.

Fourth Quarter of 2007

Net loss for the fourth quarter of 2007 was $846
million on sales of $982 million. This compares to a net loss for the fourth
quarter of 2006 of $22 million on sales of $1,180 million.

The $198 million decrease in sales was mainly the
result of lower sales volume in the Newsprint segment, and lower prices in the
Company's three business segments and by a stronger Canadian dollar compared to
the U.S. dollar.

Operating loss for the fourth quarter of 2007 was
$741 million compared to an operating income of $236 million for the fourth
quarter of 2006. This increase was primarily the result of lower sales as noted
above, an increase in cost of sales, the lumber duties refund of $197 million
realized in the fourth quarter of 2006, an increase in selling, general and
administrative expenses which were impacted by merger-related costs and an
increase in closure costs, impairment and other related charges as described in
the "Consolidated Results of Operations" section above. The $824 million
increase in net loss can be attributed to the deterioration in operating income
as noted above, partly offset by a favorable impact from the translation of
foreign currencies and income taxes.



31



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##### Index
to Financial Statements

Segment Results of Operations

Newsprint

Year Ended 2007 compared to Year Ended 2006

Newsprint operating results (in millions of
dollars, unless otherwise noted)



|                                     |  |        |       |   |                                          |   |      |        |  |   |       |   |  |   |      |    |  |     |   |  |   |      
|------------------------------------ |  | ------ | ----- | - | ---------------------------------------- | - | ---- | ------ |  | - | ----- | - |  | - | ---- | -- |  | --- | - |  | - | -----
|                                     |  | 2007   |       |   | Favorable/(Unfavorable) variance due to: |   |      | 2006  
|                                     |  | Volume |       |   | Foreignexchange                          |   |      | Prices |  |   | Costs |   | 
|Shipments (in thousands of
    tons) |  |        | 3,292 |   |                                          |   | (194 | )      |  |   |       |   |  |   |      |    |  |     |   |  |   | 3,486
|Sales                                |  | $      | 2,174 |   |                                          | $ | (144 | )      |  | $ | (78   | ) |  | $ | (183 | )$ |  |     |   |  | $ | 2,579
|Amortization                         |  |        | 224   |   |                                          |   | 13   |        |  |   | 2     |   |  |   |      |    |  | (10 | ) |  |   | 229  
|Segment income (loss)                |  |        | (40   | ) |                                          |   | (13  | )      |  |   | (44   | ) |  |   | (183 | )  |  | (35 | ) |  |   | 235  

Sales of newsprint were $2,174 million in 2007
compared to $2,579 million in 2006. Segment loss in 2007 was $40 million, or
(1.8)% of sales, compared to segment income of $235 million, or 9.1% of sales in
2006.

The decrease in sales is mainly due to lower
volume, price decrease and stronger Canadian dollar.

Year-over-year, the average newsprint price in the
U.S. for 2007 was US$67 per ton lower. In Europe, newsprint prices increased in
2007 compared to 2006. The Company announced one newsprint price increase during
2007 of US$25 per ton in the United States, effective September 1, 2007. We
have informed our North American customers of two newsprint price increases
totaling $120 per metric ton over six equal monthly installments, beginning
January 2008.

On a per ton basis, the Company's newsprint cost
of products sold in 2007 was $1 lower than in 2006. This was mainly due to a
stronger Canadian dollar when converting the costs of the U.S. mills, offset by
an increase in the cost of recycled fiber and energy.

At December 31, 2007, the Company's newsprint
inventories were approximately 60,000 tons higher than at December 31,
2006. The increase is mainly due to inventory build-up required for higher
international sales, with inventory destined to North America remaining at low
levels.

As announced in the fourth quarter of 2007, the
Company permanently closed the Belgo facility and indefinitely idled the
Mackenzie facility in the first quarter of 2008. Additionally, the Company
closed the previously idled Lufkin facility. As a result of the strategic review
as discussed previously, newsprint capacity for 2008 will be reduced by 452,000
tons.

Considering the above, the Company's capacity as
at December 31, 2007 stands at 3,443,000 tons of newsprint, including
186,000 tons of idled capacity at the Mackenzie paper mill.

According to a third party source, for the year
ended December 31, 2007, total North American demand for newsprint declined
10.3% as compared to the same period last year. North American net exports of
newsprint were 10.7% higher than 2006 levels. Total inventories (North American
mills and users) at December 31, 2007 were 1.1 million metric tons,
which is 7.6% lower than December 31, 2006. The days of supply at the U.S.
daily newspapers declined to 39 days at December 31, 2007 compared to 34
days at December 31, 2006. The North American operating rate was 92% for
the year ended December 31, 2007. Newspaper advertising linage declined
9.7% in 2007 when compared to 2006.



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##### Index
to Financial Statements

Year Ended 2006 compared to Year Ended 2005

Newsprint operating results (in millions of dollars, unless otherwise
noted)



|                                     |  |        |       |                                          |                 |      |   |        |   |       |   |  |   |     |  |   |    |  |   |      
|------------------------------------ |  | ------ | ----- | ---------------------------------------- | --------------- | ---- | - | ------ | - | ----- | - |  | - | --- |  | - | -- |  | - | -----
|                                     |  | 2006   |       | Favorable/(Unfavorable) variance due to: |                 | 2005
|                                     |  | Volume |       |                                          | Foreignexchange |      |   | Prices |   | Costs |  
|Shipments (in thousands of
    tons) |  |        | 3,486 |                                          |                 | (486 | ) |        |   |       |   |  |   |     |  |   |    |  |   | 3,972
|Sales                                |  | $      | 2,579 |                                          | $               | (347 | ) |        | $ | (148  | ) |  | $ | 237 |  | $ |    |  | $ | 2,837
|Amortization                         |  |        | 229   |                                          |                 | -    |   |        |   | 4     |   |  |   |     |  |   | 41 |  |   | 274  
|Segment income                       |  |        | 235   |                                          |                 | (48  | ) |        |   | (91   | ) |  |   | 237 |  |   | 37 |  |   | 100  

In the Newsprint segment, the $135 million
improvement in segment income was mainly due to higher U.S. dollar selling
prices and lower amortization expense, partly offset by a stronger Canadian
dollar, lower sales volume and higher manufacturing costs per ton.

Sales of newsprint were $2,579 million in 2006
compared to $2,837 million in 2005. Segment income in 2006 was $235 million, or
9.1% of sales, compared to $100 million, or 3.5% of sales in 2005.

The decrease in sales was mainly attributable to
lower sales volume and a stronger average Canadian dollar compared with the U.S.
currency, partly offset by higher average prices year-over-year. The Company's
shipments totaled 3,486,000 tons compared to 3,972,000 tons sold in 2005. The
reduction in shipments was mainly due to the elimination of the least profitable
sales, resulting in the closure of the Kenora and Stephenville paper mills in
December of 2005. The average newsprint realized price rose by $20 per ton in
2006, an increase of 3% from the previous year, primarily due to price
improvements of US$62 per ton on average for all markets, largely offset by the
strengthening of the Canadian dollar.

On a per ton basis, the Company's newsprint cost
of products sold in 2006 was $4 lower than in 2005. This was mainly due to the
stronger Canadian dollar, reducing production costs in Canadian dollars of the
Company's U.S. mills.

In 2006, the Company announced two price increases
that were put into effect on February 1 and August 1. During the third
quarter of 2006, the Company reduced to US$20 the initial US$40 per ton
newsprint price increase announced for the U.S. market effective August 1,
2006. In the fourth quarter of 2006, newsprint prices started to decline and at
year-end the industry published transaction price stood at US$646 per ton, 1.7%
above December of 2005. Newsprint prices in international markets, with the
exception of European countries, increased between 10% and 14% during the year.
In 2006, published transaction prices in continental Europe were approximately
4% to 7% higher than in 2005 in local currency basis. In 2005, the Company
announced three price increases in the U.S. that were put into effect on
March 1, June 1 and October 1. The 2005 year-end industry
published transaction price stood at US$635 per ton, 11.4% above December of
2004.

In 2006, newsprint production capacity changed due
to the conversion of one paper machine from newsprint to specialty paper grades
at the Shawinigan (Belgo), Québec mill, the allocation of the capacity between
newsprint and specialty papers, as well as the production of lighter basis
weight paper. Considering the above, the Company's capacity as at
December 31, 2006 stood at 3,709,000 tons of newsprint, including 150,000
tons of idled capacity at the Lufkin paper mill.

As announced in the fourth quarter of 2005, the
Company permanently closed one paper machine at the Bridgewater mill, on
February 28, 2006. The closure of the machine removed 60,000 tons of annual
newsprint capacity.



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##### Index
to Financial Statements

Specialty Papers

Year Ended 2007 compared to Year Ended 2006

Specialty Papers operating results (in millions of dollars, unless
otherwise noted):



|                                     |  |      |       |   |                                          |   |     |                 |  |   |        |   |  |       |     |   |      |   |    |   |  |   |       |  
|------------------------------------ |  | ---- | ----- | - | ---------------------------------------- | - | --- | --------------- |  | - | ------ | - |  | ----- | --- | - | ---- | - | -- | - |  | - | ----- | -
|                                     |  |      |       |   | Favorable/(Unfavorable) variance due to: |   |     |                 | 
|                                     |  | 2007 |       |   | Volume                                   |   |     | Foreignexchange |  |   | Prices |   |  | Costs |     |   | 2006 |  
|Shipments (in thousands of
    tons) |  |      | 1,679 |   |                                          |   | (69 | )               |  |   |        |   |  |       |     |   |      |   |    |   |  |   | 1,748 |  
|Sales                                |  | $    | 1,350 |   |                                          | $ | (62 | )               |  | $ | (65    | ) |  | $     | (16 | ) |      | $ |    |   |  | $ | 1,493 |  
|Amortization                         |  |      | 146   |   |                                          |   | 7   |                 |  |   |        |   |  |       |     |   |      |   | (1 | ) |  |   | 152   |  
|Segment loss                         |  |      | (54   | ) |                                          |   | -   |                 |  |   | (62    | ) |  |       | (16 | ) |      |   | 31 |   |  |   | (7    | )

Sales of specialty papers were $1,350 million in
2007 compared to $1,493 million in 2006. Segment loss was $54 million, or (4.0)%
of sales in 2007, compared to a segment loss of $7 million, or (0.5)% of sales
in 2006. The decrease in sales is mainly attributable to lower volumes and a
stronger Canadian dollar.

The Company's shipments of specialty papers
totaled 1,679,000 tons in 2007, compared to 1,748,000 tons in 2006. On
February 25, 2007, the Company indefinitely idled its 145,000-ton Fort
William paper mill, which remained idled for the remainder of 2007. In addition,
the Company took market-related downtime at two of its specialty paper mills,
equivalent to 14,000 tons of production in the third quarter of 2007.

The previously announced US$60 per short ton price
increase for ABICAL®
grades did not materialize but during the third quarter of 2007, the Company
announced price increases of US$60 per short ton for each of its ABIOFFSET and
ABICAL® grades, all
effective October 1, 2007. Compared to 2006, the Company's average prices
in U.S. dollars for all Specialty Paper grades were 4% higher.

In the Specialty Papers segment, the $47 million
increase in segment loss was mainly due to a stronger Canadian dollar, partly
offset by higher U.S. dollar selling prices and lower manufacturing costs.

On a per ton basis, cost of products sold for
specialty papers in 2007 was $17 lower than 2006. The cost decrease was mainly
due to better efficiency and lower usage.

According to a third party source, North American
demand for uncoated groundwood papers increased by 0.9% in 2007 compared to
2006. The increase in demand was driven by a higher demand for glossy grades.

Change in capacity

On November 29, 2007, the Company permanently
closed the Fort William paper mill located in Thunder Bay, the Belgo mill in
Shawinigan, and the Lufkin mill in Texas due to market conditions and high
production costs. The mills had an annual production capacity of approximately
635,000 tons of specialty papers (375,000 tons were already idled).

Considering the above, the Company's capacity as
at December 31, 2007 stood at 1,476,000 tons of specialty papers.

Year Ended 2006 compared to Year Ended 2005

Specialty Papers operating results (in millions of dollars, unless
otherwise noted):



|                                     |  |      |       |   |                                          |   |     |                 |  |   |        |   |       |   |    |      |   |    |   |  |   |       |  
|------------------------------------ |  | ---- | ----- | - | ---------------------------------------- | - | --- | --------------- |  | - | ------ | - | ----- | - | -- | ---- | - | -- | - |  | - | ----- | -
|                                     |  |      |       |   | Favorable/(Unfavorable) variance due to: |   |     |                 | 
|                                     |  | 2006 |       |   | Volume                                   |   |     | Foreignexchange |  |   | Prices |   | Costs |   |    | 2005 |  
|Shipments (in thousands of
    tons) |  |      | 1,748 |   |                                          |   | (34 | )               |  |   |        |   |       |   |    |      |   |    |   |  |   | 1,782 |  
|Sales                                |  | $    | 1,493 |   |                                          | $ | (33 | )               |  | $ | (90    | ) |       | $ | 93 |      | $ |    |   |  | $ | 1,523 |  
|Amortization                         |  |      | 152   |   |                                          |   |     |                 |  |   | 1      |   |       |   | 16 |      |   |    |   |  |   | 169   |  
|Segment loss                         |  |      | (7    | ) |                                          |   | (6  | )               |  |   | (86    | ) |       |   | 93 |      |   | (7 | ) |  |   | (1    | )

Sales of specialty papers were $1,493 million in
2006 compared to $1,523 million in 2005. Segment loss was $7 million, or (0.5)%
of sales in 2006, compared to $1 million, or (0.1)% of sales in 2005.

The decrease in sales was mainly attributable to a
stronger average Canadian dollar, compared with the U.S. currency and lower
sales volume, partly offset by higher average prices year-over-year. The average
realized price for specialty papers decreased from the previous year by 1% to
$864 per ton. This reduction was primarily due to the



34



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##### Table
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##### Index
to Financial Statements

strengthening of the Canadian dollar, largely offset by an average price
improvement of US$45 per ton. The Company's shipments of specialty papers
totaled 1,748,000 tons in 2006, compared to 1,782,000 tons in 2005, mainly due
to the Company exiting the Rotonews grades. In the fourth quarter of 2006, the
Company took approximately 50,000 tons of market-related downtime at four of its
specialty paper mills.

The $6 million increase in segment loss was mainly
due to a stronger Canadian dollar, partly offset by higher U.S. dollar selling
prices and lower amortization expense.

On a per ton basis, the Company's specialty papers
cost of sales in 2006 was $18 higher than in 2005. The cost increase was mainly
due to $23 per ton of input price increases, primarily energy and pension and
other employee future benefits, as well as an unfavorable product mix. These
were partly offset by productivity improvements and labor cost reductions.

Change in capacity

On February 25, 2007, the Company idled for
an indefinite period its Fort William paper mill located in Thunder Bay, due to
market conditions and high production costs. The mill has an annual production
capacity of approximately 145,000 tons of specialty papers.

In 2006, the specialty papers production capacity
changed due to the conversion of one paper machine from newsprint to specialty
paper grades at the Belgo mill and the allocation of the capacity between
newsprint and specialty papers. Considering the above, the Company's capacity as
at December 31, 2006 stood at 2,111,000 tons of specialty papers, including
375,000 tons of idled capacity at the Fort William and Lufkin paper mills.



35



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of Contents

##### Index
to Financial Statements

Wood Products

Year Ended 2007 compared to Year Ended 2006

Wood products operating results (in millions of dollars, unless otherwise
noted)



|                      |  |      |       |   |                                          |   |      |                 |  |   |        |   |  |       |     |   |      |   |      |   |  |   |      
|--------------------- |  | ---- | ----- | - | ---------------------------------------- | - | ---- | --------------- |  | - | ------ | - |  | ----- | --- | - | ---- | - | ---- | - |  | - | -----
|                      |  |      |       |   | Favorable/(Unfavorable) variance due to: |   |      |                
|                      |  | 2007 |       |   | Volume                                   |   |      | ForeignExchange |  |   | Prices |   |  | Costs |     |   | 2006
|Shipments             |  |      | 1,572 |   |                                          |   | (286 | )               |  |   |        |   |  |       |     |   |      |   |      |   |  |   | 1,858
|Sales                 |  | $    | 533   |   |                                          | $ | (112 | )               |  | $ | (16    | ) |  | $     | (65 | ) |      | $ |      |   |  | $ | 726  
|Amortization          |  |      | 44    |   |                                          |   | 7    |                 |  |   |        |   |  |       |     |   |      |   | (4   | ) |  |   | 47   
|Segment income (loss) |  |      | (156  | ) |                                          |   | 6    |                 |  |   | (14    | ) |  |       | (65 | ) |      |   | (238 | ) |  |   | 155  

In the Wood Products segment, the $311 million
reduction in segment results is mainly due to the lumber duties refund of $197
million received in 2006, lower selling prices, a stronger Canadian dollar, in a
low-demand market and inventory write-downs on wood logs and work-in-progress.
Finally, assets write-offs were taken due to the permanent closure announcement
of certain facilities.

Sales of wood products declined to $533 million in
2007, compared to $726 million in 2006. Segment loss was $156 million, or
(29.3)% of sales in 2007, compared to a segment income of $155 million, or 21.3%
of sales in 2006.

The reduction in sales was mainly attributable to
lower selling price and volume as well as a stronger average Canadian dollar.
The average realized price for wood products decreased to $339 per thousand
board feet in 2007, compared to $391 per thousand board feet in 2006. The
Company's shipments totaled 1,572 million board feet in 2007, compared to
1,858 million board feet in 2006. The reduction in sales volume is mainly
attributable to the reduction in allowable cut in the province of Quebec and
lower production due to deteriorating market conditions.

On a per thousand board feet basis, the Company's
cost of goods sold in 2007 was $30 higher than in 2006. This was mainly due to
higher fuel prices, lower production and inventory write-downs due to market
conditions.

The sawmill in Pointe-aux-Outardes, (Quebec) was
temporarily closed in 2007. The Company announced the temporary closure of the
St-Fulgence and Laterriere sawmills effective January 2008, and in February
2008, additional temporary closure of Comtois, St-Hilarion and St-Raymond
(Quebec) sawmills were announced due to market condition.

On November 29, 2007, the Company announced
the results of the initial phase of a comprehensive strategic review of the
businesses, which included a decision to indefinitely idle the two Mackenzie
sawmills which directly support the Mackenzie paper operation, which was also
indefinitely idled. These sawmills represent approximately 500 million
board feet of lumber capacity. In January 2008, the Company announced the
transfer of the wood allocation of the Chibougamau sawmill to three sawmills,
namely Girardville, Mistassini (Quebec) and La Doré (Quebec), effective in the
second quarter of 2008.

In La Tuque, (Quebec), the Company have two
sawmills facilities, one at Rivière-aux-rats and Produits Forestiers La Tuque
owned at 82% by the Company and 18% by the Cooperative Forestière du Haut
Saint-Maurice, the two facilities will be consolidated into one in the first
quarter of 2008.

Lumber market

According to a third party source, demand in the
United States slowed down throughout the year with housing decreasing by 33%
from 1.8 million in 2006 to 1.35 million in 2007. This reduction was
much more pronounced in the second half with the fourth quarter averaging
1.15 million units. However, demand in Canada continued to be very strong
with housing starts remaining above an annualized rate of 200,000 units for the
6th consecutive year. In Japan, the total wood consumption in new housing was
down approximately 10% in 2007 mainly due to a change of codes but is expected
to increase in 2008 which would improve demand for the Company's J grade
products sold through Canadian distributors.

According to a third party source, in 2007, yearly
average published lumber prices (fob Great Lakes) in North America dropped
significantly compared to 2006. Prices for 2x4 Stud dropped by approximately 7%
and 2x4x Random Length dropped by approximately 12%. This is mainly due to the
declining demand bringing the demand capacity ratio down to 79% from 82% in
2006.



36



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of Contents

##### Index
to Financial Statements

Year Ended 2006 compared to Year Ended 2005

Wood products operating results (in millions of dollars, unless otherwise
noted)



|               |  |      |       |                                          |   |     |                 |  |   |        |   |  |       |     |      |  |   |     |  |   |      
|-------------- |  | ---- | ----- | ---------------------------------------- | - | --- | --------------- |  | - | ------ | - |  | ----- | --- | ---- |  | - | --- |  | - | -----
|               |  |      |       | Favorable/(Unfavorable) variance due to: |   |    
|               |  | 2006 |       | Volume                                   |   |     | ForeignExchange |  |   | Prices |   |  | Costs |     | 2005
|Shipments      |  |      | 1,858 |                                          |   |     |                 |  |   |        |   |  |       |     |      |  |   |     |  |   | 1,965
|Sales          |  | $    | 726   |                                          | $ | (49 | )               |  | $ | (21    | ) |  | $     | (94 | )    |  | $ |     |  | $ | 890  
|Amortization   |  |      | 47    |                                          |   |     |                 |  |   |        |   |  |       |     |      |  |   | 4   |  |   | 51   
|Segment income |  |      | 155   |                                          |   | (5  | )               |  |   | (16    | ) |  |       | (94 | )    |  |   | 225 |  |   | 45   

In the Wood Products segment, the $110 million
increase in segment results was mainly due to the lumber duties refund received
in 2006, lower selling prices and a stronger Canadian dollar, partly offset by a
reduction in CVD, AD and other duty expenses.

Sales of wood products declined to $726 million in
2006, compared to $890 million in 2005. Segment income was $155 million, or
21.3% of sales in 2006, compared to a segment income of $45 million, or 5.1% of
sales in 2005.

The reduction in sales was mainly attributable to
lower selling price and volume as well as a stronger average Canadian dollar.
The average realized price for wood products decreased to $391 per thousand
board feet in 2006, compared to $453 per thousand board feet in 2005. The
Company's shipments totaled 1,858 million board feet in 2006, compared to
1,965 million board feet in 2005. The reduction in sales volume is mainly
attributable to the reduction in allowable cut in the province of Quebec and
lower production due to deteriorating market conditions.

On a per thousand board feet basis, the Company's
cost of goods sold in 2006 was $5 higher than in 2005. This was mainly due to
higher fuel prices and lower production.

In the fourth quarter of 2006, the Company
announced the idling of five Quebec sawmills, including a sawmill owned by
Produits Forestiers Saguenay Inc., a subsidiary of Abitibi. The temporary
closures were mainly attributable to deteriorating market conditions as well as
high production and fiber costs.

Lumber market

According to a third party source, demand in the
United States slowed down throughout the year with housing starts decreasing by
12.9%, from an average of 2.1 million units in 2005 to 1.8 million
units in 2006. This reduction occurred mainly in the second half of 2006 with
housing starts ending the year at 1.6 million units. Demand in Canada
continued to be very strong with housing starts remaining above an annualized
rate of 200,000 units for all of the year for the fifth consecutive year. In
Japan, housing starts increased by approximately 10% in 2006, improving demand
for the Company's 2 X 4 "J grade" products sold through Canadian distributors.

In 2006, yearly average published lumber prices
(f.o.b. Great Lakes) in North America dropped significantly compared to 2005.
Prices for 2 X 4 Stud dropped by approximately 17% and 2 X 4 Random Length
dropped by approximately 12%. This is mainly due to the declining demand and the
capacity/demand ratio in North America.

Other Noteworthy Events

On February 10, 2008, we entered into an
agreement with Catalyst Paper Corporation pursuant to which we agreed to sell
our Snowflake, Arizona mill and related assets for approximately $180 million,
including $161 million in cash and approximately $19 million in retained trade
accounts receivable. We expect this sale to close in mid-April 2008, once all
conditions to close, including a financing condition, which is expected to be
satisfied in part by a fully backstopped rights offering, and certain customary
closing conditions have been satisfied. This sale is required to comply with the
requirements set forth by the U.S. Department of Justice in October 2007 for
approval of Abitibi's combination with Bowater. If this sale does not close as
expected, the DOJ may ask a court to appoint a trustee, who will be empowered to
complete the sale on terms then obtainable by the trustee using its reasonable



37



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##### Index
to Financial Statements

efforts. We continue to explore opportunities for the sale of other
assets such as timberland or production facilities, but can make no assurances
that we will be able to complete any such sales or that the terms of any such
sales would be favorable to us.

On July 25, 2006, the Company announced its
intent to exercise its option to acquire the remaining 47.5% interest in Augusta
Newsprint Company (ANC), a company operating a newsprint mill located in
Augusta, Georgia and to concurrently sell the 55,000 acres of ANC's timberlands.
In January of 2007, the Company and its partner decided to delay the
acquisition, by Abitibi-Consolidated, of the remaining 47.5% interest to a later
date and to proceed with the sale of 55,000 acres of timberlands, with all
proceeds from the sale going to the Company. Final terms of the agreement were
concluded in the first quarter of 2007.

LIQUIDITY AND CAPITAL RESOURCES

We have a significant amount of indebtedness. As
of December 31, 2007, we had approximately $3.7 billion of indebtedness.
The Company's ability to meet its debt service obligations and to repay its
outstanding indebtedness will depend on a combination of new financings, cash
from operations and cash produced by divestitures of some of the Company's
assets. There can be no assurance that such new financings or divestitures will
be consummated, or, if consummated, that the terms of such transactions will be
advantageous to us. Further, there can be no assurance that we will be able to
generate sufficient cash flows to repay our outstanding indebtedness, in light
of the significant decreases in North American demand for newsprint, which is
our principal product, and other negative factors affecting our industry. See
"Risk Factors - Risks Related to Our Liquidity - We have substantial
indebtedness that could adversely affect our financial health, and our efforts
to reduce and restructure this indebtedness may not be successful."

We have substantial indebtedness that could
adversely affect our financial health, and our efforts to reduce and restructure
this indebtedness may not be successful."

Our primary sources of liquidity and capital
resources are cash provided by operations and available borrowings under credit
facilities, including our accounts receivable securitization program, which are
described in more detail below. Our major cash requirements are to fund
operating activities, working capital, capital expenditures and debt service
obligations.

We are currently experiencing a liquidity
shortfall and face significant near-term liquidity challenges. Absent new
financings, the Company's liquidity generated from continuing operating
activities, its cash on hand and availability under its revolving credit
facility will not be sufficient to satisfy its requirements for operating
activities, working capital, capital expenditures, and, in particular, debt
service and repayment obligations including impending maturities in 2008. See
discussion of liquidity and covenants under the "Business Strategy and Outlook"
section of this Item 5, and notes 1 and 19 of our consolidated financial
statements.

The Company's cash and cash equivalents at
December 31, 2007 were $132 million compared to $216 million at
December 31, 2006.

Cash from (used in) continuing operating activities

Cash used in continuing operating activities
amounted to $468 million in 2007, a deterioration of $700 million compared to
cash generated from operating activities of $232 million in 2006. This can be
attributed to a number of factors, including lower sales, an increase in
SG&A expenses due to merger-related costs and the $197 million cash refund
of lumber duties received in 2006, which were partially offset by lower cost of
sales and distribution costs, as noted in the "Consolidated Results of
Operations" section of this Item 5. These were partially offset by a $344
million improvement in working capital, driven mainly by lower levels of
inventories and accounts receivable. In 2007, we also received $24 million for
the monetization of certain financial instruments that were in significant gain
positions.

Cash from (used in) financing activities of continuing operations

Cash generated by financing activities from
continuing operations totaled $390 million in 2007, compared to $27 million in
2006. The $363 million increase was mainly due to a $280 million net increase in
short-term and long-term debt, $37 million of cash proceeds in 2007 on the
issuance of units by a subsidiary, a $24 million decrease



38



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##### Table
of Contents

##### Index
to Financial Statements

in dividends and cash distributions paid to non-controlling interests and
a $22 million decrease in dividends paid to shareholders following the decision
on July 25, 2006 made by the board of directors to suspend dividend
payments.

In 2007, we issued a $250 million 7.1% term loan
due in 2017, repaid the US$61 million 7.625% notes and increased borrowings
under credit facilities to $383 million at December 31, 2007. The net
borrowings were used to help pay for operating activities that used $468 million
in cash in 2007 and capital expenditures of $107 million.

Short-term and long-term debt, including the
current portion, amounted to $3,726 million as at December 31, 2007,
representing a ratio of net debt to total capitalization of 65.8%, compared to
$3,877 million and a ratio of 58.3% as at December 31, 2006.

On April 1, 2007, the Company completed the
transfer of its Ontario hydroelectric assets and related water rights (the
"Facilities") to its wholly owned subsidiary called ACH Limited Partnership
("ACH LP"). On April 2, ACH LP issued new units equivalent to a 25%
interest of the partnership to the Caisse de dépôt et placement du Québec (the
"Caisse"), for gross proceeds of $48 million ($37 million net of $11 million of
transaction costs). The Caisse has also provided ACH LP with a 10-year unsecured
7.132% term loan of $250 million, non recourse to the Company, to partially fund
the acquisition of the Facilities. ACH LP has also entered into an unsecured
bank credit facility of $15 million, for general business purposes. The facility
matures on March 31, 2010 and is non recourse to the Company. The unsecured
term loan and unsecured bank credit facility require ACH LP to meet a specific
financial ratio, which is met as at December 31, 2007.

The increase of $816 million in cash from
financing activities in 2006 when compared to 2005 can be attributed primarily
to net changes in borrowings. In 2006, the Company increased its net borrowings
by $93 million, whereas in 2005, it had net repayments of $701 million.

Cash from (used in) investing activities of continuing operations

Cash provided by investing activities was $7
million in 2007, compared to cash used in investing activities of $123 million
in 2006 and cash provided by investing activities of $566 million in 2005.

In 2007, we used $107 million for capital
expenditures compared to $165 million in 2006 and $177 million in 2005. During
2007, the Company spent $10 million towards the construction of a biomass boiler
at its Fort Frances, Ontario mill. This new boiler will feed a 52MW steam
turbine and also fulfill mill steam needs by displacing natural gas. The new
boiler should be in operation by the end of 2008 and represents a total project
of $62 million for Abitibi. The remaining capital expenditures were related to
several small projects. The Company intends to limit its capital expenditure
program in 2008 to approximately $120 million.

In 2007, the Company sold approximately 54,000
acres of timberlands and other fixed assets for cash proceeds of $135 million.
In 2006, the Company sold assets relating to the closure of the Sheldon mill in
2004 and the Kenora mill in 2005 for total cash proceeds of $32 million. In
2005, the Company sold timberlands and other fixed assets for cash proceeds of
$64 million.

In connection with the transaction between the
Company and the Caisse relating to ACH LP described above, $24 million of ACH
LP's cash became restricted in 2007 and is shown as a cash outflow from
investing activities. Of this amount, $18 million will be used over the next
three years to realize a capital project related to the Ontario hydroelectric
assets and related water rights and $6 million is required as reserves under the
term loan credit agreement.

In 2005, the Company generated $693 million from
the sale of its 50% share ownership in Pan Asia Paper Company Pte Ltd and paid
$13 million to purchase the remaining 57% of the softwood sawmill assets owned
by Gestofor Inc.

SHORT-TERM FINANCING

As of December 31, 2007, we had cash and cash
equivalents of approximately $132 million.



39



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##### Table
of Contents

##### Index
to Financial Statements

Short-term Bank Debt

As of December 31, 2007, our available borrowings under bank credit
facilities were as follows:



|                  |  |            |     |                   |   |                        |  |                 |     |                                |               |  |      |  
|----------------- |  | ---------- | --- | ----------------- | - | ---------------------- |  | --------------- | --- | ------------------------------ | ------------- |  | ---- | -
|(In millions)     |  | Commitment |     | AmountOutstanding |   | CommitmentAvailable(1) |  | TerminationDate |     | WeightedAverageInterestRate(2) |              
|Credit facilities |  | $          | 710 |                   | $ | 383                    |  | $               | 252 |                                | 11/08 & 12/08 |  | 7.98 | %



|(1) | The
      commitment available under the revolving bank credit facilities is subject
      to collateral requirements and covenant restrictions as described below
      and is reduced by outstanding letters of credit of $75 million for the
      Abitibi credit facility, while commitment fees for unused portions are 70
      basis points.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Borrowings
      under the credit facilities incur interest based, at our option, on
      specified market interest rates plus a margin.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

Since December 31, 2007, we have borrowed
additional amounts under our credit facilities. As of February 29, 2008, we
had cash of approximately $153 million (excluding $24 million of restricted
cash) and undrawn amounts under our credit facilities of approximately $62
million. Our credit facilities are described in more detail below.

Credit Facilities

The revolving bank credit facilities provide $710
million of credit in two components: "Facility A" is a $510 million credit
facility secured by certain fixed assets and "Facility B" is a $200 million
revolving credit facility secured by certain working capital elements. The
carrying value of the secured assets is $920 million as of December 31,
2007.

Financial covenants under our credit facility must
be maintained at the end of each financial quarter based upon the Company's
consolidated financial results and consist of the following two ratios:



| | i. | a maximum
      ratio of net funded debt (including all advances under Abitibi's revolving
      credit facilities and the outstanding amount of any securitization
      programs, less cash and cash equivalents) to total capitalization
      (generally defined as equity and net funded debt) of 70% until
      December 31, 2007 and 65% thereafter; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii. | a minimum
      ratio of EBITDA (generally defined as net income, excluding extraordinary
      and non-recurring gains (or losses), gains (or losses) from assets sales
      or abandonments or reserves related thereto, and non-controlling interest
      items, plus interest expenses, plus income taxes plus amortization and
      depreciation) to interest expense of 1.50 to 1. This ratio has been
      waived, as noted below, until the end of the second quarter of 2008.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In July 2007, we amended our credit agreement to
waive the interest coverage ratio requirement until the end of the second
quarter of 2008 and also waived certain other provisions to permit the
reorganization and rationalization of AbitibiBowater's corporate structure.

The credit agreement limits our ability to provide
financial assistance in favor of any person that is not an Abitibi subsidiary,
including our parent AbitibiBowater. However, Abitibi (including its
subsidiaries) may (1) pay dividends or make other distributions to its
shareholders and (2) guarantee the funded debt of any other person (certain
subsidiaries of Abitibi are restricted however in their ability to incur funded
debt and to guarantee funded debt of other persons).

Although the Company was in compliance with its
net funded debt to total capitalization covenant under its credit agreement at
December 31, 2007, there can be no assurance that it will remain in
compliance in the near term in light of the factors discussed above and the
Company's forecast of continued operating losses. Based on current forecasts,
the Company expects to be in default with its net funded debt to total
capitalization covenant to be measured as of the end of the first quarter of
2008, however, the Company has developed a refinancing plan, consisting of the
Financing Transactions, to address the upcoming debt maturities which, if
successful, will replace the current covenants. Failure to comply with the
financial or other covenants of the credit facilities, or failure to refinance
the debt as planned, could result in the outstanding borrowings under these
facilities becoming immediately due and payable (unless the lenders waive any
resulting event of default). See discussion of liquidity and covenants under the
"Business Strategy and Outlook" section of this Item 5.



40



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##### Table
of Contents

##### Index
to Financial Statements

OFF-BALANCE SHEET ARRANGEMENTS

Accounts Receivable Securitization Programs

As of December 31, 2007, borrowings under our accounts receivable
programs were as follows:



|                                                  |  |            |     |                   |   |                 |  |                             |  |      |  
|------------------------------------------------- |  | ---------- | --- | ----------------- | - | --------------- |  | --------------------------- |  | ---- | -
|(In millions)                                     |  | Commitment |     | AmountOutstanding |   | TerminationDate |  | WeightedAverageInterestRate | 
|Accounts receivable securitization
      programs |  | $          | 424 |                   | $ | 341             |  | 10/08                       |  | 6.21 | %
|                                                  |  |            |     |                   |   |                 |  |                             |  |      |  

We have historically sold most of our trade
accounts receivable through two securitization programs in order to reduce
working capital requirements. As of December 31, 2007, we had sold $489
million of trade receivables resulting in cash proceeds of $341 million, which
represented the total available at that time under the securitization programs.
Accounts receivable are sold at discounted amounts based on the securitization
provider's funding cost plus a margin. The average discount rate during 2007 was
6.2%. We act as a servicing agent and administer the collection of the accounts
receivable sold pursuant to these agreements. The fees received for servicing
the accounts receivable approximate the value of services rendered. The amount
that can be obtained under our securitization programs depends on the amount and
nature of the accounts receivable available to be sold.

In January 2008, one of those programs, which was
uncommitted, was terminated and the other, which is committed, was amended to
increase its committed amount and reset its maturity date so that we now
maintain an ongoing securitization program committed until July 2009 to obtain
aggregate cash proceeds of up to $350 million from accounts receivable, pursuant
to sale agreements.

CONTRACTUAL OBLIGATIONS

We have obligations to repay our outstanding debt
that matures at various dates in the future. In addition, we enter into various
supply and cutting rights agreements, guarantees and purchase commitments in the
normal course of business. The following summarizes our contractual obligations
at December 31, 2007 on a consolidated basis and the effect such
obligations are expected to have on our liquidity and cash flow in future
periods, but does not reflect the impact of the Financing Transactions, the sale
of the Snowflake mill or the use of the proceeds therefrom.



|                                                     |  |       |       |                    |   |                |  |                |     |                    |   |     |  |   |      
|---------------------------------------------------- |  | ----- | ----- | ------------------ | - | -------------- |  | -------------- | --- | ------------------ | - | --- |  | - | -----
|(In millions)                                        |  | Total |       | Within1
      Year |   | 1 -
    3Years |  | 4 -
    5Years |     | After
      5Years
|Short-term debt                                      |  | $     | 383   |                    | $ | 383            |  | $              | -   |                    | $ | -   |  | $ | -    
|Long-term debt, including current
      installments |  |       | 3,343 |                    |   | 342            |  |                | 546 |                    |   | 413 |  |   | 2,042
|Non-cancelable operating lease
      obligations(1)  |  |       | 88    |                    |   | 28             |  |                | 25  |                    |   | 12  |  |   | 23   
|Purchase obligations(2)                              |  |       | 201   |                    |   | 27             |  |                | 54  |                    |   | 54  |  |   | 66   
|Tax reserves                                         |  |       | 66    |                    |   | -              |  |                | 17  |                    |   | 14  |  |   | 35   
|Pension funding(3)                                   |  |       | 169   |                    |   | 169            |  |                | -   |                    |   | -   |  |   | -    
|Severance obligation(4)                              |  |       | 60    |                    |   | 60             |  |                | -   |                    |   | -   |  |   | -    
|                                                     |  |       |       |                    |   |                |  |                |     |                    |   |     |  |   |      
|Total contractual
      obligations                  |  | $     | 4,310 |                    | $ | 1,009          |  | $              | 642 |                    | $ | 493 |  | $ | 2,167
|                                                     |  |       |       |                    |   |                |  |                |     |                    |   |     |  |   |      



|(1) | We lease
      certain office premises, office equipment, and transportation equipment
      under operating leases.
|--- | --------------------------------------------------------------------------------------------------------------------

|(2) | Purchase
      obligations include a cogeneration agreement at our Bridgewater operations
      in the United Kingdom, totaling $198 million through 2015. We also have a
      gas pipeline contract at our Mackenzie operations with obligations
      totaling $3 million through 2012.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Pension
      funding is calculated on an annual basis. Consequently, our funding
      obligations in future periods may be significantly higher or lower than
      reflected in this table.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Approximately $60 million of severance obligation is associated
      with the closures announced as a result of our comprehensive strategic
      review. This obligation is expected to be paid out in 2008 and 2009. To
      the extent we close additional facilities, our severance obligations may
      increase and such increases may be material.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to the items shown in the table above,
we are party to employment and change-in-control agreements with our executive
officers.



41



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##### 

CHANGES IN ACCOUNTING POLICIES

Recent changes in accounting policies

Accounting changes

On January 1, 2007, the Company adopted the
Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1506,
Accounting Changes. This standard establishes criteria for changing
accounting policies, together with the accounting treatment and disclosure of
changes in accounting policies and estimates, and correction of errors.

Financial instruments

On January 1, 2007, the Company adopted CICA
Handbook Section 1530, Comprehensive Income; Section 3855,
Financial Instruments - Recognition and Measurement and
Section 3865, Hedges. These standards provide accounting guidelines
for recognition and measurement of financial assets, financial liabilities and
non-financial derivatives, and describe when and how hedge accounting may be
applied.

The Company's adoption of these new Financial
Instruments standards resulted in changes in the accounting for financial
instruments and hedges, as well as the recognition of certain transition
adjustments that have been recorded in opening deficit or opening accumulated
other comprehensive loss as described below. The comparative consolidated
financial statements have not been restated other than for the foreign currency
translation adjustment, which is now disclosed within accumulated other
comprehensive loss. The principal changes in the accounting for financial
instruments and hedges due to the adoption of these accounting standards are
described below.

(a) Comprehensive income (loss)

Comprehensive income (loss), established under
CICA Section 1530, is defined as the change in equity, from transactions
and other events and circumstances from non-owner sources, and is composed of
the Company's net earnings (loss) and other comprehensive income (loss). Other
comprehensive income (loss) refers to revenues, expenses, gains and losses that
are recognized in comprehensive income (loss), but excluded from net earnings
(loss), and include foreign currency translation gains and losses on the net
investment in self-sustaining operations and changes in the fair market value of
derivative instruments designated as cash flow hedges, all net of income taxes.
The components of comprehensive income (loss) are disclosed in the Consolidated
Statements of Comprehensive Income (Loss).

(b) Financial assets and financial liabilities

Under the new standards, financial assets and
financial liabilities are initially recognized at fair value and are classified
into one of these five categories: held-for-trading, held-to-maturity
investments, loans and receivables, available-for-sale financial assets or other
financial liabilities. They are subsequently accounted for based on their
classification as described below. The classification depends on the purpose for
which the financial instruments were acquired and their characteristics. Except
in very limited circumstances, the classification is not changed subsequent to
initial recognition.



42



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##### 

Held-for-trading:

Financial instruments classified as
held-for-trading are carried at fair value at each balance sheet date with the
changes in fair value recorded in net earnings (loss) in the period in which
these changes arise.

Held-to-maturity investments, loans and
receivables and other financial liabilities:

Financial instruments classified as loans and
receivables, held-to-maturity investments and other financial liabilities are
carried at amortized cost using the effective interest method. The interest
income or expense is included in net earnings (loss) over the expected life of
the instrument.

Available-for-sale:

Financial instruments classified as
available-for-sale are carried at fair value at each balance sheet date with the
changes in fair value recorded in other comprehensive income (loss) in the
period in which the changes arise. Securities that are classified as
available-for-sale and do not have a readily available market value are recorded
at cost. Available-for-sale securities are written down to fair value through
earnings (loss) whenever it is necessary to reflect other-than-temporary
impairment. Upon derecognition, all cumulative gain or loss is then recognized
in net earnings (loss).

As a result of the adoption of these new
standards, the Company has classified its cash and cash equivalents as
held-for-trading. Accounts receivable are classified as loans and receivables.
The Company's investments consist of equity accounted for investments which are
excluded from the scope of this standard. Accounts payable and accrued
liabilities, short-term debt and long-term debt, including interest payable are
classified as other liabilities, all of which are measured at amortized cost.

(c) Derivatives and hedge accounting

Embedded derivatives:

All derivative instruments are recorded in the
consolidated balance sheets at fair value at each balance sheet date.
Derivatives may be embedded in other financial instruments (the "host
instrument"). Prior to the adoption of the new standards, such embedded
derivatives were not accounted for separately from the host instrument. Under
the new standards, embedded derivatives are treated as separate derivatives if
their economic characteristics and risks are not clearly and closely related to
those of the host instrument, the terms of the embedded derivative are the same
as those of a stand-alone derivative, and the combined contract is not held for
trading or designated at fair value. These embedded derivatives are measured at
fair value at each balance sheet date with subsequent changes recognized in net
earnings (loss) in the period in which the changes arise. The Company selected
January 1, 2003 as its transition date for embedded derivatives, which is
the latest date that could be selected according to the accounting standard.

Hedge accounting:

At the inception of a hedging relationship, the
Company documents the relationship between the hedging instrument and the hedged
item, its risk management objective and its strategy for undertaking the hedge.
The Company also requires a documented assessment, both at hedge inception and
on an ongoing basis, of whether or not the derivatives that are used in hedging
transactions are effective in offsetting the changes attributable to the hedged
risks in the fair values or cash flows of the hedged items. Under the new
standards, all derivatives are recorded at fair value. These derivatives are
recorded in accounts receivable or accounts payable. The method of recognizing
fair value gains and losses depends on whether derivatives are held for trading
or are designated as hedging instruments, and, if the latter, the nature of the
risks being hedged. All gains and losses from changes in the fair value of
derivatives not designated as hedges are recognized in the Consolidated
Statements of Earnings (Loss). When derivatives are designated as hedges, the
Company classifies them either as: (i) hedges of the change in fair value
of recognized assets or liabilities or firm commitments (fair value hedges); or
(ii) hedges of the variability in highly probable future cash flows
attributable to a recognized asset or liability, or a forecasted transaction
(cash flow hedges).

Fair value hedge:

The Company has outstanding interest rate swap
contracts, which it designates as a fair value hedge related to variations of
the fair value of its long-term debt due to change in LIBOR interest rates.
Changes in the fair value of derivatives that are designated and qualify as fair
value hedging instruments are recorded in the Consolidated Statements of
Earnings (Loss). A corresponding adjustment amounting to



43



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##### 

changes in the fair value of the assets,
liabilities or group thereof that are attributable to the hedged risk is
recorded as an adjustment of the hedged item and to earnings. Any gain or loss
in fair value relating to the ineffective portion of the hedging relationship is
recognized immediately in "Interest expense" in the Consolidated Statements of
Earnings (Loss). If a hedging relationship no longer meets the criteria for
hedge accounting, the cumulative adjustment to the carrying amount of the hedged
item is amortized to the Consolidated Statements of Earnings (Loss) based on a
recalculated effective interest rate over the residual period to maturity,
unless the hedged item has been derecognized in which case it is released to the
Consolidated Statements of Earnings (Loss) immediately. Upon adoption of the new
standards, the Company recorded an increase in accounts payable of $37 million,
and a decrease of $37 million in long-term debt.

Cash flow hedge:

The Company has outstanding options and forward
exchange contracts, which it designates as cash flow hedges of anticipated
future revenue for a maximum period of two years. The amounts and timing of
future cash flows are projected on the basis of their contractual terms and
other relevant factors, including estimates of prepayments and defaults. The
aggregate cash flows over time form the basis for identifying the effective
portion of gains and losses on the derivatives designated as cash flow hedges of
forecasted transactions. The effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow hedges is recognized in
comprehensive income (loss). Any gain or loss in fair value relating to the
ineffective portion is recognized immediately in "Sales" in the Consolidated
Statements of Earnings (Loss). Amounts accumulated in other comprehensive income
(loss) are reclassified to the Consolidated Statement of Earnings (Loss) in the
period in which the hedged item affects earnings. When a hedging instrument
expires or is sold, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss existing in accumulated other
comprehensive income (loss) at that time remains in accumulated other
comprehensive income (loss) until the forecasted transaction is eventually
recognized in the Consolidated Statements of Earnings (Loss). When it is
probable that a forecasted transaction will not occur, the cumulative gain or
loss that was reported in other comprehensive income (loss) is immediately
transferred to the Consolidated Statements of Earnings (Loss). Upon adoption of
the new standards, the Company recorded an increase in accounts payable of $10
million, an increase of $3 million of future income tax assets, and an increase
of $7 million net of taxes in accumulated other comprehensive loss.

(d) Deferred financing fees

Under the new standards, transaction costs related
to the issuance or acquisition of financial assets and liabilities (other than
those classified as held-for-trading) may be either all recognized into earnings
(loss) as incurred, or are recorded with the asset or liability to which they
are associated and amortized using the effective-interest rate method.
Previously, the Company had deferred these costs and amortized them over the
life of the related financial asset or liability.

The Company elected to recognize all such costs
into earnings (loss). As a result, the Company wrote-off deferred financing
costs of $39 million and income taxes of $5 million, resulting in a $34 million
adjustment to deficit on January 1, 2007.

The following table summarizes the transition adjustments required to
adopt the new standards:



|                                               |  |             |   |  |                                     |   |  |             |   |  |            |  
|---------------------------------------------- |  | ----------- | - |  | ----------------------------------- | - |  | ----------- | - |  | ---------- | -
|                                               |  | Deficit     |   |  | Accumulated othercomprehensive loss |  
|                                               |  | Before tax$ |   |  | After tax$                          |   |  | Before tax$ |   |  | After tax$ |  
|Adoption of new accounting policies
      for: |  |             |   |  |                                     |   |  |             |   |  |            |  
|Deferred financing costs                       |  | (39         | ) |  | (34                                 | ) |  | -           |   |  | -          |  
|Cash flow hedges                               |  | -           |   |  | -                                   |   |  | (10         | ) |  | (7         | )
|                                               |  |             |   |  |                                     |   |  |             |   |  |            |  
|                                               |  | (39         | ) |  | (34                                 | ) |  | (10         | ) |  | (7         | )
|                                               |  |             |   |  |                                     |   |  |             |   |  |            |  



44



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##### 

The fair value of financial instruments is determined using price quoted
on active markets, when available, and recognized valuation models using
observable market-based inputs.

Accounting principles issued but not yet implemented

Financial instruments - disclosure and presentation

In December 2006, the CICA published the following two sections of the
CICA Handbook: Section 3862, Financial Instruments-Disclosures and
Section 3863, Financial Instruments-Presentation. These standards
introduce disclosure and presentation requirements that will enable financial
statements' users to evaluate, and enhance their understanding of the
significance of financial instruments for the entity's financial position,
performance and cash flows, and the nature and extent of risks arising from
financial instruments to which the entity is exposed, and how those risks are
managed.

Capital disclosures

In December 2006, the CICA published section 1535 of the Handbook,
Capital disclosures, which requires disclosure of both qualitative and
quantitative information that enables financial statements' users to evaluate
the entity's objectives, policies and processes for managing capital.

Inventories

In January 2007, the CICA published section 3031 of the Handbook,
Inventories, which prescribes the accounting treatment for inventories.
Section 3031 provides guidance on the determination of costs and its
subsequent recognition as an expense, and provides guidance on the cost formulas
used to assign costs to inventories.

Those standards must be adopted by the Company for the fiscal year
beginning on January 1, 2008. While the Company is currently assessing the
impact of these new recommendations on its financial statements, it does not
expect the recommendations to have a significant impact on its financial
position, earnings or cash flows.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in
conformity with Canadian GAAP requires us to make estimates, assumptions and
judgments and rely on future projections of results of operations and cash
flows. We base our estimates, assumptions and judgments on historical data and
other information that we believe are reasonable under the circumstances. These
estimates, assumptions and judgments affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of our financial statements. In addition, they affect the reported amounts
of revenues and expenses during the reporting periods. It is important that the
reader of our financial statements understand that actual results could differ
materially from these estimates, assumptions and judgments.

A summary of our significant accounting policies
is disclosed in Note 3 to our consolidated financial statements. Based upon a
review of our significant accounting policies, we believe the following
accounting policies require us to make estimates, assumptions and judgments that
can significantly affect the results reported in our consolidated financial
statements.

Employee future benefit plans

The application of CICA Handbook
Section 3461, Employee Future Benefits, requires judgments regarding
certain assumptions that affect the amounts recorded for the plans' estimated
accrued benefit obligations and related income or expense.

The major assumptions are the expected return on
plan assets and the compensation rate increase. The Company, based on its own
experience and recommendations from its actuarial firms, reviews these
assumptions annually. The discount rate used to calculate the present value of
the pension obligation is reassessed at each measurement date. For 2007, the
major assumptions have been estimated at 5.60% for the discount rate and 2.4%
for the compensation rate increase in the case of the pension obligation. In the
case of the pension expense, the assumptions have been estimated at 5.20% for
the discount rate, 6.90% for the return on plan assets and 2.50% for the
compensation rate increase.



45



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##### 

The Company amortizes past service costs and
cumulative unrecognized net actuarial gains and losses, in excess of 10% of the
greater of the projected benefit obligation or the market-related value of plan
assets, over the average remaining service period of the active employee group
covered by the plans. As at December 31, 2007, the Company's deficit of the
fair value of the pension plan assets over its accrued benefit obligation was
$436 million, compared to $607 million at the end of 2006. This decrease is
mainly attributable to the additional funding from the Company in 2007. The
Company anticipates that it will fund its actuarial deficit over the next five
years. Consequently, the Company believes its minimum pension and
post-retirement benefits funding in excess of pension expense will be in a
similar range for 2008 when compared to the corresponding $43 million for 2007.
The Company's contributions for both pension and post-retirement benefits are
expected to be approximately $184 million in 2008, compared to $209 million in
2007.

Changes in estimates or assumptions could affect
the employee future benefits in the balance sheets and cost of products sold in
the statements of earnings of the Company's consolidated financial statements. A
change of 0.25% in the discount and compensation rates would represent a
variation in the pension obligation of approximately $112 million and $22
million, respectively. Also, a change of 0.25% in the discount, return on plan
assets and compensation rates would represent a variation in the pension costs
of approximately $10 million, $8 million and $5 million, respectively. These
sensitivities are based on actual assumptions and could differ when using a
different base or percentage of variation in a way that may not be linear or
symmetrical.

A description of the plans, the assumptions used
in the calculation and certain sensitivities are presented in Note 20 of the
Company's consolidated financial statements included in this Annual Report.

Goodwill

We have a significant amount of goodwill recorded
in our consolidated balance sheets. We review the carrying value of our goodwill
for impairment in the fourth quarter of each year or more frequently, if an
event occurs that triggers such an interim review. Goodwill is allocated to
reporting units for purposes of performing a test for impairment. We completed
our annual goodwill impairment test in the fourth quarter of 2007, prior to the
Combination. We also completed another goodwill impairment test following the
Company's announcements on November 29, 2007. There were no indications of
impairment for any of the reporting units as a result of performing the
impairment tests. As discussed more fully in Note 3 to our consolidated
financial statements, if a reporting unit's carrying value exceeds its fair
value, an impairment charge equal to the difference in the carrying value of the
goodwill and the implied fair value of the goodwill is recorded. In connection
with the definitive agreement for the sale of the Snowflake facility, goodwill
associated with Snowflake of $53 million has been included in the carrying
amount of the group of Snowflake assets held for sale in determining the
impairment on assets held for sale. The amount of goodwill included in the
carrying amount was based on the relative fair values of the Snowflake facility
to be disposed of, determined based on the net realizable value of the
facility's net assets consistent with the terms of the definitive agreement for
the sale of the facility, and the portion of the Newsprint reporting unit that
will be retained.

Testing for impairment is accomplished mainly by
determining whether the fair value of a reporting unit exceeds the book value of
the net assets of that reporting unit as at the assessment date. The Company
tests its goodwill for impairment using a two-step methodology. This two-step
methodology contains estimates and judgments that are subjective and uncertain,
and thus, may change over time.

The Company conducted the initial step of the
goodwill impairment test, consisting of making the determination of fair value,
which the Company does by relying primarily on the discounted cash flows method.
This method uses projections of cash flows from each of the reporting units.
Several of the key assumptions include periods of operation, projections of
product pricing, production levels and sales volumes, product costs, market
supply and demand, foreign exchange rates, inflation, weighted average cost of
capital and capital spending. The Company derives these assumptions used in its
valuation models from several sources. Many of these assumptions are derived
from the Company's internal budgets, which would include existing sales data
based on current product lines and assumed production levels, manufacturing
costs and product pricing. The Company believes that its internal forecasts are
consistent with those that would be used by a potential buyer in valuing its
reporting units. The Company's products are commodity products; therefore,
pricing is inherently volatile and often follows a cyclical pattern. Pricing
estimates and foreign exchange rates are derived from information generated
internally, from industry research firms and from other published reports and
forecasts.



46



---

##### 

The second step is performed only when the book
value exceeds the fair value. Under this scenario, a second test is performed
whereby the fair value of the reporting unit's goodwill is estimated to
determine if it is less than its book value. Fair value of goodwill is estimated
in the same manner as goodwill is determined in an acquisition, that is, the
fair value of the reporting unit over the fair value of the identifiable net
assets of the reporting unit.

Determining the reporting units to which we should
allocate the goodwill takes considerable judgment and is based upon the
determination of the reportable segments, which in and of itself, requires
management's judgment. We are required to evaluate whether each component (i.e.,
one level below the reportable segment) is a business by assessing those
business elements (inputs, processes, outputs) that are present within the
component, those business elements that are missing from the component, and the
degree of difficulty in replacing the missing elements. Further, if any of the
components are considered a business, we are required to determine whether they
are similar for purposes of aggregation into a single reporting unit. Our
similarity assessment included a review of the customers, products, distribution
methods and other pertinent information associated with each component that
qualified as a business. Once the reporting units are defined, we are required
to determine which reporting units benefit synergistically from the Combination
and allocate the acquired goodwill to those reporting units based on their
relative fair values.

The assumptions used in the calculation models are
interrelated. The continuing degree of interrelationship of these assumptions
is, in and of itself, a significant assumption. Because of the interrelationship
among these assumptions, the Company does not believe it would be meaningful to
provide additional sensitivity analysis on any of these individual assumptions,
with the exception of paper prices and WACC. Based on the Company's most
probable price outlook scenario, if trend price projections were to decrease by
US$25 per ton, the fair value would be about equal to book value for the
"Newsprint" segment and would still exceed book value in the "Specialty Papers"
segment. If the WACC, which is used to discount the projected cash flows, was
lower, the measure of the fair value of the Company's assets would increase.
Conversely, if the WACC was higher, the measure of the fair value of the
Company's assets would decrease. If the estimate of WACC was to increase by 25
basis points, the fair values of each of the reporting units would continue to
exceed their book values amounts.

In future measurements of fair value, adverse
changes in any of these assumptions could result in an impairment of goodwill
that would require a non-cash charge to the consolidated statements of earnings
(loss) and may have a material effect on the Company's financial condition and
operating results.

Long-lived assets

Losses related to impairment of long-lived assets
are recognized when circumstances indicate the carrying values of the assets may
not be recoverable, such as continuing losses in certain locations. When certain
indicators that the carrying value of a long-lived asset may not be recoverable
are triggered, we evaluate the carrying value of the asset in relation to its
expected undiscounted future cash flows. If the carrying value of the asset is
greater than the expected undiscounted future cash flows, an impairment charge
is recorded based on the excess of the long-lived asset's carrying value over
its fair value.

Immediately upon the Combination, AbitibiBowater
began a comprehensive strategic review of its operations to reduce costs and
improve its profitability. On November 29, 2007, AbitibiBowater announced
its decision to reduce its newsprint and specialty papers production capacity by
approximately one million metric tons per year during the first quarter of 2008.
The reductions include the permanent closure of the Company's Belgo, Québec,
Fort William, Ontario and Lufkin, Texas facilities and the indefinite idling of
the Company's Mackenzie, British Columbia facility, which includes the paper
mill and two sawmills directly supporting the paper mill operations.

In 2007, as a result of permanent closures,
indefinite idling or operating losses of certain facilities, the Company
conducted impairment tests on the Alabama, Belgo, Bridgewater, Iroquois Falls,
Lufkin, Snowflake and the "Wood Products" segment.

In testing the recoverability of a long-lived
asset, the Company relies primarily on estimates of future cash flows. This
methodology contains estimates and judgments that are subjective and uncertain,
and thus, may change over time. Several of the key assumptions include periods
of operation, projections of product pricing, production levels and sales
volumes, product costs, market supply and demand, foreign exchange rates,
inflation, weighted



47



---

##### 

average cost of capital and capital spending. The Company derives these
assumptions used in its valuation models from several sources. Many of these
assumptions are derived from the Company's internal budgets, which would include
existing sales data based on current product lines and assumed production
levels, manufacturing costs and product pricing. The Company believes that its
internal forecasts are consistent with those that would be used by a potential
buyer in valuing its reporting units. The Company's products are commodity
products; therefore, pricing is inherently volatile and often follows a cyclical
pattern. Pricing estimates and foreign exchange rates are derived from
information generated internally, from industry research firms and from other
published reports and forecasts.

The Company recorded impairment charges totalling
$371 million on its long-lived assets, relating to the permanent closure of its
Belgo ($158 million), Lufkin ($184 million) facilities and a number of other
facilities ($29 million). These facilities to be permanently closed will be
dismantled, therefore, the fair value of the closed facilities' assets was
nominal and was determined based on the estimated sale and salvage value plus
any projected cash generated from its operations through the date of closing.

For the other facilities tested, the Company
concluded that the recognition of an impairment charge was not required, as the
estimated undiscounted cash flows exceeded the book values. Certain paper mills
and sawmills are particularly sensitive to the key assumptions. Given the
inherent imprecision and corresponding importance of the key assumptions used in
the impairment test, it is reasonably possible that changes in future conditions
may lead management to use different key assumptions, which could require a
material change in the book value of these assets. The total book value of these
assets was $1,117 million as at December 31, 2007.

Future income taxes

The application of CICA Handbook
Section 3465, Income taxes, requires that future income tax assets
and liabilities be recognized for the future income tax consequences of events
that have been included in the consolidated statements of earnings or income tax
returns. Future income tax is provided for using the liability method and
recognizes all significant temporary differences between the tax and
consolidated financial statements bases of assets, liabilities and certain carry
forward items.

The Company's future income tax assets are
recognized only to the extent that, in the Company's opinion, it is more likely
than not that the future income tax assets will be realized. This opinion is
based on certain estimates and assumptions. If these estimates or assumptions
change in the future, the Company could be required to reduce or increase the
value of the future income tax assets resulting in income tax expense or
recovery. The Company reviews its future income tax assets periodically.

Future tax assets and liabilities are measured
using enacted or substantively enacted tax rates and laws expected to apply in
the years in which assets and liabilities are expected to be recovered or
settled. For these years, a projection of taxable income and an assumption of
the ultimate recovery or settlement period for temporary differences are
required. The projection of future taxable income is based on management's best
estimate and may vary from actual taxable income. Changes in estimates or
assumptions could affect the income tax expense (recovery) in the consolidated
statements of earnings and the future income taxes in the balance sheets of the
Company's consolidated financial statements.



|Item 6. | Directors, Senior Management and Employees
|------- | ------------------------------------------

Management

John W. Weaver, age 62, is President of
Abitibi. He has also been Executive Chairman of AbitibiBowater since October
2007.Mr. Weaver held a number of senior executive positions in
operations and sales prior to being appointed in his current positions with the
Company and AbititiBowater. He has over 30 years of experience in the forest
products industry. Mr. Weaver is a member of the Abitibi-Consolidated Inc. board,
the chair of both the Forest Products Association of Canada (FPAC) and
FPInnovations, and a director of the U.S. Endowment for Forestry and Communities.

William G. Harvey, age 50, is a Vice
President and Treasurer of Abitibi. Mr. Harvey served as Executive Vice
President and Chief Financial Officer of Bowater from August 2006 to October 2007,
when he was appointed as Senior Vice President and Chief Financial Officer of
AbitibiBowater. From 2005 to 2006, he was Senior Vice



48



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##### 

President and Chief Financial Officer and
Treasurer of Bowater. From 1998 to 2005, he served as Vice President and
Treasurer of Bowater. Previously, he was Vice President and Treasurer of Avenor
Inc., a pulp and paper company, until its acquisition by Bowater.

Pierre Rougeau, age 50, is a Vice
President of Abitibi. Mr. Rougeau served as Senior Vice President, Corporate
Development and Chief Financial Officer of Abitibi from 2001 to October 2007,
when he was appointed as Senior Vice President, North American Newsprint
Division of AbitibiBowater.

Alain Grandmont, age 52, is a Vice
President of Abitibi. Mr. Grandmont served as Senior Vice President, Commercial
Printing Papers of Abitibi from 2005 to October 2007, when he was appointed as
Senior Vice President, Commercial Printing Papers Division of AbitibiBowater. He
served as Senior Vice President, Value-Added Operations and Sales of Abitibi in
2004. Previously, he was Senior Vice President, Value-Added Operations of
Abitibi.

The following table sets forth information
concerning all compensation paid during 2007 to our management.

SUMMARY COMPENSATION TABLE



|                                                     |  |           |  |             |  |                                                |  |                                                                                            |  |                              |  |             
|---------------------------------------------------- |  | --------- |  | ----------- |  | ---------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ---------------------------- |  | ------------
|Name and Principal Position                          |  | Salary($) |  | Bonus(1)($) |  | Non-EquityIncentive Plan
		Compensation (2)($) |  | Change in
		Pension Value
		and
		Nonqualified
		Deferred
		Compensation
		Earnings (3)($) |  | All OtherCompensation (4)($) |  | Total (5)($)
|John W. Weaver,
		President                          |  | 1,353,158 |  | -           |  | 353,848                                        |  | 783,035                                                                                    |  | 47,601                       |  | 2,537,642   
|                                                     |  |           |  |             |  |                                               
|William G. Harvey,(6)
		Vice President and Treasurer |  | -         |  | -           |  | -                                              |  | -                                                                                          |  | -                            |  | -           
|                                                     |  |           |  |             |  |                                               
|Pierre Rougeau
		Vice President                      |  | 463,005   |  | 286,266     |  | 102,946                                        |  | 211,246                                                                                    |  | 21,137                       |  | 1,084,600   
|                                                     |  |           |  |             |  |                                               
|Alain Grandmont,
		Vice President                    |  | 432,949   |  | 198,760     |  | 127,027                                        |  | 272,297                                                                                    |  | 13,485                       |  | 1,044,518   



|(1) | Amounts in this column reflect the compensation paid to the named
		individuals under the Retention Plan, which is discussed in detail under
		"Directors, Senior Management and Employees-Management-Retention Plan."
		It also includes the "Signing Bonus" for Messrs. Rougeau and Grandmont.
		The Signing Bonus was paid in U.S. dollars on November 15, 2007, and
		converted into Canadian dollars using the November 15, 2007, exchange
		rate of $1.0149.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Amounts in this column reflect the cash awards to the named individuals
		under the Abitibi Annual Bonus Plan, which is discussed in significant
		detail under "Directors, Senior Management and Employees-Management-Annual
		Bonus Plan."
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Amounts shown in this column reflect the actuarial increase in the
		present value of the named individuals' benefits under pension plans
		established by Abitibi using interest rate and mortality rate
		assumptions consistent with those used in the Company's financial
		statements. There were no above-market or preferential earnings on non-qualified
		deferred compensation for management in 2007. A discussion of pension
		benefits is provided below. The pension amounts were converted to
		Canadian dollars using the 2007 average exchange rate of $1.074.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Amounts in this column reflect, for each former Abitibi employee (except
		Mr. Rougeau), employer contributions to an employee stock ownership plan
		that was used to purchase AbitibiBowater stock (the plan was terminated
		on January 1, 2008). Additional perquisites include (i) a car allowance,
		(ii) tax and financial planning, (iii) a physical, (iv) parking and
		(v) club dues and expenses.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | All
		amounts shown in this table also reflect amounts paid by AbitibiBowater
		for services rendered to AbitibiBowater after the closing of the
		Combination.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Mr. Harvey also serves as the Chief Financial Officer of Bowater
		Incorporated and AbitibiBowater Inc. and did not receive any
		compensation in his capacity as an officer of Abitibi-Consolidated Inc.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



49



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##### 

Bonus Plan

Abitibi administered a bonus plan during
2007, which was terminated as of the closing of the Combination and
AbitibiBowater established a short term incentive plan for continuing employees.
The new plan design applies for the remainder of calendar year 2007 and all of
2008.

Abitibi Bonus Plan

The Human Resources and Compensation
Committee (the "HRCC" on the "Committee") of the Board of Directors of
AbitibiBowater set 2007 annual bonus measures for its named management in
January 2007. It included three design components, Corporate "closely watched
numbers", division objectives and strategic objectives. Abitibi's human resource
executive and Chief Executive Officer made bonus recommendations to the HRCC,
and each of the named management gave input on their bonus objectives. The Chief
Executive Officer approved division and strategic objectives for the other
officers. The Chief Executive Officer's bonus was based entirely on the
performance of the Abitibi Corporate "closely watched numbers", or "CWNs." The
CWNs are based on profit improvement, return on capital employed ("ROCE")
compared to competitors and net earnings.

Abitibi only took its Corporate CWNs into
account with respect to the first 10 months of 2007, since that financial
measure could no longer be measured as intended after the Combination was
completed (for example, some of the performance measures measured Abitibi's
performance in comparison to Bowater (which didn't exist as a separate company
following the Combination), and the original targets were created for Abitibi as
a stand-alone company).

Accordingly, Abitibi took into account the
results of its commercial printing paper business only through the first 10
months of the year, since that data was no longer available after the
Combination. However, if meaningful data with respect to a performance target
remained available after the Combination, that is, if the target could still be
measured after the Combination occurred, Abitibi took that measure into account
for the full 12 months. Strategic objectives which were taken into account for
some of the Abitibi named executive officer's bonuses remained relevant for all
of 2007.

The amounts paid to our management under
this plan are set forth above in the Summary Compensation Table in the Non-Equity
Incentive Compensation column.

Retention Bonus Plan

Because of the pending Combination
transaction and the job insecurity created among employees, Abitibi established
a Retention Bonus Plan. Abitibi management (in addition to certain other
employees reporting to headquarters) were eligible to receive a retention bonus
if they stayed at Abitibi through the closing. The amounts were paid if the
employee remained with Abitibi through the closing and were determined in part
based on contributions made by the employee to help facilitate the closing, in
part as an incentive to motivate the executive to stay through the completion of
the Closing, and, in part as a reflection of 50% of their annual bonus target.



50



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##### 

Equity Award Plans

STOCK AND OPTION AWARDS TABLE 2007



|                  |  |                                      |     |  |                     |  |                     |  |                   |  |                 |  |                     |        
|----------------- |  | ------------------------------------ | --- |  | ------------------- |  | ------------------- |  | ----------------- |  | --------------- |  | ------------------- | -------
|Name              |  | Restricted
		Stock Unit
		Awards (1) |     |  | Option
		Awards (2) |  | Option Grant
		Date |  | Expiration
		Date |  | Exercise
		Date |  | Exercise
		Price(3)
|John W. Weaver    |  | 20,328                               |     |  | 31,305              |  | 3/6/2007            |  | 3/6/2017          |  | -               |  | $                   | 52.3878
|                  |  | 28,926                               | (4) |  | -                   |  |                     |  |                   |  | -               |  |                     |        
|                  |  |                                      |     |  |                     | 
|William G. Harvey |  | -                                    |     |  | -                   |  | -                   |  | -                 |  | -               |  |                     | -      
|                  |  |                                      |     |  |                     | 
|Pierre Rougeau,   |  | 4,889                                |     |  | 7,513               |  | 3/6/2007            |  | 3/6/2017          |  | -               |  | $                   | 52.3878
|                  |  |                                      |     |  |                     | 
|Alain Grandmont   |  | 4,065                                |     |  | 6,261               |  | 3/6/2007            |  | 3/6/2017          |  | -               |  | $                   | 52.3878



|(1) | The
		restricted stock unit awards have been adjusted as a result of the
		Combination
|--- | --------------------------------------------------------------------------------------

|(2) | The
		option awards have been adjusted as a result of the Combination.
|--- | ----------------------------------------------------------------------

|(3) | The
		exercise price has been adjusted as a result of the Combination.
|--- | ----------------------------------------------------------------------

|(4) | This
		grant represents a synergy award of RSU units to which Mr. Weaver will
		be entitled to receive upon meeting certain synergy targets within two
		years following the consummation of the Combination.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Prior to the Combination, the Company
maintained various incentive stock plans ("pre-combination plans") that provided
for grants of Abitibi stock options, restricted stock units ("RSU") and deferred
stock units ("DSU") to Company directors, officers and key employees. As a
result of the Combination, the pre-combination plans have been modified and
replaced with stock options, RSUs and DSUs of AbitibiBowater ("post-combination
plans"), under substantially the same terms and conditions that existed under
the pre-combination Abitibi plans. As of the Combination, outstanding grants
under the pre-combination plans have been converted into equivalent grants of
AbitibiBowater using the Abitibi conversion ratio of 0.06261.

Abitibi made annual equity grants in
March 2007 to its management using stock options and RSUs as was done in the
past. Traditionally, Abitibi granted 50% of the annual award in the form of
stock options and 50% of the award as RSUs. Abitibi's compensation consultants
reviewed the mix and discussed with management the market pressure to reduce
dilution by using restricted stock units instead of options. Management took
this into consideration and recommended to the Abitibi Committee that the mix be
changed, and in response, the HRCC granted awards in a mix of 40% stock options
and 60% RSUs.

The RSUs Abitibi granted in March 2007
originally included three years of performance-based vesting. The RSUs would
vest based on the extent to which Abitibi's cash ROCE exceeded the cash ROCE
earned by Abitibi's competitors during the same period. In November 2007, the
HRCC decided that outstanding restricted stock unit awards granted in 2006 and
2007 would be subject only to time-based vesting, and not performance-based
vesting, because the performance targets selected for the outstanding restricted
stock unit awards were no longer relevant. The competition against which the
targets were to be measured included Bowater, which was now part of
AbitibiBowater. Stock options have always used time-based vesting, so the HRCC
made no changes to the vesting of outstanding options as a result of the
Combination.

While all Abitibi management received the
same proportion of stock options and RSUs in their 2007 grants, the Abitibi
President received an aggregate award equal to 2.5 times his base salary, while
the other Abitibi management received an aggregate award equal to 1.3 times
their base salary. Abitibi's consultant studied the grant practices of the
companies against which Abitibi had been benchmarking and determined that the
chief executive officer needed a grant equal to 2.5 times his base salary in
order for his grant to be market competitive. Adjustments were not necessary in
this regard for the other Abitibi executives.

Mid- and Long-Term Incentive
Compensation

Mid-term RSUs and long-term stock options
incentive compensation comprised a significant portion of an Abitibi
management's total direct compensation and was intended to retain and motivate
the senior executives and senior managers into taking actions that enhanced
shareholder value. Abitibi determined the value of equity awards to management
based on a percentage of salary for each salary grade based upon the advice of
Mercer. For stock options, the number of shares to be covered was determined
using the Black-Scholes valuation methodology.





51



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##### 

The table below summarizes the Abitibi
2007 mid- and long-term incentive plan designs:



|                                                  |  |                                                                                                                                                                                                         |  |                                                                                    
|------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------
|                                                  |  | RSUs
		(Mid-term)                                                                                                                                                                                       |  | Stock Options
		(Long-term)                                                        
|                                                  |  |                                                                                                                                                                                                        
|Performance Period                                |  | 36 months                                                                                                                                                                                               |  | Option life of
		120 months                                                        
|                                                  |  |                                                                                                                                                                                                        
|President (Mr. Weaver)                            |  | Annual grant
		based on 150% of position salary mid-point                                                                                                                                               |  | Annual grant
		based on 100% of position salary mid-point (using the Black-Scholes)
|                                                  |  |                                                                                                                                                                                                        
|Vice-Presidents (Messrs. Rougeau
		and Grandmont) |  | Annual grant
		based on 78% of position salary mid-point                                                                                                                                                |  | Annual grant
		based on 52% of position salary mid-point (using the Black-Scholes) 
|                                                  |  |                                                                                                                                                                                                        
|Vesting conditions                                |  | Units will vest
		based on the Company's relative 3-year average financial performance
		versus a selected comparator group. Value of units directly pegged to
		stock price. Payment in cash or stock. |  | Options will vest
		25% per year after first year and will expire in 10 years.     

Abitibi Stock Option Plan

In 2007, Abitibi granted stock options to
key executive and management personnel at exercise prices equal to the market
price of the common shares on the date that the options were granted. Market
price was defined as the average of the highest and lowest share price as
reported for the five business days immediately preceding the grant date on the
principal Canadian exchange on which the common shares were traded. The number
of options granted to each senior executive and senior manager was based on
benchmarking within the North American industry peer group, on the advice of
Mercer. To prevent significant fluctuations in the number of options that were
granted to senior executives from year to year, the number of options was
derived from a formula that took into account the expected value of the options
(pursuant to a three-year average under the Black-Scholes formula) and the
average price of the Company's common shares for each of the three years
preceding the date of grant.

The 2007 nonqualified stock option awards
provide for vesting in 1/4
increments at the end of each year during the four-year vesting period. If the
employment of the individual is terminated, his or her option terminates, except
that if employment is terminated by reason of death, retirement, involuntary
termination or other reason approved by the Company, then options are
exercisable with respect to the number of shares the individual had the right to
purchase at the time of the termination within five years after the date of the
termination event, provided that in no event would any option be exercisable
after the original expiration date. All options are canceled upon termination of
employment for cause. The options are immediately vested if the executive is
terminated and is entitled to benefits under his change in control severance
agreement.

If the employment of the employee
terminates for any reason other than those previously referred to above then the
option would be exercisable by the employee with respect to the number of common
shares that he had the right to purchase at the time of the termination within
three months after such termination (or, in the case of the death of the
employee within three months after such termination, then by his personal
representative within one year after the date of his death).

Until July 2002, certain members of
management were entitled to receive a loan from the company to purchase optioned
common shares under the Stock Option Plan. After the enactment of the Sarbanes-Oxley
Act of 2002, the Company determined that members of management were no longer
eligible for personal loans under the Stock Option Plan and none of the
outstanding loans granted under the Stock Option Plan could be modified or
renewed. Common shares purchased through the former loan program are held as
security until the loan is repaid.

Abitibi Restricted Share Unit Plan

The Abitibi Restricted Share Unit Plan was
established in 2004 and provided for the granting of RSUs to senior executive
and senior managers, and, on an exceptional basis, other selected high potential
and/or high performing key employees. The RSUs represent phantom shares that
vest on the basis of performance as opposed to pure time vesting and are
generally paid out at the end of the performance period, usually within three
years from issuance. The vesting of RSUs is subject to the Company's relative
average financial performance versus other companies that comprise the
comparator group during a set period.



52



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##### 

On an annual basis, the Abitibi Committee
approved the RSU grants, the financial benchmarks, the composition of the
comparator group, the period during which the company's performance was to be
evaluated, and the vesting conditions. The number of RSUs granted to each
executive was evaluated, as well as the specific vesting conditions. The number
of RSUs granted to each executive was based on the same methodology as the stock
option grants, as described in the previous section, and the value was
calculated based on the average price of the company's common shares for each of
the three years preceding the date of grant. The award payments are in cash
and/or by the delivery of common shares purchased by the company on the open
market. However, there is a mandatory withholding of shares from RSU payouts for
executives until share ownership guidelines are met.

For the 2007 award, Cash ROCE was set as
the financial benchmark for senior executives. The performance period for the
2007 grant was established at three years and the comparator group included four
US companies (International Paper, Weyerhaeuser, Bowater, MeadWestvaco) and four
Canadian companies (Domtar, Canfor, Tembec and Catalyst). The table below
summarizes the 2007 ranking schedule for award determination over the three-year
period:



|                    |  |                                   
|------------------- |  | ----------------------------------
|Company beats two   |  | 25% of granted
		units are earned 
|Company beats four  |  | 50% of granted
		units are earned 
|Company beats six   |  | 75% of granted
		units are earned 
|Company beats seven |  | 100% of
		granted units are earned

Because the combination made the
determination of the performance criteria inappropriate, the Abitibi Committee
decided that all outstanding RSU awards would become time vested based on their
original vesting schedule.

In addition, Mr. Weaver has received a
special grant of 28,926 AbitibiBowater RSUs as a synergy award to which he will
be entitled upon the meeting of certain performance targets following the
completion of the Combination related to achievement of levels of synergies.
Mr. Weaver may earn a lesser number of RSUs to the extent a lesser level of
synergies is achieved, as follows:



|                                |  |         |   |  |         |   |  |         |  
|------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|Synergies                       |  | US$200M |   |  | US$250M |   |  | US$300M |  
|Percentage Vested               |  | 80      | % |  | 100     | % |  | 120     | %
|# Restricted share Units Vested |  | 19,284  |   |  | 24,105  |   |  | 28,926  |  

Retirement Plans

We provide traditional defined benefit
pension plans for our named management. Our mix of tax-qualified retirement
plans and supplemental plans for select members of management is designed to
attract and retain the senior and experienced mid to late-career executive
talent we think we need to be a competitive company in the forest products
industry. The plans provide these management with a retirement benefit targeted
to a competitive income replacement ratio at normal retirement age.

Our executives are covered by a registered
or qualified defined benefit retirement plan and a supplemental executive plan.
These plans are intended to provide a combined pension at the normal retirement
age of 65 that is equal to 2% of the average annual compensation multiplied by
the years of credited service, up to a maximum of 70% of such earnings.
Compensation is based on the average of the highest five consecutive years of
base salary within the last 10 years of service plus the average of the five
highest annual awards paid pursuant to the annual incentive awards plan within
the last 10 years of service.

Pension Benefits

Retirement benefits for Mr. Weaver are
payable under the following qualified and supplemental defined benefit pension
plans: a qualified defined benefit plan covering all US salaried employees ("Qualified
Sales Plan") which provides pension benefits based on earnings, service, and age;
the Augusta Newsprint Company Retirement Plan ("Augusta Plan"), a qualified plan
in which Mr. Weaver was formerly an active participant, which provides pension
benefits based on earnings and service; and a nonqualified Supplemental Plan
covering designated senior executives including Mr. Weaver (the "Supplemental
Plan"), which provides a target benefit offset by the value of benefits provided
in other qualified plans. The definition of compensation under the plans
includes those categories of compensation under the salary and bonus headings in
the Summary Compensation Table and does not include compensation in any of the
other headings of the Summary Compensation Table.

The Qualified Sales Plan is a cash balance
retirement plan which provides an account balance based upon accumulated
interest and pay credits. The interest crediting rate is based upon the 30-year
U.S. Treasury Rate for the month of November preceding the plan year. The pay
credits are based upon a participant's age and range from 4% to 8% of
compensation, which includes both base pay and bonuses. The Qualified Sales Plan
allows for the payment of a lump sum at the time of termination. The Augusta
Plan provides an age 65 benefit based upon 1.5% of



53



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average compensation times years of
credited services. Compensation includes base pay only. The Augusta Plan allows
for an unreduced early retirement benefit at age 62 if the participant has at
least 85 points (age plus service). The Augusta Plan also provides for a reduced
early retirement benefit if the participant has attained age 55 and completed at
least 15 years of service. The early retirement reduction is 4.8% per year
before age 65.

The Supplemental Plan provides an age 65
retirement benefit (if the participant has at least two years of service) equal
to 2% of average compensation times years of credited service up to 35 years
(reduced by qualified plan amounts). Compensation includes base salary and
bonus. Average compensation is based on the best 60 consecutive months of base
salary within the last 120 months, and the best five bonuses in the last 10
years. The total pension is payable unreduced if the executive retires at age 58
with at least 80 points (age plus service). A reduction of 6% per year is
applicable for retirement before such unreduced eligibility if the member has
completed 20 years of service; if the member has less than 20 years of service
the 6% per year reduction is calculated for each year prior to 65. The total
pension is initially paid for a two-year period under a joint and survivor 50%
lifetime pension. The lump sum value of the benefit is paid at the end of such
two-year period. The Abitibi Committee granted Mr. Weaver an additional five
years of service in the Supplemental Plan.

The accrued benefit amounts for Mr. Weaver
are measured as of October 29, 2007, using a 6.5% discount rate and the RP2000
mortality table projected to 2006 with white collar adjustments. Benefits were
calculated assuming retirement at age 65.

Messrs. Grandmont and Rougeau will receive
total pension benefits equal to 2% of average compensation times years of
credited service under an unfunded Supplemental Plan. Compensation includes base
salary and bonus. Average compensation is based on the best 60 consecutive
months of base salary within the last 120 months, and the best five bonuses in
the last ten years. Total pension benefits are payable from a Registered Plan
and a Supplemental Plan. The Supplemental Plan provides benefits in excess of
the maximum benefits payable under the Registered Plan.

The total pension is paid under a joint
and survivor 50% lifetime pension. The pension payable under the Supplemental
Plan may be paid in a lump sum two years after termination or retirement at the
discretion of the Company, with the approval of the executive.

The total pension is payable unreduced if
the executive retires at age 58 with at least 80 points (age plus service). A
reduction of 6% per year is applicable for retirement before such unreduced
eligibility if the member has completed 20 years of service; if the member has
less than 20 years of service the 5% per year reduction is calculated for each
year prior to 65.

The Abitibi granted five extra years of
credited service under the Supplemental Plan to Mr. Rougeau. The extra years
vest gradually and will be fully vested on September 4, 2009.

Severance and Change in Control
Arrangements

Severance Agreements

Mr. Weaver has a severance arrangement
that entitles him to a lump sum payment equal to three times base salary plus
bonus (based on the average of the last two bonuses), three years of pension
credit, and welfare benefits and car use for three years. The severance benefits
are only payable upon termination of Mr. Weaver's employment without just cause
in a circumstance other than a circumstance involving a change of control of
Abitibi.

54



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Change in Control Agreements

Abitibi granted change in control
agreements to ten executives including Messrs. Weaver, Rougeau and Grandmont.
Following a change in control, if the executive's employment is terminated
within 24 months other than for "just cause" (defined as the willful failure of
the executive to properly carry out the executive's duties or theft, fraud or
dishonesty or material misconduct involving the property or affairs of the
Company or the carrying out of his duties) or by the executive in response to a
"good reason", the executive will receive a cash amount equal to three times
(1.5 times for Mr. Weaver) annual compensation (defined as base salary plus
bonus), group welfare benefits for three years, and three years of pension
credit. Mr. Weaver would receive an additional 1.5 times base salary plus bonus
as consideration for agreeing to the two year noncompete obligation.

In the context of the Combination, the
Board of Directors of Abitibi has agreed to vary the terms of such severance
arrangement to allow Mr. Weaver to be entitled to a lump sum payment equal to
three years of annual compensation, less one-half of the compensation paid to
Mr. Weaver between the completion of the Combination and the termination of his
employment, provided that Mr. Weaver remains in the employ of the Company for at
least two years following the completion of the Combination (unless his
employment is terminated by the Company at an earlier date for any reason other
than cause).

The Abitibi agreements define a "change in
control" as (i) the acquisition of 35% of the voting shares, (ii) election by
any holders of voting shares, or a number of holders, of the Board of Directors
equal to or greater than one-third of the Board of Directors, or
(iii) transaction(s) whereby 50% of the assets are transferred. The Combination
was considered a change in control under this definition. If Messrs. Weaver,
Rougeau or Grandmont are terminated within 24 months after the Closing, they
will be entitled to the severance benefits described above.

The Abitibi agreements define "good reason"
as (i) a material change in position, duties or responsibilities, (ii) reduction
of the executive's salary, (iii) material reduction in benefits (iv) relocation
or substantial increase in travel obligations, or (iv) any reason that would be
considered constructive dismissal by a court of competent jurisdiction.

The Abitibi agreements generally provide
that the Company will pay all legal fees and expenses incurred by the executive
as a result of the termination of employment in circumstances covered by the
agreement. The agreement imposes confidentiality restrictions and a two-year
noncompete obligation.

Directors

Current Abitibi Directors

John W. Weaver, age 62, has been a
director since April 1999. He has been Executive Chairman of AbitibiBowater
since October 2007.Mr. Weaver presently serves as President of
Abitibi-Consolidated Inc.Mr. Weaver held a number of senior executive
positions in operations and sales prior to being appointed in his current
positions with Abitibi-Consolidated Inc. and AbitibiBowater. He has over 30
years of experience in the forest products industry. Mr. Weaver is a member of
the Abitibi-Consolidated Inc. board, the chair of both the Forest Products
Association of Canada (FPAC) and FPInnovations, and a director of the U.S.
Endowment for Forestry and Communities. Mr. Weaver did not receive fees in 2007
for his service on the Abitibi Board.

Allen Dea, age 53, has been a director
since October 2007. Mr. Dea presently serves as the Vice-President, Finance -
Operations since October 2007 of AbitibiBowater. Prior to his being appointed as
such, Mr. Dea served as Vice-President and Treasurer of Abitibi-Consolidated
Inc., after having served previously as the Company's Vice-President Corporate
Controller. He has been employed by the Company since 1976. Since consummation
of the Combination, directors of Abitibi no longer receive fees for their
service on the Abitibi Board.

Alain Grandmont, age 52, has been a
director since October 2007. Mr. Grandmont served as Senior Vice President,
Commercial Printing Papers of Abitibi from 2005 to October 2007, when he was
appointed as Senior Vice President, Commercial Printing Papers Division of
AbitibiBowater. He served as Senior Vice President, Value-Added Operations and
Sales of Abitibi in 2004. Previously, he was Senior Vice President, Value-Added
Operations of Abitibi. Since consummation of the Combination, directors of
Abitibi no longer receive fees for their service on the Abitibi Board.

William G. Harvey, age 50, has been a
director of the company since October 2007. Mr. Harvey served as Executive Vice
President and Chief Financial Officer of Bowater from August 2006 to October 2007,
when he was

55



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appointed as Senior Vice President and
Chief Financial Officer of AbitibiBowater. From 2005 to 2006, he was Senior Vice
President and Chief Financial Officer and Treasurer of Bowater. From 1998 to
2005, he served as Vice President and Treasurer of Bowater. Previously, he was
Vice President and Treasurer of Avenor Inc., a pulp and paper company, until its
acquisition by Bowater. Since consummation of the Combination, directors of
Abitibi no longer receive fees for their service on the Abitibi Board.

Pierre Rougeau, age 50, has been a
director since October 2007. Mr. Rougeau served as Senior Vice President,
Corporate Development and Chief Financial Officer of Abitibi from 2001 to
October 2007, when he was appointed as Senior Vice President, North American
Newsprint Division of AbitibiBowater. Since consummation of the Combination,
directors of Abitibi no longer receive fees for their service on the Abitibi
Board.

Former Abitibi Directors

John Q. Anderson, age 56, has been a
director of AbitibiBowater Inc. since October 2007. He is Chairman and Chief
Executive Officer of BigWheel Partners Inc.Mr. Anderson served as a
director of Abitibi-Consolidated Inc. from 2006 to October 2007. He is a member
of the Board of Trustees of North American Electric Reliability Corporation. He
also serves as a director of Panther Expedited Services, Inc, Gemini Traffic
Sales. Inc. and as Chairman of Board of Roadlink USA, Inc. Mr. Anderson received
$71,234 in cash and other compensation for his service on the Abitibi Board in
2007.

Hans P. Black, age 54, has been a director
of AbitibiBowater Inc. since October 2007. Mr. Black served as a director of
Abitibi-Consolidated Inc. from 2005 to October 2007. He serves as a director of
Amorfix Life Sciences Ltd., RPMH Global Marco Fund, Wi2Si Inc. Les Aliments
SoYummi Inc., la Fondation de l'Institut de Cardiologie de Montréal and is a
member of the Advisory Council of The Paul H. Nitze School of Advanced
International Studies of John Hopkins University. Mr. Black received $75,169 in
cash and other compensation for his service on the Abitibi Board in 2007.

Jacques Bougie, age 60, has been a
director of AbitibiBowater Inc. since October 2007. Mr. Bougie served as a
director of Abitibi-Consolidated Inc. from 2004 October 2007. He serves a
director of Nova Chemicals Inc. and McCain Foods Ltd. From 1993 to 2001 he
served as President and Chief Executive Officer of Alcan Inc. Mr. Bougie
received $214,393 in cash and other compensation for his service on the Abitibi
Board in 2007.

William E. Davis, age 66, is a Director of
Consol Energy Inc.Mr. Davis served as a director of Abitibi-Consolidated
Inc. from 2003 to October 2007. From 2002 to 2003, he served as Chairman of
National Grid USA and as an executive director of National Grid (UK) From 1993
to 2002, he served as Chairman of the Board and Chief Executive Officer of
Niagara Mohawk Power Corporation. He currently serves on the Board of Trustees
of Syracuse University as Chairman and Chief Executive officer of the
Metropolitan Development Foundation of Central New York. Mr. Davis received
$72,545 in cash and other compensation for his service on the Abitibi Board in
2007.

Marlene Davidge, age 57, was a director of
Abitibi-Consolidated Inc. from 2001 to October 2007. Ms. Davidge is a partner at
Torys LLP, a law firm. She is also a member of the Advisory Committee of the
University College, University of Toronto. Ms. Davidge received $63,254 in cash
and other compensation for her service on the Abitibi Board in 2007.

David A. Galloway, age 64, was a director
of Abitibi-Consolidated from 2006 to October 2007. Since 2004, Mr. Galloway has
been Chairman of the Board of the Bank of Montreal. He also serves on the Board
of Directors of E. W. Scripps Company, Shell Canada Limited and Toromont
Industries Ltd. He was President and CEO of Torstar Corporation from 1988 to
2002 and a founding partner of Canada Consulting Group. Mr. Galloway received
$64,566 in cash and other compensation for his service on the Abitibi Board in
2007.

Lise Lachapelle, age 58, has been a
director of AbitibiBowater Inc. since October 2007. Ms. Lachapelle served as a
director of Abitibi-Consolidated Inc. from 2002 to October 2007. Ms. Lachapelle
is also a director of Industrielle Alliance, Insurance and Financial Services
Inc., Russels Metals Inc., Innergex Poser Trust, BNP-Paribas (Canada) and
Mirabaud Canada Inc. She is also a director





56



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of Export Development Canada.
Ms. Lachapelle received $78,667 in cash and other compensation for her service
on the Abitibi Board in 2007.

Gary J. Lukassen, age 67, has been a
director of AbitibiBowater Inc. since October 2007. Mr. Lukassen served as a
director of Abitibi-Consolidated Inc. from 2002 to October 2007. He is a
director of The North West Company and Spinrite Income Fund. From 1989 to 2001,
he served as Executive Vice-President and Chief Financial Officer of the Hudson
Bay's Company. Mr. Lukassen received $86,792 in cash and other compensation for
his service on the Abitibi Board in 2007.

John A. Tory, age 78, was a director of
AbitibiBowater from 1965 to October 2007. He is a director of The Woodbridge
Company Limited, the Thomson Corporation and Rogers Communications Inc. He was
Deputy Chairman of The Thomson Corporation from 1978 to 1997 and President of
Woodbridge from 1973 to 1993. Mr. Tory received $79,869 in cash and other
compensation for his service on the Abitibi Board in 2007.

Employees

As at December 31, 2007, the Company
employed approximately 11,500 employees. Fourteen collective bargaining
agreements covering approximately 1,450 of our employees have been renewed in
2007 with one paper mill, six sawmills, and seven woodlands operations. Four
collective bargaining agreements, covering approximately 500 of our employees,
which expired on or before December 31, 2007, are in the process of being
renewed. The facilities covered by these collective agreements consist of one
paper mills, two sawmills, and one group of woodlands operations. In 2008, five
other collective bargaining agreements will expire for one paper mill, two
sawmills and two groups of woodlands operations, covering approximately 525
employees. A significant number of our collective bargaining agreements with
respect to newsprint and specialty paper operations in Eastern Canada will
expire April 30, 2009. We began negotiations with the union representing the
majority of our Eastern Canadian employees on the 2009 agreements in March 2008.
The negotiations continued for a week without resolution and we are not
currently in negotiations. See "Risk Factors - Risks Related to Our Business -
We could experience disruptions in operations and/or increased labor costs due
to labor disputes."

Set forth below is a chart with the number
of employees employed at the end of fiscal years 2005, 2006 and 2007, classified
by area of work and geographic location.



|                   |  |       |  |       |  |      
|------------------ |  | ----- |  | ----- |  | -----
|                   |  | 2005  |  | 2006  |  | 2007 
|Pulp & Paper Mills |  |       |  |       |  |      
|Canada             |  | 7046  |  | 6013  |  | 5100 
|U.S.               |  | 948   |  | 931   |  | 925  
|U.K./Europe        |  | 350   |  | 274   |  | 300  
|                   |  |       |  |       |  |      
|Subtotal           |  | 8344  |  | 7218  |  | 6325 
|Wood Products      |  |       |  |       |  |      
|Canada             |  | 4718  |  | 4635  |  | 4475 
|U.S.               |  | 0     |  | 0     |  | 0    
|U.K./Europe        |  | 0     |  | 0     |  | 0    
|                   |  |       |  |       |  |      
|Subtotal           |  | 4718  |  | 4635  |  | 4475 
|Recycling          |  |       |  |       |  |      
|Canada             |  | 0     |  | 0     |  | 0    
|U.S.               |  | 160   |  | 186   |  | 205  
|U.K./Europe        |  | 37    |  | 37    |  | 35   
|                   |  |       |  |       |  |      
|Subtotal           |  | 197   |  | 223   |  | 240  
|Corporate          |  |       |  |       |  |      
|Canada             |  | 400   |  | 378   |  | 369  
|U.S.               |  | 126   |  | 120   |  | 107  
|U.K./Europe        |  | 15    |  | 16    |  | 13   
|                   |  |       |  |       |  |      
|Subtotal           |  | 541   |  | 514   |  | 489  
|Total              |  |       |  |       |  |      
|Canada             |  | 12164 |  | 11026 |  | 9944 
|U.S.               |  | 1234  |  | 1237  |  | 1237 
|U.K./Europe        |  | 402   |  | 327   |  | 348  
|                   |  |       |  |       |  |      
|Subtotal           |  | 13800 |  | 12600 |  | 11529



|Item 7. | Major Shareholders and Related Party Transactions
|------- | -------------------------------------------------

A. Major Shareholders

Abitibi is a subsidiary of AbitibiBowater.
AbitibiBowater owns 82% of our common stock, and AbitibiBowater Canada Inc. ("ABCI"),
a Canadian corporation and subsidiary of AbitibiBowater, owns the remaining 18%
of our common stock. AbitibiBowater's common stock trades on the New York Stock
Exchange and the Toronto Stock Exchange under the symbol ABH.

B. Related Party Transactions

Upon consummation of the Financing
Transactions, AbitibiBowater, through a newly created direct subsidiary,
acquired through a series of intercompany transactions, all of the common stock
and all of the outstanding non-voting preferred stock of D Corp. D Corp.,
previously a subsidiary of Abitibi, indirectly owns the investment in Augusta
Newsprint Company, which operates a newsprint mill, the Alabama River and
Snowflake paper mills, and the U.S. Recycling Operations. As a result of the
intercompany transactions, D Corp. is now an indirect subsidiary of
AbitibiBowater while ceasing to be a subsidiary of the Company. This transaction
will have a material impact on the Company's results of operations, financial
condition and liquidity going forward.

Abitibi may also, from time to time,
subject to any applicable restrictions contained in any indebtedness documents,
enter into transactions with related parties, including AbitibiBowater, Bowater
and their subsidiaries and affiliates, for management and other services (such
as IT, environmental, human resources and legal services) and inter-company
advances, loans and investments, intercompany product sales and purchases.
Because the Combination with Bowater was completed on October 29, 2007,
transactions with AbitibiBowater, Bowater and their subsidiaries and affiliates
were not material as of March 31, 2008, but this may change as we continue the
integration of the businesses and operations of Abitibi and Bowater. Similarly,
there were no material loans or guarantees with related entities, other than any
such transactions with entities whose results of operations are consolidated in
the Company's consolidated financial statements from the period from January 1,
2008 to March 31, 2008.

C. Interests of Experts and Counsel

Not applicable.



|Item 8. | Financial
      Information
|------- | ---------------------------

A. Consolidated Statements and Other Financial Information

See Item 18, "Financial Statements."

Legal Proceedings

We are involved in various legal
proceedings relating to contracts, commercial disputes, taxes, environmental
issues, employment and workers' compensation claims and other matters. We
periodically review the status of these proceedings with both inside and outside
counsel. Although the final outcome of any of these matters is subject to many
variables and cannot be predicted with any degree of certainty, we establish
reserves for a matter when we believe an adverse outcome is probable and the
amount can reasonably be estimated. We believe that the ultimate disposition of
these matters will not have a material adverse effect on our financial
condition, but it could have a material adverse effect on the results of
operations in any given quarter or year.



57



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Export Sales

Export sales constitute a significant portion of
our sales. The following chart describes our total export sales and describes
the percentage of total export sales for Canada, United States and other
countries for the last three fiscal years:



|                   |  |       |  |      |  |       |  |     |  |       |  |    
|------------------ |  | ----- |  | ---- |  | ----- |  | --- |  | ----- |  | ---
|                   |  | 2007  |  | 2006 |  | 2005 
|                   |  | $     |  | %    |  | $     |  | %   |  | $     |  | %  
|Canada             |  | 672   |  | 16   |  | 750   |  | 15  |  | 710   |  | 13 
|United States      |  | 2,534 |  | 62   |  | 3,190 |  | 66  |  | 3,547 |  | 67 
|Other countries    |  | 907   |  | 22   |  | 911   |  | 19  |  | 1,085 |  | 20 
|                   |  |       |  |      |  |       |  |     |  |       |  |    
|Total export sales |  | 3,441 |  | 84   |  | 4,101 |  | 85  |  | 4,632 |  | 87 
|Total sales        |  | 4,113 |  | 100  |  | 4,851 |  | 100 |  | 5,342 |  | 100
|                   |  |       |  |      |  |       |  |     |  |       |  |    

Dividend Policy

Our credit agreement limits our ability to provide
financial assistance in favor of any person that is not an Abitibi subsidiary,
including our parent AbitibiBowater. However, Abitibi (including its
subsidiaries) may (1) pay dividends or make other distributions to its
shareholders and (2) guarantee the funded debt of any other person (certain
subsidiaries of Abitibi are restricted however in their ability to incur funded
debt and to guarantee funded debt of other persons). The declaration of
dividends on our common shares is within the discretion of our Board of
Directors and will depend upon, among other factors, earnings, capital
requirements, and the operating and financial condition of the Company.

Abitibi ceased all payments of dividends after the
second quarter of 2006.

B. Significant Changes

None.



|Item 9. | The Offer
      and Listing.
|------- | ----------------------------

A. Offer and Listing Details

Market Information

Abitibi is a subsidiary of AbitibiBowater. Since
Abitibi's common stock is no longer traded on a national securities exchange,
there is not an active public market for its common stock.On
October 29, 2007, following the consummation of the Combination,
AbitibiBowater's common stock began trading on the New York Stock Exchange and
the Toronto Stock Exchange under the symbol ABH. Prior to the Combination,
Abitibi common shares traded on the New York Stock Exchange under the symbol
"ABY" and on the Toronto Stock Exchange under the symbol "A," and Bowater common
stock traded on the New York Stock Exchange under the symbol "BOW." Shares of
Abitibi and Bowater common stock ceased separate trading on October 29,
2007.

B. Plan of Distribution

Not applicable.

C. Markets.

We are a subsidiary of AbitibiBowater.
AbitibiBowater common stock trades on the New York Stock Exchange and the
Toronto Stock Exchange under the symbol ABH.

D. Selling Shareholders.

Not applicable.

E. Dilution

Not applicable.



58



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F. Expenses of the Issue

Not applicable.



|Item 10. | Additional Information
|-------- | ----------------------

A. Share Capital.

Not applicable.

B. Memorandum and Articles of Incorporation

Our authorized capital consists of an unlimited
number of common shares and Class A preferred shares. Holders of common
shares are entitled to receive notice of and attend all meeting of our
shareholders and have one vote for each common share held. Our Class A
preferred shares have rights, powers, limitations and restrictions as may be
fixed from time to time by the Company's Board of Directors. The Class A
preferred shares are entitled to priority over the common shares and over any
other shares of the Company ranking junior to the Class A preferred shares with
respect to priority in the payment of dividends and the distribution of the
assets in the event of the liquidation, dissolution or winding-up of the
Company. No dividends may be paid on any shares of the Company ranking junior to
the Class A preferred shares unless all dividends previously declared have been
paid or set apart for payment. The approval of two-thirds of the holders of the
Class A preferred shares is required in order to add to, change or remove any
right, privilege, restriction or condition attaching to the Class A preferred
shares. We currently do not have any Class A preferred shares outstanding.

C. Material Contracts

Combination Agreement

On January 29, 2007, we entered into a
Combination Agreement and Plan of Merger with Alpha-Bravo Holdings, Inc.,
Bowater Incorporated, Alpha-Bravo MergerSub, Inc. and Bowater Canada Inc.
pursuant to which Abitibi and Bowater became subsidiaries of AbitibiBowater.

Third Amendment to Credit Agreement

On July 16 2007, we entered into a Third
Amendment, to the Credit Agreement among Abitibi-Consolidated Inc.,
Abitibi-Consolidated Company of Canada, the Bank of Nova Scotia, Citibank, N.A.
and Goldman Sachs Credit Partners, dated October 3, 2005 (the "Credit
Agreement"), to waive the interest coverage ratio requirement until the end of
the second quarter of 2008 and also waived certain other provisions to permit
the reorganization and rationalization of AbitibiBowater's corporate structure.
We also entered into a Fourth Amendment, dated August 14, 2007, to the Credit
Agreement in order to reduce the aggregate amount of its Facility A by
$40,000,000. In addition, we entered into a Fifth Amendment, dated December 27,
2007, to the Credit Agreement to extend the deadline for the completion of the
reorganization of AbitibiBowater's corporate structure, to permit borrowings to
be made under Facility B even though Facility A is not fully used at the time
and to amend certain other sections to the Credit Agreement.

Receivables Purchase Agreement

In connection with our accounts receivable
securitization programs, we entered into (i) an Amended and Restated Receivables
Purchase Agreement among Abitibi-Consolidated U.S. Funding Corp., Eureka
Securitisation, PLC, Citibank, N.A., the Originators Named Herein, and Abitibi
Consolidated Sales Corporation dated January 31, 2008, and (ii) Amended and
Restated Purchase and Contributed Agreement among Abitibi-Consolidated Inc.,
Abitibi Consolidated Sales Corporation, Abitibi Consolidated Sales Corporation
and Abitibi-Consolidated U.S. Funding Corp., dated January 31, 2008.

Snowflake Mill Purchase Agreement

On February 10, 2008, we entered into an
agreement with Catalyst Paper Corporation pursuant to which we agreed to sell
our Snowflake mill for approximately US$180 million, including US$161 million in
cash and approximately US$19 million in retained trade receivables. We expect
this sale to close in April 2008.

Sale of 13.75% Senior Secured Notes
due 2011

On April 1, 2008, ACCC and Abitibi
completed their private sale of $413.0 million aggregate principal amount of
13.75% Senior Secured Notes due 2011 (the "Secured Notes") pursuant to a
purchase agreement by and among ACCC, as issuer of the Secured Notes, Abitibi
and certain of its subsidiaries, as guarantors of the Secured Notes, and
Goldman, Sachs & Co. and J.P. Morgan Securities Inc., as initial purchasers of
the Secured Notes.

The Secured Notes, which were issued
pursuant to an Indenture dated April 1, 2008, by and among, ACCC, Abitibi, the
additional subsidiary guarantors named therein, and Wells Fargo, National
Association, as trustee and collateral trustee (the "Secured Notes Indenture"),
will mature on April 1, 2011, are guaranteed by Abitibi and all of Abitibi's
wholly owned restricted subsidiaries (other than certain immaterial
subsidiaries) and any other restricted subsidiaries that guarantee the Senior
Term Loan. ACCC will pay interest on the notes on April 1 and October 1 of each
year with the first such payment to be made on October 1, 2008.

The Secured Notes (and the related
guarantees) are secured on a first priority basis by a lien on certain fixed
assets owned or acquired by ACCC or the guarantors (except D Corp. and its
restricted subsidiaries). The collateral securing the notes consists primarily
of (i) mortgages on 11 pulp and paper mills, located in Canada and the United
Kingdom and related rights of way; (ii) a pledge of ACCC's 60% equity interest
in Manicouagan Power Company, which owns and operates a hydroelectric plant on
the Manicouagan river in Quebec, Canada; (iii) pledges of ACCC's 75% equity
interests in each of ACH Limited Partnership and its general partner,
Abitibi-Consolidated Hydro Inc.; (iv) substantially all of the equipment (other
than vehicles) and intellectual property of ACCC and the guarantors (other than
Donohue Corp. and its restricted subsidiaries); (v) all records and documents of
title relating to the above; and (vi) certain other rights incidental to the
above items. Additionally, ACCC has agreed to use its commercially reasonable
efforts to obtain all consents necessary to provide a mortgage on its Iroquois
Falls, Ontario paper mill, subject to the satisfaction of certain conditions.

The Secured Notes are ACCC's
senior obligations and rank pari passu in right of payment with all of ACCC's
existing and future unsecured senior indebtedness, including the outstanding
senior unsecured notes ACCC has issued, becomes a co-obligor under or
guaranteed. The Secured Notes are effectively subordinated to obligations of
ACCC under the Senior Term Loan, to the extent of the value of the collateral
securing the Senior Term Loan. The Secured Notes are senior in right of payment
to any existing and future subordinated indebtedness of ACCC, if any.

If a "change of control" of ACCC occurs,
ACCC must give holders of the Secured Notes the opportunity to sell their
Secured Notes to ACCC at a purchase price of 101% of their principal amount,
plus accrued interest.

The Secured Notes Indenture contains
covenants that limit ACCC's and Abitibi's ability and that of Abitibi's
restricted subsidiaries to: incur additional debt, create liens on assets, pay
dividends or distributions on, or redeem or purchase, ACCC's capital stock, make
investments, engage in sale and leaseback transactions, engage in transactions
with affiliates, transfer or sell assets, issue and sell equity interests in
Abitibi's wholly owned subsidiaries, guarantee debt, restrict dividends or other
payments to ACCC, consolidate, merge or transfer all or substantially all of
ACCC's assets and the assets of its subsidiaries, and engage in unrelated
businesses, subject to certain exceptions.

In connection with the sale of the Secured
Notes, ACCC has also entered into a Registration Rights Agreement (the "Secured
Notes Registration Rights Agreement") pursuant to which ACCC has agreed to
conduct an exchange offer with respect to the Secured Notes pursuant to which
the holders of the Secured Notes can exchange their Secured Notes for notes that
are substantially similar to Secured Notes that have been registered under the
Securities Act of 1933, as amended (the "Securities Act"). In addition, in
certain circumstances, ACCC has also agreed to file a resale registration
statement with respect to the Secured Notes.

The foregoing descriptions of the Secured
Notes Indenture and the Secured Notes Registration Rights Agreement do not
purport to be complete and are qualified in their entirety by reference to the
Secured Notes Indenture and the Secured Notes Registration Rights Agreement,
which are filed as Exhibits 4.15 and 10.38 respectively hereto, and are
incorporated herein by reference.

Issuance of 15.5% Senior Notes due
2010

In connection with the private exchange
offers by ACCC for (i) outstanding 6.95% Senior Notes due 2008 issued by
Abitibi, (ii) outstanding 5.25% Senior Notes due 2008 issued by ACCC and
(iii) outstanding 7.875% Senior Notes due 2009 issued by Abitibi-Consolidated
Finance L.P. (together with the notes listed in (i) and (ii) above, the
"Existing ACI Notes"), on April 1, 2008, ACCC issued approximately $293 million
principal amount of 15.5% Senior Notes due 2010 (the "Exchange Notes"). The
Exchange Notes were issued pursuant to an Indenture dated April 1, 2008, by and
among, ACCC, Abitibi, the additional subsidiary guarantors named therein, and
Wells Fargo, National Association, as trustee (the "Exchange Notes Indenture").
The Exchange Notes, which unsecured and are guaranteed by Abitibi and all of
Abitibi's wholly owned restricted subsidiaries (other than certain immaterial
subsidiaries) and any other restricted subsidiaries that guarantee the Senior
Term Loan will mature on July 15, 2010. ACCC will pay interest on the notes on
January 15 and July 15 of each year with the first such payment to be made on
July 15, 2008.

The Exchange Notes are ACCC's senior
obligations and rank pari passu in right of payment with all of ACCC's existing
and future unsecured senior indebtedness, including the outstanding senior
unsecured notes ACCC has issued, becomes a co-obligor under or guaranteed. The
Exchange Notes are effectively subordinated to obligations of ACCC under the
Senior Term Loan and the Secured Notes, to the extent the value of the
collateral securing the Senior Term Loan and the Secured Notes. The Exchange
Notes are senior in right of payment to any existing and future subordinated
indebtedness of ACCC, if any.

If a "change of control" of ACCC occurs,
ACCC must give holders of the Exchange Notes the opportunity to sell their
Exchange Notes to ACCC at a purchase price of 101% of their principal amount,
plus accrued interest.

The Exchange Notes Indenture governing the
Exchange Notes contains covenants that limit ACCC's and Abitibi's ability and
that of Abitibi's restricted subsidiaries to: incur additional debt, create
liens on assets, pay dividends or distributions on, or redeem or purchase,
ACCC's capital stock, make investments, engage in sale and leaseback
transactions, engage in transactions with affiliates, transfer or sell assets,
issue and sell equity interests in Abitibi's wholly owned subsidiaries,
guarantee debt, restrict dividends or other payments to ACCC, consolidate, merge
or transfer all or substantially all of ACCC's assets and the assets of its
subsidiaries, and engage in unrelated businesses, subject to certain exceptions.

In connection with the issuance of the
Exchange Notes, ACCC has also entered into a Registration Rights Agreement (the
"Exchange Notes Registration Rights Agreement") pursuant to which ACCC has
agreed to conduct an exchange offer with respect to the Exchange Notes pursuant
to which the holders of the Exchange Notes can exchange their Exchange Notes for
notes substantially similar to the Exchange Notes that have been registered
under the Securities Act. In addition, in certain circumstances, ACCC has also
agreed to file a resale registration statement with respect to the Exchange
Notes.

The foregoing descriptions of the Exchange
Notes Indenture and the Exchange Notes Registration Rights Agreement do not
purport to be complete and are qualified in their entirety by reference to the
Exchange Notes Indenture and the Exchange Notes Registration Rights Agreement,
which are filed as Exhibits 4.16 and 10.39 respectively hereto, and are
incorporated herein by reference.

As part of the exchange offers, in
tendering their Existing ACI Notes, holders of the Existing ACI Notes also
consented to certain amendments to the indentures governing the Existing ACI
Notes to eliminate from such indentures the covenants included therein with
respect to the limitation on liens and sale and leaseback transactions. In
addition, the tendering holders of Existing ACI Notes, by tendering their
Existing ACI Notes also agreed not to exercise or enforce any of their rights or
remedies under the applicable Existing ACI Notes indentures with respect to the
Existing ACI Notes until April 8, 2008. Copies of the supplemental indentures
entered into with respect to the remaining Existing ACI Notes outstanding are
filed as Exhibits 4.17, 4.18 and 4.19 hereto and are incorporated herein by
reference.

The 6.95% Senior Notes due 2008 matured on
April 1, 2008 and on that date, the remaining 6.95% Senior Notes that were not
tendered in the exchange offers as of that date were paid in full. The exchange
offers expired on April 4, 2008 and, in connection therewith, an additional
$229,000 aggregate principal amount of Exchange Notes was issued on April 8,
2008 with respect to Existing ACI Notes tendered between March 31, 2008 and the
expiration date of the exchange offers.

Senior Secured Term Loan

On April 1, 2008, ACCC entered into a $400
million Senior Secured Senior Term Loan (the "Senior Term Loan") with a
syndicate of lenders. The Senior Term Loan has a maturity of 364 days and is
guaranteed by Abitibi, Donohue Corp. and certain of their respective
subsidiaries. The Senior Term Loan is secured primarily by the personal property
(including accounts receivable and inventory, but excluding equipment,
intellectual property and capital stock of subsidiaries) of ACCC, Abitibi and
the other guarantors, as well as substantially all of the assets (including
fixed assets) of D Corp. and its subsidiaries. The Senior Term Loan is
effectively senior to the Secured Notes and the Exchange Notes to the extent of
the collateral securing the Senior Term Loan. ACCC expects to use approximately
$3.1 million of the cash reserved for potential settlement of Existing ACI Notes
(which cash was not needed because no additional Existing ACI Notes were
tendered in the exchange offers after March 31, 2008) to pay down the principal
amount outstanding under the Senior Term Loan. In addition, ACCC will be
required to use $50 million of the proceeds it receives from the previously
announced sale of its Snowflake, Arizona mill to further pay down the principal
amount of the Senior Term Loan. Amounts borrowed under the Senior Term Loan
accrue interest at a floating rate based on LIBOR plus 800 basis points, with a
3.5% LIBOR floor, payable quarterly.

The Senior Term Loan is subject to
mandatory prepayment, in addition to those specific prepayment requirements
discussed above, with, in general: (i) 100% of the net cash proceeds of the sale
of any property or assets that secure the Senior Term Loan; (ii) subject to
certain reinvestment rights, 50% of the net cash proceeds of the sale of any
property or assets of ACCC, the guarantors thereunder and their respective
subsidiaries that do not secure the Senior Term Loan or the notes being offered
hereby; (iii) 100% of the net cash proceeds of certain insurance and
condemnation payments, subject to certain exceptions and reinvestment rights;
(iv) 100% of the net cash proceeds of debt incurrences (other than debt
incurrences permitted under the Senior Term Loan); and (v) any amount necessary
so that the aggregate principal amount of the loans outstanding under the Senior
Term Loan (net of any prepayments) shall not exceed the lesser of (a) $450
million and (b) the Current Asset Amount. "Current Asset Amount" is defined as
the sum of (i) a specified percentage of net eligible accounts receivable of
ACCC and the guarantors, subject to certain exceptions and limitations, and
(ii) a specified percentage of the book value of net eligible inventory of ACCC
and the guarantors, subject to certain exceptions and limitations, minus (iii) reserves
established by the agents under the Senior Term Loan in their commercially
reasonable discretion. Consequently, decreases in the amount of net eligible
accounts receivable or net eligible inventory could require ACCC to prepay
amounts under the Senior Term Loan when it may not possess the cash required to
do so. Amounts prepaid under the Senior Term Loan may not be reborrowed.

The Senior Term Loan contains various
customary affirmative and negative covenants (subject to materiality thresholds,
baskets, and customary exceptions and qualifications), including, but not
limited to, restrictions on the ability of ACCC, the guarantors thereof and
their subsidiaries to (i) incur additional indebtedness and guarantee
obligations, (ii) create liens on certain assets, (iii) make restricted junior
payments, (iv) restrict distributions from subsidiaries, (v) make investments,
loans or advances, (vi) engage in mergers or consolidations, (vii) dispose of
subsidiary interests or other assets, (viii) make acquisitions, (ix) enter into
sale-leaseback transactions, (x) engage in certain transactions with
shareholders and affiliates, (xi) change the conduct of business, (xii) amend or
waive organizational documents, (xiii) amend or waive certain indebtedness,
(xiv) change the fiscal year, or (xv) engage in hedging transactions.

The Senior Term Loan contains customary
events of default (subject to mutually agreed exceptions, thresholds and grace
periods).

D. Exchange Controls

The Company is aware of no governmental laws,
decrees regulations or other legislation, including foreign exchange controls,
in Canada which may affect the export or import of capital or that may affect
the remittance of dividends, interest or other payments to non-resident holders
of the Company's securities. Any such remittances to United States residents,
however, are subject to a withholding tax pursuant to The Canada - U.S.
Income Tax Convention (1980), as amended.

E. Taxation

The Company is a subsidiary of
AbitibiBowater, a Delaware corporation. AbitibiBowater owns 82% of our common
stock, and AbitibiBowater Canada, Inc. ("ABCI"), a Canadian corporation and
subsidiary of AbitibiBowater, owns the remaining 18% of our common stock.
Therefore, the tax considerations that would be applicable to AbitibiBowater and
ABCI, as our only shareholders, are not the same as,





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and disclosure of such consequences is not
as significant as it would be, if individuals or unaffiliated entities were the
holders of our common shares. AbitibiBowater and ABCI should consult with their
own tax advisors with respect to the Canadian and U.S. income tax consequences
that would be particular to their circumstances.

F. Dividends and Paying Agents

Not applicable.

G. Statements by Experts

Not applicable.

H. Documents on Display

Public documents are available for inspection at
the Company's offices located at 1155 Metcalfe Street, Suite 800, Montreal,
Quebec, Canada H3B 5H2, and, for certain documents, on the Internet at
www.abitibibowater.com and at www.sec.gov.

Statements made in this Annual Report on
Form 20-F about the contents of contracts or other documents are not
necessarily complete and we refer shareholders to the copy of such contracts or
other documents filed as exhibits to this Annual Report.

The Company's SEC filings, and the exhibits
thereto, are available for inspection and copying at the public reference
facilities maintained by the SEC in Judiciary Plaza, Room 1580, 100 F Street
N.W., Washington, D.C., 20549. Copies of these filings may be obtained from
these offices after the payment of prescribed fees. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. These
filings are also available on the SEC's website at www.sec.gov.

I. Subsidiary Information

Not applicable.



|Item 11. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------

Price, costs and exchange rate
sensitivity

We purchase significant amounts of energy,
chemicals, wood fiber and recovered paper to supply our manufacturing facilities.
These raw materials are market-priced commodities and, as such, are subject to
fluctuations in market prices. Increases in the prices of these commodities will
tend to reduce our reported earnings and decreases will tend to increase our
reported earnings.

The Company's pre-tax earnings and net
earnings are impacted by fluctuations in selling prices, input costs and foreign
exchange to the extent shown in the following table, based on 2008 estimated
volumes, prices, exchange rates and financial hedges in place as at December 31,
2007:



|                                                      |  |                    |    |                |   |   
|----------------------------------------------------- |  | ------------------ | -- | -------------- | - | --
|                                                      |  | Impact on         
|                                                      |  | Pre-tax
		earnings |    | Net
		earnings
|                                                      |  | (in millions)     
|US$25 change in transaction
		price - per unit        |  |                    |    |                |   |   
|Newsprint (per ton)                                   |  | $                  | 74 |                | $ | 50
|Specialty Papers (per ton)                            |  |                    | 39 |                |   | 26
|Wood Products (per thousand board
		feet)             |  |                    | 33 |                |   | 22
|                                                      |  |                   
|US$0.01 change in relative
		value of Canadian dollar |  |                    |    |                |   |   





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|Cash impact(1)                           |  | 23 |  | 16
|---------------------------------------- |  | -- |  | --
|Manufacturing costs                      |  |    |  |   
|Virgin fiber (2% on external
		source)   |  | 1  |  | 1 
|Recycled fiber (2% on external
		source) |  | 1  |  | 1 
|Energy                                   |  |    |  |   
|Natural Gas (US$1/Gj)                    |  | 10 |  | 7 
|Bunker "C" (US$1/Barrel)                 |  | 1  |  | 1 
|Electricity ($1/MWh)                     |  |    |  |   
|Regulated markets                        |  | 9  |  | 6 
|Deregulated markets                      |  | 1  |  | 1 



|(1) | Cash
		impact offsets non-cash impact due to translation of foreign currencies.
|--- | -------------------------------------------------------------------------------

Financial instruments and other
instruments

In the normal course of business, the
Company is exposed to certain financial risks. The Company does not hold
financial instruments for speculative purposes but only to reduce the volatility
of its results from its exposure to these risks. The market value of financial
instruments contracted by the Company arises mostly from changes in interest and
exchange rates between the inception dates of these contracts and the balance
sheet date.

The Company utilizes certain derivative
instruments to enhance its ability to manage risk relating to cash flow
exposures. Derivative instruments are entered into for periods consistent with
related underlying cash flow exposures and do not constitute positions
independent of those exposures. The Company does not enter into contracts for
speculative purposes; however, it does, from time to time enter into interest
rate, commodity and currency derivative contracts that are not accounted for as
accounting hedges.

For derivatives that qualify for hedge
accounting, the Company designates the derivative as a hedge at its inception.
The Company formally documents all relationships between the hedging instruments
and the hedged items, as well as its risk management objectives and strategies
for undertaking the various hedge transactions. The Company links all hedges
that are designated as cash flow hedges to forecasted transactions. Under the
terms of its risk management policy, the Company may enter into derivative
contracts to hedge forecasted transactions for a period not to exceed two years.
The Company also assesses, both at the inception of the hedge and on an on-going
basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of the hedged items. If it is
determined that a derivative is no longer highly effective as a hedge, we
discontinue hedge accounting prospectively.



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Information regarding the Company's
outstanding contracts' notional amount, fair market value, and range of rates is
summarized in the table below. The fair value of our derivative financial
instruments is based on current termination values or quoted market prices of
comparable contracts. The notional amount of these contracts represents the
amount to be purchased or sold at maturity and does not represent our exposure
on these contracts. The counterparties to our derivative financial instruments
are substantial and creditworthy multi-national financial institutions. The risk
of counterparty non-performance is considered to be remote.



|                                        |  |                                       |  |                                    |  |                                                         
|--------------------------------------- |  | ------------------------------------- |  | ---------------------------------- |  | --------------------------------------------------------
|                                        |  | NotionalAmount ofDerivatives
		($USD) |  | Asset/(Liability)Fair Market Value |  | Range of Interest
		Rates andU.S.$ in CDN$Exchange Rates
|As of December 31, 2007:                |  |                                       |  |                                    |  |                                                         
|Foreign Currency Exchange
		Agreements: |  |                                       |  |                                    |  |                                                         
|Buy US dollars due in 2008              |  | 70                                    |  | 6                                  |  | 1.0478-1.1988                                           
|Sell US dollars due in 2008             |  | 70                                    |  | (1)                                |  | 1.0049-1.1988                                           
|Interest Rate Swaps                     |  | 800                                   |  | (4)                                |  | 2.53- 4.73                                              

Foreign exchange

The Company uses various financial
instruments such as U.S. dollar forward contracts as well as U.S. dollar and
Euro zero cost option tunnels to reduce its exposure to foreign currency
exchange risk. In 2007, the Company's sales denominated in U.S. dollar and Euro
represented 75% and 4% of total sales, respectively. The foreign exchange
financial contracts only hedge a portion of the sales. This portion declines as
the hedge horizon increases. The gains and losses on foreign exchange contracts
are recognized in earnings when the related hedged revenue is recorded.

Furthermore, the long-term debt
denominated in U.S. dollars is also considered an effective economic hedge
against the exchange risk related to the future revenue streams originating from
sales denominated in U.S. dollars.

Interest rate

The Company utilizes interest rate swaps
to manage its fixed and floating interest rate mix on its recourse debt
portfolio and related cost of borrowing whereby it is committed to exchange with
the contracting parties, at specific intervals, the difference between the fixed
and floating interest rates calculated by reference to the notional amounts.
Interest expense on the debt is adjusted to include payments made or received
under these agreements. The net related amount receivable or payable from
counterparts is included in the accounts receivable or accounts payable.

At year-end, 62% of the Company's recourse
debt was at fixed rates taking into account interest rate swap agreements
designated as hedges. Based on our outstanding short and long-term variable rate
debt at December 31, 2007, a 100 basis-point increase in interest rates would
increase our interest expense in 2008 by approximately $14 million before the
impact of our interest rate swaps. The interest rate contracts are only for a
portion of the Company's bond portfolio and mature in the years 2008 through
2011. A 100 basis point increase in short-term interest rates would increase our
cash disbursements for these swaps by approximately $8 million in 2008.

Credit risk

The Company is exposed to credit risk on
the accounts receivable from its customers. In order to manage its credit risk,
the Company has adopted policies, which include the analysis of the financial
position of its customers and the regular review of their credit limits. The
Company also subscribes to credit insurance and, in some cases, requires bank
letters of credit. As a result, the Company does not have significant exposure
to any individual customer. Its customers are mainly in the newspaper publishing,
specialty, advertising and paper converting, as well as lumber wholesaling and
retailing businesses.

The Company is exposed to credit risk on
the favourable fair value of its derivative financial instruments. In order to
mitigate this risk, the Company contracts its derivative financial instruments
with credit-worthy financial institutions and sets a limit on a percentage basis
that it can contract with any given financial institution.





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Item 12. Description of Securities Other
than Equity Securities

Not applicable.

PART II

Item 13. Defaults, Dividend Arrearages
and Delinquencies

A. Indebtedness

There has been no material default in the payment
of principal or interest on our outstanding indebtedness since the date of
filing of our last annual report on Form 40-F. However, in July 2007, we
amended our credit agreement to waive the interest coverage ratio requirement
until the end of the second quarter of 2008 and also waived certain other
provisions to permit the reorganization and rationalization of AbitibiBowater's
corporate structure.

Although the Company was in compliance with its
net funded debt to total capitalization covenant under its credit agreement at
December 31, 2007, there can be no assurance that it will remain in
compliance in the near term in light of the factors discussed above and the
Company's forecast of continued operating losses. Based on current forecasts,
the Company expects to be in default with its net funded debt to total
capitalization covenant to be measured as of the end of the first quarter of
2008, however, the Company has developed a refinancing plan, consisting of the
Financing Transactions, to address the upcoming debt maturities which, if
successful, will replace the current covenants. Failure to comply with the
financial or other covenants of the credit facilities, or failure to refinance
the debt as planned, could result in the outstanding borrowings under these
facilities becoming immediately due and payable (unless the lenders waive any
resulting event of default). See discussion of liquidity and covenants under the
"Management's Operating and Financial Review and Prospects-Business Strategy and
Outlook" section of this Annual Report.

B. Dividends

No dividends are in arrears and there has been no
other material delinquency not cured within 30 days since the date of
filing of our last annual report on Form 40-F.

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

On October 29, 2007, we combined with Bowater
in a merger of equals to form AbitibiBowater. As a result of the Combination, we
and Bowater became subsidiaries of AbitibiBowater. In the Combination,
shareholders of Abitibi generally received 0.06261 shares of AbitibiBowater
common stock for each common share of Abitibi they owned and shareholders of
Bowater received 0.52 shares of common stock of AbitibiBowater for each share of
Bowater common stock they owned. The exchange ratio resulted in approximately
48% of AbitibiBowater being owned by former Abitibi shareholders and
approximately 52% of AbitibiBowater being owned by former Bowater shareholders.
In connection with the Combination, we terminated our reporting requirements
under Section 13(a), Section 15(d) and Section 12(b) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). However,
in order to comply with reporting covenants contained in our outstanding
indentures governing our various notes, debentures and debt securities, the
Company is a "voluntary filer" for purposes of the periodic and current
reporting requirements of the Securities and Exchange Commission (the "SEC").

Item 15. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be



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disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our President and Vice President and Treasurer, as
appropriate to allow timely decisions regarding required disclosure.

We have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of
December 31, 2007. Based on that evaluation, the President and the Vice
President and Treasurer concluded that our disclosure controls and procedures
are effective in recording, processing, summarizing, and timely reporting
information required to be disclosed in our reports to the Securities and
Exchange Commission.

Management's Annual Report on Internal
Control Over Financial Reporting

The Company's management, more
specifically, the President and the Vice President and Treasurer, is responsible
for establishing and maintaining adequate internal control over the financial
reporting of the Company, as such term is defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934.

The Company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting as well as the preparation and
the presentation of the Company's financial statements for external reporting
purposes in accordance with Canadian generally accepted accounting principles,
including a reconciliation to United States generally accepted accounting
principles.

The Company's management conducted an
assessment of the effectiveness of the Company's internal control over financial
reporting as at December 31, 2007 based on the criteria established in "Internal
Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management has concluded
that such internal control over financial reporting was effective at December
31, 2007 based on those criteria. There are no material weaknesses that have
been identified by management in this regard, as of December 31, 2007.

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

This Annual Report does not include a
report of the Company's independent auditors regarding internal control over
financial reporting pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management's report in this
Annual Report.

Changes in internal control over
financial reporting

On October 29, 2007, Abitibi and Bowater
combined in a merger of equals under a newly formed holding company,
AbitibiBowater, and Abitibi became a subsidiary of AbitibiBowater. Bowater is
deemed to be the "acquirer" of Abitibi for accounting purposes. After the
consummation of the Combination, AbitibiBowater extended its Section 404
compliance program under the Sarbanes-Oxley Act of 2002 and the applicable rules
and regulations under such Act to include the internal controls over financial
reporting of both Abitibi and Bowater.

Item 16. [Reserved.]

Item 16A. Audit Committee Financial
Expert

Since the Company has terminated its
reporting requirements under the Exchange Act, and is no longer subject to stock
exchange listing requirements, it is no longer required to maintain an audit
committee. Since the Company is no longer required to maintain an audit
committee, the Company's Board of Directors has not identified an "audit
committee financial expert." The Abitibi Board reviews and approves the
Company's financial statements and related notes. The Audit Committee of
AbitibiBowater oversees, internal controls and the audit function process of
AbitibiBowater and its consolidated subsidiaries, including Abitibi and Bowater
on behalf of the AbitibiBowater Board. The AbitibiBowater Audit Committee is
currently comprised





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of six outside directors, all of whom the
AbitibiBowater Board has determined are independent as defined under the listing
standards of the New York Stock Exchange and the standards of the SEC adopted
under the Sarbanes-Oxley Act. The AbitibiBowater Board has determined that Audit
Committee Chairman John A. Rolls and members Gary L. Lukassen and Bruce W. Van
Saun are each an "audit committee financial expert" as defined by the SEC.

Item 16B. Code of Ethics

AbitibiBowater has adopted a Code of
Business Conduct for all employees of AbitibiBowater, its subsidiaries and
divisions, including the employees of Abitibi. AbitibiBowater Code of Business
Conduct, as well as the AbitibiBowater Board of Directors Code of Business
Conduct and Ethics, are published on the website of AbitibiBowater at
www.abitibibowater.com. Both codes are in line with the requirements of the
Sarbanes-Oxley Act and the NYSE Standards.

Item 16C. Principal Accountant Fees and
Services

In 2007 and 2006 the aggregate amounts
billed for professional services rendered by the Company's independent auditors,
PricewaterhouseCoopers LLP ("PWC"), to the Company and its subsidiaries were
approximately as follows:



|                            |  |      |     |      |   |    
|--------------------------- |  | ---- | --- | ---- | - | ---
|FEES IN MILLIONS OF DOLLARS |  | 2007 |     | 2006
|Audit fees                  |  | $    | 2.5 |      | $ | 2.9
|Audit-related fees          |  | $    | 1.1 |      | $ | 0.6
|Tax fees                    |  | $    | 1.0 |      | $ | 0.2
|All other non-audit fees    |  | $    | 0.1 |      | $ | 0.0
|                            |  |      |     |      |   |    
|TOTAL                       |  | $    | 4.7 |      | $ | 3.7

"Audit fees" are fees for professional
services for the audit of the Company's consolidated financial statements, the
Management's assessment on the effectiveness of internal control over financial
reporting and on the effectiveness of the Company's internal control over
financial reporting as of December 31, 2006, and review of quarterly financial
statements, services that are normally provided by PWC in connection with
statutory and regulatory filings or engagements or any other services performed
by PWC to comply with generally accepted auditing standards; "audit-related fees"
are fees for assurance and related services that are typically performed by the
independent public accountant; "tax fees" are fees for tax compliance, tax
advice and tax planning; and "non-audit fees" are fees for any services not
included in the first three categories.

Auditors' Independence

The AbitibiBowater Audit Committee
evaluates on a yearly basis the independence of the Company's auditors and has
concluded that PWC is deemed independent.

Policy and Procedures for Pre-Approval
of Auditors' Services

AbitibiBowater's Audit Committee has
adopted a policy requiring that the AbitibiBowater Audit Committee pre-approve
all audit and non-audit services (including audit-related, tax and other
services) performed by AbitibiBowater's independent registered public accounting
firm for AbitibiBowater, Abitibi and Bowater. Under policies and procedures
adopted by the AbitibiBowater Audit Committee, the terms and fees of the annual
audit services engagement are subject to approval by the AbitibiBowater Audit
Committee prior to the rendering of the services. The AbitibiBowater Audit
Committee also reviews and approves non-audit services prior to the rendering of
the services. The AbitibiBowater Audit Committee may not approve the provision
of non-audit services that the SEC prohibits independent auditors from
performing for their audit clients or that are otherwise inconsistent with the
independent auditor's independence. The AbitibiBowater Audit Committee is
required to establish annually a budget for services to be performed by
AbitibiBowater's independent accountants, and AbitibiBowater's management is
required to track the independent auditor's fees against the budget and report
at least annually to the committee.



65



---

##### 

AbitibiBowater's Chief Financial Officer,
Controller or other officer designated by the Board must submit, jointly with
the independent registered public accounting firm, requests for the independent
registered public accounting firm to provide services to the AbitibiBowater
Audit Committee that require pre-approval. Each request must include a statement
as to whether both the independent registered public accounting firm and the
submitting officer view the provision of the requested services as consistent
with the SEC's rules on auditor independence. The request must be sufficiently
detailed to enable the AbitibiBowater Audit Committee to precisely identify the
services requested. The AbitibiBowater Audit Committee may delegate pre-approval
authority to its chair or one or more other committee members but not to
AbitibiBowater's management. Any committee members with delegated authority must
report all pre-approval decisions to the Audit Committee at its next scheduled
meeting.



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

None.

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

On October 29, 2007, we combined with Bowater
in a merger of equals to form AbitibiBowater. As a result of the Combination, we
and Bowater became subsidiaries of AbitibiBowater. In the Combination,
shareholders of Abitibi generally received 0.06261 shares of AbitibiBowater
common stock for each common share of Abitibi they owned and shareholders of
Bowater received 0.52 shares of common stock of AbitibiBowater for each share of
Bowater common stock they owned. The exchange ratio resulted in approximately
48% of AbitibiBowater being owned by former Abitibi shareholders and
approximately 52% of AbitibiBowater being owned by former Bowater shareholders.

PART III

Item 17. Financial Statements

Not applicable.

Item 18. Financial Statements

The following financial statements have been filed
as a part of this Annual Report:



|                                                                 |  |     
|---------------------------------------------------------------- |  | ----
|                                                                 |  | Page
|Report
      of Independent Auditors                             |  | F-1 
|Consolidated
      Statements of Earnings (Loss)                 |  | F-2 
|Consolidated
      Statements of Cash Flow                       |  | F-3 
|Consolidated
      Balance Sheets                                |  | F-4 
|Consolidated
      Statements of Changes in Shareholders' Equity |  | F-5 
|Notes
      to Consolidated Financial Statements                 |  | F-6 

Item 19. Exhibits

The following exhibits have been filed as part of
this Annual Report:



|(1) | Exhibits
      (numbered in accordance with Item 601 of Regulation S-K):
|--- | ------------------------------------------------------------------------



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 
|2.1*        |  | Combination Agreement
      and Agreement and Plan of Merger dated as of January 29, 2007 among
      Alpha-Bravo Holdings Inc., Abitibi-Consolidated Inc., Bowater
      Incorporated, Alpha-Bravo Merger Sub Inc., and Bowater Canada Inc.
      (incorporated by reference to Exhibit 2.1 to Bowater Incorporated's
      Form 8-K filed January 29, 2007).                                                                                                              
|            | 
|2.1.1*      |  | First Amendment, dated
      as of May 7, 2007, to the Combination Agreement and Agreement and
      Plan of Merger dated as of January 29, 2007 among AbitibiBowater
      Inc., Abitibi-Consolidated Inc., Bowater Incorporated, Alpha-Bravo Merger
      Sub Inc. and Bowater Canada Inc. (the "First Amendment") (incorporated by
      reference to Exhibit 10.1 to Bowater Incorporated's Form 10-Q
      filed May 10, 2007 for the Period ended March 31,
    2007).



66



---

##### 

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|2.2*  |  | Form of Plan
      Arrangement (incorporated by reference to Annex E to the Joint Proxy
      Statement/Prospectus/Management Information Circular of AbitibiBowater
      Inc., filed pursuant to Rule 424(b)(3) on June 25,
    2007).                                                                                                                                                                                                                                                                                                                                             
|      | 
|2.3*  |  | Asset and Stock
      Purchase Agreement dated as of February 10, 2008 between Abitibi
      Consolidated Sales Corporation and Catalyst Paper Corporation
      (incorporated by reference to Exhibit 2.3 to AbitibiBowater Inc. Form
      10-KA filed on March 20, 2008).                                                                                                                                                                                                                                                                                                         
|      | 
|3.1*  |  | Articles of
      Amalgamation of Abitibi-Consolidated, Inc. dated May 20,
1997 (incorporated by reference to Exhibit 3.1 to Abitibi-Consolidated Inc.'s
	Form 20-F filed April 10, 2008).                                                                                                                                                                                                                                                                                                                                                                                           
|      | 
|3.2*  |  | By-Law Number 1 of
      Abitibi-Consolidated, Inc. (incorporated by reference to Exhibit 3.2 to
	Abitibi-Consolidated Inc.'s Form 20-F filed April 10, 2008).                                                                                                                                                                                                                                                                                                                                                                                                                       
|      | 
|4.1*  |  | Form of Provisions
      Attaching to the Exchangeable Shares (incorporated by reference to
      Schedule 1 of Annex F to the Joint Proxy
      Statement/Prospectus/Management Information Circular of AbitibiBowater
      Inc., filed pursuant to Rule 424(b)(3) on June 25,
    2007).                                                                                                                                                                                                                                                                                          
|      | 
|4.2*  |  | Indenture, dated
      June 15, 2004, among Abitibi-Consolidated Inc., Abitibi-Consolidated
      Company of Canada (as Issuer) and the Bank of Nova Scotia Trust Company of
      New York (as Trustee) (incorporated by reference to Exhibit 7.1 to
      Abitibi-Consolidated Inc.'s Form F-10 filed July 26,
      2004).                                                                                                                                                                                                                                                        
|      | 
|4.3*  |  | Indenture, dated
      December 11, 2001, among Abitibi-Consolidated Inc., Abitibi-Consolidated
      Company of Canada (as Issuer) and the Bank of Nova Scotia Trust Company of
      New York (as Trustee) (incorporated by reference to Exhibit 7.1 to
      Abitibi-Consolidated Inc.'s Form F-9/A filed November 20,
      2001).                                                                                                                                                                                                                                               
|      | 
|4.4*  |  | Indenture, dated
      November 2001, among Abitibi-Consolidated Inc., Abitibi-Consolidated
      Finance L.P. (as Issuer) and the Bank of Nova Scotia Trust Company of New
      York (as Trustee) (incorporated by reference to Exhibit 7.1 to
      Abitibi-Consolidated Inc.'s Form F-9/A filed July 12,
      2000).                                                                                                                                                                                                                                                            
|      | 
|4.5*  |  | Purchase Agreement
      among Abitibi-Consolidated Company of Canada, Abitibi-Consolidated Inc.,
      Banc of America Securities LLC, Citigroup Global Markets Inc., CIBC World
      Markets Corp., Scotia Capital (USA) Inc., NBF Securities (USA) Corp., RBC
      Dominion Securities Corporation, ABN Amro Incorporated, SG Americas
      Securities, LLC, Credit Suisse First Boston LLC, Tokyo-Mitsubishi
      International PLC, dated June 10, 2004 (incorporated by reference to
      Exhibit 3.1 to Abitibi-Consolidated Inc.'s Form F-10 filed
      July 26, 2004).
|      | 
|4.6*  |  | Indenture, dated as of
	April 6, 1998, between Abitibi-Consolidated Inc. and Montreal Trust Company,
	as trustee (incorporated by reference to Exhibit 4.6 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                                                                                                                                                                                                                                                        
|      | 
|4.7*  |  | First Supplemental
	Indenture to the April 6, 1998 Indenture, dated as of September 1, 2001,
	between Abitibi-Consolidated Inc., 3834328 Canada Inc., and
	Abitibi-Consolidated Inc as partner, Abitibi-Consolidated General
	Partnership and Computershare Trust Company of Canada (incorporated by reference to Exhibit 4.7 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                                                                                     
|      | 
|4.8*  |  | Second Supplemental
	Indenture to the April 6, 1998 Indenture, dated as of October 1, 2001,
	between Abitibi-Consolidated Inc., 3834328 Canada Inc., and
	Abitibi-Consolidated Inc as partner, Abitibi-Consolidated General
	Partnership, Donohue Forest products Inc. and Computershare Trust Company of
	Canada (incorporated by reference to Exhibit 4.8 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                                                       
|      | 
|4.9*  |  | Third Supplemental
	Indenture to the April 6, 1998 Indenture, dated as of December 1, 2001,
	between Abitibi-Consolidated Inc., Abitibi-Consolidated Company of Canada,
	Abitibi-Consolidated General Partnership and Computershare Trust Company of
	Canada (incorporated by reference to Exhibit 4.9 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                                                                                                            
|      | 
|4.10* |  | Indenture, dated as of
	July 26, 1999, between Abitibi-Consolidated Inc., Abitibi-Consolidated
	Finance L.P., and The Bank of Nova Scotia Trust Company of New York, as
	trustee (incorporated by reference to Exhibit 4.10 to Abitibi-Consolidated
	Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                                                                                                                                                                                       
|      | 
|4.11* |  | First Supplemental
	Indenture to the July 26, 1999 Indenture, dated as of September 1, 2001,
	between Abitibi-Consolidated Inc., Abitibi-Consolidated Finance L.P.,
	3834328 Canada Inc., and Abitibi-Consolidated Inc as partner,
	Abitibi-Consolidated General Partnership and The Bank of Nova Scotia Trust
	Company of New York (incorporated by reference to Exhibit 4.11 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                                    
|      | 
|4.12* |  | Second Supplemental
	Indenture to the July 26, 1999 Indenture, dated as of October 1, 2001,
	between Abitibi-Consolidated Inc., Abitibi-Consolidated Finance L.P.,
	3834328 Canada Inc., and Abitibi-Consolidated Inc as partner,
	Abitibi-Consolidated General Partnership, Donohue Forest Products and The
	Bank of Nova Scotia Trust Company of New York (incorporated by reference to
	Exhibit 4.12 to Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10,
	2008).                                                                                                           
|      | 
|4.13* |  | Third Supplemental
	Indenture to the July 26, 1999 Indenture, dated as of December 1, 2001,
	between Abitibi-Consolidated Inc., Abitibi-Consolidated Finance L.P.,
	Abitibi-Consolidated Company of Canada, Abitibi-Consolidated General
	Partnership and The Bank of Nova Scotia Trust Company of New York
	(incorporated by reference to Exhibit 4.13 to Abitibi-Consolidated Inc.'s
	Form 20-F/A filed April 10, 2008).                                                                                                                                                           
|      | 
|4.14* |  | Fourth Supplemental
	Indenture to the July 26, 1999 Indenture, dated as of November 21, 2005,
	between Abitibi-Consolidated Inc., Abitibi-Consolidated Finance L.P.,
	Abitibi-Consolidated Company of Canada, The Bank of Nova Scotia Trust
	Company of New York (incorporated by reference to Exhibit 4.14 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                                                                                                       
|      | 
|4.15* |  | 13.75% Senior Secured
	Notes due 2011 Indenture, dated April 1, 2008, by and among
	Abitibi-Consolidated Company of Canada, the Guarantor Parties Named Therein
	and Wells Fargo, National Association (incorporated by reference to Exhibit
	10.1 to AbitibiBowater Inc.'s Current Report on Form 8-K filed April 7,
	2008).                                                                                                                                                                                                                                                        
|      | 
|4.16* |  | 15.5% Senior Notes due
	2010 Indenture, dated April 1, 2008, by and among Abitibi-Consolidated
	Company of Canada, the Guarantor Parties Named Therein and Wells Fargo,
	National Association (incorporated by reference to Exhibit 10.3 to
	AbitibiBowater Inc.'s Current Report on Form 8-K filed April 7, 2008).                                                                                                                                                                                                                                                                  
|      | 
|4.17* |  | Fourth Supplemental
	Indenture, dated April 1, 2008, to the Indenture Governing the 6.95% Senior
	Notes due 2008 (incorporated by reference to Exhibit 10.5 to AbitibiBowater
	Inc.'s Current Report on Form 8-K filed April 7, 2008).                                                                                                                                                                                                                                                                                                                                               
|      | 
|4.18* |  | First Supplemental
	Indenture, dated April 1, 2008, to the Indenture Governing the 5.25% Senior
	Notes due 2008 (incorporated by reference to Exhibit 10.6 to AbitibiBowater
	Inc.'s Current Report on Form 8-K filed April 7, 2008).                                                                                                                                                                                                                                                                                                                                                
|      | 
|4.19* |  | Fifth Supplemental
	Indenture, dated April 1, 2008, to the Indenture Governing the 7.875% Senior
	Notes due 2009 (incorporated by reference to Exhibit 10.7 to AbitibiBowater
	Inc.'s Current Report on Form 8-K filed April 7, 2008).                                                                                                                                                                                                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|10.1* |  | Severance Compensation
      Agreement between Abitibi-Consolidated Inc. and Pierre Rougeau, dated
      April 1, 2002 (incorporated by reference to Exhibit 10.2 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 

|10.2* |  | Severance Compensation
      Agreement between Abitibi-Consolidated Inc. and John W. Weaver, dated
      February 18, 2006 (incorporated by reference to Exhibit 10.9 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).  
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.3* |  | Severance Entitlements
      Letter between Abitibi-Consolidated Inc. and John W. Weaver, dated
      September 25, 2000 (incorporated by reference to Exhibit 10.10 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).   
|       | 
|10.4* |  | Severance Compensation
      Agreement between Abitibi-Consolidated Inc. and Alain Grandmont, dated
      April 1, 2002 (incorporated by reference to Exhibit 10.11 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).    
|       | 
|10.5* |  | Severance Compensation
      Agreement between Abitibi-Consolidated Inc. and Thor Thorsteinson, dated
      April 1, 2002 (incorporated by reference to Exhibit 10.13 to
      AbitibiBowater Inc. Form 10-KA filed on March 20,
  2008).

67



---

##### 

|10.6*  |  | Supplemental Executive
      Retirement Plan of AbitibiBowater Inc.'s subsidiary, Abitibi-Consolidated
      Inc. (formerly Donohue Inc.) dated December 1999 (incorporated by
      reference to Exhibit 10.15 to AbitibiBowater Inc. Form 10-KA filed on
      March 20, 2008).                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|10.7*  |  | Supplement Retirement
      Plan between Donohue Inc. and Yves Laflamme, dated January 27, 2000
      (incorporated by reference to Exhibit 10.16 to AbitibiBowater Inc. Form
      10-KA filed on March 20, 2008).                                                                                                                                                                                             
|        | 
|10.8*  |  | Severance Compensation
      Agreement Letter between Abitibi-Consolidated and Yves Laflamme, dated
      December 11, 2006 (incorporated by reference to Exhibit 10.17 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).                                                                                                                                                                       
|        | 
|10.9*  |  | Severance Compensation
      Agreement between Abitibi-Consolidated and Yves Laflamme, dated
      September 1, 2006 (incorporated by reference to Exhibit 10.18 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).                                                                                                                                                                              
|        | 
|10.10* |  | Severance Compensation
      Agreement between Abitibi-Consolidated and Jacques Vachon, dated
      November 10, 1998 (incorporated by reference to Exhibit 10.19 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).                                                                                                                                                                             
|        | 
|10.20* |  | Abitibi-Consolidated
      Executive Deferred Share Units Plan, effective date as of January 1,
      2000 (incorporated by reference to Exhibit 10.24 to AbitibiBowater Inc.
      Form 10-KA filed on March 20, 2008).                                                                                                                                                                                        
|        | 
|10.21* |  | Abitibi-Consolidated
      Inc. Restricted Share Unit Plan, undated (incorporated by reference to
      Exhibit 10.25 to AbitibiBowater Inc. Form 10-KA filed on March 20,
      2008).                                                                                                                                                                                                                         
|        | 
|10.22* |  | Abitibi-Consolidated
      Deferred Share Unit Plan (Stock plan for non-employee directors), dated
      March 11, 1998 (incorporated by reference to Exhibit 10.26 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).                                                                                                                                                                           
|        | 
|10.23* |  | Abitibi-Consolidated
      U.S. Supplement Executive Retirement Plan (SERP), as Amended and Restated,
      dated January 1, 2007 (incorporated by reference to Exhibit 10.27 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).                                                                                                                                                                 
|        | 
|10.24* |  | Canadian Supplement
      Executive Retirement Plan (SERP) for Executive Employees of
      Abitibi-Consolidated Inc., dated January 1, 1999 (incorporated by
      reference to Exhibit 10.28 to AbitibiBowater Inc. Form 10-KA filed on
      March 20, 2008).                                                                                                                                                
|        | 
|10.25* |  | Amended and Restated
      Receivables Purchase Agreement among Abitibi-Consolidated U.S. Funding
      Corp., Eureka Securitisation, PLC, Citibank, N.A., the Originators Named
      Herein, Abitibi Consolidated Sales Corporation and Abitibi-Consolidated
      Inc. dated January 31, 2008 (incorporated by reference to Exhibit
      10.40 to AbitibiBowater Inc. Form 10-KA filed on March 20,
  2008).
|        | 
|10.26* |  | Amended and Restated
      Purchase and Contributed Agreement among Abitibi-Consolidated Inc.,
      Abitibi Consolidated Sales Corporation, Abitibi Consolidated Sales
      Corporation and Abitibi-Consolidated U.S. Funding Corp., dated
      January 31, 2008 (incorporated by reference to Exhibit 10.41 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).                               
|        | 
|10.27* |  | Credit Agreement among
      Abitibi-Consolidated Inc., Abitibi-Consolidated Company of Canada, the
      Bank of Nova Scotia, Citibank, N.A. and Goldman Sachs Credit Partners,
      dated October 3, 2005 (incorporated by reference to Exhibit 10.42 to
      AbitibiBowater Inc. Form 10-KA filed on March 20,
  2008).                                                                                    



68



---

##### 

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|10.28* |  | First Amendment, dated
      September 28, 2006, to the Credit Agreement among
      Abitibi-Consolidated Inc., Abitibi-Consolidated Company of Canada, the
      Bank of Nova Scotia, Citibank, N.A. and Goldman Sachs Credit Partners,
      dated October 3, 2005 (incorporated by reference to Exhibit 10.43 to
      AbitibiBowater Inc. Form 10-KA filed on March 20, 2008).                                                       
|        | 
|10.29* |  | Second Amendment, dated
      November 24, 2006, to the Credit Agreement among Abitibi-Consolidated
      Inc., Abitibi-Consolidated Company of Canada, the Bank of Nova Scotia,
      Citibank, N.A. and Goldman Sachs Credit Partners, dated October 3,
      2005 (incorporated by reference to Exhibit 10.44 to AbitibiBowater Inc.
      Form 10-KA filed on March 20, 2008).                                                       
|        | 
|10.30* |  | Third Amendment, dated
      July 16, 2007, to the Credit Agreement among Abitibi-Consolidated
      Inc., Abitibi-Consolidated Company of Canada, the Bank of Nova Scotia,
      Citibank, N.A. and Goldman Sachs Credit Partners, dated October 3,
      2005 (incorporated by reference to Exhibit 10.45 to AbitibiBowater Inc.
      Form 10-KA filed on March 20, 2008).                                                            
|        | 
|10.31* |  | Fourth Amendment, dated
      August 14, 2007, to the Credit Agreement among Abitibi-Consolidated
      Inc., Abitibi-Consolidated Company of Canada, the Bank of Nova Scotia,
      Citibank, N.A. and Goldman Sachs Credit Partners, dated October 3,
      2005 (incorporated by reference to Exhibit 10.46 to AbitibiBowater Inc.
      Form 10-KA filed on March 20, 2008).                                                         
|        | 
|10.32* |  | Fifth Amendment, dated
      December 27, 2007, to the Credit Agreement among Abitibi-Consolidated
      Inc., Abitibi-Consolidated Company of Canada, the Bank of Nova Scotia,
      Citibank, N.A. and Goldman Sachs Credit Partners, dated October 3,
      2005 (incorporated by reference to Exhibit 10.47 to AbitibiBowater Inc.
      Form 10-KA filed on March 20, 2008).                                                        
|        | 
|10.33*  |  | Amended and Restated
	Agreement between Reynolds Aluminum Company of Canada, LTD. and Donohue
	Forest Products Inc., dated December 20, 1996 (incorporated by reference to Exhibit 10.33 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                                                                              
|        | 
|10.34*  |  | Unitholders' Agreement,
	dated April 2, 2007, amongst Abitibi-Consolidated Hydro Inc.,
	Abitibi-Consolidated Company of Canada, CDP Investissements Inc. and ACH
	Limited Partnership (incorporated by reference to Exhibit 10.34 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                                     
|        | 
|10.35*  |  | Shareholders'
	Agreement, dated April 2, 2007, amongst Abitibi-Consolidated Hydro Inc.,
	Abitibi-Consolidated Company of Canada, Caisse de Depot et Placement du
	Quebec and ACH Limited Partnership (incorporated by reference to Exhibit 10.35 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                      
|        | 
|10.36*  |  | Amended and Restated
	Limited Partnership Agreement, dated March 30, 2007, amongst
	Abitibi-Consolidated Hydro Inc. and Abitibi-Consolidated Company of Canada
	(initial agreement was dated June 1, 2006) (incorporated by reference to Exhibit 10.36 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                
|        | 
|10.37*  |  | Credit Agreement, dated
	as of March 31, 2007, amongst ACH Limited Partnership, as Borrower, and
	Caisse de Depot et Placement du Quebec, for a $250,000,000 loan (incorporated by reference to Exhibit 10.37 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008).                                                                                                                                                         
|        | 
|10.38*  |  | 13.75% Senior Secured
	Notes due 2011 Exchange and Registration Rights Agreement, dated April 1,
	2008 (incorporated by reference to Exhibit 10.2 to AbitibiBowater Inc.'s
	Current Report on Form 8-K filed April 7, 2008).                                                                                                                                                                                                             
|        | 
|10.39*  |  | 15.5% Senior Notes due
	2010 Exchange and Registration Rights Agreement, dated April 1, 2008
	(incorporated by reference to Exhibit 10.4 to AbitibiBowater Inc.'s Current
	Report on Form 8-K filed April 7, 2008).                                                                                                                                                                                                                      
|        | 
|10.40*  |  | Credit and Guaranty
	Agreement, dated April 1, 2008, by and among Abitibi-Consolidated Company of
	Canada, Abitibi-Consolidated Inc., Certain Subsidiaries and Affiliates of
	Abitibi-Consolidated Inc., Goldman Sachs Credit Partners L.P., Wachovia
	Capital Markets, LLC and the Various Lenders Named Therein (incorporated by
	reference to Exhibit 10.10 to AbitibiBowater Inc.'s Current Report on Form
	8-K filed April 7, 2008).
|        | 
|21.1*   |  | Subsidiaries of the
      Company (incorporated by reference to Exhibit 21.1 to
	Abitibi-Consolidated Inc.'s Form 20-F/A filed April 10, 2008)..                                                                                                                                                                                                                                                                                         
|        | 
|31.1**  |  | Certification of
      President Pursuant to Section 302.                                                                                                                                                                                                                                                                                                                                                                                
|        | 
|31.2**  |  | Certification of Vice
      President and Treasurer Pursuant to
Section 302.                                                                                                                                                                                                                                                                                                                                                             



|* | Previously
      filed and incorporated herein by reference
|- | -----------------------------------------------------------

|** | Filed with
      this Form 20-F/A.
|-- | ----------------------------------

| | This is a
      management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------------





69



---

##### 

SIGNATURES

The Company hereby certifies that it meets all of
the requirements for filing on Form 20-F/A and that it has duly caused and
authorized the undersigned to sign this Annual Report on its behalf.



Abitibi-Consolidated Inc.Per:
    
    /s/ David J. PatersonPresidentDate: December 9,
      2008Per:
    
    /s/ William G. HarveyVice President and
      TreasurerDate: December 9,
      2008




70



---

##### 

INDEX TO FINANCIAL STATEMENTS



|                                                                 |  |    
|---------------------------------------------------------------- |  | ---
|Report
      of Independent Auditors                             |  | F-1
|                                                                 | 
|Consolidated
      Statements of Earnings (Loss)                 |  | F-2
|                                                                 | 
|Consolidated
      Statements of Cash Flows                      |  | F-3
|                                                                 | 
|Consolidated
      Balance Sheets                                |  | F-4
|                                                                 | 
|Consolidated
      Statements of Changes in Shareholders' Equity |  | F-5
|                                                                 | 
|Notes
      to Consolidated Financial Statements                 |  | F-6



---

##### 

Independent Auditors' report

To the Shareholders of
Abitibi-Consolidated Inc.

We have audited the accompanying
consolidated balance sheets of Abitibi-Consolidated Inc. as at December 31, 2007
and 2006, and the related consolidated statements of earnings (loss),
comprehensive income (loss), changes in shareholders' equity and cash flows for
each of the years in the three year period ended December 31, 2007. Our audits
also included the financial statement schedule II. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and on the financial statement schedule based on our audits.

We conducted our audits in accordance with
Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform an audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. A financial statement audit also
includes assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of the Company as at December 31, 2007 and 2006 and the
results of its operations and its cash flows for each of the years in the three
year period ended December 31, 2007 in accordance with Canadian generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule II presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.

(Signed PricewaterhouseCoopers LLP)

Chartered Accountants

Montréal, Canada

March 21, 2008

Comments by Auditor for U.S. Readers on
Canada-U.S. Reporting Difference

In the United States, reporting standards
for auditors require the addition of an explanatory paragraph (following the
opinion paragraph) when the financial statements are affected by conditions and
events that cast substantial doubt on the Company's ability to continue as a
going concern, such as those described in Note 1 to the financial statements.
Our report to the shareholders dated March 21, 2008 is expressed in accordance
with Canadian reporting standards which do not permit a reference to such events
and conditions in the auditor's report when these are adequately disclosed in
the financial statements.

(Signed PricewaterhouseCoopers LLP)

Chartered Accountants

Montréal, Canada

March 21, 2008



F-1



---

##### 

Abitibi-Consolidated Inc.

Consolidated
Statements of Earnings (Loss)



|                                                                                                                                                            |  |                                |   |  |       |   |  |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | - |  | ----- | - |  | ----- | -
|                                                                                                                                                            |  | Years ended December 31        |  
|                                                                                                                                                            |  | 2007                           |   |  | 2006  |   |  | 2005  |  
|                                                                                                                                                            |  | $                              |   |  | $     |   |  | $     |  
|                                                                                                                                                            |  | In millions of Canadiandollars |  
|Sales                                                                                                                                                       |  | 4,113                          |   |  | 4,851 |   |  | 5,342 |  
|                                                                                                                                                            |  |                                |   |  |       |   |  |       |  
|Cost of sales, excluding
      amortization                                                                                                                 |  | 3,491                          |   |  | 3,616 |   |  | 3,910 |  
|Amortization of property, plant and
      equipment                                                                                                         |  | 411                            |   |  | 424   |   |  | 492   |  
|Amortization of intangible
    assets                                                                                                                       |  | 17                             |   |  | 16    |   |  | 16    |  
|Distribution costs                                                                                                                                          |  | 461                            |   |  | 509   |   |  | 581   |  
|Countervailing, anti-dumping and other
      duties                                                                                                         |  | 11                             |   |  | 28    |   |  | 67    |  
|Lumber duties refund                                                                                                                                        |  | -                              |   |  | (197  | ) |  | -     |  
|Selling, general and administrative
      expenses                                                                                                          |  | 224                            |   |  | 143   |   |  | 179   |  
|Closure costs, impairment and other related
      charges (note 5)                                                                                          |  | 503                            |   |  | 5     |   |  | 431   |  
|Net gain on disposition of assets (note
      6)                                                                                                            |  | (98                            | ) |  | (20   | ) |  | (58   | )
|                                                                                                                                                            |  |                                |   |  |       |   |  |       |  
|Operating income (loss) from continuing
      operations                                                                                                    |  | (907                           | ) |  | 327   |   |  | (276  | )
|Interest expense                                                                                                                                            |  | 333                            |   |  | 330   |   |  | 374   |  
|Gain on translation of foreign
      currencies                                                                                                             |  | (446                           | ) |  | (10   | ) |  | (101  | )
|Net gain on dilution of interest in
      subsidiary (note 7)                                                                                               |  | (33                            | ) |  | -     |   |  | -     |  
|Other expenses, net (note 8)                                                                                                                                |  | 14                             |   |  | 5     |   |  | 48    |  
|                                                                                                                                                            |  |                                |   |  |       |   |  |       |  
|Earnings (loss) from continuing operations
      before the following items                                                                                 |  | (775                           | ) |  | 2     |   |  | (597  | )
|Income tax recovery (note 9)                                                                                                                                |  | (81                            | ) |  | (85   | ) |  | (271  | )
|Share of earnings (losses) from investments
      subject to significant influence                                                                          |  | 1                              |   |  | 4     |   |  | 2     |  
|Non-controlling interests                                                                                                                                   |  | (21                            | ) |  | (37   | ) |  | (29   | )
|                                                                                                                                                            |  |                                |   |  |       |   |  |       |  
|Earnings (loss) from continuing
      operations                                                                                                            |  | (714                           | ) |  | 54    |   |  | (353  | )
|Earnings from discontinued operations (note
      10)                                                                                                       |  | -                              |   |  | -     |   |  | 3     |  
|                                                                                                                                                            |  |                                |   |  |       |   |  |       |  
|Net earnings (loss)                                                                                                                                         |  | (714                           | ) |  | 54    |   |  | (350  | )
|                                                                                                                                                            |  |                                |   |  |       |   |  |       |  
|Going concern (note 1)                                                                                                                                      |  |                                |   |  |       |   |  |       |  
|                                                                                                                                                           
|Consolidated Statements of Comprehensive
      Income (Loss)                                                                                                | 
|                                                                                                                                                            |  | Years ended December 31        |  
|                                                                                                                                                            |  | 2007                           |   |  | 2006  |   |  | 2005  |  
|                                                                                                                                                            |  | $                              |   |  | $     |   |  | $     |  
|                                                                                                                                                            |  | In millions of Canadiandollars |  
|Net earnings (loss)                                                                                                                                         |  | (714                           | ) |  | 54    |   |  | (350  | )
|Other comprehensive income (loss), net of
      income taxes                                                                                                |  |                                |   |  |       |   |  |       |  
|Foreign currency translation
      adjustment                                                                                                               |  | (180                           | ) |  | 12    |   |  | 60    |  
|Reclassification to earnings of gains on
      derivatives designated as cash flow hedges, net of income taxes of $11 in
      2007 (nil for 2006 and 2005) |  | (25                            | ) |  | -     |   |  | -     |  
|Change in unrealized gains on derivatives
      designated as cash flow hedges, net of income taxes of $23 in 2007 (nil
      for 2006 and 2005)            |  | 52                             |   |  | -     |   |  | -     |  
|                                                                                                                                                            |  |                                |   |  |       |   |  |       |  
|Total other comprehensive income (loss), net
      of income taxes                                                                                          |  | (153                           | ) |  | 12    |   |  | 60    |  
|                                                                                                                                                            |  |                                |   |  |       |   |  |       |  
|Comprehensive income (loss)                                                                                                                                 |  | (867                           | ) |  | 66    |   |  | (290  | )
|                                                                                                                                                            |  |                                |   |  |       |   |  |       |  

See accompanying notes to consolidated financial
statements.



F-2



---

##### 

Abitibi-Consolidated Inc.

Consolidated
Statements of Cash Flows



|                                                                                 |  |                                       |   |  |      |   |  |        |  
|-------------------------------------------------------------------------------- |  | ------------------------------------- | - |  | ---- | - |  | ------ | -
|                                                                                 |  | Years ended December 31               |  
|                                                                                 |  | 2007                                  |   |  | 2006 |   |  | 2005   |  
|                                                                                 |  | $                                     |   |  | $    |   |  | $      |  
|                                                                                 |  | In millions of Canadian
      dollars |  
|Operating activities                                                             |  |                                       |   |  |      |   |  |        |  
|Earnings (loss) from continuing
      operations                                 |  | (714                                  | ) |  | 54   |   |  | (353   | )
|Amortization                                                                     |  | 428                                   |   |  | 440  |   |  | 508    |  
|Future income taxes (note 9)                                                     |  | (96                                   | ) |  | (68  | ) |  | (194   | )
|Loss (gain) on translation of foreign
      currency long-term debt              |  | (529                                  | ) |  | 6    |   |  | (154   | )
|Employee future benefits, excess of funding
      over expense                   |  | (43                                   | ) |  | (73  | ) |  | (65    | )
|Net gain on dilution resulting from units
      issued by a subsidiary (note 7)  |  | (33                                   | ) |  | -    |   |  | -      |  
|Non-cash closure costs, impairment and other
      related charges (note 5)      |  | 403                                   |   |  | -    |   |  | 390    |  
|Net gain on disposition of assets (note
      6)                                 |  | (98                                   | ) |  | (20  | ) |  | (58    | )
|Non-controlling interests                                                        |  | 21                                    |   |  | 37   |   |  | 29     |  
|Other non-cash items                                                             |  | (8                                    | ) |  | 23   |   |  | 28     |  
|Cash received in monetization of financial
      instruments (note 20)           |  | 24                                    |   |  | -    |   |  | -      |  
|Changes in non-cash operating working
      capital components:                  |  |                                       |   |  |      |   |  |        |  
|Accounts receivable                                                              |  | 65                                    |   |  | 12   |   |  | (51    | )
|Inventories                                                                      |  | 117                                   |   |  | (29  | ) |  | 7      |  
|Prepaid expenses                                                                 |  | 8                                     |   |  | (1   | ) |  | 4      |  
|Accounts payable and accrued
      liabilities                                   |  | (13                                   | ) |  | (149 | ) |  | 73     |  
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Cash flows from (used in) continuing
      operating activities                  |  | (468                                  | ) |  | 232  |   |  | 164    |  
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Financing activities                                                             |  |                                       |   |  |      |   |  |        |  
|Increase in short-term debt                                                      |  | 25                                    |   |  | 5    |   |  | 8      |  
|Increase in long-term debt                                                       |  | 683                                   |   |  | 558  |   |  | 1,172  |  
|Repayment of long-term debt                                                      |  | (335                                  | ) |  | (470 | ) |  | (1,881 | )
|Financing fees                                                                   |  | -                                     |   |  | -    |   |  | (14    | )
|Dividends paid to shareholders                                                   |  | -                                     |   |  | (22  | ) |  | (44    | )
|Dividends and cash distributions paid to
      non-controlling interests         |  | (20                                   | ) |  | (44  | ) |  | (31    | )
|Net proceeds on issuance of units by a
      subsidiary (note 7)                 |  | 37                                    |   |  | -    |   |  | -      |  
|Other                                                                            |  | -                                     |   |  | -    |   |  | 1      |  
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Cash flows from (used in) financing
      activities of continuing operations    |  | 390                                   |   |  | 27   |   |  | (789   | )
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Investing activities                                                             |  |                                       |   |  |      |   |  |        |  
|Additions to property, plant and
      equipment                                 |  | (107                                  | ) |  | (165 | ) |  | (177   | )
|Additions to intangible assets                                                   |  | -                                     |   |  | (3   | ) |  | -      |  
|Net proceeds on disposal of property, plant
      and equipment and other assets |  | 135                                   |   |  | 32   |   |  | 64     |  
|Business acquisitions, net of cash and cash
      equivalents (note 4)           |  | -                                     |   |  | -    |   |  | (13    | )
|Net proceeds on disposal of discontinued
      operations (note 4)               |  | -                                     |   |  | -    |   |  | 693    |  
|Receipt on note receivable                                                       |  | -                                     |   |  | 10   |   |  | -      |  
|Cash subject to restriction (note
      17)                                      |  | (24                                   | ) |  | -    |   |  | -      |  
|Other                                                                            |  | 3                                     |   |  | 3    |   |  | (1     | )
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Cash flows from (used in) investing
      activities of continuing operations    |  | 7                                     |   |  | (123 | ) |  | 566    |  
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Cash generated by (used in) continuing
      operations                          |  | (71                                   | ) |  | 136  |   |  | (59    | )
|Cash generated by discontinued operations
      (note 10)                        |  | -                                     |   |  | -    |   |  | 3      |  
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Increase (decrease) in cash and cash
      equivalents                           |  | (71                                   | ) |  | 136  |   |  | (56    | )
|Foreign currency translation adjustment on
      cash and cash equivalents       |  | (13                                   | ) |  | 5    |   |  | (4     | )
|Cash and cash equivalents, beginning of
      year                               |  | 216                                   |   |  | 75   |   |  | 135    |  
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Cash and cash equivalents, end of
      year                                     |  | 132                                   |   |  | 216  |   |  | 75     |  
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Cash and cash equivalents, end of year,
      related to:                        |  |                                       |   |  |      |   |  |        |  
|Cash of continuing operations                                                    |  | 83                                    |   |  | 68   |   |  | 51     |  
|Cash equivalents of continuing
      operations                                  |  | 49                                    |   |  | 148  |   |  | 16     |  
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Cash and cash equivalents, end of
      year                                     |  | 132                                   |   |  | 216  |   |  | 67     |  
|                                                                                 |  |                                       |   |  |      |   |  |        |  
|Cash flows related to:                                                           |  |                                       |   |  |      |   |  |        |  
|Interest paid                                                                    |  | 324                                   |   |  | 321  |   |  | 376    |  
|Income taxes paid (received)                                                     |  | 12                                    |   |  | (4   | ) |  | (40    | )

See accompanying notes to consolidated financial
statements.



F-3



---

##### 

Abitibi-Consolidated Inc.

Consolidated Balance
Sheets



|                                                                 |  |                                       |   |  |       |  
|---------------------------------------------------------------- |  | ------------------------------------- | - |  | ----- | -
|                                                                 |  | As at December 31                     |  
|                                                                 |  | 2007                                  |   |  | 2006  |  
|                                                                 |  | $                                     |   |  | $     |  
|                                                                 |  | In millions of Canadian
      dollars |  
|ASSETS                                                           |  |                                       |   |  |       |  
|Cash and cash equivalents                                        |  | 132                                   |   |  | 216   |  
|Accounts receivable, net                                         |  | 303                                   |   |  | 362   |  
|Inventories, net (note 12)                                       |  | 530                                   |   |  | 683   |  
|Prepaid expenses                                                 |  | 44                                    |   |  | 53    |  
|Future income taxes (note 9)                                     |  | -                                     |   |  | 70    |  
|                                                                 |  |                                       |   |  |       |  
|Total current assets                                             |  | 1,009                                 |   |  | 1,384 |  
|                                                                 |  |                                      
|Assets held for sale (note 13)                                   |  | 174                                   |   |  | -     |  
|Property, plant and equipment, net (note
      14)               |  | 3,015                                 |   |  | 3,984 |  
|Intangible assets, net (note
    15)                             |  | 443                                   |   |  | 460   |  
|Employee future benefits (note
    21)                           |  | 500                                   |   |  | 452   |  
|Future income taxes (note 9)                                     |  | 8                                     |   |  | 322   |  
|Other assets (note 17)                                           |  | 183                                   |   |  | 200   |  
|Goodwill (note 16)                                               |  | 1,240                                 |   |  | 1,297 |  
|                                                                 |  |                                       |   |  |       |  
|Total assets                                                     |  | 6,572                                 |   |  | 8,099 |  
|                                                                 |  |                                       |   |  |       |  
|                                                                 |  |                                      
|LIABILITIES AND SHAREHOLDERS
      EQUITY                        |  |                                       |   |  |       |  
|Accounts payable and accrued liabilities
      (note 18)         |  | 691                                   |   |  | 779   |  
|Short-term debt (note 19)                                        |  | 383                                   |   |  | -     |  
|Long-term debt due within one year (note
      19)               |  | 342                                   |   |  | 72    |  
|                                                                 |  |                                       |   |  |       |  
|Total current
    liabilities                                    |  | 1,416                                 |   |  | 851   |  
|                                                                 |  |                                      
|Liabilities associated with assets held for
      sale (note 13) |  | 19                                    |   |  | -     |  
|Long-term debt (note 19)                                         |  | 3,001                                 |   |  | 3,805 |  
|Employee future benefits (note
    21)                           |  | 261                                   |   |  | 262   |  
|Future income taxes (note 9)                                     |  | 205                                   |   |  | 629   |  
|Other long-term liabilities (note
      22)                      |  | 55                                    |   |  | 30    |  
|Non-controlling interests                                        |  | 69                                    |   |  | 71    |  
|Commitments and contingencies (note
      22)                    |  |                                       |   |  |       |  
|                                                                 |  |                                      
|SHAREHOLDERS' EQUITY                                             |  |                                       |   |  |       |  
|Capital stock                                                    |  | 3,518                                 |   |  | 3,518 |  
|Contributed surplus                                              |  | 43                                    |   |  | 40    |  
|Deficit                                                          |  | (1,591                                | ) |  | (843  | )
|Accumulated other comprehensive loss (note
      11)             |  | (424                                  | ) |  | (264  | )
|                                                                 |  |                                       |   |  |       |  
|Total shareholders'
    equity                                   |  | 1,546                                 |   |  | 2,451 |  
|                                                                 |  |                                       |   |  |       |  
|Total liabilities and shareholders'
      equity                 |  | 6,572                                 |   |  | 8,099 |  
|                                                                 |  |                                       |   |  |       |  

Going concern (note 1)

See accompanying notes to consolidated financial
statements.



F-4



---

##### 

Abitibi-Consolidated Inc.

Consolidated
Statements of Changes in Shareholders' Equity



|                                                                                                  |  |                                |   |  |       |   |  |       |  
|------------------------------------------------------------------------------------------------- |  | ------------------------------ | - |  | ----- | - |  | ----- | -
|                                                                                                  |  | Years ended December 31        |  
|                                                                                                  |  | 2007                           |   |  | 2006  |   |  | 2005  |  
|                                                                                                  |  | $                              |   |  | $     |   |  | $     |  
|                                                                                                  |  | In millions of Canadiandollars |  
|Capital Stock                                                                                     |  |                                |   |  |       |   |  |       |  
|Common shares, beginning of
    year                                                              |  | 3,518                          |   |  | 3,518 |   |  | 3,517 |  
|Share purchase financing
      arrangements                                                       |  | -                              |   |  | -     |   |  | 1     |  
|                                                                                                  |  |                                |   |  |       |   |  |       |  
|Common shares, end of year(1)                                                                     |  | 3,518                          |   |  | 3,518 |   |  | 3,518 |  
|                                                                                                  |  |                                |   |  |       |   |  |       |  
|Contributed Surplus                                                                               |  |                                |   |  |       |   |  |       |  
|Contributed surplus, beginning of
      year                                                      |  | 40                             |   |  | 34    |   |  | 26    |  
|Stock option compensation
    expense                                                             |  | 3                              |   |  | 6     |   |  | 8     |  
|                                                                                                  |  |                                |   |  |       |   |  |       |  
|Contributed surplus, end of
    year                                                              |  | 43                             |   |  | 40    |   |  | 34    |  
|                                                                                                  |  |                                |   |  |       |   |  |       |  
|Deficit                                                                                           |  |                                |   |  |       |   |  |       |  
|Deficit, beginning of year                                                                        |  | (843                           | ) |  | (875  | ) |  | (481  | )
|Transition adjustment on adoption of
      Financial Instruments standards, net of taxes (note 3) |  | (34                            | ) |  | -     |   |  | -     |  
|Net earnings (loss)                                                                               |  | (714                           | ) |  | 54    |   |  | (350  | )
|Dividends declared(2)                                                                             |  | -                              |   |  | (22   | ) |  | (44   | )
|                                                                                                  |  |                                |   |  |       |   |  |       |  
|Deficit, end of year(3)                                                                           |  | (1,591                         | ) |  | (843  | ) |  | (875  | )
|                                                                                                  |  |                                |   |  |       |   |  |       |  
|Accumulated other comprehensive
      loss                                                        |  |                                |   |  |       |   |  |       |  
|Accumulated other comprehensive loss,
      beginning of year                                     |  | (264                           | ) |  | (276  | ) |  | (336  | )
|Transition adjustment on adoption of
      Financial Instruments standards, net of taxes (note 3) |  | (7                             | ) |  | -     |   |  | -     |  
|Other comprehensive income
    (loss)                                                             |  | (153                           | ) |  | 12    |   |  | 60    |  
|                                                                                                  |  |                                |   |  |       |   |  |       |  
|Accumulated other comprehensive loss, end of
      year(3)                                        |  | (424                           | ) |  | (264  | ) |  | (276  | )
|                                                                                                  |  |                                |   |  |       |   |  |       |  
|Total shareholders' equity, end of
      year                                                     |  | 1,546                          |   |  | 2,451 |   |  | 2,401 |  
|                                                                                                  |  |                                |   |  |       |   |  |       |  



|(1) | Abitibi-Consolidated Inc. is authorized to issue an unlimited
      number of common shares and preferred shares. There were 440 million
      common shares outstanding at December 31, 2007, 2006 and 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On
      July 25, 2006, the board of directors suspended dividend payments.
      Dividends declared amounted to $0.05 per common share in 2006 and $0.10
      per common share in 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Total of
      deficit and accumulated other comprehensive loss amounted to $2,015
      million at December 31, 2007 (2006 - $1,107 million; 2005 - $1,151
      million).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial
statements.



F-5



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated
Financial Statements

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted

Note 1. Going Concern

These consolidated financial statements of
Abitibi-Consolidated Inc. (the "Company" or "Abitibi") are expressed in Canadian
dollars and are prepared in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP") applicable to a going concern, which
contemplates the realization of assets and settlement of liabilities in the
normal course of business as they come due.

The Company is currently experiencing a liquidity
shortfall and faces significant near-term liquidity challenges. For the year
ended December 31, 2007, the Company reported a net loss of $714 million,
negative cash flows from operating activities of $468 million and reported an
accumulated deficit of $1,591 million as at December 31, 2007. The Company
has a total of $346 million (US$346 million) of long-term debt that matures in
2008: $196 million (US$196 million) principal amount of its 6.95% Notes due
April 1, 2008 and $150 million (US$150 million) principal amount of 5.25%
Notes due June 20, 2008 issued by Abitibi-Consolidated Company of Canada, a
wholly-owned subsidiary of Abitibi. The Company also has revolving credit
facilities with commitments totalling $710 million maturing in the fourth
quarter of 2008. None of these debts have yet been refinanced. These
circumstances lend substantial doubt as to the ability of the Company to meet
its obligations as they come due and, accordingly, substantial doubt as to the
appropriateness of the use of accounting principles applicable to a going
concern.

To address these near-term liquidity challenges,
the Company, and its parent company, AbitibiBowater Inc. ("AbitibiBowater"),
have developed a refinancing plan to address upcoming debt maturities and
general liquidity needs designed to enable Abitibi to repay the $346 million due
in April and June 2008 and to repay all its maturities due in 2009, while
continuing to fund the Company's operations, debt service and capital
expenditures, so it can continue as a going concern. This refinancing plan is
expected to consist of a US$200-300 million of new senior unsecured
exchange notes due 2010; up to US$450 million of a new 364-day senior secured
term loan secured by substantially all of the Company's assets other than fixed
assets; approximately US$400 million of new senior secured notes or a term loan
due 2011 secured by fixed assets; and US$200-300 million of new convertible
notes of AbitibiBowater. The current state of the credit markets is a
significant impediment to securing the necessary financing for the Company.
There is no assurance that these financing alternatives will ultimately be
consummated on terms that are acceptable to the Company or at all.

Management's most immediate concern is repaying
the Company's April and June debt maturities. If Abitibi is unable to secure
adequate new financing, the Company will be unable to make such repayments. In
addition, although the Company is in compliance with its net funded debt to
total capitalization covenant under credit facilities at December 31, 2007,
there can be no assurance that it will remain in compliance in the near term in
light of the factors discussed above. Based on current forecasts, the Company
expects to be in default with its net funded debt to total capitalization
covenant to be measured as of the end of the first quarter of 2008; however, the
Company has developed a refinancing plan to address the upcoming debt maturities
which, if successful, will replace the current covenants. Failure to comply with
the financial or other covenants of the Company's credit facilities could result
in the outstanding borrowings under these facilities becoming immediately due
and payable (unless the lenders waive any resulting event of default). In the
event of any combination of an inability to repay Abitibi's 2008 debt maturities
or acceleration of indebtedness under credit facilities, the Company may be
compelled to seek protection under or be forced into a proceeding under Canada's
Companies' Creditors Arrangement Act.



F-6



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



The Company's ability to continue as a going
concern is dependent upon its ability to refinance or amend its credit
facilities, repay its April and June 2008 debt maturities, timely repay all
amounts due in 2009, fund its operations, debt service and capital expenditures
and generate positive cash flows from operations. These financial statements do
not reflect the adjustments to the carrying values of assets and liabilities and
the reported expenses and balance sheet classifications that would be necessary
were the going concern assumption inappropriate, and these adjustments could be
material. Management has not reflected these adjustments as the Company
continues to focus on implementing the series of financing initiatives designed
to enable it to continue as a going concern.

Note 2. Organization and Basis of Presentation

Nature of operations

The Company is a leading producer of newsprint and
commercial printing papers, as well as wood products. It operates pulp and paper
manufacturing facilities in Canada, the United States and the United Kingdom as
well as sawmills, remanufacturing facilities and engineered wood facilities in
Canada. Abitibi is among the largest recyclers of newspapers and magazines in
the world.

Abitibi and Bowater combination

On October 29, 2007, pursuant to a
Combination Agreement and Agreement and Plan of Merger, dated as of
January 29, 2007, Abitibi and Bowater Incorporated ("Bowater") became
wholly-owned subsidiaries of AbitibiBowater. Bowater is deemed to be the
"acquirer" of Abitibi for accounting purposes. Abitibi maintained its
pre-acquisition basis of accounting in its consolidated financial statements
after the Combination. All Abitibi stock options and other stock-based awards
outstanding, whether vested or unvested, were converted into AbitibiBowater
stock options or stock-based awards. The number of shares subject to such
converted awards was adjusted by multiplying the number of shares by the Abitibi
exchange ratio of 0.06261. Similarly, the exercise price of the converted stock
options was adjusted by dividing such price by the Abitibi exchange ratio.

Financial statements

These consolidated financial statements differ in
certain respects from those prepared in accordance with United States generally
accepted accounting principles ("US GAAP") and are not intended to provide
certain disclosures which would typically be found in US GAAP financial
statements. These measurement and disclosure differences are described in note
26, "Differences between Canadian and United States generally accepted
accounting principles".

Some of the figures for the comparative years in
the consolidated financial statements and notes have been reclassified to make
them consistent with the presentation for the current year.



F-7



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Principles of consolidation

These consolidated financial statements include
the accounts of the Company, its wholly-owned and controlled subsidiaries, and a
proportionate share of its interests in joint ventures. The investments in
entities subject to significant influence are accounted for using the equity
method. All significant transactions and balances between these companies have
been eliminated. All consolidated subsidiaries are wholly-owned with the
exception of the following:



|                                                 |  |                  |   |  |                                                    |  |                                     |  
|------------------------------------------------ |  | ---------------- | - |  | -------------------------------------------------- |  | ----------------------------------- | -
|Consolidated Subsidiary                          |  | AbitibiOwnership |   |  | Non-Controlling
    Shareholder                    |  | Non-ControllingShareholderOwnership |  
|Produits Forestiers
      Saguenay               |  | 85.5             | % |  | Les Placements H.N.M.A. Inc.                       |  | 14.5                                | %
|Produits Forestiers La
      Tuque               |  | 82.2             | % |  | Coopérative Forestière
      du Haut Saint-Maurice |  | 17.8                                | %
|ACH Limited
      Partnership                    |  | 75               | % |  | Caisse de dépôt et placement du Québec             |  | 25                                  | %
|Manicouagan Power
      Company                  |  | 60               | % |  | Alcoa Inc.                                         |  | 40                                  | %
|Augusta Newsprint
      Company                  |  | 52.5             | % |  | The Woodbridge
      Company                       |  | 47.5                                | %
|Donohue Malbaie
      Inc.                       |  | 51               | % |  | New York
    Times                                 |  | 49                                  | %
|                                                 |  |                  |  
|Proportionately-Consolidated
      Joint Venture |  | AbitibiOwnership |   |  | Partner                                            |  | PartnerOwnership                    |  
|Star Lake Hydro
      Partnership                |  | 51               | % |  | Enel SpA                                           |  | 49                                  | %
|Abitibi-LP Engineering
      Wood Inc.           |  | 50               | % |  | Louisiana-Pacific
      Corporation                |  | 50                                  | %
|Abitibi-LP Engineering Wood II Inc.              |  | 50               | % |  | Louisiana-Pacific
      Corporation                |  | 50                                  | %
|Produits Forestiers
      Petit-Paris Inc.       |  | 50               | % |  | Coopérative
      Forestière Petit-Paris           |  | 50                                  | %

Note 3. Summary of Significant Accounting Policies

Use of estimates

In preparing the consolidated financial statements
in accordance with Canadian GAAP, management is required to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
revenues and expenses during the reporting period and the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements. The most significant estimates relate
to expected future cash flows used in goodwill and long-lived asset impairment
testing, future tax asset valuation allowances and assumptions underlying
pension accounting. Estimates are based on a number of factors, including
historical experience, current events and other assumptions that management
believes are reasonable under the circumstances. Actual results could differ
materially from those estimates under different assumptions or conditions.

Cash and cash equivalents

Cash and cash equivalents generally consist of
direct obligations of the United States and Canadian governments and their
agencies, demand deposits, banker's acceptances, investment-grade commercial
paper and other short-term investment-grade securities with a maturity of three
months or less from the date of purchase. These investments are recorded at
cost, which approximates their market value.



F-8



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Accounts receivable (note 19)

Accounts receivable are recorded at cost, net of
an allowance for doubtful accounts that is based on expected collectibility.

Losses on the sale of accounts receivable (through
the Company's securitization program) are calculated by comparing the book value
of the accounts receivable sold to the total of the cash proceeds received from
the sale and the fair value of the retained interest in such receivables on the
date of the transfer. Fair value is determined on a discounted cash flow basis.
Losses on the sale of accounts receivable are recognized when incurred and
included in "Other expenses, net" in the Consolidated Statements of Earnings
(Loss).

As at December 31, 2007, accounts receivable
recorded on the balance sheet are net of an allowance for doubtful accounts of
$6 million (2006-$3 million).

Inventories (note 12)

Inventories are stated at the lower of cost or
market value. Cost includes labor, materials and production overhead and is
determined by using the average cost method. Production overhead included in the
cost of inventories is based on the normal capacity of the Company's production
facilities. Unallocated overhead, including production overhead associated with
abnormal production levels, is recognized in "Cost of sales" in the Consolidated
Statements of Earnings (Loss) when incurred.

Timber and timberlands

The Company capitalizes costs related to the
acquisition of timber and timberlands. The cost generally includes the
acquisition cost of land and timber, property taxes, lease payments, site
preparation and other costs. These costs, excluding land, are expensed at the
time the timber is harvested, based on annually determined depletion rates, and
are included in "Amortization of property, plant and equipment" in the
Consolidated Statements of Earnings (Loss). Growth and yield models are used to
estimate timber volume on land from year to year. These volumes affect the
depletion rates, which are calculated annually based on the capitalized costs
and the total timber volume based on the current stage of the growth cycle.

Property, plant and equipment (note 14)

Property, plant and equipment are stated at cost
less accumulated amortization and impairment. The cost of the property, plant
and equipment is reduced by any investment tax credits or government capital
grants received. Amortization is provided on a straight-line basis over the
estimated useful lives of the assets. Repair and maintenance costs, including
those associated with planned major maintenance, are expensed as incurred. The
Company capitalizes interest on borrowings during the construction period of
major capital projects as part of the related asset and amortizes the
capitalized interest into earnings over the related asset's remaining useful
life.



F-9



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Asset retirement obligations (note 22)

The Company records an asset and a liability equal
to the present value of the estimated costs associated with the retirement of
long-lived assets where a legal or contractual obligation exists; life is
determinable; and a reasonable estimate of fair value can be made, even if the
timing and/or settlement of the obligation is conditional on a future event that
may or may not be within the Company's control. The liability is accreted to
recognize the passage of time using a credit adjusted risk-free interest rate,
and the asset is depreciated over the life of the related equipment or facility.
The asset and liability are subsequently adjusted for changes in the amount or
timing of the estimated costs.

Environmental costs (note 22)

The Company expenses environmental costs related
to existing conditions resulting from past or current operations and from which
no current or future benefit is discernible. Expenditures that extend the life
of the related property are capitalized. The liability is determined on a
site-by-site basis and recorded at the time it is probable and can be reasonably
estimated. Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental remediation
obligations are discounted to their present value when the amount and timing of
expected cash payments are reliably determinable.

Impairment of long-lived assets (note 5)

Long-lived assets are reviewed for impairment when
events or changes in circumstances indicate that the carrying value of a
long-lived asset or group of assets (herein defined as "long-lived asset") may
no longer be recoverable. The recoverability of a long-lived asset to be held
and used is tested by comparing the carrying amount of the long-lived asset to
the sum of the estimated future undiscounted cash flows expected to be generated
by that asset. In estimating the future undiscounted cash flows, the Company
uses projections of cash flows directly associated with, and which are expected
to arise as a direct result of, the use and eventual disposition of the asset.
The principal assumptions include periods of operation, projections of product
pricing, sales volumes, production levels, product costs, market supply and
demand, foreign exchange rates, inflation and projected capital spending.
Changes in any of these estimates could have a material effect on the estimated
future undiscounted cash flows expected to be generated by the asset. If it is
determined that a long-lived asset is not recoverable, an impairment loss would
be calculated equal to the excess of the carrying amount of the long-lived asset
over its fair value. Long-lived assets classified as held for sale are recorded
at the lower of their carrying amount or fair value less cost to sell. In making
its determination of the fair value of a long-lived asset, the Company relies
primarily on the discounted cash flow method. Long-lived assets to be disposed
of other than by sale are classified as held and used until the long-lived asset
is disposed or use has ceased.

Goodwill and other intangible assets(notes 15 and 16)

Goodwill is tested for impairment annually in the
fourth quarter of each year and when events or changes in circumstances indicate
that goodwill might be impaired. The Company's reporting units' fair values are
compared with their respective carrying values, including goodwill. If a
reporting unit's fair value exceeds its carrying value, no impairment loss is
recognized. If a reporting unit's carrying value



F-10



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



exceeds its fair value, an impairment charge equal to the difference
between the carrying value of the goodwill and the implied fair value of the
goodwill is recorded. The implied fair value of goodwill is determined in the
same manner as the amount of goodwill recognized in a business combination. The
excess of the fair value of the reporting unit over the fair value of the
identifiable net assets of the reporting unit is the implied fair value of
goodwill. In making its determination of the fair value of a reporting unit, the
Company relies primarily on the discounted cash flow method. This method uses
projections of cash flows from each of the reporting units and makes use of
several key assumptions.

Intangible assets are recorded at cost less
accumulated amortization. Amortization is provided on a straight-line basis over
the estimated life of the asset. An impairment loss is recognized in the amount
that the intangible asset's carrying value exceeds its fair value if it is
determined that the carrying amount is not recoverable.

Income taxes (note 9)

Future tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit carryforwards.
Future tax assets and liabilities are measured using enacted or substantively
enacted tax rates expected to be recovered or settled. Valuation allowances are
recognized to reduce future tax assets to the amount that is more likely than
not to be realized. In assessing the likelihood of realization, the Company
considers its history of earnings and losses in recent years, estimates of
future taxable income and tax planning strategies. The Company has not provided
for income taxes on the undistributed earnings of certain of its foreign
subsidiaries, as it has specific plans for the reinvestment of such earnings.
Investment tax credits are recognized in earnings as a reduction of research and
development expenses, as part of cost of goods sold, when the Company has made
the qualifying expenditures and there is a reasonable assurance that the credits
will be realized.

Employee future benefits (note 21)

Net periodic benefit costs are recognized as
employees render the services necessary to earn the pension and other
postretirement benefits. The pension plans' obligations are determined in
accordance with the projected benefit method prorated on services. The Company
accrues the cost of defined benefit plans and other postretirement benefits
based on assumptions determined by the Company. The determination of the net
periodic benefit cost includes:



| |  |  | the cost of pension
      benefits provided in exchange of employees' services rendered during the
      year;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | the interest cost of
      pension obligations;
| | - |  | -----------------------------------------------



| |  |  | the expected long-term
      return on pension fund assets, which is based on a market-related value
      determined using a five-year moving average market value for equity
      securities and fair value for other asset classes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | gains or losses on
      settlements, curtailments and special early retirement;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the straight-line
      amortization of past service costs and plan amendments over the average
      remaining service period of the active employee group covered by the plans
      (approximately 10 years); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-11



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



| |  |  | the amortization of
      cumulative unrecognized net actuarial gains and losses in excess of 10% of
      the greater of the accrued benefit obligation or market-related value of
      plan assets, at the beginning of the year, over the average remaining
      service period of the active employee group covered by the plans.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Amounts paid by the Company to match employees'
contributions in its defined contribution plans are expensed as incurred.

Financial instruments (note 20)

Effective January 1, 2007, the Company
records all derivatives as either assets or liabilities in the balance sheet at
fair value (refer to the "Recent changes in accounting standards-Financial
instruments" section of this note for more information on the Company's adoption
of the new accounting standards on January 1, 2007 and related impact on
the financial statements). Changes in the fair value of a derivative that has
been designated and qualifies as a cash flow hedge are deferred and recorded as
a component of "Accumulated other comprehensive loss" until the underlying
transaction is recorded in earnings. At that time, gains or losses are
reclassified from "Accumulated other comprehensive loss" to the Consolidated
Statements of Earnings (Loss) on the same line as the underlying transaction has
been recorded (sales, cost of sales or interest expense). Any ineffective
portion of a hedging derivative's change in fair value is recognized immediately
in earnings. Changes in the fair value of a derivative that has not been
designated or does not qualify for hedge accounting treatment are recognized in
earnings immediately. The Company hedges part of its risk exposure to interest
rates on its long-term debt through the use of interest rate swap contracts.
Amounts accounted for under interest rate swap agreements are recognized as
adjustments to interest expense.

Stock-based compensation plans (note 23)

The Company amortizes the fair value of its
stock-based awards over the requisite service period using the straight-line
attribution approach. The requisite service period is reduced for those
employees who are retirement eligible at the date of the grant or who will
become retirement eligible during the vesting period. The fair value of stock
options is determined using a Black-Scholes option pricing formula. As of
October 29, 2007, the fair values of restricted share units ("RSUs") and
deferred share units ("DSUs") are determined by multiplying the market price of
a share of AbitibiBowater common stock by the number of units (Abitibi common
stock before October 29, 2007), and remeasured at each balance sheet date.
The cumulative effect of the change in fair value is recognized in the period of
the change as an adjustment to compensation cost. Forfeitures of stock-based
awards are estimated based on historical experience and recognize compensation
cost only for those awards expected to vest. Estimated forfeitures are adjusted
to actual experience as needed. Compensation cost for performance-based awards
is recognized when it is probable that the performance criteria will be met.

Revenue recognition

The Company's sales are essentially generated from
sales of paper and wood products, which are primarily delivered to the Company's
customers directly from its mills by either truck, boat or rail and typically
have the terms free on board ("FOB") shipping point. For these sales, revenue is
typically recorded when the product leaves the mill. Sales are reported net of
allowances and rebates, and the



F-12



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



following criteria must be met before they are recognized: persuasive
evidence of an arrangement exists, delivery has occurred and the Company has no
remaining obligations, prices are fixed or determinable, and collectibility is
reasonably assured.

Translation of foreign currencies

Self-sustaining foreign operations

Assets and liabilities of self-sustaining foreign
subsidiaries and joint ventures are translated into Canadian dollars at year-end
exchange rates and the resulting unrealized exchange gains or losses are
included in accumulated other comprehensive loss in shareholders' equity.
Revenue and expense items are translated into Canadian dollars at the exchange
rate in effect on the date on which such items are recognized into earnings.

Translation of other foreign currency transactions

Monetary items denominated in foreign currency
such as foreign currency debt are translated at the year-end exchange rate. The
resulting exchange gains or losses are included in earnings of the year.
Realized gains and losses on currency options and forward exchange contracts
designated as hedges of anticipated revenues are recognized in earnings when
such revenue is earned.

Recent changes in accounting policies

Accounting changes

On January 1, 2007, the Company adopted the
Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1506,
Accounting Changes. This standard establishes criteria for changing
accounting policies, together with the accounting treatment and disclosure of
changes in accounting policies and estimates, and correction of errors.

Financial instruments

On January 1, 2007, the Company adopted CICA
Handbook Section 1530, Comprehensive Income; Section 3855,
Financial Instruments-Recognition and Measurement and Section 3865,
Hedges. These standards provide accounting guidelines for recognition and
measurement of financial assets, financial liabilities and non-financial
derivatives, and describe when and how hedge accounting may be applied.

The Company's adoption of these new Financial
Instruments standards resulted in changes in the accounting for financial
instruments and hedges, as well as the recognition of certain transition
adjustments that have been recorded in opening deficit or opening accumulated
other comprehensive loss as described below. The comparative consolidated
financial statements have not been restated other than for the foreign currency
translation adjustment, which is now disclosed within accumulated other
comprehensive loss. The principal changes in the accounting for financial
instruments and hedges due to the adoption of these accounting standards are
described below.



F-13



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



(a) Comprehensive income (loss)

Comprehensive income (loss), established under
CICA Section 1530, is defined as the change in equity, from transactions
and other events and circumstances from non-owner sources, and is composed of
the Company's net earnings (loss) and other comprehensive income (loss). Other
comprehensive income (loss) refers to revenues, expenses, gains and losses that
are recognized in comprehensive income (loss), but excluded from net earnings
(loss), and include foreign currency translation gains and losses on the net
investment in self-sustaining operations and changes in the fair market value of
derivative instruments designated as cash flow hedges, all net of income taxes.
The components of comprehensive income (loss) are disclosed in the Consolidated
Statements of Comprehensive Income (Loss).

(b) Financial assets and financial liabilities

Under the new standards, financial assets and
financial liabilities are initially recognized at fair value and are classified
into one of these five categories: held-for-trading, held-to-maturity
investments, loans and receivables, available-for-sale financial assets or other
financial liabilities. They are subsequently accounted for based on their
classification as described below. The classification depends on the purpose for
which the financial instruments were acquired and their characteristics. Except
in very limited circumstances, the classification is not changed subsequent to
initial recognition.

Held-for-trading:

Financial instruments classified as
held-for-trading are carried at fair value at each balance sheet date with the
changes in fair value recorded in net earnings (loss) in the period in which
these changes arise.

Held-to-maturity investments, loans and
receivables and other financial liabilities:

Financial instruments classified as loans and
receivables, held-to-maturity investments and other financial liabilities are
carried at amortized cost using the effective interest method. The interest
income or expense is included in net earnings (loss) over the expected life of
the instrument.

Available-for-sale:

Financial instruments classified as
available-for-sale are carried at fair value at each balance sheet date with the
changes in fair value recorded in other comprehensive income (loss) in the
period in which the changes arise. Securities that are classified as
available-for-sale and do not have a readily available market value are recorded
at cost. Available-for-sale securities are written down to fair value through
earnings (loss) whenever it is necessary to reflect other-than-temporary
impairment. Upon derecognition, all cumulative gain or loss is then recognized
in net earnings (loss).

As a result of the adoption of these new
standards, the Company has classified its cash and cash equivalents as
held-for-trading. Accounts receivable are classified as loans and receivables.
The Company's investments consist of equity accounted for investments which are
excluded from the scope of this standard. Accounts payable and accrued
liabilities, short-term debt and long-term debt, including interest payable are
classified as other liabilities, all of which are measured at amortized cost.



F-14



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



(c) Derivatives and hedge accounting

Embedded derivatives:

All derivative instruments are recorded in the
consolidated balance sheets at fair value at each balance sheet date.
Derivatives may be embedded in other financial instruments (the "host
instrument"). Prior to the adoption of the new standards, such embedded
derivatives were not accounted for separately from the host instrument. Under
the new standards, embedded derivatives are treated as separate derivatives if
their economic characteristics and risks are not clearly and closely related to
those of the host instrument, the terms of the embedded derivative are the same
as those of a stand-alone derivative, and the combined contract is not held for
trading or designated at fair value. These embedded derivatives are measured at
fair value at each balance sheet date with subsequent changes recognized in net
earnings (loss) in the period in which the changes arise. The Company selected
January 1, 2003 as its transition date for embedded derivatives, which is
the latest date that could be selected according to the accounting standard.

Hedge accounting:

At the inception of a hedging relationship, the
Company documents the relationship between the hedging instrument and the hedged
item, its risk management objective and its strategy for undertaking the hedge.
The Company also requires a documented assessment, both at hedge inception and
on an ongoing basis, of whether or not the derivatives that are used in hedging
transactions are effective in offsetting the changes attributable to the hedged
risks in the fair values or cash flows of the hedged items. Under the new
standards, all derivatives are recorded at fair value. These derivatives are
recorded in accounts receivable or accounts payable. The method of recognizing
fair value gains and losses depends on whether derivatives are held for trading
or are designated as hedging instruments, and, if the latter, the nature of the
risks being hedged. All gains and losses from changes in the fair value of
derivatives not designated as hedges are recognized in the Consolidated
Statements of Earnings (Loss). When derivatives are designated as hedges, the
Company classifies them either as: (i) hedges of the change in fair value
of recognized assets or liabilities or firm commitments (fair value hedges); or
(ii) hedges of the variability in highly probable future cash flows
attributable to a recognized asset or liability, or a forecasted transaction
(cash flow hedges).

Fair value hedge:

The Company has outstanding interest rate swap
contracts, which it designates as a fair value hedge related to variations of
the fair value of its long-term debt due to change in LIBOR interest rates.
Changes in the fair value of derivatives that are designated and qualify as fair
value hedging instruments are recorded in the Consolidated Statements of
Earnings (Loss). A corresponding adjustment amounting to changes in the fair
value of the assets, liabilities or group thereof that are attributable to the
hedged risk is recorded as an adjustment of the hedged item and to earnings. Any
gain or loss in fair value relating to the ineffective portion of the hedging
relationship is recognized immediately in "Interest expense" in the Consolidated
Statements of Earnings (Loss). If a hedging relationship no longer meets the
criteria for hedge accounting, the cumulative adjustment to the carrying amount
of the hedged item is amortized to the Consolidated Statements of Earnings
(Loss) based on a recalculated effective interest rate over the residual period
to



F-15



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



maturity, unless the hedged item has been
derecognized in which case it is released to the Consolidated Statements of
Earnings (Loss) immediately. Upon adoption of the new standards, the Company
recorded an increase in accounts payable of $37 million, and a decrease of $37
million in long-term debt.

Cash flow hedge:

The Company has outstanding options and forward
exchange contracts, which it designates as cash flow hedges of anticipated
future revenue for a maximum period of two years. The amounts and timing of
future cash flows are projected on the basis of their contractual terms and
other relevant factors, including estimates of prepayments and defaults. The
aggregate cash flows over time form the basis for identifying the effective
portion of gains and losses on the derivatives designated as cash flow hedges of
forecasted transactions. The effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow hedges is recognized in
comprehensive income (loss). Any gain or loss in fair value relating to the
ineffective portion is recognized immediately in "Sales" in the Consolidated
Statements of Earnings (Loss). Amounts accumulated in other comprehensive income
(loss) are reclassified to the Consolidated Statement of Earnings (Loss) in the
period in which the hedged item affects earnings. When a hedging instrument
expires or is sold, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss existing in accumulated other
comprehensive income (loss) at that time remains in accumulated other
comprehensive income (loss) until the forecasted transaction is eventually
recognized in the Consolidated Statements of Earnings (Loss). When it is
probable that a forecasted transaction will not occur, the cumulative gain or
loss that was reported in other comprehensive income (loss) is immediately
transferred to the Consolidated Statements of Earnings (Loss). Upon adoption of
the new standards, the Company recorded an increase in accounts payable of $10
million, an increase of $3 million of future income tax assets, and an increase
of $7 million net of taxes in accumulated other comprehensive loss.

(d) Deferred financing fees

Under the new standards, transaction costs related
to the issuance or acquisition of financial assets and liabilities (other than
those classified as held-for-trading) may be either all recognized into earnings
(loss) as incurred, or are recorded with the asset or liability to which they
are associated and amortized using the effective-interest rate method.
Previously, the Company had deferred these costs and amortized them over the
life of the related financial asset or liability.

The Company elected to recognize all such costs
into earnings (loss). As a result, the Company wrote-off deferred financing
costs of $39 million and income taxes of $5 million, resulting in a $34 million
adjustment to deficit on January 1, 2007.



F-16



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



The following table summarizes the transition
adjustments required to adopt the new standards:



|                                               |  |            |   |  |                                     |   |  |            |   |  |           |  
|---------------------------------------------- |  | ---------- | - |  | ----------------------------------- | - |  | ---------- | - |  | --------- | -
|                                               |  | Deficit    |   |  | Accumulated othercomprehensive loss |  
|                                               |  | Before tax |   |  | After tax                           |   |  | Before tax |   |  | After tax |  
|                                               |  | $          |   |  | $                                   |   |  | $          |   |  | $         |  
|Adoption of new accounting policies
      for: |  |            |   |  |                                     |   |  |            |   |  |           |  
|Deferred financing costs                       |  | (39        | ) |  | (34                                 | ) |  | -          |   |  | -         |  
|Cash flow hedges                               |  | -          |   |  | -                                   |   |  | (10        | ) |  | (7        | )
|                                               |  |            |   |  |                                     |   |  |            |   |  |           |  
|                                               |  | (39        | ) |  | (34                                 | ) |  | (10        | ) |  | (7        | )
|                                               |  |            |   |  |                                     |   |  |            |   |  |           |  

The fair value of financial instruments is
determined using price quoted on active markets, when available, and recognized
valuation models using observable market-based inputs.

Accounting principles issued but not yet implemented

Financial instruments-disclosure and presentation

In December 2006, the CICA published the following
two sections of the CICA Handbook: Section 3862, Financial
Instruments-Disclosures and Section 3863, Financial
Instruments-Presentation. These standards introduce disclosure and
presentation requirements that will enable financial statements' users to
evaluate, and enhance their understanding of the significance of financial
instruments for the entity's financial position, performance and cash flows, and
the nature and extent of risks arising from financial instruments to which the
entity is exposed, and how those risks are managed.

Capital disclosures

In December 2006, the CICA published section 1535
of the Handbook, Capital disclosures, which requires disclosure of both
qualitative and quantitative information that enables financial statements'
users to evaluate the entity's objectives, policies and processes for managing
capital.

Inventories

In January 2007, the CICA published section 3031
of the Handbook, Inventories, which prescribes the accounting treatment
for inventories. Section 3031 provides guidance on the determination of
costs and its subsequent recognition as an expense, and provides guidance on the
cost formulas used to assign costs to inventories.

Those standards must be adopted by the Company for
the fiscal year beginning on January 1, 2008. While the Company is
currently assessing the impact of these new recommendations on its financial
statements, it does not expect the recommendations to have a significant impact
on its financial position, earnings or cash flows.



F-17



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Note 4. Acquisition and Divestiture

Divestiture

On November 17, 2005, the Company completed
the sale of its 50% share ownership in Pan Asia Paper Company Pte Ltd
("PanAsia") to Norske Skogindustrier ASA of Norway for a cash consideration of
$712 million (US$600 million), less $11 million of post-closing transaction
costs, plus a cash purchase price adjustment of up to US$30 million depending on
the achievement of certain financial performance objectives in 2006. No price
adjustment has been booked as at December 31, 2007. The Company recorded a
gain of $3 million (loss of $10 million net of income taxes) related to this
transaction in "Earnings from discontinued operations" in the Consolidated
Statements of Earnings (Loss).

Acquisition

In 2005, the Company acquired the remaining 57% of
the softwood sawmill assets owned by Gestofor Inc. The sawmill is located in
Saint-Raymond de Portneuf, Québec. The results of the acquired business have
been included in the consolidated financial statements since January 1,
2005. This acquisition was accounted for using the purchase method of
accounting, whereby the total cost of the acquisitions has been allocated to the
assets acquired and to the liabilities assumed based upon their respective fair
values at the effective date of acquisition.

The fair value of net assets acquired, net
liabilities assumed or book value of net assets sold were as follows:



|                                                                         |  |                        |   |  |                            |  
|------------------------------------------------------------------------ |  | ---------------------- | - |  | -------------------------- | -
|                                                                         |  | Net assetssold in 2005 |   |  | Net assetsacquired in 2005 |  
|                                                                         |  | $                      |   |  | $                          |  
|Current assets, excluding cash and cash
      equivalents                |  | 174                    |   |  | 8                          |  
|Property, plant and equipment                                            |  | 814                    |   |  | 5                          |  
|Intangible assets                                                        |  | 5                      |   |  | 21                         |  
|Other non-current assets                                                 |  | 4                      |   |  | -                          |  
|Goodwill                                                                 |  | 75                     |   |  | -                          |  
|Current liabilities                                                      |  | (81                    | ) |  | (1                         | )
|Long-term debt                                                           |  | (346                   | ) |  | (1                         | )
|Future income tax liabilities                                            |  | (46                    | ) |  | (8                         | )
|Non-controlling interests                                                |  | (33                    | ) |  | -                          |  
|Foreign currency translation
      adjustment                            |  | 120                    |   |  | -                          |  
|                                                                         |  |                        |   |  |                            |  
|Fair value of net assets acquired or book
      value of net assets sold |  | 686                    |   |  | 24                         |  
|                                                                         |  |                       
|Consideration paid (received):                                           |  |                        |   |  |                            |  
|Cash (net of cash and cash
      equivalents)                            |  | (689                   | ) |  | 13                         |  
|Transaction costs payable                                                |  | (4                     | ) |  | -                          |  
|Book value of investment in Gestofor
      Inc.                          |  | -                      |   |  | 11                         |  
|                                                                         |  |                        |   |  |                            |  
|                                                                         |  | (693                   | ) |  | 24                         |  
|                                                                         |  |                        |   |  |                            |  



F-18



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Note 5. Closure Costs, Impairment and Other Related Charges

The following table provides the components of the
closure costs, impairment and other related charges for the years ended
December 31:



|                                                    |  |      |  |      |   |  |     
|--------------------------------------------------- |  | ---- |  | ---- | - |  | ----
|                                                    |  | 2007 |  | 2006 |   |  | 2005
|                                                    |  | $    |  | $    |   |  | $   
|Impairment of long-lived
assets                     |  | 371  |  | (7   | ) |  | 383 
|Impairment of assets held for
    sale              |  | 58   |  | -    |   |  | -   
|Severance and other labour-related
      costs      |  | 71   |  | 14   |   |  | 38  
|Contractual obligations and other
      commitments |  | 3    |  | (2   | ) |  | 10  
|                                                    |  |      |  |      |   |  |     
|                                                    |  | 503  |  | 5    |   |  | 431 
|                                                    |  |      |  |      |   |  |     

In addition, we recorded pension curtailment
charges and inventory write-downs associated with these closures. See note 21,
Employee Future Benefits, and note 12, Inventories, net, for
additional information.

The following table provides a reconciliation of
the mill closure elements provision (excluding defined benefit pension and other
benefits cost, early retirement program and labour force reductions, inventory
obsolescence, asset retirement obligations and other gains), for the years ended
December 31:



|                                                         |  |      |   |  |      |   |  |      |  
|-------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                         |  | 2007 |   |  | 2006 |   |  | 2005 |  
|                                                         |  | $    |   |  | $    |   |  | $    |  
|Mill closure elements provision, beginning
      of year |  | 7    |   |  | 38   |   |  | 17   |  
|Mill closure elements incurred during the
      year     |  | 73   |   |  | -    |   |  | 49   |  
|Mill closure elements reversed during the
      year     |  | -    |   |  | (4   | ) |  | -    |  
|Payments                                                 |  | (20  | ) |  | (27  | ) |  | (28  | )
|                                                         |  |      |   |  |      |   |  |      |  
|Mill closure elements provision, end of
      year       |  | 60   |   |  | 7    |   |  | 38   |  
|                                                         |  |      |   |  |      |   |  |      |  

The Company expects to pay most of the balance of
the provision for mill closure elements within the next twelve months.

2007

Immediately upon the Combination, AbitibiBowater
began a comprehensive strategic review of its operations to reduce costs and
improve its profitability. On November 29, 2007, AbitibiBowater announced
its decision to reduce its newsprint and specialty papers production capacity by
approximately one million metric tons per year during the first quarter of 2008.
The reductions include the permanent closure of the Company's Belgo, Québec,
Fort William, Ontario and Lufkin, Texas facilities and the indefinite idling of
the Company's Mackenzie, British Columbia facility, which includes the paper
mill and two sawmills directly supporting the paper mill operations.

In February 2008, the Company signed a definitive
agreement for the sale of its Snowflake, Arizona facility (see note 13,
Assets Held for Sale and Liabilities Associated with Assets Held for
Sale, for more information).



F-19



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Impairment of long-lived assets

In 2007, as a result of permanent closures,
indefinite idling or operating losses of certain facilities, the Company
conducted impairment tests on the Alabama River, Belgo, Bridgewater, Iroquois
Falls, Lufkin and Snowflake facilities and the "Wood Products" segment.

In testing the recoverability of a long-lived
asset, the Company relies primarily on estimates of future cash flows. This
methodology contains estimates and judgments that are subjective and uncertain,
and thus, may change over time. Several of the key assumptions include periods
of operation, projections of product pricing, production levels and sales
volumes, product costs, market supply and demand, foreign exchange rates,
inflation, weighted average cost of capital and capital spending. The Company
derives these assumptions used in its valuation models from several sources.
Many of these assumptions are derived from the Company's internal budgets, which
would include existing sales data based on current product lines and assumed
production levels, manufacturing costs and product pricing. The Company believes
that its internal forecasts are consistent with those that would be used by a
potential buyer in valuing its reporting units. The Company's products are
commodity products; therefore, pricing is inherently volatile and often follows
a cyclical pattern.

Pricing estimates and foreign exchange rates are
derived from information generated internally, from industry research firms and
from other published reports and forecasts.

The Company recorded impairment charges totalling
$371 million on its long-lived assets, relating to the permanent closure of its
Belgo ($158 million) and Lufkin ($184 million) mills and a number of other
facilities ($29 million). These facilities to be permanently closed will be
dismantled, therefore, the fair value of the closed facilities' assets was
nominal and was determined based on the estimated sale and salvage value plus
any projected cash generated from its operations through the date of closing.

For the other facilities tested, the Company
concluded that the recognition of an impairment charge was not required, as the
estimated undiscounted cash flows exceeded the book values. Certain paper mills
and sawmills are particularly sensitive to the key assumptions. Given the
inherent imprecision and corresponding importance of the key assumptions used in
the impairment test, it is reasonably possible that changes in future conditions
may lead management to use different key assumptions, which could require a
material change in the book value of these assets. The total book value of these
assets was $1,117 million, as at December 31, 2007.

Impairment of assets held for sale

In connection with the review and approval of the
Combination by the antitrust division of the U.S. Department of Justice, the
Company agreed, among other things, to sell its Snowflake newsprint mill and
certain related assets and liabilities. The Company expects to complete the sale
of this facility to Catalyst Paper Corporation in the second quarter of 2008 for
approximately $161 million, excluding certain elements of working capital of $19
million that it will retain. The Company recorded an impairment charge of $5
million on that facility's long-lived assets. Fair values were determined based
on the net realizable value of the long-lived assets consistent with the terms
of the definitive agreement for the sale of the facility. The Company also
recorded an impairment charge of $53 million relating to the goodwill allocated
to the facility (see note 16, Goodwill, for more information).



F-20



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Other elements

In 2007, the Company also recorded charges of $71
million for severance and other labour-related costs and $3 million for
contractual obligations and other commitments relating primarily to the
permanent closure of its Belgo, Fort William and Lufkin facilities and the
indefinite idling of the Mackenzie facility.

2006

In 2006, the Company recorded a net charge of $5
million mainly pertaining to the severance and other labour-related costs, which
was partly offset by a reversal of previously recorded provisions for asset
retirement obligations relating to impaired long-lived assets for the Sheldon
mill that was sold.

2005

Impairment of long-lived assets

The Company recorded an impairment charge of $215
million, mainly due to the permanent closure of its Stephenville, Newfoundland
and Kenora, Ontario newsprint mills. The book value of the property, plant and
equipment has been written down to its fair value, which represented the present
value of the estimated net proceeds from dismantling, redeployment and disposal
based on experience with the disposal of similar assets. The Company also
recognized an impairment charge of $125 million related to the property, plant
and equipment of the Lufkin paper mill as some of its long-lived assets were no
longer recoverable and exceeded their fair value. Furthermore, following the
sale of timberlands in the Thunder Bay area, in Ontario, the Company assessed
its Fort William paper mill to fair value and recognized an impairment charge of
$43 million.

Other elements

With respect to the permanent closure of the
Stephenville and Kenora newsprint mills, as well as the Champneuf, Québec
sawmill, and the closure of one paper machine at the Bridgewater paper mill, the
Company recorded charges of $38 million for severance and other labour-related
costs and $10 million for contractual obligations and other commitments.

Note 6. Net Gain on Disposition of Assets



|                                                                 |  |      |  |      |  |     
|---------------------------------------------------------------- |  | ---- |  | ---- |  | ----
|                                                                 |  | 2007 |  | 2006 |  | 2005
|                                                                 |  | $    |  | $    |  | $   
|Net gain on disposition of
      timberlands                     |  | 96   |  | -    |  | 53  
|Net gain on disposition of sawmills and
      other fixed assets |  | 2    |  | 20   |  | 5   
|                                                                 |  |      |  |      |  |     
|Net gain on disposition of
    assets                            |  | 98   |  | 20   |  | 58  
|                                                                 |  |      |  |      |  |     

In 2007, the Company recorded a net gain of $98
million on the sale of approximately 54,000 acres of timberlands and other fixed
assets for cash proceeds of $135 million. In 2006, the Company recorded a gain
on the disposal of assets relating to the closure of the Sheldon mill in 2004 of
$18 million and the Kenora mill in 2005 of $2 million for total cash proceeds of
$32 million. In 2005, the



F-21



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Company recorded a net gain of $58 million on the sale of timberlands and
other fixed assets for cash proceeds of $64 million.

Note 7. Net gain on dilution of interest in subsidiary

Net gain on dilution of interest in subsidiary

On April 1, 2007, the Company completed the
transfer of its Ontario hydroelectric assets and related water rights (the
"Facilities") to its wholly owned subsidiary called ACH Limited Partnership
("ACH LP"). On April 2, ACH LP issued new units equivalent to a 25%
interest of the partnership to the Caisse de dépôt et placement du Québec (the
"Caisse"), for gross proceeds of $48 million. This transaction resulted in a net
gain on dilution resulting from units issued by a subsidiary of $33 million,
after $11 million of transaction costs ($32 million net of income taxes). The
Caisse has also provided ACH LP with a 10-year unsecured 7.132% term loan of
$250 million, non recourse to the Company, to partially fund the acquisition of
the Facilities. ACH LP has also entered into an unsecured bank credit facility
of $15 million, for general business purposes. The facility matures on
March 31, 2010 and is non recourse to the Company. The unsecured term loan
and unsecured bank credit facility require ACH LP to meet a specific financial
ratio, which is met as at December 31, 2007.

Note 8. Other (Income) Expenses, Net



|                                                                                              |  |      |   |  |      |   |  |      |  
|--------------------------------------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                                              |  | 2007 |   |  | 2006 |   |  | 2005 |  
|                                                                                              |  | $    |   |  | $    |   |  | $    |  
|Interest income                                                                               |  | (12  | ) |  | (37  | ) |  | (17  | )
|Gain on transfer of
timberlands                                                               |  | (9   | ) |  | -    |   |  | -    |  
|Discount on sale of accounts receivable
      (note 19)                                       |  | 25   |   |  | 28   |   |  | 17   |  
|Amortization of deferred financing elements
      related to debt                             |  | -    |   |  | 7    |   |  | 13   |  
|Premium on early retirement of debt and
      other elements related to early debt retirement |  | -    |   |  | -    |   |  | 32   |  
|Other                                                                                         |  | 10   |   |  | 7    |   |  | 3    |  
|                                                                                              |  |      |   |  |      |   |  |      |  
|                                                                                              |  | 14   |   |  | 5    |   |  | 48   |  
|                                                                                              |  |      |   |  |      |   |  |      |  

Gain on transfer of timberlands

On February 23, 2007, the Company acquired
all of the timberlands from its 52.5%-owned subsidiary located in Augusta,
Georgia. As a result, the Company recorded a gain on the transfer of $9 million,
representing the 47.5% non-controlling interest's share of the gain recorded by
the subsidiary, and a non-controlling interest expense of the same amount.

Interest income

In 2006, interest income includes $32 million
related to the settlement of the softwood lumber dispute. In 2005, $11 million
of interest income was recognized in relation to tax refunds.



F-22



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Note 9. Income Taxes

a) Reconciliation of income taxes

The following table provides a reconciliation of
income taxes computed at the combined statutory rate, to income tax recovery
presented on the consolidated statements of earnings:



|                                                                                                                                                        |  |      |   |  |      |   |  |      |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                                                                                                        |  | 2007 |   |  | 2006 |   |  | 2005 |  
|                                                                                                                                                        |  | $    |   |  | $    |   |  | $    |  
|Income tax expense (recovery) based on
      combined basic Canadian federal and provincial tax rates (2007 - 32.15%,
      2006 - 33.5%, 2005 - 31.6%) |  | (249 | ) |  | 1    |   |  | (189 | )
|Manufacturing and processing
      allowances                                                                                                           |  | -    |   |  | -    |   |  | 3    |  
|Difference in tax rates for foreign
      subsidiaries                                                                                                  |  | 23   |   |  | 5    |   |  | (6   | )
|Charge (recovery) from change in tax
      rates                                                                                                        |  | (48  | ) |  | (94  | ) |  | 9    |  
|Non-taxable portion of foreign exchange gain
      and loss                                                                                             |  | (85  | ) |  | 2    |   |  | (30  | )
|Canadian large corporation tax                                                                                                                          |  | -    |   |  | -    |   |  | 6    |  
|Tax exempt items                                                                                                                                        |  | -    |   |  | -    |   |  | (50  | )
|Non-taxable portion of gain on disposal of
      capital assets                                                                                         |  | -    |   |  | -    |   |  | (11  | )
|Charges for calculation of temporary
      differences                                                                                                  |  | 21   |   |  | 12   |   |  | -    |  
|Tax benefit related to the business
      combination(1)                                                                                                |  | (106 | ) |  | -    |   |  | -    |  
|Valuation allowance                                                                                                                                     |  | 360  |   |  | -    |   |  | -    |  
|Other                                                                                                                                                   |  | 3    |   |  | (11  | ) |  | (3   | )
|                                                                                                                                                        |  |      |   |  |      |   |  |      |  
|Income tax recovery                                                                                                                                     |  | (81  | ) |  | (85  | ) |  | (271 | )
|                                                                                                                                                        |  |      |   |  |      |   |  |      |  



|(1) | As a result
      of the business combination with Bowater, the Company has been subject to
      the acquisition of control rules for Canadian tax purposes. The overall
      purpose of these rules is to recognize for tax purposes unrealized losses
      inherent in certain assets at the time of the business combination. Tax
      benefits have been recognized for such inherent losses to the extent it is
      considered more likely than not that these losses will be used to offset
      deferred tax liabilities of the Company.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-23



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



b) Components of future income tax assets and liabilities

The temporary differences that give rise to future
tax assets and liabilities at December 31 consist of the following:



|                                                          |  |      |   |  |      |  
|--------------------------------------------------------- |  | ---- | - |  | ---- | -
|                                                          |  | 2007 |   |  | 2006 |  
|                                                          |  | $    |   |  | $    |  
|Future income tax assets                                  |  |      |   |  |      |  
|Research and development expenditure
      pools          |  | 172  |   |  | 133  |  
|Loss carry forwards                                       |  | 527  |   |  | 532  |  
|Valuation allowance                                       |  | (360 | ) |  | -    |  
|                                                          |  |      |   |  |      |  
|                                                          |  | 339  |   |  | 665  |  
|                                                          |  |      |   |  |      |  
|Future income tax liabilities                             |  |      |   |  |      |  
|Property, plant and equipment and intangible
      assets |  | (315 | ) |  | (647 | )
|Long-term debt                                            |  | (196 | ) |  | (171 | )
|Other                                                     |  | (25  | ) |  | (84  | )
|                                                          |  |      |   |  |      |  
|                                                          |  | (536 | ) |  | (902 | )
|                                                          |  |      |   |  |      |  
|                                                          |  | (197 | ) |  | (237 | )
|                                                          |  |      |   |  |      |  
|Classified in the consolidated balance
      sheets as:   |  |      |   |  |      |  
|Net current future income tax
      assets                |  | -    |   |  | 70   |  
|Net non-current future income tax
      assets            |  | 8    |   |  | 322  |  
|Net non-current future income tax
      liabilities       |  | (205 | ) |  | (629 | )
|                                                          |  |      |   |  |      |  
|                                                          |  | (197 | ) |  | (237 | )
|                                                          |  |      |   |  |      |  

c) Loss carry forwards and Research and Development Expenditure Pool

During 2007, a valuation allowance in the amount
of $360 million was recorded. Based on operating losses generated by our US
operations in 2007, as well as an evaluation of available tax planning
strategies, it was determined in accordance with the CICA Handbook
Section 3465 that a valuation allowance of $344 million recorded against
our net US future tax assets was appropriate. These future tax assets consist
primarily of loss carryforwards and pension liabilities in the US. In connection
therewith, the income tax benefit ($19 million) that was generated by our
current year US operating losses was offset by the $344 million valuation
allowance recorded against the net US future tax assets, resulting in a net tax
charge of $325 million. The remaining increase in the valuation allowance for an
amount of $16 million results from the reversal of a Canadian subsidiary's net
future income tax assets for which it was determined that it was not more likely
than not that these assets will be realized.

The Company believes that it is more likely than
not that the remaining deferred tax assets will ultimately be realized.

Canadian federal and provincial tax jurisdictions

At December 31, 2007 and 2006, the Company
had Canadian federal and provincial (other than Québec) net operating loss carry
forwards of $593 million and $104 million, respectively, and Québec



F-24



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



net operating loss carry forwards of $597 million and $105 million,
respectively. During 2007, a valuation allowance was recorded in an amount of
$16 million against these net operating loss carry forwards. These loss carry
forwards expire at various dates between 2009 and 2027. In addition, $126
million of Canadian investment tax credit carry forwards expiring between 2011
and 2027 were available to reduce future income taxes.

During 2006, the Canadian tax authorities
completed the audits of the 2001 through 2005 fiscal periods for two of the
Company's major Canadian legal entities. The completion of these audits allowed
the Company to review certain discretionary tax deductions claimed in previous
years. More specifically, the Company elected to reduce for all years audited,
the amount of tax depreciation claimed and to defer the deduction of certain
research and development expenditures to future years. As a result, the Company
has significantly reduced the amount of losses carried forward for Canadian tax
purposes.

At December 31, 2007, the Company had a
Canadian federal and provincial (other than Québec) research and development
expenditure pool of $468 million (2006 - $430 million) and a Québec research and
development expenditure pool of $768 million (2005 - $435 million). These
research and development expenditure pools do not have expiry dates.

United States federal and state tax jurisdictions

At December 31, 2007 and 2006, the Company
had United States federal and state net operating loss carry forwards of $1,103
million (US$1,120 million) and $1,310 million (US$1,124 million), respectively.
During 2007, a valuation allowance was recorded in an amount of $344 million
against these net operating loss carry forwards. These loss carry forwards
expire at various dates between 2019 and 2025.

Other tax jurisdictions

At December 31, 2007 and 2006, the Company
had other tax jurisdictions net operating loss carry forwards totalling $70
million and $68 million, respectively. These loss carry forwards do not have an
expiry date.

d) Geographic information related to income taxes

Earnings (loss) from continuing operations before
income taxes arose in the following tax jurisdictions:



|         |  |      |   |  |      |   |  |      |  
|-------- |  | ---- | - |  | ---- | - |  | ---- | -
|         |  | 2007 |   |  | 2006 |   |  | 2005 |  
|         |  | $    |   |  | $    |   |  | $    |  
|Domestic |  | (663 | ) |  | (77  | ) |  | (460 | )
|Foreign  |  | (112 | ) |  | 79   |   |  | (137 | )
|         |  |      |   |  |      |   |  |      |  
|         |  | (775 | ) |  | 2    |   |  | (597 | )
|         |  |      |   |  |      |   |  |      |  



F-25



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



The income tax expense (recovery) by geographic
distribution is as follows:



|                     |  |      |   |  |      |   |  |      |  
|-------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                     |  | 2007 |   |  | 2006 |   |  | 2005 |  
|                     |  | $    |   |  | $    |   |  | $    |  
|Current income taxes |  |      |   |  |      |   |  |      |  
|Domestic             |  | 3    |   |  | (19  | ) |  | (80  | )
|Foreign              |  | 12   |   |  | 2    |   |  | 3    |  
|                     |  |      |   |  |      |   |  |      |  
|                     |  | 15   |   |  | (17  | ) |  | (77  | )
|                     |  |      |   |  |      |   |  |      |  
|Future income taxes  |  |      |   |  |      |   |  |      |  
|Domestic             |  | (404 | ) |  | (95  | ) |  | (139 | )
|Foreign              |  | 308  |   |  | 27   |   |  | (55  | )
|                     |  |      |   |  |      |   |  |      |  
|                     |  | (96  | ) |  | (68  | ) |  | (194 | )
|                     |  |      |   |  |      |   |  |      |  
|Income tax recovery  |  | (81  | ) |  | (85  | ) |  | (271 | )
|                     |  |      |   |  |      |   |  |      |  

e) Other disclosures

In the normal course of business, the Company is
subject to audits from taxation authorities. These audits may alter the timing
or amount of the taxable income or deductions. The amount ultimately reassessed
upon resolution of issues raised may differ from the amount recorded. The
Company believes that taxes recorded on the consolidated balance sheets fairly
represent the amount of future tax liability due.

Note 10. Discontinued Operations

On November 17, 2005, the Company completed
the sale of its 50% share ownership in PanAsia. Accordingly, the information
pertaining to PanAsia is no longer included on a proportionate consolidation
basis, but presented as discontinued operations in the Company's consolidated
financial statements.

Condensed earnings from discontinued operations
are as follows:



|                                                                              |  |      |  
|----------------------------------------------------------------------------- |  | ---- | -
|                                                                              |  | 2005 |  
|                                                                              |  | $    |  
|Sales                                                                         |  | 430  |  
|Operating profit                                                              |  | 33   |  
|Non-operating expenses                                                        |  | 13   |  
|Loss on disposal of business, net of income
      tax recovery of $13 million |  | (10  | )
|                                                                              |  |      |  
|Earnings from discontinued
      operations                                   |  | 3    |  
|                                                                              |  |      |  



F-26



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Condensed cash flows from discontinued operations
are as follows:



|                                                      |  |      |  
|----------------------------------------------------- |  | ---- | -
|                                                      |  | 2005 |  
|                                                      |  | $    |  
|Cash flows from operating
      activities            |  | 36   |  
|Cash flows from financing
      activities            |  | 33   |  
|Cash flows used in investing
      activities         |  | (66  | )
|                                                      |  |      |  
|Cash flows generated by discontinued
      operations |  | 3    |  
|                                                      |  |      |  

Condensed business segments from discontinued
operations are as follows:



|                            |  |     
|--------------------------- |  | ----
|                            |  | 2005
|                            |  | $   
|Newsprint                   |  |     
|Sales                       |  | 354 
|Amortization                |  | 40  
|Operating income            |  | 26  
|Additions to capital assets |  | 64  
|                            | 
|Specialty Papers            |  |     
|Sales                       |  | 76  
|Amortization                |  | 6   
|Operating income            |  | 7   
|Additions to capital assets |  | 1   

Note 11. Accumulated Other Comprehensive Loss

The following table provides the components of
"Accumulated other comprehensive loss" in the Consolidated Balance Sheets as at:



|                                                                                                                               |  |      |   |  |      |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---- | - |  | ---- | -
|                                                                                                                               |  | 2007 |   |  | 2006 |  
|                                                                                                                               |  | $    |   |  | $    |  
|Foreign currency translation
      adjustment                                                                                  |  | (444 | ) |  | (264 | )
|Unrealized gains on derivative instruments
      designated as cash flow hedges, net of taxes of $9 at December 31,
      2007 |  | 20   |   |  | -    |  
|                                                                                                                               |  |      |   |  |      |  
|                                                                                                                               |  | (424 | ) |  | (264 | )
|                                                                                                                               |  |      |   |  |      |  

Note 12. Inventories, net



|                                          |  |      |  |     
|----------------------------------------- |  | ---- |  | ----
|                                          |  | 2007 |  | 2006
|                                          |  | $    |  | $   
|Newsprint and specialty papers            |  | 137  |  | 96  
|Wood products                             |  | 78   |  | 110 
|Logs, chips and other raw
      materials |  | 146  |  | 260 
|Production and maintenance
      supplies |  | 169  |  | 217 
|                                          |  |      |  |     
|                                          |  | 530  |  | 683 
|                                          |  |      |  |     



F-27



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



In 2007, the Company recorded a $26 million charge
for inventory obsolescence in connection with its mill closures (see note 5,
Closure costs, impairment and other related charges, for more
information).

Note 13. Assets Held for Sale and Liabilities Associated with
Assets Held for Sale

Assets held for sale are comprised of the
following:



|                              |  |      |  |     
|----------------------------- |  | ---- |  | ----
|                              |  | 2007 |  | 2006
|                              |  | $    |  | $   
|Accounts receivable           |  | 2    |  | -   
|Inventories                   |  | 15   |  | -   
|Other current assets          |  | 1    |  | -   
|Property, plant and equipment |  | 156  |  | -   
|                              |  |      |  |     
|Total assets held for sale    |  | 174  |  | -   
|                              |  |      |  |     

Liabilities associated with assets held for sale
are comprised of the following:



|                                                             |  |      |  |     
|------------------------------------------------------------ |  | ---- |  | ----
|                                                             |  | 2007 |  | 2006
|                                                             |  | $    |  | $   
|Accounts payable and accrued
      liabilities               |  | 17   |  | -   
|Other long-term liabilities                                  |  | 2    |  | -   
|                                                             |  |      |  |     
|Total liabilities associated with assets
      held for sale |  | 19   |  | -   
|                                                             |  |      |  |     

In connection with the review and approval of the
Combination by the antitrust division of the U.S. Department of Justice, the
Company agreed, among other things, to sell its Snowflake newsprint mill and
certain related assets and liabilities (see note 5, Closure costs, impairment
and other related charges). The Company expects this sale to close in April
2008, once all conditions to close, including a financing condition, which is
expected to be satisfied in part by a fully backstopped rights offering, and
certain customary closing conditions, have been satisfied.

Additionally, the Company's Fort William facility
and some timberlands are being held for sale at December 31, 2007. The
Company plans to complete the sale of these assets in early 2008 for an amount
that exceeds their individual carrying values.

The assets and liabilities to be sold are carried
on the Consolidated Balance Sheets as of December 31, 2007 at the lower of
carrying value or fair value less costs to sell.



F-28



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Note 14. Property, Plant and Equipment



|                                                          |  |                                             |      |       |                         |       |              |       |      |       |                         |       |              |      
|--------------------------------------------------------- |  | ------------------------------------------- | ---- | ----- | ----------------------- | ----- | ------------ | ----- | ---- | ----- | ----------------------- | ----- | ------------ | -----
|                                                          |  | Range
      ofestimateduseful livesin years |      | 2007  |                         | 2006 
|                                                          |  |                                             | Cost |       | AccumulatedAmortization |       | NetBookValue |       | Cost |       | AccumulatedAmortization |       | NetBookValue
|                                                          |  |                                             | $    |       | $                       |       | $            |       | $    |       | $                       |       | $           
|Buildings, pulp and paper mill production
      equipment |  | 20-40                                       |      | 4,360 |                         | 2,057 |              | 2,303 |      | 6,220 |                         | 3,015 |              | 3,205
|Sawmill production equipment                              |  | 10-12                                       |      | 644   |                         | 509   |              | 135   |      | 640   |                         | 458   |              | 182  
|Woodlands, roads, timberlands, camps and
      equipment  |  | 10-20                                       |      | 251   |                         | 115   |              | 136   |      | 347   |                         | 170   |              | 177  
|Hydroelectric power plants                                |  | 40                                          |      | 558   |                         | 150   |              | 408   |      | 554   |                         | 141   |              | 413  
|Construction in progress                                  |  |                                             |      | 33    |                         | -     |              | 33    |      | 7     |                         | -     |              | 7    
|                                                          |  |                                             |      |       |                         |       |              |       |      |       |                         |       |              |      
|                                                          |  |                                             |      | 5,846 |                         | 2,831 |              | 3,015 |      | 7,768 |                         | 3,784 |              | 3,984
|                                                          |  |                                             |      |       |                         |       |              |       |      |       |                         |       |              |      

Interest expense of $1 million has been
capitalized in connection with capital projects in 2007 (nil in 2006 and 2005).
As at December 31, 2007, the net book value of idled and permanently closed
plant facilities amounted to $219 million (2006 - $273 million).

Note 15. Intangible Assets



|               |  |                                            |      |      |                         |      |              |     |      |     |                         |     |              |    
|-------------- |  | ------------------------------------------ | ---- | ---- | ----------------------- | ---- | ------------ | --- | ---- | --- | ----------------------- | --- | ------------ | ---
|               |  | Range
      ofestimatedusefullives inyears |      | 2007 |                         | 2006
|               |  |                                            | Cost |      | AccumulatedAmortization |      | NetBookValue |     | Cost |     | AccumulatedAmortization |     | NetBookValue
|               |  |                                            | $    |      | $                       |      | $            |     | $    |     | $                       |     | $           
|Water Rights   |  | 40                                         |      | 503  |                         | 97   |              | 406 |      | 503 |                         | 84  |              | 419
|Cutting Rights |  | 25-33                                      |      | 97   |                         | 60   |              | 37  |      | 97  |                         | 56  |              | 41 
|               |  |                                            |      |      |                         |      |              |     |      |     |                         |     |              |    
|               |  |                                            |      | 600  |                         | 157  |              | 443 |      | 600 |                         | 140 |              | 460
|               |  |                                            |      |      |                         |      |              |     |      |     |                         |     |              |    

Based on the current carrying value of intangible
assets subject to amortization, the estimated amortization expense will be $17
million in each year from 2008 through 2012. As acquisitions and dispositions
occur in the future, these amounts may vary.



F-29



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Note 16. Goodwill



|                                                 |  |           |   |  |                 |  |       |   |  |           |  |                 |  |      
|------------------------------------------------ |  | --------- | - |  | --------------- |  | ----- | - |  | --------- |  | --------------- |  | -----
|                                                 |  | 2007      |   |  | 2006           
|                                                 |  | Newsprint |   |  | SpecialtyPapers |  | Total |   |  | Newsprint |  | SpecialtyPapers |  | Total
|                                                 |  | $         |   |  | $               |  | $     |   |  | $         |  | $               |  | $    
|Goodwill, beginning of year                      |  | 858       |   |  | 439             |  | 1,297 |   |  | 857       |  | 439             |  | 1,296
|Goodwill allocated to assets held for
      sale |  | (53       | ) |  | -               |  | (53   | ) |  | -         |  | -               |  | -    
|Foreign exchange adjustment                      |  | (4        | ) |  | -               |  | (4    | ) |  | 1         |  | -               |  | 1    
|                                                 |  |           |   |  |                 |  |       |   |  |           |  |                 |  |      
|Goodwill, end of year                            |  | 801       |   |  | 439             |  | 1,240 |   |  | 858       |  | 439             |  | 1,297
|                                                 |  |           |   |  |                 |  |       |   |  |           |  |                 |  |      

In connection with the definitive agreement for
the sale of its Snowflake facility, goodwill associated with Snowflake of $53
million has been included in the carrying amount of the group of Snowflake
assets held for sale in determining the impairment on assets held for sale. The
amount of goodwill included in the carrying amount was based on the relative
fair values of the Snowflake facility to be disposed of, determined based on the
net realizable value of the facility's net assets consistent with the terms of
the definitive agreement for the sale of the facility, and the portion of the
Newsprint reporting unit that will be retained.

The Company has completed its annual goodwill
impairment test in the fourth quarter of 2007, prior to the Combination. The
Company has also completed another goodwill impairment test following the
Combination. There were no indications of impairment for any of the reporting
units as a result of performing the impairment tests. The Company also performed
sensitivity analyses under various scenarios and assumptions.

Testing for impairment is accomplished mainly by
determining whether the fair value of a reporting unit exceeds the book value of
the net assets of that reporting unit as at the assessment date. The Company
tests its goodwill for impairment using a two-step methodology. This two-step
methodology contains estimates and judgments that are subjective and uncertain,
and thus, may change over time.

The Company conducted the initial step of the
goodwill impairment test, consisting of making the determination of fair value,
which the Company does by relying primarily on the discounted cash flows method.
This method uses projections of cash flows from each of the reporting units.
Several of the key assumptions include periods of operation, projections of
product pricing, production levels and sales volumes, product costs, market
supply and demand, foreign exchange rates, inflation, weighted average cost of
capital and capital spending. The Company derives these assumptions used in its
valuation models from several sources. Many of these assumptions are derived
from the Company's internal budgets, which would include existing sales data
based on current product lines and assumed production levels, manufacturing
costs and product pricing. The Company believes that its internal forecasts are
consistent with those that would be used by a potential buyer in valuing its
reporting units. The Company's products are commodity products; therefore,
pricing is inherently volatile and often follows a cyclical pattern. Pricing
estimates and foreign exchange rates are derived from information generated
internally, from industry research firms and from other published reports and
forecasts.



F-30



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



The second step is performed only when the book
value exceeds the fair value. Under this scenario, a second test is performed
whereby the fair value of the reporting unit's goodwill is estimated to
determine if it is less than its book value. Fair value of goodwill is estimated
in the same manner as goodwill is determined in an acquisition, that is, the
excess of the fair value of the reporting unit over the fair value of the
identifiable net assets of the reporting unit.

The above-listed assumptions used in the
calculation models are interrelated. The continuing degree of interrelationship
of these assumptions is, in and of itself, a significant assumption. Because of
the interrelationship among these assumptions, the Company does not believe it
would be meaningful to provide additional sensitivity analysis on any of these
individual assumptions, with the exception of paper prices and WACC. Based on
the Company's most probable price outlook scenario, if trend price projections
were to decrease by US$25 per tonne, the fair value would be equal to book value
for the

"Newsprint" segment and would still exceed book
value for the "Specialty papers" segment. If the WACC, which is used to discount
the projected cash flows, was lower, the measure of the fair value of the
Company's assets would increase. Conversely, if the WACC was higher, the measure
of the fair value of the Company's assets would decrease. If the estimate of
WACC was to increase by 25 basis points, the fair values of each of the
reporting units would continue to exceed their book values amounts.

In future measurements of fair value, adverse
changes in any of these assumptions could result in an impairment of goodwill
that would require a non-cash charge to the Consolidated Statements of Earnings
(Loss) and may have a material effect on the Company's financial condition and
operating results.

Note 17. Other Assets



|                                           |  |      |  |     
|------------------------------------------ |  | ---- |  | ----
|                                           |  | 2007 |  | 2006
|                                           |  | $    |  | $   
|Research and development tax
      credits |  | 129  |  | 114 
|Deferred financing fees                    |  | -    |  | 39  
|Cash subject to restriction                |  | 24   |  | -   
|Investments                                |  | 7    |  | 10  
|Other                                      |  | 23   |  | 37  
|                                           |  |      |  |     
|                                           |  | 183  |  | 200 
|                                           |  |      |  |     

As of December 31, 2007, ACH LP had $24
million of restricted cash. Of this amount, $18 million will be used over the
next three years to realize a capital project related to the its Ontario
hydroelectric assets and related water rights and $6 million is required as
reserves under the term loan credit agreement (see note 7, Net gain on
dilution of interest in subsidiary, for more information).



F-31



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Note 18. Accounts Payable and Accrued Liabilities

The components of accounts payable and accrued
liabilities as at December 31 are as follows:



|                                                            |  |      |  |     
|----------------------------------------------------------- |  | ---- |  | ----
|                                                            |  | 2007 |  | 2006
|                                                            |  | $    |  | $   
|Trade payables                                              |  | 330  |  | 386 
|Accrued Interest                                            |  | 72   |  | 79  
|Compensated absences accrued                                |  | 69   |  | 76  
|Provision for mill closure elements (note
      5)          |  | 60   |  | 7   
|Payroll-related liabilities                                 |  | 56   |  | 65  
|Freight payable                                             |  | 22   |  | 30  
|Employee future benefits (note
    21)                      |  | 18   |  | 24  
|Payable on capital projects                                 |  | 14   |  | 15  
|Stumpage fees and silviculture
      payable                |  | 11   |  | 26  
|Income and other taxes payable                              |  | 9    |  | 17  
|Provision for asset retirement obligations
      (note 22b) |  | 8    |  | 1   
|Provision for environmental costs (note
      22b)          |  | 7    |  | 13  
|Other                                                       |  | 15   |  | 40  
|                                                            |  |      |  |     
|                                                            |  | 691  |  | 779 
|                                                            |  |      |  |     

Note 19. Short-Term Debt, Long-Term Debt and Accounts Receivable
Securitization Program

a) Short-Term Debt



|                                                                                                                                                                                                |  |      |  |     
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ----
|                                                                                                                                                                                                |  | 2007 |  | 2006
|                                                                                                                                                                                                |  | $    |  | $   
|Canadian and U.S. revolving facilities
      bearing interest at floating rates based on bankers' acceptances, prime,
      U.S. base rate or LIBOR, maturing in November and December
    2008 |  | 383  |  | -   

The revolving bank credit facilities provide $710
million of credit in two components: "Facility A" is a $510 million revolving
credit facility secured by certain fixed assets and "Facility B" is a $200
million revolving credit facility secured by certain working capital elements.
The carrying value of the secured assets is $920 million as of December 31,
2007. Amounts drawn do not require reimbursement before maturity. As at
December 31, 2007, the Company had outstanding letters of credit pursuant
to this revolving facility, for an amount of $75 million (2006 - $93 million).
The unused portion of the facilities incurs a commitment fee of 0.7%.

Since December 31, 2007, the Company borrowed
additional amounts under its revolving credit facilities.



F-32



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Financial covenants under the Company's revolving
credit facilities agreement ("credit agreement") must be maintained at the end
of each financial quarter based upon the Company's consolidated financial
results and consist of the following two ratios:



| | i. | a maximum
      ratio of net funded debt (including all advances under the Company's
      revolving credit facilities and the outstanding amount of any
      securitization programs, less cash and cash equivalents) to total
      capitalization (generally defined as equity and net funded debt) of 70%
      until December 31, 2007 and 65% thereafter; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii. | a minimum
      ratio of EBITDA (generally defined as net income, excluding extraordinary
      and non-recurring gains (or losses), gains (or losses) from assets sales
      or abandonments or reserves related thereto, and non-controlling interest
      items, plus interest expenses, plus income taxes plus amortization and
      depreciation) to interest expense of 1.50 to 1. This ratio has been
      waived, as noted below, until the end of the second quarter of 2008.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In July 2007, the Company amended its credit
agreement to waive its interest coverage ratio requirement until the end of the
second quarter of 2008 and also waived certain other provisions to permit the
reorganization and rationalization of its corporate structure.

The Company's credit agreement limits its ability
to provide financial assistance in favour of any person that is not an Abitibi
subsidiary, including its parent AbitibiBowater. However, the Company (including
its subsidiaries) may (1) pay dividends or make other distributions to its
shareholders and (2) guarantee the funded debt of any other person (certain
subsidiaries of the Company are restricted however in their ability to incur
funded debt and to guarantee funded debt of other persons).

Although the Company is in compliance with its net
funded debt to total capitalization covenant under its credit agreement at
December 31, 2007, there can be no assurance that it will remain in
compliance in the near term in light of the factors discussed above and the
Company's forecast of continued operating losses. Based on current forecasts,
the Company expects to be in default with its net funded debt to total
capitalization covenant to be measured as of the end of the first quarter of
2008, however, the Company has developed a refinancing plan to address the
upcoming debt maturities which, if successful, will replace the current
covenants. Failure to comply with the financial or other covenants of the credit
facilities, or failure to refinance the debt as planned, could result in the
outstanding borrowings under these facilities becoming immediately due and
payable (unless the lenders waive any resulting event of default).

ACH LP entered into an unsecured $15 million
credit facility, which requires ACH LP to meet a specific financial ratio.



F-33



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



b) Long-Term Debt



|                                                                                                                                                                                                |  |       |  |      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | -----
|                                                                                                                                                                                                |  | 2007  |  | 2006 
|                                                                                                                                                                                                |  | $     |  | $    
|Recourse                                                                                                                                                                                        |  |       |  |      
|Canadian and U.S. revolving facilities
      bearing interest at floating rates based on bankers' acceptances, prime,
      U.S. base rate or LIBOR, maturing in November and December
    2008 |  | -     |  | 193  
|US$15 million 6.95% notes matured on
      December 15, 2006                                                                                                                                    |  | -     |  | -    
|US$61 million 7.625% notes due May 15,
      2007                                                                                                                                               |  | -     |  | 71   
|US$196 million 6.95% notes due April 1,
      2008                                                                                                                                              |  | 193   |  | 223  
|US$150 million 5.25% notes due June 20,
      2008                                                                                                                                              |  | 148   |  | 175  
|US$150 million 7.875% notes due
      August 1, 2009                                                                                                                                            |  | 148   |  | 173  
|US$395 million 8.55% notes due
      August 1, 2010                                                                                                                                             |  | 388   |  | 460  
|US$200 million 7.75% notes due June 15,
      2011                                                                                                                                              |  | 205   |  | 233  
|US$200 million, three-month LIBOR plus 3.5%
      floating-rate notes due June 15, 2011                                                                                                         |  | 200   |  | 233  
|US$350 million 6.00% notes due June 20,
      2013                                                                                                                                              |  | 350   |  | 408  
|US$450 million 8.375% notes due
      April 1, 2015                                                                                                                                             |  | 449   |  | 524  
|CAD $250 million 7.132% term loan due
      March 31, 2017(1)                                                                                                                                   |  | 250   |  | -    
|US$100 million 7.40% debentures due
      April 1, 2018                                                                                                                                         |  | 87    |  | 102  
|US$250 million 7.50% debentures due
      April 1, 2028                                                                                                                                         |  | 204   |  | 244  
|US$250 million 8.50% debentures due
      August 1, 2029                                                                                                                                        |  | 235   |  | 276  
|US$450 million 8.85% debentures due
      August 1, 2030                                                                                                                                        |  | 449   |  | 524  
|Other recourse debt                                                                                                                                                                             |  | 14    |  | 14   
|Non-recourse (9.2% amortized loan maturing
      April 1, 2023)(2)                                                                                                                              |  | 23    |  | 24   
|                                                                                                                                                                                                |  |       |  |      
|                                                                                                                                                                                                |  | 3,343 |  | 3,877
|Less: Due within one year                                                                                                                                                                       |  | 342   |  | 72   
|                                                                                                                                                                                                |  |       |  |      
|                                                                                                                                                                                                |  | 3,001 |  | 3,805
|                                                                                                                                                                                                |  |       |  |      



|(1) | Term loan,
      non recourse to the Company, which requires ACH LP to meet a specific
      financial ratio.
|--- | -------------------------------------------------------------------------------------------------------------

|(2) | Amortized
      loan, non recourse to the Company, secured by the assets of Star Lake
      Hydro Partnership.
|--- | --------------------------------------------------------------------------------------------------------------

c) Scheduled long-term debt repayments



|           |  |      
|---------- |  | -----
|           |  | $    
|2008       |  | 342  
|2009       |  | 153  
|2010       |  | 393  
|2011       |  | 409  
|2012       |  | 4    
|Thereafter |  | 2,042
|           |  |      
|           |  | 3,343
|           |  |      



F-34



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



d) Fair value of long-term debt

The estimated fair value of the long-term debt as
at December 31, 2007 is at $3,084 million (2006 - $3,499 million) and
has been determined based on management's best estimate of the fair value to
renegotiate debt with similar terms at December 31, 2007.

e) Accounts Receivable Securitization Program

Abitibi has historically sold most of its trade
accounts receivable through two securitization programs in order to reduce
working capital requirements. Under the programs, outstanding proceeds as at
December 31, 2007 were $341 million out of total trade receivables sold of
$489 million for a difference of $147 million, which is included in "Accounts
receivable" in the Consolidated Balance Sheets (2006 - $433 million out of total
trade receivables sold of $588 million for a difference of $155 million).
Accounts receivable are sold at discounted amounts based on the securitization
provider's funding cost plus a margin. The Company acts as a service agent and
administers the collection of the accounts receivable sold pursuant to these
agreements. Since the fees received for servicing the accounts receivable
approximate the value of services rendered, no servicing asset or liability has
been recorded. The amount that can be obtained under the accounts receivable
securitization programs depends on the amount and nature of the accounts
receivable available to be sold.

In January 2008, one of those programs, which was
uncommitted, was terminated and the other, which is committed, was amended to
incorporate the receivables of the other and its maturity date was reset so that
the Company now maintains an ongoing securitization program committed until July
2009 to obtain aggregate proceeds of up to $350 million from accounts
receivable, pursuant to sale agreements.

The net cash paid during the year, $32 million
(2006 - $27 million paid, 2005 - $29 million received), is presented as a change
in non-cash operating working capital components in the Consolidated Statements
of Cash Flows. The net charge during the year is included in "Other expenses
(income)" in the Consolidated Statements of Earnings (Loss).

Note 20. Financial Instruments and Risk Management

The Company utilizes certain derivative
instruments to enhance its ability to manage risk relating to cash flow
exposures. Derivative instruments are entered into for periods consistent with
related underlying cash flow exposures and do not constitute positions
independent of those exposures. The Company does not enter into contracts for
speculative purposes; however, it does, from time to time enter into interest
rate, commodity and currency derivative contracts that are not accounted for as
accounting hedges.

For derivatives that qualify for hedge accounting,
the Company designates the derivative as a hedge at its inception. The Company
formally documents all relationships between the hedging instruments and the
hedged items, as well as its risk management objectives and strategies for
undertaking the various hedge transactions. The Company links all hedges that
are designated as cash flow hedges to forecasted transactions. Under the terms
of its risk management policy, the Company may enter into derivative contracts
to hedge forecasted transactions for a period not to exceed two years. The
Company also assesses, both at the inception of the hedge and on an on-going
basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting



F-35



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



changes in cash flows of the hedged items. If it is determined that a
derivative is no longer highly effective as a hedge, we discontinue hedge
accounting prospectively.

Canadian dollar and U.S. dollar forward contracts and U.S. dollar zero
cost tunnels

The Company generates a significant portion of its
sales in U.S. dollars. To reduce its exposure to U.S.-Canadian dollar exchange
rate fluctuations, the Company has periodically entered into and has designated
forward contracts and tunnel contracts to hedge certain of the forecasted U.S.
dollar cash inflows, which the Company believes are probable of occurring. Hedge
ineffectiveness associated with these forward contracts was negligible for the
periods presented.

Interest rate swaps

The Company utilizes interest rate swaps to manage
its fixed and floating interest rate mix on its recourse debt portfolio and
related cost of borrowing whereby it is committed to exchange with the
contracting parties, at specific intervals, the difference between the fixed and
floating interest rates calculated by reference to the notional amounts.
Interest expense on the debt is adjusted to include payments made or received
under these agreements.

Monetization of Financial Instrument

The Company's foreign exchange instruments were in
a substantial gain position at the date of the Combination due to the
strengthening of the Canadian dollar against the U.S. dollar. In November 2007,
the Board authorized the monetization of the Company's forward exchange and
tunnel contracts. The Company completed the monetization of these derivative
instruments in 2007 and, as a result, received cash proceeds of approximately
$30 million upon the termination of certain of these contracts. For those
contracts that were not terminated, the Company entered into offsetting currency
contracts to effectuate the monetization. The change in fair value of the
contracts up to the date of the monetization has been recorded in "Accumulated
Other Comprehensive Loss".

Information regarding the Company's outstanding
contracts' notional amount, fair market value, and range of rates is summarized
in the table below. The fair value of our derivative financial instruments is
based on current termination values or quoted market prices of comparable
contracts.



F-36



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



The notional amount of these contracts represents
the amount to be purchased or sold at maturity and does not represent our
exposure on these contracts.



|                                            |  |                                          |  |                                    |   |  |                                                             
|------------------------------------------- |  | ---------------------------------------- |  | ---------------------------------- | - |  | ------------------------------------------------------------
|                                            |  | NotionalAmount
      ofDerivatives($USD) |  | Asset/(Liability)Fair Market Value |   |  | Range of Interest Ratesand U.S.$ in
      CDN$Exchange Rates
|As of December 31,
      2007:              |  |                                          |  |                                    |   |  |                                                             
|Foreign Currency Exchange
      Agreements: |  |                                          |  |                                    |   |  |                                                             
|Buy US dollars due in 2008                  |  | 70                                       |  | 6                                  |   |  | 1.1988 - 1.0478                                             
|Sell US dollars due in 2008                 |  | 70                                       |  | (1                                 | ) |  | 1.1988
      - 1.0049                                       
|Interest Rate Swaps(1)                      |  | 800                                      |  | (4                                 | ) |  | 2.53 -
      4.73                                           
|                                            |  |                                          | 
|As of December 31,
      2006:              |  |                                          |  |                                    |   |  |                                                             
|Foreign Currency Exchange
      Agreements: |  |                                          |  |                                    |   |  |                                                             
|Buy US dollars due in 2007                  |  | 632                                      |  | (9                                 | ) |  | 1.1792
      - 1.1000                                       
|Interest Rate Swaps(1)                      |  | 800                                      |  | (37                                | ) |  | 2.53 -
      4.73                                           



|(1) | The interest
      rate swap contracts are only on a portion of the Company's debt portfolio
      and mature in the years 2008 through 2011.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------



|                                            |  |                                           |  |                                    |   |  |                                            
|------------------------------------------- |  | ----------------------------------------- |  | ---------------------------------- | - |  | -------------------------------------------
|                                            |  | NotionalAmount
      ofDerivatives(Euros) |  | Asset/(Liability)Fair Market Value |   |  | Range of Euro $ in CDN$Exchange
      Rates
|As of December 31,
      2007:              |  |                                           |  |                                    |   |  |                                            
|Foreign Currency Exchange
      Agreements: |  |                                           |  |                                    |   |  |                                            
|Buy Euro dollars due in 2008                |  | -                                         |  | -                                  |   |  | -                                          
|                                            |  |                                           | 
|As of December 31, 2006:                    |  |                                           |  |                                    |   |  |                                            
|Foreign Currency Exchange
      Agreements: |  |                                           |  |                                    |   |  |                                            
|Buy Euro dollars due in 2007                |  | 60                                        |  | (1                                 | ) |  | 1.5000 - 1.5553                            

The counterparties to our derivative financial
instruments are substantial and creditworthy multi-national financial
institutions. The risk of counterparty non-performance is considered to be
remote.

Credit risk management

The Company is exposed to credit risk on the
accounts receivable from its customers. In order to manage its credit risk, the
Company has adopted policies, which include the analysis of the financial
position of its customers and the regular review of their credit limits. The
Company also subscribes to credit insurance and, in some cases, requires bank
letters of credit. As a result, the Company does not have significant exposure
to any individual customer. Its customers are mainly in the newspaper
publishing, commercial printing, paper converting, advertising and lumber
wholesaling and retailing businesses.

The Company is exposed to credit risk on the
favourable fair value of its derivative financial instruments. In order to
mitigate that risk, the Company contracts its derivative financial instruments
with credit-worthy financial institutions and sets a limit on a percentage basis
that it can contract with any given financial institution.



F-37



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Fair value of financial instruments

The book value of the Company's other financial
instruments, namely cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates their fair value because of the
short-term maturities of these items.

The differences between the carrying and the fair
value of financial instruments contracted by the Company arise in part, from
changes in interest and exchange rates between the inception dates of these
contracts and the balance sheet date. The effect on the financial statements may
vary depending on future changes in interest and exchange rates. See note 19,
Short- Term Debt, Long-Term Debt and Accounts Receivable Securitization
Program, for a comparison of the carrying and the fair value of the
Company's long-term debt.

Note 21. Employee Future Benefits

a) Defined contribution plans

The Company contributes to several defined
contribution, multi-employer and 401(k) plans. The pension expense under these
plans is equal to the Company's contribution. The 2007 pension expense was $14
million (2006 - $15 million, 2005 - $14 million).

b) Defined benefit plans

The Company maintains contributory defined benefit
pension plans covering certain groups of employees. The Company has an
obligation to ensure that these plans have sufficient funds to pay the benefits
earned. These plans provide pensions based on length of service and final
average employee earnings. The pension expense and the obligation related to the
defined benefit plans are actuarially determined using management's most
probable assumptions.

c) Other benefit plans

The Company provides other benefit plans
consisting of group health care and life insurance benefits to eligible retired
employees and their dependents. The other benefit expense and the obligation
related to the other benefit plans are actuarially determined using management's
most probable assumptions.

d) Description of fund assets

The assets of the pension plans are held by an
independent custodian and are accounted for separately in the Company's pension
funds. The pension plan target percentage allocations and weighted average asset
allocations as at December 31, by asset category, are as follows:



|                            |  |                    |  |       |  |      
|--------------------------- |  | ------------------ |  | ----- |  | -----
|                            |  | TargetAllocation % |  | 2007% |  | 2006%
|Debt securities             |  | 50                 |  | 53    |  | 47   
|Equity and other securities |  | 50                 |  | 47    |  | 53   
|                            |  | 100                |  | 100   |  | 100  



F-38



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



e) Funding policy

The Company makes contributions that are required
to provide for benefits earned in the year and fund past service obligations
over periods not exceeding those permitted by the applicable regulatory
authorities.

The Company's funding policy is in accordance with
the regulatory authorities' requirements and is determined by actuarial
valuation conducted at least on a triennial basis for Canadian and United
Kingdom pension plans and annually for U.S. pension plans. With regards to all
pension plans, the latest actuarial valuations were conducted as at
December 31, 2006 for plans representing approximately 89% of the total
plan obligations, as at December 31, 2005 for plans representing
approximately 5% of the total plan obligations, and at different dates between
December 31, 2004 and December 31, 2005 for the remaining plans.

These valuations indicated a funding deficit at
that time. Total cash contributions for all the Company's defined benefit
pension plans are expected to be approximately $169 million in 2008 compared to
$193 million paid in 2007 (2006 - $206 million).

f) Investment policy

The Company's investment strategy for pension
plans is to maximize the long-term rate of return on plan assets within an
acceptable level of risk in order to secure the Company's obligation to pay
pension benefits to qualifying employees while minimizing and stabilizing
pension expense and contributions. The asset allocation for each plan is
reviewed periodically and rebalancing toward target asset mix is made when asset
classes fall outside of a predetermined range. Risk is managed for each
plan through diversification of asset classes, specific constraints imposed
within asset classes, annual review of the investment policies to assess the
need for changes, and monitoring of fund managers for compliance with mandates
as well as performance measurement. A series of permitted and prohibited
investments are listed in the Company's respective investment policies. The
policy also permits the use of derivative financial instruments in its asset
allocation. Prohibited investments include investments in the equity securities
of the ultimate parent company, AbitibiBowater, or its affiliates as well as
investments in the Company's debt securities.

g) Expected return on assets assumption

The expected long-term rate of return on plan
assets is based on several factors, including input from pension managers,
consultants, and projected long-term returns on broad equity and bond indices.
Based on the target asset allocation for each asset class, the overall expected
rate of return for the portfolio is developed considering the effects of active
portfolio management and expenses paid from plan assets.



F-39



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



h) Information about the Company's defined benefit pension plans and
other benefit plans in aggregate

The following table presents the change in the
accrued benefit obligation, the change in the fair value of plan assets and the
funded status of the plans:



|                                                                      |  |                       |   |  |                     |   |  |      |   |  |      |  
|--------------------------------------------------------------------- |  | --------------------- | - |  | ------------------- | - |  | ---- | - |  | ---- | -
|                                                                      |  | Pension Benefit Plans |   |  | Other Benefit Plans |  
|                                                                      |  | 2007                  |   |  | 2006                |   |  | 2007 |   |  | 2006 |  
|                                                                      |  | $                     |   |  | $                   |   |  | $    |   |  | $    |  
|Change in accrued benefit
      obligation                            |  |                       |   |  |                     |   |  |      |   |  |      |  
|Accrued benefit obligation, beginning of
      year                   |  | 4,234                 |   |  | 4,167               |   |  | 251  |   |  | 256  |  
|Current service cost                                                  |  | 88                    |   |  | 94                  |   |  | 3    |   |  | 4    |  
|Interest cost                                                         |  | 219                   |   |  | 215                 |   |  | 12   |   |  | 13   |  
|Plan amendments                                                       |  | 4                     |   |  | 9                   |   |  | (5   | ) |  | -    |  
|Actuarial loss (gain) on accrued benefit
      obligation             |  | (161                  | ) |  | 7                   |   |  | (19  | ) |  | (6   | )
|Curtailments, settlements and special early
      retirement benefits |  | (17                   | ) |  | -                   |   |  | (25  | ) |  | -    |  
|Foreign exchange loss (gain)                                          |  | (46                   | ) |  | 15                  |   |  | (12  | ) |  | -    |  
|Benefits paid                                                         |  | (260                  | ) |  | (273                | ) |  | (16  | ) |  | (16  | )
|                                                                      |  |                       |   |  |                     |   |  |      |   |  |      |  
|Accrued benefit obligation, end of
      year                         |  | 4,061                 |   |  | 4,234               |   |  | 189  |   |  | 251  |  
|                                                                      |  |                       |   |  |                     |   |  |      |   |  |      |  
|Change in fair value of plan
      assets                             |  |                       |   |  |                     |   |  |      |   |  |      |  
|Fair value of plan assets, beginning of
      year                    |  | 3,627                 |   |  | 3,293               |   |  | -    |   |  | -    |  
|Actual return on plan assets                                          |  | 76                    |   |  | 363                 |   |  | -    |   |  | -    |  
|Employer's contributions                                              |  | 193                   |   |  | 206                 |   |  | 16   |   |  | 16   |  
|Plan participants'
    contributions                                  |  | 27                    |   |  | 28                  |   |  | -    |   |  | -    |  
|Benefits paid                                                         |  | (260                  | ) |  | (273                | ) |  | (16  | ) |  | (16  | )
|Settlement                                                            |  | (5                    | ) |  | -                   |   |  | -    |   |  | -    |  
|Foreign exchange gain (loss) and
      other                          |  | (33                   | ) |  | 10                  |   |  | -    |   |  | -    |  
|                                                                      |  |                       |   |  |                     |   |  |      |   |  |      |  
|Fair value of plan assets, end of
      year                          |  | 3,625                 |   |  | 3,627               |   |  | -    |   |  | -    |  
|                                                                      |  |                       |   |  |                     |   |  |      |   |  |      |  
|Funded status of the
    plans                                        |  |                       |   |  |                     |   |  |      |   |  |      |  
|Funded status of the plans
      (deficit)                            |  | (436                  | ) |  | (607                | ) |  | (189 | ) |  | (251 | )
|Unrecognized prior service
cost                                       |  | 75                    |   |  | 96                  |   |  | 12   |   |  | 24   |  
|Unrecognized actuarial loss                                           |  | 740                   |   |  | 837                 |   |  | 16   |   |  | 64   |  
|Other components                                                      |  | 2                     |   |  | 2                   |   |  | 1    |   |  | 1    |  
|                                                                      |  |                       |   |  |                     |   |  |      |   |  |      |  
|Net amount recognized in balance
      sheets                         |  | 381                   |   |  | 328                 |   |  | (160 | ) |  | (162 | )
|                                                                      |  |                       |   |  |                     |   |  |      |   |  |      |  
|Included in:                                                          |  |                       |   |  |                     |   |  |      |   |  |      |  
|Accrued pension benefit asset                                         |  | 500                   |   |  | 452                 |   |  | -    |   |  | -    |  
|Accounts payable and accrued
      liabilities                        |  | (3                    | ) |  | (7                  | ) |  | (15  | ) |  | (17  | )
|Pension and other postretirement benefit
      obligations            |  | (116                  | ) |  | (117                | ) |  | (145 | ) |  | (145 | )



F-40



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



The following table presents defined benefit
pension plans and other benefit plans for which the accrued benefit obligation
is in excess of fair value of plan assets:



|                           |  |                       |  |                     |  |      |  |     
|-------------------------- |  | --------------------- |  | ------------------- |  | ---- |  | ----
|                           |  | Pension Benefit Plans |  | Other Benefit Plans
|                           |  | 2007                  |  | 2006                |  | 2007 |  | 2006
|                           |  | $                     |  | $                   |  | $    |  | $   
|Accrued benefit obligation |  | 3,409                 |  | 4,021               |  | 189  |  | 251 
|Fair value of plan assets  |  | 2,934                 |  | 3,395               |  | -    |  | -   
|                           |  |                       |  |                     |  |      |  |     
|                           |  | 475                   |  | 626                 |  | 189  |  | 251 
|                           |  |                       |  |                     |  |      |  |     

i) Components of periodic cost for defined benefit pension and other
benefit plans

The following table presents the periodic cost for
the defined benefit pension plans:



|                                                                                                                                   |  |      |   |  |      |   |  |      |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                                                                                   |  | 2007 |   |  | 2006 |   |  | 2005 |  
|                                                                                                                                   |  | $    |   |  | $    |   |  | $    |  
|Current service cost, net of participant
      contributions                                                                       |  | 61   |   |  | 66   |   |  | 55   |  
|Interest cost                                                                                                                      |  | 219  |   |  | 215  |   |  | 222  |  
|Actual return on assets                                                                                                            |  | (76  | ) |  | (363 | ) |  | (350 | )
|Plan amendments                                                                                                                    |  | 4    |   |  | 9    |   |  | 10   |  
|Recognized actuarial loss on accrued benefit
      obligation                                                                      |  | (161 | ) |  | 7    |   |  | 354  |  
|Settlement, curtailment and special early
      retirement                                                                         |  | (12  | ) |  | -    |   |  | 16   |  
|                                                                                                                                   |  |      |   |  |      |   |  |      |  
|Benefit costs before adjustments to
      recognize the long-term nature of plans                                                  |  | 35   |   |  | (66  | ) |  | 307  |  
|                                                                                                                                   |  |      |  
|Adjustments to recognize the long-term
      nature of plans:                                                                      |  |      |   |  |      |   |  |      |  
|Difference between expected return and
      actual return on plan assets                                                          |  | (159 | ) |  | 132  |   |  | 123  |  
|Difference between actuarial loss recognized
      for year and actual actuarial loss on accrued benefit obligation for
      year |  | 247  |   |  | 55   |   |  | (323 | )
|Difference between amortization of past
      service costs for year and actual plan amendments for year                           |  | 21   |   |  | 4    |   |  | 3    |  
|                                                                                                                                   |  |      |   |  |      |   |  |      |  
|Defined benefit pension cost
      recognized                                                                                      |  | 144  |   |  | 125  |   |  | 110  |  
|                                                                                                                                   |  |      |   |  |      |   |  |      |  



F-41



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



The following table presents the periodic cost for
the other benefit plans:



|                                                                                                                                   |  |      |   |  |      |   |  |      |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                                                                                   |  | 2007 |   |  | 2006 |   |  | 2005 |  
|                                                                                                                                   |  | $    |   |  | $    |   |  | $    |  
|Current service cost, net of participant
      contributions                                                                       |  | 3    |   |  | 4    |   |  | 3    |  
|Interest cost                                                                                                                      |  | 12   |   |  | 13   |   |  | 13   |  
|Plan amendments                                                                                                                    |  | (5   | ) |  | -    |   |  | 20   |  
|Actuarial loss (gain) on accrued benefit
      obligation                                                                          |  | (19  | ) |  | (6   | ) |  | 23   |  
|Curtailment and special early
      retirement                                                                                     |  | (25  | ) |  | -    |   |  | -    |  
|                                                                                                                                   |  |      |   |  |      |   |  |      |  
|Benefit costs before adjustments to
      recognize the long-term nature of plans                                                  |  | (34  | ) |  | 11   |   |  | 59   |  
|                                                                                                                                   |  |      |  
|Adjustments to recognize the long-term
      nature of plans:                                                                      |  |      |   |  |      |   |  |      |  
|Difference between actuarial loss recognized
      for year and actual actuarial loss on accrued benefit obligation for
      year |  | 46   |   |  | 10   |   |  | (20  | )
|Difference between amortization of past
      service costs for year and actual plan amendments for year                           |  | 10   |   |  | 3    |   |  | (19  | )
|                                                                                                                                   |  |      |   |  |      |   |  |      |  
|Defined benefit cost
recognized                                                                                                    |  | 22   |   |  | 24   |   |  | 20   |  
|                                                                                                                                   |  |      |   |  |      |   |  |      |  

j) Events Impacting Net Periodic Benefit Cost for the Year Ended
December 31, 2007

In November 2007, the Company announced the
permanent closure of its Belgo and Fort William facilities (Note 5. Closure
Costs, Impairment and Other Related Charges). In December 2007, the Company
announced the termination of certain non-union employees. In December 2007, the
Company also announced that benefits under two of its non-union defined benefit
plans would be frozen at December 31, 2007 for some employees and at
March 31, 2008 and January 1, 2009 for others. As a result,
curtailment losses of $11 million and special termination benefits of $2 million
were included in net periodic benefit cost of the pension plans.

In December 2007, the Company announced that
benefits under certain of its OPEB plans will be eliminated for most employees.
As a result, a curtailment loss of $1 million was included in net periodic
benefit cost of the OPEB plans.

In December 2007, certain employees received
lump-sum or change of control payouts from the Company's U.S. Supplemental
Executive Retirement Plan. Accordingly, settlement losses of $1 million and
special termination benefits of $1 million were included in net periodic benefit
cost of the pension plans.



F-42



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



k) Measurement date and assumptions

The Company uses December 31 as the
measurement date for all the defined benefit pension plans and other benefit
plans. Weighted average assumptions used to determine net defined benefit plan
and other benefit costs for the years ended as at December 31, were as
follows:



|                                               |  |      |  |      |  |     
|---------------------------------------------- |  | ---- |  | ---- |  | ----
|                                               |  | 2007 |  | 2006 |  | 2005
|                                               |  | %    |  | %    |  | %   
|Discount rate                                  |  | 5.20 |  | 5.25 |  | 6.00
|Expected long-term return on plan
      assets |  | 6.90 |  | 7.00 |  | 7.25
|Rate of compensation increase                  |  | 2.50 |  | 3.10 |  | 3.10

Weighted average assumptions used to determine
benefit obligations as of December 31, were as follows:



|                              |  |      |  |     
|----------------------------- |  | ---- |  | ----
|                              |  | 2007 |  | 2006
|                              |  | %    |  | %   
|Discount rate                 |  | 5.60 |  | 5.25
|Rate of compensation increase |  | 2.40 |  | 3.10

Assumed health care cost trend rate for other
benefit plans as of December 31, was as follows:



|                                                                     |  |      |  |     
|-------------------------------------------------------------------- |  | ---- |  | ----
|                                                                     |  | 2007 |  | 2006
|                                                                     |  | %    |  | %   
|Initial health care cost trend
      rate                            |  | 8.31 |  | 9.75
|Cost trend rate declines to                                          |  | 5.00 |  | 6.13
|Year that the rate reaches the rate it is
      assumed to remain at |  | 2010 |  | 2014

l) Sensitivity analysis

Assumed health care cost trend rate has an effect
on the amounts reported for the other benefit plans. A one-percentage-point
increase or decrease in assumed health care trend rate would have the following
impact on:



|                           |  |                     |  |                     |  
|-------------------------- |  | ------------------- |  | ------------------- | -
|                           |  | Increaseof
      1% |  | Decreaseof
      1% |  
|                           |  | $                   |  | $                   |  
|Net periodic benefit cost  |  | 1                   |  | (1                  | )
|Accrued benefit obligation |  | 12                  |  | (11                 | )



F-43



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



m) Expected benefit payments

Benefit payments, which reflect expected future
service, as appropriate, are expected to be paid as follows for the years ending
December 31:



|          |  |                 |  |               |  |                        
|--------- |  | --------------- |  | ------------- |  | -----------------------
|          |  | PensionBenefits |  | OtherBenefits |  | ExpectedSubsidyReceipts
|          |  | $               |  | $             |  | $                      
|2008      |  | 239             |  | 15            |  | -                      
|2009      |  | 240             |  | 15            |  | -                      
|2010      |  | 241             |  | 15            |  | 1                      
|2011      |  | 249             |  | 15            |  | 1                      
|2012      |  | 337             |  | 15            |  | 1                      
|2013-2017 |  | 1,458           |  | 74            |  | 3                      

In 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 was passed, which introduced amongst
others, a federal subsidy to sponsors of retiree health care benefit plans
offering a prescription drug program comparable to Medicare's drug program. The
FASB issued, in 2004, the FASB Staff Position 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003, which requires employers who sponsor
post-retirement health care plans that provide drug benefits to provide some
disclosures as to the expectation of the subsidy that will be received. This
only applies to the Company's US other benefit plans.

The estimates are based on assumptions about
future events. Actual benefit payments may vary significantly from these
estimates.

Note 22. Commitments and Contingencies

a) Contingencies

In the normal course of business activities, the
Company is subject to a number of claims and legal actions that may be made by
customers, suppliers and others in respect of which either an adequate provision
has been made or for which no material liability is expected.

Although the Company considers the provision to be
adequate for all its outstanding and pending claims, the final outcome with
respect to actions outstanding or pending as at December 31, 2007, or with
respect to future claims, cannot be predicted with certainty. It is management's
opinion that their resolution will not have a material adverse effect on the
Company's consolidated financial position, earnings and cash flows.

b) Environmental matters

The Company is subject to environmental laws and
regulations, enacted by Federal, Provincial, State and local authorities.

In 2007, the Company's operating expenditures for
environmental matters, which comprise air emission, effluent treatment, landfill
operation and closure, bark pile management and silviculture



F-44



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



activities, amounted to $77 million (2006 - $82 million, 2005 - $89
million). The Company made capital expenditures for environmental related
matters of $19 million in 2007 (2006 - $20 million, 2005 - $17 million) for the
improvement of effluent treatment, air emissions and remedy actions to address
environmental compliance.

While the Company believes that it has identified
costs likely to be incurred in the next several years, based on known
information, for environmental matters, the Company's ongoing efforts to
identify potential environmental concerns that may be associated with its
properties may lead to future environmental investigations. These efforts may
result in the identification of additional environmental costs and liabilities,
which cannot be reasonably estimated at this time.

Additional costs, not known or identifiable, could
be incurred for remediation efforts. Based on policies and procedures in place
to monitor environmental exposure, management believes that such additional
remediation costs would not have a material adverse effect on the Company's
consolidated financial position, earnings and cash flows.

The following table provides a reconciliation of
the environmental provision as of December 31, 2007.



|                                                                            |  |      |  
|--------------------------------------------------------------------------- |  | ---- | -
|                                                                            |  | 2007 |  
|                                                                            |  | $    |  
|Environmental provision, beginning of
      year                            |  | 19   |  
|Environmental provisions incurred during the
      year                     |  | 6    |  
|Environmental payments during the
      year                                |  | (2   | )
|                                                                            |  |      |  
|Environmental provision, end of
      year                                  |  | 23   |  
|                                                                            |  |      |  
|Consists of:                                                                |  |      |  
|Current portion, included in Accounts
      payable and accrued liabilities |  | 7    |  
|Long-term portion, included in Other
      long-term liabilities            |  | 16   |  

Provisions for environmental matters are not
discounted. The Company anticipates that most of the liability as at
December 31, 2007 will be paid out over the next five years.

The following table provides a reconciliation of
the asset retirement obligations provision as of December 31, 2007.



|                                                                            |  |      |  
|--------------------------------------------------------------------------- |  | ---- | -
|                                                                            |  | 2007 |  
|                                                                            |  | $    |  
|Asset retirement obligations provision,
      beginning of year             |  | 18   |  
|Asset retirement obligations provisions
      incurred during the year      |  | 26   |  
|Asset retirement obligations payments during
      the year                 |  | (1   | )
|                                                                            |  |      |  
|Asset retirement obligations provision, end
      of year                   |  | 43   |  
|                                                                            |  |      |  
|Consists of:                                                                |  |      |  
|Current portion, included in Accounts
      payable and accrued liabilities |  | 8    |  
|Long-term portion, included in Other
      long-term liabilities            |  | 35   |  



F-45



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



In 2007, as part of its comprehensive strategic
review, the Company announced the permanent closure of the Belgo and Lufkin
paper mills. As a result, the Company was able to estimate the fair value for
certain asset retirement obligations that were conditional upon closing of the
facilities and previously could not be estimated since the settlement date of
the obligation was indeterminate, and recorded a provision of $26 million within
the "Impairment of long-lived assets" component of "Closure costs, impairment
and other related charges" in the Consolidated Statements of Earnings (Loss).

Provisions for asset retirement obligations are
discounted. The Company anticipates that most of the liability at
December 31, 2007 will be paid out over the next five years. The Company
has also identified other asset retirement obligations that have an
indeterminate settlement date for which fair value is not reasonably estimable,
and as a result, no liability has been recorded. A liability stemming from these
asset retirement obligations will be accounted for in the period in which there
is sufficient information to set an obligation maturity schedule.

c) Commitments

In the normal course of its business activities,
the Company has commitments under various operating leases and purchase
obligations for expected cash outflows for the following years as presented
herein:



|           |  |    
|---------- |  | ---
|           |  | $  
|2008       |  | 55 
|2009       |  | 42 
|2010       |  | 37 
|2011       |  | 34 
|2012       |  | 32 
|Thereafter |  | 89 
|           |  |    
|           |  | 289
|           |  |    

Total rental expense for operating leases was $87
million in 2007, $70 million in 2006 and $63 million in 2005.

d) Indemnities

The Company has, over time, sold portions of its
business. Pursuant to these sale agreements, the Company may have to indemnify
the purchasers because of representations, guarantees and related indemnities
made by the Company on issues such as tax, environment, litigation, employment
matters or as a result of other indemnification obligations. These types of
indemnification guarantees generally extend for periods not exceeding 10 years.

The Company is unable to estimate the potential
liability for these types of indemnification guarantees as the amounts are
dependent upon the outcome of future contingent events, the nature and
likelihood of which cannot be determined at this time. However, the maximum
guarantee is not to exceed the proceeds from the disposal, accordingly, no
provisions have been recorded.

Historically, the Company has not incurred any
significant expense under such agreements.



F-46



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Note 23. Stock-Based Compensation Plans

Prior to the Combination, the Company maintained
various incentive stock plans ("pre-combination plans") that provided for grants
of Abitibi stock options, restricted stock units ("RSUs") and deferred stock
units ("DSUs") to Company directors, officers and key employees. As a result of
the Combination, the pre-combination plans have been modified and replaced with
stock options, RSUs and DSUs of AbitibiBowater ("post-combination plans"), under
substantially the same terms and conditions that existed under the
pre-combination Abitibi plans. On the Combination, outstanding grants under the
pre-combination plans have been converted into equivalent grants of
AbitibiBowater using the Abitibi exchange ratio of 0.06261.

With the exception of the stock option plans which
are described more fully below, over the last three years, including the current
year effect of the aforementioned modifications of the plans, no significant
expense was incurred for the RSU and DSU pre and post-combination plans and
there were no significant amounts payable.

Stock option plans

Prior to the Combination, the Company had stock
option plans for eligible employees and non-employee directors of the Company,
under which common shares of the Company may be purchased at a price equal to
the market price of the common shares at the grant date of the option. The right
to exercise the options generally vests over a period of four years of
continuous employment or immediately for non-employee directors of the Company.
The options can be exercised over a period not to exceed 10 years from the date
of the grant. No more grants will be made under the pre-combination plans.

The Company records stock option expense based on
the fair value-based method and during the year ended December 31, 2007,
under the pre-combination stock option plans, as described above, an amount of
$3 million (2006 - $6 million; 2005 - $8 million) was included in "Contributed
surplus" in the Consolidated Balance Sheets in conjunction with the recognition
of stock-based compensation expense. The related expense is included in
"Selling, general and administrative expenses" in the Consolidated Statements of
Earnings (Loss).

Since the Combination, benefits earned by Company
directors, officers and employees under the post-combination plans are recorded
by the Company in the Consolidated Statements of Earnings (Loss) as stock based
compensation expense with an equivalent amount now considered as contributed
surplus from the parent company, AbitibiBowater.



F-47



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



The fair value of each option granted under the
pre-combination plans during the years ended December 31, 2007, 2006 and
2005, was estimated on the granting date using the Black-Scholes option-pricing
model with the following weighted average assumptions:



|                                                            |  |      |   |  |      |   |  |      |  
|----------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                            |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Assumptions                                                 |  |      |   |  |      |   |  |      |  
|Dividend yield                                              |  | -    |   |  | 2.5  | % |  | 1.6  | %
|Volatility                                                  |  | 37.2 | % |  | 36.6 | % |  | 25.4 | %
|Risk-free interest rate                                     |  | 4.0  | % |  | 4.1  | % |  | 4.1  | %
|Expected option lives (in
    years)                        |  | 6.1  |   |  | 6.1  |   |  | 6.1  |  
|Weighted average fair value of each option
      ($/option) |  | 1.42 |   |  | 1.32 |   |  | 2.11 |  

A summary of the status of the pre-Combination
stock option plans as at December 31, 2007, 2006 and 2005, and changes
during the years ended on those dates is presented below:



|                                          |  |                               |   |      |                                           |      |                               |   |  |                                           |  |                               |   |  |                                          
|----------------------------------------- |  | ----------------------------- | - | ---- | ----------------------------------------- | ---- | ----------------------------- | - |  | ----------------------------------------- |  | ----------------------------- | - |  | -----------------------------------------
|                                          |  | 2007                          |   | 2006 |                                           | 2005
|                                          |  | Options(in millionsof shares) |   |      | Weightedaverageexerciseprice($ peroption) |      | Options(in millionsof shares) |   |  | Weightedaverageexerciseprice($ peroption) |  | Options(in millionsof shares) |   |  | Weightedaverageexerciseprice($ peroption)
|Outstanding, beginning of year            |  | 14.5                          |   |      | 11.51                                     |      | 13.6                          |   |  | 12.61                                     |  | 13.9                          |   |  | 13.61                                    
|Granted                                   |  | 1.7                           |   |      | 3.28                                      |      | 1.5                           |   |  | 4.06                                      |  | 1.4                           |   |  | 6.12                                     
|Forfeited                                 |  | (1.0                          | ) |      | 14.69                                     |      | (0.2                          | ) |  | 13.18                                     |  | (1.3                          | ) |  | 15.06                                    
|Expired                                   |  | (0.5                          | ) |      | 21.53                                     |      | (0.4                          | ) |  | 17.78                                     |  | (0.4                          | ) |  | 17.29                                    
|Converted to AbitibiBowater
      Options |  | (14.7                         | ) |      | 10.04                                     |      |                               |   |  |                                           |  |                               |   |  |                                          
|                                          |  |                               |   |      |                                           |      |                               |   |  |                                           |  |                               |   |  |                                          
|Outstanding, end of year                  |  | -                             |   |      | -                                         |      | 14.5                          |   |  | 11.51                                     |  | 13.6                          |   |  | 12.61                                    
|                                          |  |                               |   |      |                                           |      |                               |   |  |                                           |  |                               |   |  |                                          
|Options exercisable, end of
    year      |  | -                             |   |      | -                                         |      | 10.7                          |   |  | 13.19                                     |  | 9.7                           |   |  | 13.89                                    
|                                          |  |                               |   |      |                                           |      |                               |   |  |                                           |  |                               |   |  |                                          

The following tables summarize information about
AbitibiBowater stock options granted to Company employees and non-employee
directors outstanding as at December 31, 2007:



|                                     |  |                                |   |  |                                          
|------------------------------------ |  | ------------------------------ | - |  | -----------------------------------------
|                                     |  | 2007                          
|                                     |  | Options(in thousandsof shares) |   |  | Weightedaverageexerciseprice($ peroption)
|Outstanding, beginning of year       |  | -                              |   |  | -                                        
|Converted from Abitibi Options       |  | 920                            |   |  | 160.43                                   
|Forfeited                            |  | (2                             | ) |  | 211.31                                   
|                                     |  |                                |   |  |                                          
|Outstanding, end of year             |  | 918                            |   |  | 160.32                                   
|                                     |  |                                |   |  |                                          
|Options exercisable, end of
    year |  | 678                            |   |  | 190.95                                   
|                                     |  |                                |   |  |                                          



F-48



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



|                  |  |                                                 |  |                                |  |                                           |  |                                                 |  |                                          
|----------------- |  | ----------------------------------------------- |  | ------------------------------ |  | ----------------------------------------- |  | ----------------------------------------------- |  | -----------------------------------------
|                  |  | Options
      Outstanding                       |  |                                |  | Options
      Exercisable                
|                  |  | Optionsoutstanding(in thousandsof
      shares) |  | Averageremaininglife(in years) |  | Weightedaverageexerciseprice($ peroption) |  | Optionsexercisable(in thousandsof
      shares) |  | Weightedaverageexerciseprice($ peroption)
|$52.39            |  | 106                                             |  | 9                              |  | 52.39                                     |  | -                                               |  | 52.39                                    
|$64.85            |  | 96                                              |  | 8                              |  | 64.85                                     |  | 24                                              |  | 64.85                                    
|$97.75 - $155.57  |  | 86                                              |  | 7                              |  | 97.96                                     |  | 43                                              |  | 98.17                                    
|$156.84 - $170.26 |  | 82                                              |  | 6                              |  | 166.55                                    |  | 63                                              |  | 166.44                                   
|$175.21 - $187.35 |  | 132                                             |  | 5                              |  | 175.31                                    |  | 132                                             |  | 175.31                                   
|$187.99 - $195.34 |  | 103                                             |  | 3                              |  | 188.81                                    |  | 103                                             |  | 188.81                                   
|$205.40 - $212.75 |  | 120                                             |  | 4                              |  | 212.74                                    |  | 120                                             |  | 212.74                                   
|$212.83 - $227.92 |  | 93                                              |  | 2                              |  | 214.36                                    |  | 93                                              |  | 214.36                                   
|$230.00 - $295.80 |  | 100                                             |  | 1                              |  | 250.97                                    |  | 100                                             |  | 250.97                                   
|                  |  |                                                 |  |                                |  |                                           |  |                                                 |  |                                          
|                  |  | 918                                             |  | 5                              |  | 160.32                                    |  | 678                                             |  | 190.95                                   
|                  |  |                                                 |  |                                |  |                                           |  |                                                 |  |                                          

Note 24. Investments in Joint Ventures

The Company's consolidated financial position as
at December 31, 2007 and 2006 and consolidated results of operations and
cash flows for the years ended December 31, 2007, 2006, and 2005 include,
on a proportionate consolidation basis, its 51% joint venture interest in Star
Lake Hydro Partnership, and its 50% joint venture interest in each of Abitibi-LP
Engineering Wood Inc., Abitibi-LP Engineering Wood II Inc. and Produits
Forestiers Petit-Paris Inc.



|                                       |  |      |  |      |  |     
|-------------------------------------- |  | ---- |  | ---- |  | ----
|                                       |  | 2007 |  | 2006 |  | 2005
|                                       |  | $    |  | $    |  | $   
|Condensed statements of
      earnings |  |      |  |      |  |     
|Sales                                  |  | 57   |  | 65   |  | 76  
|Operating expenses                     |  | 50   |  | 57   |  | 70  
|                                       |  |      |  |      |  |     
|Operating profit                       |  | 7    |  | 8    |  | 6   
|Non-operating expenses                 |  | 4    |  | 3    |  | 3   
|                                       |  |      |  |      |  |     
|Net earnings                           |  | 3    |  | 5    |  | 3   
|                                       |  |      |  |      |  |     



|                                              |  |      |   |  |      |   |  |      |  
|--------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                              |  | 2007 |   |  | 2006 |   |  | 2005 |  
|                                              |  | $    |   |  | $    |   |  | $    |  
|Condensed statements of cash
      flows      |  |      |   |  |      |   |  |      |  
|Cash flows from operating
      activities    |  | 3    |   |  | 7    |   |  | 8    |  
|Cash flows used in financing
      activities |  | (1   | ) |  | (1   | ) |  | (1   | )
|Cash flows used in investing
      activities |  | (1   | ) |  | (1   | ) |  | (1   | )



F-49



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



|                                                                                    |  |      |  |     
|----------------------------------------------------------------------------------- |  | ---- |  | ----
|                                                                                    |  | 2007 |  | 2006
|                                                                                    |  | $    |  | $   
|Condensed balance
sheets                                                            |  |      |  |     
|Assets                                                                              |  |      |  |     
|Current assets                                                                      |  | 20   |  | 21  
|Property, plant and equipment, intangible
      assets and other non-current assets |  | 42   |  | 42  
|                                                                                    |  |     
|Liabilities                                                                         |  |      |  |     
|Current liabilities                                                                 |  | 7    |  | 8   
|Long-term debt (including current
      portion)                                    |  | 23   |  | 24  
|Other non-current liabilities                                                       |  | 1    |  | 1   

Note 25. Segment Information

The Company's reportable segments are newsprint,
specialty papers and wood products, which are based on the products the Company
manufactures and sells to external customers. The business segments are managed
separately because each segment requires different technology and marketing
strategies.

Following the Combination of the Company with
Bowater, the Company no longer allocates any of the income or loss items
following "Operating income (loss)" in the Company's Consolidated Statements of
Earnings (Loss) to the segments, since they are reviewed separately by
management. For the same reason, impairments, severance, gains on dispositions
of assets and other discretionary charges or credits are not allocated to the
segments. Head-office costs are not allocated to the segments. Share-based
compensation expense is, however, allocated to the segments. The Company also
allocates amortization expense to the segments, although the related property,
plant and equipment are not allocated to the segment assets. Only assets which
are identifiable by segment and reviewed by management are allocated to segment
assets. Allocated assets include finished goods inventory for the reportable
segments. Goodwill is also allocated to the identifiable segments and tested for
impairment annually. All other assets are not identifiable by segment and are
included in "Corporate and Other". Prior year information has been recast to
reflect the current year presentation.

The accounting policies used in each of these
business segments are the same as those described in the summary of significant
accounting policies. Inter-segment transfers of wood chips and old papers are
recorded at the exchange value, which is the amount agreed to by the parties.



F-50



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



The following tables summarize information about
segment profit and loss and segment assets for the three years ended
December 31, 2007, 2006 and 2005:

Consolidated Business Segments



|                      |  |       |  |              |  |                     |   |  |        |  |                     |  |                       
|--------------------- |  | ----- |  | ------------ |  | ------------------- | - |  | ------ |  | ------------------- |  | ----------------------
|                      |  | Sales |  | Amortization |  | Segmentincome(loss) |   |  | Assets |  | CapitalExpenditures |  | SalesVolume(unaudited)
|                      |  | $     |  | $            |  | $                   |   |  | $      |  | $                   | 
|2007                  |  |       |  |              |  |                     |   |  |        |  |                     |  |                       
|Newsprint             |  | 2,174 |  | 224          |  | (40                 | ) |  | 885    |  | 58                  |  | 3,292 a               
|Specialty Papers      |  | 1,350 |  | 146          |  | (54                 | ) |  | 493    |  | 35                  |  | 1,679
      a         
|Wood products         |  | 533   |  | 44           |  | (156                | ) |  | 78     |  | 12                  |  | 1,572 b               
|Corporate and Other   |  | 56    |  | 14           |  | (657                | ) |  | 5,116  |  | 2                   |  |                       
|                      |  |       |  |              |  |                     |   |  |        |  |                     |  |                       
|Continuing operations |  | 4,113 |  | 428          |  | (907                | ) |  | 6,572  |  | 107                 |  |                       
|                      |  |       |  |              |  |                     |   |  |        |  |                     |  |                       
|2006                  |  |       |  |              |  |                     |   |  |        |  |                     |  |                       
|Newsprint             |  | 2,579 |  | 229          |  | 235                 |   |  | 907    |  | 82                  |  | 3,486
      a         
|Specialty Papers      |  | 1,493 |  | 152          |  | (7                  | ) |  | 489    |  | 51                  |  | 1,748
      a         
|Wood products         |  | 726   |  | 47           |  | 155                 |   |  | 110    |  | 32                  |  | 1,858 b               
|Corporate and Other   |  | 53    |  | 12           |  | (56                 | ) |  | 6,593  |  | 3                   |  |                       
|                      |  |       |  |              |  |                     |   |  |        |  |                     |  |                       
|Continuing operations |  | 4,851 |  | 440          |  | 327                 |   |  | 8,099  |  | 168                 |  |                       
|                      |  |       |  |              |  |                     |   |  |        |  |                     |  |                       
|2005                  |  |       |  |              |  |                     |   |  |        |  |                     |  |                       
|Newsprint             |  | 2,837 |  | 274          |  | 100                 |   |  |        |  | 65                  |  | 3,972
      a         
|Specialty Papers      |  | 1,523 |  | 169          |  | (1                  | ) |  |        |  | 67                  |  | 1,782
      a         
|Wood products         |  | 890   |  | 51           |  | 45                  |   |  |        |  | 37                  |  | 1,965
      b         
|Corporate and Other   |  | 92    |  | 14           |  | (420                | ) |  |        |  | 8                   |  |                       
|                      |  |       |  |              |  |                     |   |  |        |  |                     |  |                       
|Continuing operations |  | 5,342 |  | 508          |  | (276                | ) |  |        |  | 177                 |  |                       
|                      |  |       |  |              |  |                     |   |  |        |  |                     |  |                       



|a) | in thousands
      of tonnes
|-- | ----------------------------

|b) | in millions
      of board feet
|-- | -------------------------------

Wood products sales exclude inter-segment sales of
$155 million in 2007 (2006 - $162 million, 2005 - $172 million).



F-51



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Specific items affecting:



|                    |              |                                                          |   |                                      |     |   |                                       |    |  |                    |   |  |                 |   |  |                    |   |  |    |   |  |      |  
|------------------- | ------------ | -------------------------------------------------------- | - | ------------------------------------ | --- | - | ------------------------------------- | -- |  | ------------------ | - |  | --------------- | - |  | ------------------ | - |  | -- | - |  | ---- | -
|                    |              | Closure costs, impairment
      andother related charges |   | Gain
      onDispositionof Assets    |     |   | OtherElements(1)                      |    |  | LumberDutiesRefund |   |  | SG&AExpenses(2) |   |  | TotalSpecificItems |  
|                    | ClosureCosts |                                                          |   | Impairmentof
      long-lived assets |     |   | Impairmenton
      assetsheld forsale |    |  |                    |   | 
|2007                |              |                                                          |   |                                      |     |   |                                       |    |  |                    |   |  |                 |   |  |                    |   |  |    |   |  |      |  
|Newsprint           |              | 3                                                        |   |                                      | -   |   |                                       | -  |  | -                  |   |  | 2               |   |  | -                  |   |  | -  |   |  | 5    |  
|Specialty Papers    |              | -                                                        |   |                                      | -   |   |                                       | -  |  | -                  |   |  | -               |   |  | -                  |   |  | -  |   |  | -    |  
|Wood products       |              | -                                                        |   |                                      | -   |   |                                       | -  |  | -                  |   |  | -               |   |  | -                  |   |  | -  |   |  | -    |  
|Corporate and Other |              | 71                                                       |   |                                      | 371 |   |                                       | 58 |  | (98                | ) |  | -               |   |  | -                  |   |  | 75 |   |  | 477  |  
|                    |              |                                                          |   |                                      |     |   |                                       |    |  |                    |   |  |                 |   |  |                    |   |  |    |   |  |      |  
|                    |              | 74                                                       |   |                                      | 371 |   |                                       | 58 |  | (98                | ) |  | 2               |   |  | -                  |   |  | 75 |   |  | 482  |  
|                    |              |                                                          |   |                                      |     |   |                                       |    |  |                    |   |  |                 |   |  |                    |   |  |    |   |  |      |  
|2006                |              |                                                          |   |                                      |     |   |                                       |    |  |                    |   |  |                 |   |  |                    |   |  |    |   |  |      |  
|Newsprint           |              | (2                                                       | ) |                                      | (7  | ) |                                       | -  |  | -                  |   |  | 3               |   |  | -                  |   |  | (6 | ) |  | (12  | )
|Specialty Papers    |              | -                                                        |   |                                      | -   |   |                                       | -  |  | -                  |   |  | -               |   |  | -                  |   |  | (3 | ) |  | (3   | )
|Wood products       |              | -                                                        |   |                                      | -   |   |                                       | -  |  | -                  |   |  | (1              | ) |  | (197               | ) |  | (2 | ) |  | (200 | )
|Corporate and Other |              | 14                                                       |   |                                      | -   |   |                                       | -  |  | (20                | ) |  | 2               |   |  | -                  |   |  | 2  |   |  | (2   | )
|                    |              |                                                          |   |                                      |     |   |                                       |    |  |                    |   |  |                 |   |  |                    |   |  |    |   |  |      |  
|                    |              | 12                                                       |   |                                      | (7  | ) |                                       | -  |  | (20                | ) |  | 4               |   |  | (197               | ) |  | (9 | ) |  | (217 | )
|                    |              |                                                          |   |                                      |     |   |                                       |    |  |                    |   |  |                 |   |  |                    |   |  |    |   |  |      |  
|2005                |              |                                                          |   |                                      |     |   |                                       |    |  |                    |   |  |                 |   |  |                    |   |  |    |   |  |      |  
|Newsprint           |              | 16                                                       |   |                                      | -   |   |                                       | -  |  | -                  |   |  | 30              |   |  | -                  |   |  | -  |   |  | 46   |  
|Specialty Papers    |              | -                                                        |   |                                      | -   |   |                                       | -  |  | -                  |   |  | -               |   |  | -                  |   |  | -  |   |  | -    |  
|Wood products       |              | -                                                        |   |                                      | -   |   |                                       | -  |  | -                  |   |  | -               |   |  | -                  |   |  | -  |   |  | -    |  
|Corporate and Other |              | 32                                                       |   |                                      | 383 |   |                                       | -  |  | (58                | ) |  | 9               |   |  | -                  |   |  | -  |   |  | 366  |  
|                    |              |                                                          |   |                                      |     |   |                                       |    |  |                    |   |  |                 |   |  |                    |   |  |    |   |  |      |  
|                    |              | 48                                                       |   |                                      | 383 |   |                                       | -  |  | (58                | ) |  | 39              |   |  | -                  |   |  | -  |   |  | 412  |  
|                    |              |                                                          |   |                                      |     |   |                                       |    |  |                    |   |  |                 |   |  |                    |   |  |    |   |  |      |  



|(1) | Other
      elements include early retirement program costs, pension and other benefit
      costs, inventory obsolescence related to closure costs and idling costs.
      These expenses are included as part of "Cost of sales" in the Consolidated
      Statements of Earnings (Loss).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | SG&A
      expenses in 2007 pertain to merger related costs. 2006 credits pertain to
      the reversal of prior years' provision of capital taxes. Amounts are
      presented in "Selling, general and administrative expenses" in the
      Consolidated Statements of Earnings (Loss).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Consolidated Geographic Segments

Property, plant and equipment, intangible assets
and goodwill by geographic manufacturing location as at December 31 are as
follows:



|                      |  |       |  |       |  |      
|--------------------- |  | ----- |  | ----- |  | -----
|                      |  | 2007  |  | 2006  |  | 2005 
|                      |  | $     |  | $     |  | $    
|Canada                |  | 3,870 |  | 4,341 |  | 4,587
|United States         |  | 609   |  | 1,147 |  | 1,192
|United Kingdom        |  | 219   |  | 253   |  | 250  
|                      |  |       |  |       |  |      
|Continuing operations |  | 4,698 |  | 5,741 |  | 6,029
|                      |  |       |  |       |  |      



F-52



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Sales by final destination for the years ended
December 31 are as follows:



|                |  |       |  |       |  |      
|--------------- |  | ----- |  | ----- |  | -----
|                |  | 2007  |  | 2006  |  | 2005 
|                |  | $     |  | $     |  | $    
|Canada          |  | 672   |  | 750   |  | 710  
|United States   |  | 2,534 |  | 3,190 |  | 3,547
|Other Countries |  | 907   |  | 911   |  | 1,085
|                |  |       |  |       |  |      
|                |  | 4,113 |  | 4,851 |  | 5,342
|                |  |       |  |       |  |      

Note 26. Differences Between Canadian and United States Generally
Accepted Accounting Principles

The Company's consolidated financial statements
have been prepared in accordance with Canadian GAAP, which differ in some
respects from US GAAP. The following are the significant differences in
accounting principles as they pertain to the consolidated financial statements.

a) Net earnings (loss) adjustments

The following table provides a reconciliation of
the net earnings (loss) under Canadian GAAP to US GAAP:



|                                                                                                    |  |      |   |  |      |   |  |      |  
|--------------------------------------------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                                                    |  | 2007 |   |  | 2006 |   |  | 2005 |  
|                                                                                                    |  | $    |   |  | $    |   |  | $    |  
|Net earnings (loss), as reported in the
      consolidated statements of earnings per Canadian GAAP |  | (714 | ) |  | 54   |   |  | (350 | )
|Adjustments                                                                                         |  |      |   |  |      |   |  |      |  
|Duplicate property
    provisions(4)                                                                |  | 2    |   |  | -    |   |  | -    |  
|Contract for the purchase of
      energy(11)                                                       |  | -    |   |  | 2    |   |  | -    |  
|Deferred financing fees(12)                                                                         |  | (7   | ) |  | -    |   |  | -    |  
|Future income taxes(13)                                                                             |  | (190 | ) |  | -    |   |  | -    |  
|Future tax effect of the above
      adjustments                                                    |  | 1    |   |  | (1   | ) |  | -    |  
|                                                                                                    |  |      |   |  |      |   |  |      |  
|Net earnings (loss), as adjusted per
      US GAAP                                                  |  | (908 | ) |  | 55   |   |  | (350 | )
|                                                                                                    |  |      |   |  |      |   |  |      |  

All numerical references in this table relate to
note 26 f).



F-53



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



b) Consolidated statements of comprehensive income (loss)

The following table presents the consolidated
statements of comprehensive income (loss) under US GAAP:



|                                                                                                                                                                                        |  |      |   |  |      |   |  |      |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                                                                                                                                        |  | 2007 |   |  | 2006 |   |  | 2005 |  
|                                                                                                                                                                                        |  | $    |   |  | $    |   |  | $    |  
|Net earnings (loss) in accordance with
      US GAAP                                                                                                                                    |  | (908 | ) |  | 55   |   |  | (350 | )
|Other comprehensive income (loss), net of
      income taxes                                                                                                                            |  |      |   |  |      |   |  |      |  
|Foreign currency translation
      adjustment(11)                                                                                                                                       |  | (179 | ) |  | 11   |   |  | (60  | )
|Reclassification adjustment to earnings upon
      business divestiture (note 4)                                                                                                        |  | -    |   |  | -    |   |  | 120  |  
|Change in unrealized gains on derivatives
      designated as cash flow hedges, net of income taxes of $23 million in 2007
      (2006 - $3 million, 2005 - $10 million)(1)             |  | 52   |   |  | 6    |   |  | 23   |  
|Reclassification to earnings of gains on
      derivatives designated as cash flow hedges, net of income taxes of $11
      million in 2007 (2006 - $17 million, 2005 - $28 million)(1) |  | (25  | ) |  | (35  | ) |  | (65  | )
|Additional minimum liability adjustment of
      defined benefit pension plans, net of income taxes of $112 million in 2006
      and $38 million in 2005)(5)                           |  | -    |   |  | 256  |   |  | (80  | )
|Change in unamortized prior service costs
      and unamortized actuarial gains, net of income taxes of $60 million in
      2007(5)                                                    |  | 110  |   |  | -    |   |  | -    |  
|                                                                                                                                                                                        |  |      |   |  |      |   |  |      |  
|Total other comprehensive income (loss), net
      of income taxes                                                                                                                      |  | (42  | ) |  | 238  |   |  | (62  | )
|                                                                                                                                                                                        |  |      |   |  |      |   |  |      |  
|Comprehensive income (loss) in accordance
      with US GAAP                                                                                                                            |  | (950 | ) |  | 293  |   |  | (412 | )
|                                                                                                                                                                                        |  |      |   |  |      |   |  |      |  

All numerical references in this table relate to
note 26 f).

c) Condensed consolidated balance sheets

The following table presents the condensed
consolidated balance sheets under Canadian and US GAAP:



|                                     |  |              |  |        |  |              |  |       
|------------------------------------ |  | ------------ |  | ------ |  | ------------ |  | ------
|                                     |  | 2007         |  | 2006  
|                                     |  | CanadianGAAP |  | USGAAP |  | CanadianGAAP |  | USGAAP
|                                     |  | $            |  | $      |  | $            |  | $     
|Assets                               |  |              |  |        |  |              |  |       
|Current assets(1,3)                  |  | 1,009        |  | 990    |  | 1,384        |  | 1,368 
|Investments(3)                       |  | 7            |  | 27     |  | 10           |  | 32    
|Assets held for sale                 |  | 174          |  | 174    |  | -            |  | -     
|Property, plant and
    equipment(3) |  | 3,015        |  | 2,982  |  | 3,984        |  | 3,950 
|Intangible assets                    |  | 443          |  | 443    |  | 460          |  | 460   
|Employee future benefits(5)          |  | 500          |  | 39     |  | 452          |  | 19    
|Future income taxes(5,13)            |  | 8            |  | 8      |  | 322          |  | 354   
|Other assets(9,12)                   |  | 176          |  | 92     |  | 190          |  | 95    
|Goodwill(4)                          |  | 1,240        |  | 1,199  |  | 1,297        |  | 1,254 
|                                     |  |              |  |        |  |              |  |       
|                                     |  | 6,572        |  | 5,954  |  | 8,099        |  | 7,532 
|                                     |  |              |  |        |  |              |  |       



F-54



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



|                                                       |  |              |  |        |  |              |  |       
|------------------------------------------------------ |  | ------------ |  | ------ |  | ------------ |  | ------
|                                                       |  | 2007         |  | 2006  
|                                                       |  | CanadianGAAP |  | USGAAP |  | CanadianGAAP |  | USGAAP
|                                                       |  | $            |  | $      |  | $            |  | $     
|Liabilities and shareholders'
      equity             |  |              |  |        |  |              |  |       
|Current liabilities(1,2,3)                             |  | 1,416        |  | 1,408  |  | 851          |  | 890   
|Liabilities associated with assets held for
      sale |  | 19           |  | 19     |  | -            |  | -     
|Long-term debt(2, 3)                                   |  | 3,001        |  | 2,978  |  | 3,805        |  | 3,745 
|Employee future benefits(5)                            |  | 261          |  | 646    |  | 262          |  | 853   
|Future income taxes(1,5,11)                            |  | 205          |  | 3      |  | 629          |  | 227   
|Other long-term
liabilities(11)                        |  | 55           |  | 71     |  | 30           |  | 47    
|Non-controlling interests(5)                           |  | 69           |  | 71     |  | 71           |  | 65    
|Shareholders'
      equity(1,4,5,11,12,13)             |  | 1,546        |  | 758    |  | 2,451        |  | 1,705 
|                                                       |  |              |  |        |  |              |  |       
|                                                       |  | 6,572        |  | 5,954  |  | 8,099        |  | 7,532 
|                                                       |  |              |  |        |  |              |  |       

All numerical references in this table relate to
note 26 f).

d) Condensed consolidated statements of cash flows

The following table presents the condensed
consolidated statements of cash flows under Canadian and US GAAP:



|                                                          |  |              |   |  |        |   |  |              |   |  |        |   |  |              |   |  |        |  
|--------------------------------------------------------- |  | ------------ | - |  | ------ | - |  | ------------ | - |  | ------ | - |  | ------------ | - |  | ------ | -
|                                                          |  | 2007         |   |  | 2006   |   |  | 2005         |  
|                                                          |  | CanadianGAAP |   |  | USGAAP |   |  | CanadianGAAP |   |  | USGAAP |   |  | CanadianGAAP |   |  | USGAAP |  
|                                                          |  | $            |   |  | $      |   |  | $            |   |  | $      |   |  | $            |   |  | $      |  
|Cash flows from (used in) operating
      activities(3,8) |  | (468         | ) |  | (465   | ) |  | 232          |   |  | 225    |   |  | 164          |   |  | 159    |  
|Cash flows from (used in) financing
      activities(3,8) |  | 390          |   |  | 391    |   |  | 27           |   |  | 28     |   |  | (789         | ) |  | (788   | )
|Cash flows from (used in) investing
      activities(3,8) |  | 7            |   |  | 8      |   |  | (123         | ) |  | (117   | ) |  | 566          |   |  | 592    |  
|Cash generated by discontinued
      operations(8)        |  | -            |   |  | -      |   |  | -            |   |  | -      |   |  | 3            |   |  | -      |  
|                                                          |  |              |   |  |        |   |  |              |   |  |        |   |  |              |   |  |        |  
|Increase (decrease) in cash and cash
      equivalents    |  | (71          | ) |  | (66    | ) |  | 136          |   |  | 136    |   |  | (56          | ) |  | (37    | )
|Currency translation adjustment on
      cash             |  | (13          | ) |  | (13    | ) |  | 5            |   |  | 5      |   |  | (4           | ) |  | (4     | )
|Cash and cash equivalents, beginning of
      year(3)     |  | 216          |   |  | 211    |   |  | 75           |   |  | 70     |   |  | 135          |   |  | 111    |  
|                                                          |  |              |   |  |        |   |  |              |   |  |        |   |  |              |   |  |        |  
|Cash and cash equivalents, end of
      year(3)           |  | 132          |   |  | 132    |   |  | 216          |   |  | 211    |   |  | 75           |   |  | 70     |  
|                                                          |  |              |   |  |        |   |  |              |   |  |        |   |  |              |   |  |        |  

All numerical references in this table relate to
note 26 f).



F-55



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



e) Condensed consolidated statements of shareholders' equity



|                                                                                                                                |  |              |   |  |        |   |  |              |   |  |        |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------ | - |  | ------------ | - |  | ------ | -
|                                                                                                                                |  | 2007         |   |  | 2006   |  
|                                                                                                                                |  | CanadianGAAP |   |  | USGAAP |   |  | CanadianGAAP |   |  | USGAAP |  
|                                                                                                                                |  | $            |   |  | $      |   |  | $            |   |  | $      |  
|Capital stock                                                                                                                   |  | 3,518        |   |  | 3,518  |   |  | 3,518        |   |  | 3,518  |  
|Contributed surplus                                                                                                             |  | 43           |   |  | 43     |   |  | 40           |   |  | 40     |  
|Deficit                                                                                                                         |  | (1,591       | ) |  | (1,808 | ) |  | (843         | ) |  | (900   | )
|Accumulated other comprehensive
      loss                                                                                      |  |              |   |  |        |   |  |              |   |  |        |  
|Foreign currency translation
      adjustment(11)                                                                               |  | (444         | ) |  | (441   | ) |  | (264         | ) |  | (263   | )
|Unrecognized actuarial gains and losses and
      past service cost on defined benefit pension and other benefit
      plans(5) |  | -            |   |  | (574   | ) |  | -            |   |  | (683   | )
|Unrealized gains (losses) on derivative
      instruments designated as cash flow hedges(1)                                     |  | 20           |   |  | 20     |   |  | -            |   |  | (7     | )
|                                                                                                                                |  |              |   |  |        |   |  |              |   |  |        |  
|Total accumulated other comprehensive
      loss                                                                                |  | (424         | ) |  | (995   | ) |  | (264         | ) |  | (953   | )
|                                                                                                                                |  |              |   |  |        |   |  |              |   |  |        |  
|Total shareholders' equity                                                                                                      |  | 1,546        |   |  | 758    |   |  | 2,451        |   |  | 1,705  |  
|                                                                                                                                |  |              |   |  |        |   |  |              |   |  |        |  

All numerical references in this table relate to
note 26 f).

f) Differences between Canadian and US GAAP

1) Currency options and forward exchange contracts

The Company has outstanding options and/or forward
exchange contracts, which it designates as cash flow hedges of anticipated
future revenue for a maximum period of two years. On January 1, 2001, under
US GAAP, the Company adopted the FASB Statement of Financial Accounting
Standards ("SFAS") 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. On January 1, 2007, the Company adopted the
Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3855,
Financial Instruments-Recognition and Measurement. This new standard
provides for recognition and measurement requirements that are harmonized with
SFAS 133 requirements, therefore the differences noted below only apply to other
comprehensive income for the years ended December 31, 2005 and 2006 and the
balance sheet as at December 31, 2006.

In accordance with SFAS 133, the Company has
recorded in its balance sheet the fair value of the options and forward exchange
contracts used to hedge a portion of the Company's revenues. Changes in the fair
value of these options and forward exchange contracts are recorded in "Other
comprehensive income (loss)", a separate component of shareholders' equity until
the underlying transaction is recorded in earnings. There were no similar fair
value recognitions under Canadian GAAP prior to January 1, 2007. When the
hedged item affects earnings, gains or losses are reclassified from "Accumulated
other comprehensive income (loss)" to the consolidated statements of earnings on
the same line as the underlying transaction ("Sales"). Any ineffective portion
of hedging derivative's change in fair value is recognized immediately into
earnings. The fair value of derivative contracts that is recognized in the
balance sheets is included in "Accounts receivable" or "Accounts payable and
accrued liabilities". Cash flows related to the derivative instruments are
included in operating activities.



F-56



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



2) Interest rate swap contracts

The Company has outstanding interest rate swap
contracts, which it designates as a fair value hedge related to variations of
the fair value of its long-term debt due to change in LIBOR interest rates.
Under Canadian GAAP, before the adoption of CICA Handbook Section 3855, on
January 1, 2007 an outstanding interest rate swap contract's fair value was
not recognized on the balance sheets. Under US GAAP under SFAS 133, and
under Canadian GAAP, since the Company adopted Section 3855, when an
interest rate swap contract is designated as an effective fair value hedge of
the debt, the swap is measured at fair value on the balance sheets and the
offset is applied to the book value of the debt. Cash flows related to the
derivative instruments are included in operating activities.

3) Joint ventures

The Company accounts for its joint venture
investments using the proportionate consolidation method. Under US GAAP,
these joint ventures would be accounted for using the equity method. This
difference does not affect net earnings.

4) Duplicate property provisions

Up to July 1, 2001, Canadian GAAP permitted
the acquirer in a business combination accounted as a purchase to adjust to fair
value specific assets and obligations of the acquirer as if they were those of
the acquired Company. These are referred to as the duplicate property
provisions. US GAAP would not have permitted this accounting treatment in
accordance with Emerging Issues Task Force Abstract 95-3, Recognition of
Liabilities in Connection with a Purchase Business Combinationand these
costs would have been recorded in earnings instead of having been included in
Goodwill. During the year, as is further described in note 13, the Company
recorded an impairment charge on the goodwill allocated to the Snowflake mill.
The adjustment to earnings in the current year reflects the lower carrying
amount of goodwill under US GAAP.



F-57



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



5) Employee future benefits

Effective December 31, 2006, the Company
adopted SFAS 158, Accounting for Defined Benefit Plans and Other
Post-Retirement Benefits - an amendment of FASB Statements No. 87, 88, 106
and 132 (R). This standard requires an employer to recognize the over-funded
or under-funded status of a defined benefit post-retirement plan as an asset or
liability in its statement of financial position and to recognize changes in
that status in the year in which the change occurs through "Other comprehensive
income (loss)". There are no such requirements under Canadian GAAP. The
following table presents the incremental effect of applying this statement on
individual line items in the consolidated balance sheet as at December 31,
2006:



|                                                 |  |                                 |   |  |                                         |   |  |                                |  
|------------------------------------------------ |  | ------------------------------- | - |  | --------------------------------------- | - |  | ------------------------------ | -
|                                                 |  | Beforeapplicationof SFASno. 158 |   |  | Incrementaleffectof applyingSFASno. 158 |   |  | Afterapplicationof SFASno. 158 |  
|                                                 |  | $                               |   |  | $                                       |   |  | $                              |  
|Intangible assets                                |  | 528                             |   |  | (68                                     | ) |  | 460                            |  
|Employee future benefits                         |  | 328                             |   |  | (309                                    | ) |  | 19                             |  
|Future income taxes                              |  | 332                             |   |  | 22                                      |   |  | 354                            |  
|Total assets                                     |  | 7,968                           |   |  | (355                                    | ) |  | 7,613                          |  
|                                                 |  |                                 |   |  |                                         |   |  |                                |  
|Employee future benefits                         |  | 525                             |   |  | 352                                     |   |  | 877                            |  
|Future income taxes                              |  | 538                             |   |  | (216                                    | ) |  | 322                            |  
|Non-controlling interests                        |  | 71                              |   |  | (6                                      | ) |  | 65                             |  
|Accumulated other comprehensive
      income     |  | (468                            | ) |  | (485                                    | ) |  | (953                           | )
|Total liabilities and shareholder's
      equity |  | 7,968                           |   |  | (355                                    | ) |  | 7,613                          |  

Components of net periodic benefit cost:



|                                                           |  |                       |   |  |                           |   |  |      |   |  |      |   |  |      |  |     
|---------------------------------------------------------- |  | --------------------- | - |  | ------------------------- | - |  | ---- | - |  | ---- | - |  | ---- |  | ----
|                                                           |  | Pension benefit plans |   |  | Other benefit
      plans
|                                                           |  | 2007                  |   |  | 2006                      |   |  | 2005 |   |  | 2007 |   |  | 2006 |  | 2005
|                                                           |  | $                     |   |  | $                         |   |  | $    |   |  | $    |   |  | $    |  | $   
|Service cost                                               |  | 61                    |   |  | 66                        |   |  | 55   |   |  | 3    |   |  | 4    |  | 3   
|Interest cost                                              |  | 219                   |   |  | 215                       |   |  | 222  |   |  | 12   |   |  | 13   |  | 13  
|Expected return on plan assets                             |  | (235                  | ) |  | (231                      | ) |  | (227 | ) |  | -    |   |  | -    |  | -   
|Amortization of past service
    cost                      |  | 25                    |   |  | 13                        |   |  | 13   |   |  | 5    |   |  | 3    |  | 1   
|Amortization of unrecognized actuarial
      loss          |  | 86                    |   |  | 62                        |   |  | 31   |   |  | 27   |   |  | 4    |  | 3   
|Settlement, curtailment and special early
      retirement |  | (12                   | ) |  | -                         |   |  | 16   |   |  | (25  | ) |  | -    |  | -   
|                                                           |  |                       |   |  |                           |   |  |      |   |  |      |   |  |      |  |     
|Net periodic benefit cost                                  |  | 144                   |   |  | 125                       |   |  | 110  |   |  | 22   |   |  | 24   |  | 20  
|                                                           |  |                       |   |  |                           |   |  |      |   |  |      |   |  |      |  |     

Amounts expected to be recognized in net periodic
benefit cost:



|                                |  |                         |  |                      
|------------------------------- |  | ----------------------- |  | ---------------------
|                                |  | Pensionbenefitplans2008 |  | Otherbenefitplans2008
|                                |  |                        
|                                |  | $                       |  | $                    
|Past service cost amortization  |  | 11                      |  | 2                    
|Net actuarial loss
amortization |  | 37                      |  | -                    



F-58



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



Until the adoption of SFAS 158, the provisions of
SFAS 87, Employers' Accounting for Pensionsrequired the Company to
record an additional minimum pension liability for plans where the accumulated
benefit obligation exceeded plan assets' fair value. With regards to these
plans, an intangible asset was recorded up to the extent of unrecognized past
service costs. The balance was recorded net of income tax in "Other
comprehensive income (loss)". There were no such requirements under Canadian
GAAP.

The projected benefit obligation, accumulated
benefit obligation and fair value of plan assets for the pension plans with
accumulated benefit obligations in excess of plan assets were $2,373 million,
$2,207 million and $1,941 million, respectively, as at December 31, 2007
(2006 - $2,509 million, $2,292 million and $1,930 million, respectively).

Accumulated benefit obligation as of
December 31, 2007 amounted to $3,742 million (2006 - $3,916 million).

6) Accounts receivable

As at December 31, 2007, accounts receivable
included $132 million of non-trade receivables (2006 - $111 million).

7) Dividends from investments subject to significant influence

For the year ended December 31, 2007, the
Company received dividends or cash distributions in the amount of $5 million
from its joint ventures (2006 - $5 million, 2005 - $25 million).

8) Discontinued operations

On November 17, 2005, the Company completed
the sale of its 50% share ownership in PanAsia. Under Canadian GAAP, the
Company's share in the results, prior to the sale, is reported as discontinued
operations. Under US GAAP, as the investment was accounted for using the
equity method, there are no discontinued operations.

Under US GAAP, the amount for each category
of cash flows from discontinued operations presented in note 10 would be
presented directly on the statement of cash flows.

9) Research and development tax credits

Tax credits relating to research and development
are recognized in earnings as a reduction of the related expenses, which are
part of cost of sales, when the Company has made the qualifying expenditures and
it is more likely than not that the credits will be realized.

Under US GAAP, those tax credits have been
recorded as a reduction of the income tax expense or an increase of the income
tax recovery. The tax credits relating to research and development for the year
ended December 31, 2007 amounted to $15 million (2006 - $29 million, 2005 -
$52 million).

In addition, under Canadian GAAP, those tax
credits are included in the balance sheets in "Other assets". Under
US GAAP, they are included in "Future income taxes".



F-59



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



10) FIN 48

Under US GAAP, we adopted FIN 48 on
January 1, 2007. As a result of the implementation of FIN 48, no additional
charges were accounted for against our liability for unrecognized tax benefits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:



|                                                                     |  |      |  
|-------------------------------------------------------------------- |  | ---- | -
|                                                                     |  | 2007 |  
|                                                                     |  | $    |  
|Balance at January 1,
2007                                           |  | 56   |  
|Increase (decrease) in unrecorded tax
      benefits resulting from: |  |      |  
|Positions taken in a prior
    period                                |  | 3    |  
|Current year unrecognized tax
      benefits                         |  | 18   |  
|Settlements with taxing
      authorities                            |  | (1   | )
|Expiration of statute of
      limitations                           |  | (10  | )
|                                                                     |  |      |  
|Balance at December 31,
    2007                                     |  | 66   |  
|                                                                     |  |      |  

Under US GAAP, the Company evaluated the
provisions of FIN 48. The total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate is $66 million. If recognized,
these items would impact the Consolidated Statements of Earnings (Loss) and our
effective tax rate. We do not anticipate a decrease of the unrecognized tax
benefits during the next twelve months. The unrecognized tax benefits are
attributable to various Canadian income tax issues related to non-arm's length
transactions and Canadian investment tax credits. Interest and penalties accrued
related to unrecognized tax benefits are recognized as components of income tax
expense.

In the normal course of business, we are subject
to audits from the federal, state, provincial and other tax authorities
regarding various tax liabilities. Any audits may alter the timing or amount of
taxable income or deductions, or the allocation of income among tax
jurisdictions. The amount ultimately paid upon resolution of issues raised may
differ from the amount accrued. We believe that taxes accrued on our
Consolidated Balance Sheets fairly represent the amount of future tax liability
due.

11) Contract for the purchase of energy

The Company is party to a contract for the
purchase of energy signed in 1998 and deemed acquired in April 2000 in the
business combination of the Company and Donohue Inc. Under US GAAP, this
contract contains embedded derivatives that needs to be bifurcated and recorded
at fair value with changes recorded in earnings. Under Canadian GAAP, this
contract is exempted by virtue of the transitional provisions of
Section 3855 and is accordingly not separately recognized in the financial
statements.

There was no impact on earnings for the year ended
December 31, 2007 (a reduction of $2 million of cost of sales and an
increase of $1 million of income tax expense in 2006). In addition, foreign
currency translation adjustment was positively impacted by $1 million in 2007 in
"Other comprehensive income (loss)" ($1 million in 2006).



F-60



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



12) Deferred financing fees

Upon adoption of Section 3855 on
January 1, 2007, the Company elected to recognize all transaction costs
associated to long-term debt into earnings as incurred and accordingly, has
written off to opening deficit the balance of deferred financing costs. No
further costs were incurred during the period ended December 31, 2007.
Under US GAAP, these costs continue to be deferred in "Other Assets" and
amortized over the term of the respective debt.

13) Future income taxes

This adjustment reflects differences related to
the accounting for valuation allowance and changes in income tax rates for
US GAAP purposes that arise from different balances of temporary
differences.

g) Recent accounting developments

In December 2007, the FASB issued Statement
No. 160, "Non-controlling Interests in Consolidated Financial Statements-an
amendment of ARB No. 51" ("SFAS 160"). SFAS 160 amends ARB 51 to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires that
all changes in a parent's ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently
as equity transactions. It also requires that any gain or loss on the
deconsolidation of the subsidiary to be measured using the fair value of any
non-controlling equity investment rather than the carrying amount of that
retained investment. This Statement requires expanded presentation and
disclosures in the consolidated financial statements that clearly identify and
distinguish between the interests of the parent's owners and the interests of
the non-controlling owners of a subsidiary. SFAS 160 is effective for fiscal
years beginning after December 15, 2008. The Company is currently
evaluating the impact of this statement on its results of operations and
financial position.

In December 2007, the FASB issued Statement
No. 141R, "Business Combinations" ("SFAS 141R"). SFAS 141R retains the
fundamental requirements in SFAS 141, "Business Combinations", that the
acquisition method of accounting be used for all business combinations and for
an acquirer to be identified for each business combination, The Statement makes
a number of changes however to how the acquisition method is applied, such as
measuring the assets acquired, the liabilities assumed, and any non-controlling
interest at their fair values; recognizing assets acquired and liabilities
assumed arising from contingencies; recognizing contingent consideration at the
acquisition date, measured at its fair value; and recognizing a gain in the
event of a bargain purchase (i.e. negative goodwill). SFAS 141R will be applied
prospectively for business combinations for which the acquisition date is on or
after the beginning of fiscal years beginning after December 15, 2008, and
in the case of post-acquisition tax adjustments, for all business combinations,
regardless of the acquisition date.

In February 2007, the FASB issued Statement
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" ("SFAS 159"), which permits entities to choose to measure many
financial instruments and certain other items at fair value. The fair value
option established by SFAS 159 permits all companies to choose to measure
eligible items at fair value at specified election dates. Unrealized gains and
losses on items for which the fair value option has been elected will be
reported in earnings at each subsequent reporting date. The decision to elect
the fair value option may be



F-61



---

##### 

Abitibi-Consolidated Inc.

Notes to Consolidated Financial
Statements-(Continued)

Years ended December 31, 2007, 2006 and 2005

In millions of Canadian dollars, unless otherwise
noted



applied on an instrument by instrument basis, with a few exceptions, is
irrevocable, unless a new election date occurs, and is applied to entire
instruments only, not to portions of instruments. SFAS 159 is effective for
fiscal years beginning after November 1, 2007. For example, SFAS 159 would
allow the Company to change the way it accounts for certain investments from the
equity method (where its record its proportional interest in the operations of
an investee) to a method that would base its income on a change in the fair
value of the investment. The Company has not yet determined whether it will make
this election to change the accounting basis of any of its eligible assets or
liabilities.

In September 2006, the FASB issued Statement
No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 provides
enhanced guidance for determining the fair value of assets and liabilities. SFAS
157 also responds to investors' requests for expanded information about the
extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 applies to other accounting pronouncements
that require or permit fair value measurements and is effective for financial
statements issued for fiscal years beginning after November 15, 2007 as it
is applied to financial assets and liabilities and for fiscal years beginning
after November 15, 2008 as it is applied to non-financial assets and
liabilities. Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction. Under the
guidance of SFAS 157, the valuation of liabilities assumes that the credit risk
of the liability is the same before and after the transfer. Although the Company
is still determining which of the valuations used in its financial statements
will be affected by this guidance, it has identified that the liability for the
fair value of interest rate swaps is one of them. These instruments are carried
in the balance sheet at fair value, which has previously been based on the
amount for which they could be settled with the counterparty. Under the guidance
of SFAS 157, beginning in 2008, their valuation will also consider the credit
risk of the Company, resulting in the liability being recorded at an amount
different than its settlement value. The Company has not yet determined the
amount of this difference.



F-62



---

##### 

Abitibi-Consolidated Inc.

Schedule II - Valuation and Qualifying
Accounts

Years Ended December 31, 2007, 2006 and
2005



|                                                        |  |                           |  |                                  |  |                               |  |            |   |  |                           
|------------------------------------------------------- |  | ------------------------- |  | -------------------------------- |  | ----------------------------- |  | ---------- | - |  | --------------------------
|(In millions of
      Canadian dollars)                 |  |                           |  | Additions                        |  |                               |  |            |  
|Description                                             |  | Balanceatbeginningof year |  | Chargedto
      costsandexpenses |  | Chargedto
      otheraccounts |  | Deductions |   |  | Balanceat
      endof year
|Year ended December 31,
    2007                        |  |                           |  |                                  |  |                               |  |            |   |  |                           
|Allowance for doubtful
accounts                         |  | 3                         |  | 4                                |  | -                             |  | (1         | ) |  | 6                         
|Valuation allowances for future income tax
      assets |  | -                         |  | 360                              |  | -                             |  | -          |   |  | 360                       
|                                                        |  |                           |  |                                  |  |                               |  |            |   |  |                           
|Year ended December 31,
    2006                        |  |                           |  |                                  |  |                               |  |            |   |  |                           
|Allowance for doubtful
accounts                         |  | 4                         |  | 1                                |  | -                             |  | (2         | ) |  | 3                         
|                                                        |  |                           |  |                                  |  |                               |  |            |   |  |                           
|Year ended December 31,
    2005                        |  |                           |  |                                  |  |                               |  |            |   |  |                           
|Allowance for doubtful
accounts                         |  | 4                         |  | 1                                |  | -                             |  | (1         | ) |  | 4                         
|                                                        |  |                           |  |                                  |  |                               |  |            |   |  |